STUDY MATERIAL

PROFESSIONAL PROGRAMME

GOVERNANCE, RISK
­MANAGEMENT,
­ OMPLIANCES AND ETHICS
C
MODULE 1
PAPER 1
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 PROFESSIONAL PROGRAMME
GOVERNANCE, RISK MANAGEMENT,
COMPLIANCES AND ETHICS
Corporate governance offers a comprehensive, interdisciplinary approach to the management and control of
companies. Corporate professionals of today and tomorrow must imbibe in themselves the evolving principles of
good corporate governance across the globe on a continual basis. Therefore Corporate Governance has emerged as
an important academic discipline in its own right, bringing together contributions from accounting, finance, law and
management. Excellence can be bettered only through continuous study, research and academic and professional
interaction of the highest quality in the theory and practice of good corporate governance. The corporate world
especially looks upon Company Secretaries to provide the impetus, guidance and direction for achieving world-class
corporate governance. Company Secretaries are the primary source of advice on the conduct of business. This can
take into its fold everything from legal advice on conflicts of interest, through accounting advice, to the development
of strategy/corporate compliance and advice on sustainability aspects.
The paper on Governance, Risk Management, Compliances and Ethics has been introduced to provide knowledge
on global development on governance, risk management, compliances, ethics and sustainability aspects and best
governance practices followed worldwide.
This Paper is divided into four parts: Part I deals with Governance, Part II deals with Risk Management, Part III deals
with Compliances and Part IV deals with Ethics & Sustainability.
Part I elaborates on the conceptual and legal framework of Corporate Governance and the role of Board of Directors,
promoters and stakeholders. Part II explains about the Risk identification, its management, mitigation and audit.
Part III explains the significance of Compliance and essentials of a compliance management program. This part also
details about the Internal Control and Reporting. Part IV details about the relation of Ethics and business. This part
also explains about Sustainability and approaches to measure Business Sustainability.
The legislative changes made up to July, 2021 have been incorporated in the study material. The students to be
conversant with the amendments to the laws made upto six months preceding the date of examination. It may
happen that some developments might have taken place during the printing of the study material and its supply to
the students. The students are therefore advised to refer to the updations at the Regulator’s website, Supplement
relevant for the subject issued by ICSI and ICSI Journal Chartered Secretary and other publications for updation of
study material.
In the event of any doubt, students may write to the Directorate of Academics of the Institute for clarification at
academics@icsi.edu.
Although due care has been taken in publishing this study material, the possibility of errors, omissions and/or
discrepancies cannot be ruled out. This publication is released with an understanding that the Institute shall not be
responsible for any errors, omissions and/or discrepancies or any action taken in that behalf.
Should there be any discrepancy, error or omission noted in the study material, the Institute shall be obliged if the
same is brought to its notice for issue of corrigendum in the e-journal ‘Student Company Secretary’.

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 PROFESSIONAL PROGRAMME
GOVERNANCE, RISK MANAGEMENT,
COMPLIANCES AND ETHICS

Objective

This study material is divided into four parts with following weightage of marks:
Part I – Governance (50 marks)
Part II - Risk Management (20 marks)
Part III - Compliances (20 marks)
Part IV - Ethics & Sustainability (10 marks)

PART I – GOVERNANCE

Corporate Governance has a broad scope. It includes both social and institutional aspects. Corporate Governance
encourages a trustworthy, moral, as well as ethical environment. In other words, the heart of corporate governance
is transparency, disclosure, accountability and integrity. In the last decade, many emerging markets, international
bodies, governments, financial institutions, public and private sector bodies have reformed their corporate
governance systems and are encouraging debate and spearheading initiatives towards good corporate governance.
Better regulatory and self-regulatory corporate governance frameworks and enforcement mechanisms are being
implemented through tougher legislations and Corporate Governance Codes.
This part of the study apprise about the developments across jurisdictions and brief about the historic origin, need
and importance of corporate governance, legislative framework of Corporate Governance explaining the need,
scope and evolution of Corporate Governance, Contemporary Developments in Corporate Governance Corporate
Governance codes in major jurisdictions, Corporate Governance in Indian Ethos and family enterprises. This part
further explains the Board effectiveness, its committees, performance evaluation of Board and role of Promoters.

PART II - RISK MANAGEMENT

Risk is inherent in every business, whether it is of financial nature or non-financial nature. Thus, management of
the risk is very important. Risk management begins with the risk identification, analyzing the risk factors, making
assessment of the risk and mitigation of the risk. Better risk management techniques provide early warning signals
so that the same may addressed in time. In traditional concept the natural calamities like fire, earthquake, flood,
etc were only treated as risk and keeping the safe guard equipments etc were assumed to have mitigated the risk.
But now in the era of fast changing global economy, the management of various types of risks has gained utmost
importance.
This part of the study explains the concepts, process, its advantages and steps for implementation of risk management.
It also deals with the fraud and reputation risk management and how the negative reputation of an entity may have
adverse impact on the operations and profitability.

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 PART III - COMPLIANCES

Compliance means the complete alliance of various parts of the business – whether commercial, financial, or
regulatory. It necessitates following the rules, both external and internal. Compliance with law and regulation must
be managed as an integral part of any corporate strategy. The board of directors and management must recognize
the scope and implications of laws and regulations that apply to the company. They must establish a compliance
management system as a supporting system of risk management system as it reduces compliance risk to a great
extent. Compliance with the requirements of law through a compliance management programme can produce
positive results at several levels.
This part of study explains the adequacy and effectiveness of the compliance system, internal compliance reporting
mechanism and ensuring the best practices available for the good governance principles for compliance issues.
It further details about the concept of internal control, elements of internal control and its efficacy, concept of
Reporting which includes the financial as well as non-financial reporting.

PART IV - ETHICS & SUSTAINABILITY

Business Ethics is the application of ethical principles and methods of analysis to business. In past few decades
business ethics has been given due importance in business, commerce and industry. Promotion of culture of ethics
is an imperative, and it is increasingly being realized that it is the bedrock of good governance which ultimately re-
instills the confidence of the stakeholder in the company.
Sustainable development is a broad concept that balances the need for economic growth with environmental
protection and social equity. Sustainability is based on a simple principle: Everything that we need for our survival
and well-being depends, either directly or indirectly, on our natural environment. Sustainability creates and
maintains the conditions under which humans and nature can exist in productive harmony that permits fulfilling
the social, economic and other requirements of the present and future generations.
This part of the study elaborates the concept and advantages of business ethics and also explains about corporate
sustainability and sustainable development.

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 PROFESSIONAL PROGRAMME
Module1
Paper1
GOVERNANCE, RISK MANAGEMENT,
COMPLIANCES AND ETHICS
(100 Marks)

SYLLABUS

Objective
Part-I: To develop skills of high order so as to provide thorough knowledge and insight into the corporate
governance framework, best governance practices.
Part–II: To develop skills of high order so as to provide thorough knowledge and insight into the spectrum of risks
faced by businesses.
Part-III: To develop the ability to devise and implement adequate and effective systems to ensure compliance of
all applicable laws.
Part-IV: To acquire knowledge of ethics in business and framework for corporate sustainability reporting.

Detailed Contents

Part I: Governance (50 Marks)

1. Conceptual Framework of Corporate Governance: Introduction, Need and Scope, Evolution of Corporate
Governance, Management vs. Ownership, Majority vs Minority, Corporate Governance codes in major
jurisdictions, Sarbanes Oxley Act, US Securities and Exchange Commission; OECD Principles of Corporate
Governance; Developments in India, Corporate Governance in Indian Ethos, Corporate Governance –
Contemporary Developments.
2. Legislative Framework of Corporate Governance in India: Listed Companies, Unlisted Companies, PSUs,
Banks and Insurance Companies.
3. Board Effectiveness: Composition and Structure, Duties and Liabilities, Evolution of Jurisprudence, Diversity
in Board Room, Women Director, Nominee Directors; Selection and Appointment Process, Independent
Directors: expectations, liabilities and their role, code of conduct, responsibilities and effectiveness.
4. Board Processes through Secretarial Standards.
5. Board Committees: Composition & Terms of Reference, Roles and Responsibilities.
6. Corporate Policies & Disclosures: Various policies and disclosures to be made as per regulatory requirements
/ voluntarily made as part of good governance.

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7. Directors’ Training, Development and familiarisation.
8. Performance Evaluation of Board and Management: Evaluation of the performance of the Board as a whole,
individual director (including independent directors and Chairperson), various Committees of the Board and
of the management.
9. Role of promoter/controlling shareholder, redressal against Oppression and Mismanagement.
10. Monitoring of group entities and subsidiaries.
11. Accounting and Audit related issues.
12. Related Party Transactions.
13. Vigil Mechanism/Whistle blower.
14. Corporate Governance and Shareholders’ Rights.
15. Corporate Governance and other Stakeholders: Employees, Customers, Lenders, Vendors, Government and
Regulators, Society, etc.
16. Governance and Compliance Risk: Governance/Compliance failure and their impact on business, reputation
and fund raising.
17. Corporate Governance Forums.
18. Parameters of Better Governed Companies: ICSI National Award for Excellence in Corporate Governance.
19. Dealing with Investor Associations, Proxy Services Firms and Institutional Investors.
20. Family Enterprise and Corporate Governance.
Case Laws, Case Studies & Practical Aspects.

Part II: Risk Management (20 Marks)

21. Risk Identification, Mitigation and Audit: Risk Identification, Risk Analysis, Risk Measurement, Risk
Mitigation, Risk Elimination, Risk Management Committee, Clarification and Investigation, Role of Internal
Audit, Risk Audit, Risk Related Disclosures.
Case Studies & Practical Aspects.

Part III: Compliances (20 Marks)

22. Compliance Management: Essentials of successful compliance program, Significance of Compliance, devising
proper systems to ensure compliance, ensuring adequacy and effectiveness of compliance system, internal
compliance reporting mechanisms, use of technology for compliance management.
23. Internal Control: Nature, Scope and Elements, Techniques of Internal Control System, Steps for Internal
Control, Efficacy of internal controls and its review.
24. Reporting: Integrated Reporting, Non-financial Reporting, Corporate Sustainability Reporting, Board
Reporting, Annual Report, Other Reports under LODR, PIT, SAST Regulations.
25. Website Management: Meeting through Video Conferencing.
Case Studies & Practical Aspects

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 Part IV: Ethics & Sustainability (10 Marks)

26. Ethics & Business: Ethics, Business Ethics, Organization Structure and Ethics, Addressing Ethical Dilemmas,
Code of Ethics, Indian Ethos, Designing Code of Conduct, Policies, Fair practices and frameworks.
27. Sustainability: Corporate Social Responsibility, Corporate Sustainability Reporting Framework, Legal
Framework, Conventions, Treaties on Environmental and Social Aspects, Triple Bottom Line, Principle of
Absolute Liability - Case Studies, Contemporary Developments, Indian Ethos.
28. Models / Approaches to measure Business Sustainability: Altman Z-Score Model, Risk Adjusted Return on
Capital, Economic Value Added (EVA), Market Value Added (MVA), Sustainable Value Added Approach.
29. Indian and contemporary Laws relating to Anti-bribery: Prevention of corruption Act,1988, Central
Vigilance Commission Act, 2003, Lokpal & Lokayukta Act, 2013, Foreign Corrupt Practices Act, 1977, Unlawful
Activities (Prevention) Act, 1967 & Delhi Special Police Establishment Act, 1946; ICSI Anti Bribery Code.
Case Studies & Practical Aspects

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 ARRANGEMENT OF STUDY LESSONS
Module 1
Paper 1
GOVERNANCE, RISK MANAGEMENT,
COMPLIANCES AND ETHICS

PART I: GOVERNANCE

Lesson No. Lesson Title

1 Conceptual Framework of Corporate Governance
2 Legislative Framework of Corporate Governance in India
3 Board Effectiveness
4 Board Processes through Secretarial Standards
5 Board Committees
6 Corporate Policies and Disclosures
7 Accounting and Audit related issues, RPTs and Vigil Mechanism
8 Corporate Governance and Shareholders Rights
9 Corporate Governance and Other Stakeholders
10 Governance and Compliance Risk
11 Corporate Governance Forums

PART II: RISK MANAGEMENT

12 Risk Management

PART III: COMPLIANCE

13 Internal Control
14 Reporting

PART IV: ETHICS & SUSTAINABILITY

15 Ethics and Business

16 CSR and Sustainability
17 Anti-Corruption and Anti-Bribery Laws in India

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 LESSON WISE SUMMARY
GOVERNANCE, RISK MANAGEMENT,
COMPLIANCES AND ETHICS
Lesson 1: Conceptual Framework of Corporate Governance

Corporate Governance is how a corporation is administered or controlled. It is a set of processes, customs, policies,
laws and instructions affecting the way a corporation is directed, administered or controlled. The participants in the
process include employees, suppliers, partners, customers, government, and professional organization regulators,
and the communities in which the organization has presence.
Corporate Governance is integral to the existence of the company. Corporate Governance is needed to create a
corporate culture of transparency, accountability and disclosure.
Good corporate governance systems attract investment from global investors, which subsequently leads to greater
efficiencies in the financial sector. The relation between corporate governance practices and the increasing
international character of investment is very important. International flows of capital enable companies to access
financing from a much larger pool of investors. In order to reap the full benefits of the global capital market and
attract long-term capital, corporate governance arrangements must be credible, well understood across borders and
should adhere to internationally accepted principles.
Corporate governance is a critical factor in economic stability and organisational success. In the last decade, many
emerging markets, international bodies, governments, financial institutions, public and private sector bodies have
reformed their corporate governance systems and are encouraging debate and spearheading initiatives towards good
corporate governance. Better regulatory and self-regulatory corporate governance frameworks and enforcement
mechanisms are being implemented through tougher legislations and Corporate Governance Codes.
This Lesson gives an overview of the evolution of Corporate Governance worldwide and the existence and
development of corporate governance in India since centuries.

Lesson 2: Legislative Framework of Corporate Governance in India

The Companies Act, 2013 which envisages radical changes in the sphere of Corporate Governance in India along with SEBI
LODR Regulations, 2015 provide for various provisions for good governance of companies. The Companies Act, 2013 is
applicable to all companies registered under the Act and listed companies have to follow SEBI Regulations also. However
the same is not the case with nationalized banks as these are governed by separate Acts. The sector specific companies
i.e. banking/insurance/ public sector are required to follow the regulatory norms prescribed by their sectoral regulator.
For example Insurance companies are subject to compliance with IRDA guidelines in addition to other applicable
legislations. The guidelines issued by the IRDA on the Corporate Governance norms applicable to the Insurance
Company have been dealt with in the chapter.
The lesson details the corporate governance developments in Companies, Banks and NBFCs. Also details the
guidelines for the insurance companies. Stewardship Code for insurers in India has also been explained. It also
provides overview of the governance of Public Sector Enterprises under DPE Guidelines.

Lesson 3: Board Effectiveness

Company being an artificial person it requires certain natural persons to represent the company at various fronts. The
position of directors in their relationship to the company is not only as the agents, but also trustees of the company.

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The Board of Directors plays a pivotal role in ensuring good governance. The contribution of directors on the Board
is critical to the way a corporate conducts itself. A board’s responsibilities derive from law, custom, tradition and
prevailing practices.
In the present times transparency, disclosure, accountability, issues of sustainability, corporate citizenship,
globalization are some of the concerns that the Boards have to deal with. In addition, the Boards have to respond to
the explosive demands of the marketplace. This two dimensional role of the Board of Directors is the cornerstone
in evolving a sound, efficient, vibrant and dynamic corporate sector for attaining of high standards in integrity,
transparency, conduct, accountability as well as social responsibility.
Therefore in this Lesson Board’s role, powers and duties, types of directors required to be appointed under the laws,
board composition and role of independent director in ensuring board effectiveness have been discussed.
The lesson also gives an insight on training of directors and performance evaluation of directors.

Lesson 4: Board Processes through Secretarial Standards

In general, board process refers mainly to the decision-making activities of the board which need to be performed
so that the objectives of the board can be achieved. Decisions relating to the policy and operations of the company
are arrived at meetings of the Board held periodically. Meetings of the Board enable discussions on matters placed
before them and facilitate decision making based on collective judgment of the Board.
The fundamental principles with respect to Board Meetings are laid down in the Companies Act, 2013 and the
Secretarial Standard -1 facilitates compliance with these principles by endeavouring to provide further clarity
where there is ambiguity and establishing benchmark standards to harmonise prevalent diverse practices. For
the benefit of companies, SS-1 provides necessary flexibility in many cases viz. with respect to calling Meeting
at shorter notice, transacting any other business not contained in the agenda and passing of Resolutions by
circulation.
In this lesson, effective working of Boards through Secretarial Standard- 1 has been discussed.

Lesson 5: Board Committees

A board committee is a small working group identified by the board, consisting of board members, for the purpose of
supporting the board’s work. Committees are generally formed to perform some expertise work and improve board
effectiveness and efficiency.
Companies Act, 2013 requires certain class of companies to form some committees mandatorily. Similarly SEBI
(LODR) Regulations, 2015 makes it mandatory for the listed companies to formulate certain committees of the
board.
In this lesson role and functioning various committees like audit committee, stakeholder relationship committee,
corporate social responsibility committee is explained.
For the prospective company secretaries this lesson shall be useful in performing the advisory role and in compliance
management in practical areas of work.

Lesson 6: Corporate Policies and Disclosures

A Company has to formulate specific policies in different areas of operations that help to bring uniformity in
processes by clearly defining the business approach. Some of the policies are legally required, some are
organisational needs and some are voluntarily made as part of good governance. This lesson discusses about various
disclosure and transparency requirements under Companies Act 2013 and SEBI Regulations.
Various disclosures mandatorily required by the companies and listed entities are also elaborated in detail in this chapter.

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Lesson 7: Accounting and Audit related issues, RPTs and Vigil Mechanism

Corporate Governance is concerned with holding the balance between economic and social goals and between
individual and communal goals. The corporate governance framework is there to encourage the efficient use of
resources and equally to require accountability for the stewardship of those resources. The aim is to align as nearly
as possible the interests of individuals, corporations and society.
Good accounting and auditing practices are highly effective as an instrument of corporate governance. Companies
Act 2013 has provided for various mandatory and voluntary practices to improve financial reporting, internal audit
and statutory audit of companies in India. Keeping this in view, this study lesson covers various good governance
initiatives taken by the government of our country for accounting and audit related issues.
It also covers in brief various legal provisions as well as background to related party transactions, meaning of related
parties, transactions covered under RPT and the procedure for approval etc.
At the end, lesson provides brief about vigil mechanism, background of whistle blower concept and various laws
pertaining to it.

Lesson 8 : Corporate Governance and Shareholders Rights

The central element in corporate governance is the challenges arising out of separation of ownership and control.
The shareholders are the true owners of a corporate and the governance function controls the operations of the
corporate. There is a strong likelihood that there is a mismatch between the expectations of the shareholders and
the actions of the management. Therefore there is a need to lay down clearly the rights of the shareholders and that
of the management.
SEBI Act, 1992, the various SEBI Regulations and Guidelines and the Companies Act, 2013 enables the empowerment of
shareholder rights. Companies Act, 2013 provides for some measures to protect the interest of minority shareholders.
One of the objectives of the SEBI is to provide a degree of protection to the investors and to safeguard their rights,
steady flow of savings into market and to promote the development of and regulate the securities market. Investors
should be safeguarded not only against frauds and cheating but also against the losses arising out of unfair practices.
This lesson will enable the students to understand what the rights of the shareholders are and how it is important
from corporate governance perspective.

Lesson 9: Corporate Governance and Other Stakeholders

In a business context, customers, investors, shareholders, employees, suppliers, government agencies, communities
and many others who have a ‘stake’ or claim in some aspect of a company’s products, operations, markets, industry
and outcomes are known as stakeholders.
Stakeholders are characterized by their relationship to the company and their needs, interests and concerns, which
will be foremost in their minds at the start of an engagement process. However, as the process unfolds they will soon
take a particular role with related tasks and responsibilities.
A major reason for increasing adoption of a Stakeholder Concept in setting business objectives is the recognition
that businesses are affected by the “environment” in which they operate. Businesses come into regular contact with
customers, suppliers, government agencies, families of employees, special interest groups. Decisions made by a
business are likely to affect one or more of these “stakeholder groups”.
Stakeholders can only be well informed and knowledgeable if companies are transparent and report on issues that
impact stakeholders. Both parties have an obligation to communicate sincerely and attempt to understand, not just
be understood.

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In this lesson relationship between company and various stakeholders has been discussed and explained how better
stakeholder engagement ensures good governance.

Lesson 10: Governance and Compliance Risk

Historically, boards have been perceived to focus primarily on value creation for shareholders. But with renewed
attention to statutory compliance, regulators now also want boards to focus on value management and value
protection by doing a formal review of compliance obligations. As a result, corporations are looking to replace
informal compliance frameworks with well structured, documented and demonstrable compliance structures that
help management monitor and report compliance risk and exposure as well as compliance status to the Board.
Regulatory compliance is an organization’s adherence to laws, regulations, guidelines and specifications relevant to
its business. Violations of regulatory compliance regulations often result in legal punishment, including penalties/
fines. As the number of rules has increased since the turn of the century, regulatory compliance has become more
prominent in a variety of organizations. The trend has even led to the creation of corporate, chief and regulatory
compliance officer positions to hire employees whose sole focus is to make sure the organization conforms to
stringent, complex legal mandates.
This lesson describes the importance compliance and consequences of non compliance. Besides, it also highlights
the importance of corporate compliance management and compliance risks.

Lesson 11: Corporate Governance Forums

The world has become a borderless global village. The spirit to implement internationally accepted norms of corporate
governance standards found expression in private sector, public sector and the government thinking. The framework
for corporate governance is not only an important component affecting the long-term prosperity of companies, but it is
critical in terms of National Governance, Human Governance, Societal Governance, Economic Governance and Political
Governance since the activities of the corporate have an impact on every aspect of the society as such.
The need to find an institutional framework for corporate governance and to advocate its cause has resulted in the
setting up and constitution of various corporate governance forums and institutions the world over. In this study
lesson we will be discussing with some of the prominent Forums and Institutions of Corporate Governance.

Lesson 12: Risk Management

Risk and reward go hand by hand. We have often heard the statement that without risk there is no gain. Risk is
inherent in the business. Different types of risk exist in the business according to the nature of the business and they
are to be controlled and managed.
Risk Management is a continuous process of identifying, evaluating and assessing the inherent and potential risk,
adopting the methods for its systematic reduction in order to sustainable business development.
Companies Act, 2013 provides that a statement indicating development and implementation of a risk management
policy for the company including identification therein of elements of risk, if any, which in the opinion of the Board
may threaten the existence of the company.
SEBI (LODR) Regulations, 2015 also provides that company shall lay down procedures to inform Board members
about the risk assessment and minimization procedures. The Board shall be responsible for framing, implementing
and monitoring the risk management plan for the company.
The company secretaries are governance professionals whose role is to enforce a compliance framework to
safeguard the integrity of the organization and to promote high standards of ethical behavior. He has a significant
role in assisting the board of the organization to achieve its vision and strategy. The activities of the governance

xiii
professional encompass legal and regulatory duties and obligations and additional responsibilities assigned by the
employer.
This lesson shall enable the students to understand risk management framework, the definition and types of risks;
risk management process; advantages of risk management; steps in risk management; legal provisions on risk
management; who is responsible for risk management etc.

Lesson 13: Internal Control

Internal control, as defined in accounting and auditing, is a process for assuring achievement of an organization’s
objectives in operational effectiveness and efficiency, reliable financial reporting, and compliance with laws,
regulations and policies. It is a means by which an organization’s resources are directed, monitored, and measured. It
plays an important role in detecting and preventing fraud and protecting the organization’s resources, both physical
(e.g., machinery and property) and intangible (e.g., reputation or intellectual property such as trademarks).
This lesson details various elements of internal control, techniques of internal control system and gives an insight
on efficacy and limitations of internal audit.

Lesson 14: Reporting

Reporting may mean to provide the information to the stake holders as per the requirement of the law.
Reporting is not the new concept. The companies are reporting through their annual report which is a
comprehensive report on a company’s activities throughout the preceding year. Annual reports are intended
to give shareholders and other interested people information about the company’s activities and financial
performance. They may be considered as grey literature. The annual reports contain the financial reporting as
well as non-financial reporting too.
Corporate reporting is an essential means by which companies communicate with investors as part of their
accountability and stewardship obligations. The current financial reporting model was developed in the 1930’s for
an industrial world which is like “looking in the rear-view mirror.”
This has led to the development of contemporary means of reporting like CSR reporting, reporting of business
sustainability and the most recent development is integrated reporting.
In this study lesson reporting requirements for a company under the laws and some best practices have been
discussed. The lesson highlights requirements for Board’s report, CSR Report, BRR and the framework for integrated
reporting.

Lesson 15: Ethics and Business

Ethics is a “Science of morals.” The new and emerging concepts in management like corporate governance, business
ethics and corporate sustainability are some of the expressions through which this emerging ethical instinct in the
corporate world is trying to express and embody itself in the corporate life. In this study we examine the concept
of ethics and its importance for the business, corporate governance and governance through inner conscience and
sustainability.
The objective of the study lesson is to enable the students understand the following:
• Inner Conscience and its Linkage to Governance
• The concept of business ethics
• Advantages of Ethics

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Lesson 16: CSR and Sustainability

Corporate Social Responsibility (CSR) is a concept whereby companies not only consider their profitability and
growth, but also the interests of society and the environment by taking responsibility for the impact of their activities
on stakeholders, environment, consumers, employees, communities, and all other members of the public sphere.
The basic premise is that when the corporations get bigger in size, apart from the economic responsibility of earning
profits, there are many other responsibilities attached to them which are more of non- financial/social in nature.
These are the expectations of the society from these corporate to give something in return to the society with whose
explicit or implicit help these entities stand where they are.
Sustainability is an emerging mega trend that focuses on business capacity to create value for the customers,
shareholders, and other stakeholders. Globalized workforces and supply chains have created environmental
pressures and attendant business liabilities. The rise of new world powers has intensified competition for natural
resources (especially oil) and added a geopolitical dimension to sustainability.
The objective of this study lesson is to enable the students to understand the concept, applicability and reporting in
respect to Corporate Social Responsibility and Sustainability. The lesson also highlights the importance of sustainable
development and important global treaties on environmental and social aspects.
The various models and approaches used for measuring the business sustainability which will guide the students to
understand the models and approaches used for measuring the business sustainability are also discussed.

Lesson 17: Anti-Corruption and Anti-Bribery Laws in India

Indian laws and regulations often provide for considerable discretion in the hands of government agencies and
personnel, and this can make interacting with government a subjective and time-consuming exercise.
While Indian anti-corruption laws are fairly stringent, corruption is not uncommon in India, and until recently the
enforcement of anti-corruption laws left much to be desired. This has led to unfortunate notion (particularly outside
India) that corruption is an accepted practice in India – however, this notion is misplaced, and recent years have been
marked with growing public dissatisfaction over corruption and its cost to the Indian economy. Over the past five to
six years, there has been a strong public sentiment against corruption, and high-profile instances of corruption have
become key political and election issues.
The objective of this study lesson is to enable the students to understand the legal framework in India which regard
to the prevailing Anti-Corruption and Anti-Bribery Laws.
Most importantly, the past few years have seen a change in attitude of enforcement agencies, which have started
enforcing anti-corruption laws aggressively in India, and have been supported in their efforts by the judiciary (which
has taken up an active role in monitoring corruption cases) are discussed in this lesson.

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 LIST OF RECOMMENDED BOOKS

PAPER 1 – GOVERNANCE, RISK MANAGEMENT, COMPLIANCE AND ETHICS

Readings

1. Corporate Governance, Principles, policies and Practices – A.C. Fernando, Pearson Education
2. Business, Ethics and Corporate Governance - A.C. Fernando, Pearson Education
3. Corporate Governance – IICA, Taxmann
4. Business Ethics- Concepts and Cases – Manuel G. Velasquez
5. The Art of Corporate Governance – Dr. Joffy George
6. Journals – (a) ICSI – Chartered Secretary
(b) ICSI – Student Company Secretary – E-Journal
7. Companies Act, 2013 and Rules
8. SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015

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 CONTENTS

PAPER 1 – GOVERNANCE, RISK MANAGEMENT, COMPLIANCE AND ETHICS

Lesson 1
Conceptual Framework of Corporate Governance

Meaning and Definitions of Corporate Governance 2

Need for Corporate Governance 3
Elements / Scope of Good Corporate Governance 5
Evolution of Corporate Governance 7
Concept of Management Vs. Ownership 9
Concept of Majority Rule Vs. Minority Interest 9
Roots of Corporate Governance in Indian Ethos 9
Corporate Governance – Contemporary Developments in India 10
International Regulatory Framework 14
Stages of Corporate Governance Across Globe 14
Stages of Development of Corporate Governance in USA 14
Corporate Governance Codes in Major Jurisdictions Across the World 20
Corporate Governance Framework in USA 20
UK Corporate Governance Code, 2018 22
Corporate Governance Principles and Recommendations, Australia - 2019 24
Code of Corporate Governance, Singapore - 2018 25
King IV Report on Corporate Governance, South Africa – 2016 26
King IV Principles 26
OECD Principles of Corporate Governance 27
The Finnish Corporate Governance Code, 2020 32
The Italian Corporate Governance Code 33
Japan’s Stewardship Code - Principles for Responsible Institutional Investors 34
LESSON ROUND UP 34
GLOSSARY 35
TEST YOURSELF 36

xvii
 Lesson 2
Legislative Framework of Corporate Governance in India

Introduction 38
Regulatory Framework 39
Regulation 4 of SEBI (LODR) Regulations, 2015 39
Principles Governing Disclosures and Obligations – Regulation 4 39
Corporate Governance in Banks/ Financial Institutions 43
Basel Committee on Corporate Governance 44
Guidelines on Corporate Governance for Nbfcs 48
Corporate Governance Guidelines for Insurance Companies 50
1. General 51
2. Objectives 51
3. Significant Owners, Controlling Shareholders – Role of Board 52
3A. Conflict of Interest – Role of Board 52
4. Governance Structure 53
5. Board of Directors 53
6. Control Functions 56
7. Delegation of Functions- Committees of the Board 56
8. Key Managerial Persons 63
8A. External Audit – Appointment of Statutory Auditors 64
9. Disclosure Requirements 65
10. Outsourcing Arrangements 65
11. Interaction with the Regulator 66
12. Whistle Blower Policy 66
13. Evaluation of Board of Directors Including Independent Directors 67
14. Applicability 67
Stewardship Code for Insurers in India 67
Revised Guidelines on Stewardship Code for Insurers in India 67
Corporate Governance in Central Public Sector Enterprises (CPSEs) 71
Guidelines on Corporate Social Responsibility and Sustainability for CPSEs 77
DPE Guidelines on CSR and Sustainability for CPSEs 78
Guidelines for CSR Expenditure of CPSEs 80
LESSON ROUND UP 81
GLOSSARY 81
TEST YOURSELF 82

xviii
 Lesson 3
Board Effectiveness

Introduction 84
Role of the Board of Directors 84
Meaning of Board of Directors 85
Types of Directors under Companies Act, 2013 85
1. Executive Director 85
2. Non-Executive Director 86
3. Shadow Director 86
4. Woman Director 86
5. Resident Director 87
6. Independent Director 87
7. Nominee Director 88
8. Small Shareholder Director 88
Composition and Structure of Baord 88
Selection and Appointment of Directors 90
Duties of Directors 92
Powers of the Board 93
Independent Directors for Better Board Effectiveness 94
Meaning of Independent Director under Regulation 16(1)(B) of SEBI (Lodr) Regulations, 2015 100
Liability of Independent Directors 101
Clarification Provided by MCA Vide General Circular No. 1/ 2020 Dated 2nd March, 2020 101
Other Good Practices to Enhance Board Effectiveness 103
Appointment of Lead Independent Director 103
Separation of Role of Chairman and Chief Executive Officer 103
Succession Planning 105
Directors Training, Development and Familarisation 106
Performance Evaluation of the Board and Management 108
Main Provisions under the Companies Act, 2013 with respect to Board Evaluation 109
Broad Evaluation Framework and Parameters 110
Board Effectiveness and the Role of the Company Secretary 113
LESSON ROUND UP 115
GLOSSARY 116
TEST YOURSELF 116

xix
 Lesson 4
Board Processes Through Secretarial Standards

Introduction 118
SS-1: Meetings of the Board of Directors 118
Board Processes Through Secretarial Standards (SS-1) 119
Meeting Through Video Conferencing 133
LESSON ROUND UP 135
GLOSSARY 136
TEST YOURSELF 136

Lesson 5
Board Committees

Introduction 138
Need for Committees 138
Rational Behind Board Committees 139
Committee Management 139
Selection of Committee Members 140
Appointment of Committee Chairman 140
Mandatory Committees of the Board 142
Audit Committee 142
Constitution under Companies Act, 2013 143
Under SEBI (LODR) Regulation, 2015 143
Functions / Role of the Audit Committee 144
Powers of the Audit Committee 147
Number of Meetings and Quorum of the Audit Committee 147
Disclosure in Board’s Report 147
Nomination and Remuneration Committee 148
Constitution of Nomination and Remuneration Committee 148
Composition 148
Functions of the Nomination and Remuneration Committee 149
Stakeholders Relationship Committee 151
Constitution / Composition of the Stakeholders Committee 151
Role of Stakeholders Relationship Committee 151
Corporate Social Responsibility Committee under Companies Act, 2013 152

xx
Composition of the CSR Committee 152
Functions of the CSR Committee 153
CSR Expenditure 153
Risk Management Committee (RMC) 156
Vigil Mechanism 156
Other Committees / Non-Mandatory Committees of The Board 158
LESSON ROUND UP 159
GLOSSARY 160
TEST YOURSELF 161

Lesson 6
Corporate Policies and Disclosures

Corporate Policies - Meaning and Importance 164

Policies under the Companies Act, 2013 164
Policies/Codes under the SEBI (LODR), Regulations, 2015 166
Policies under other Laws and Voluntary Policies 168
Disclosure and Transparency Requirements 169
1. In terms of Companies Act, 2013 169
2. In terms of Various Rules Made under Companies Act, 2013 172
3. Under SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 177
4. Under SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 179
5. Under SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 180
6. Under SEBI (Prohibition of Insider Trading) Regulations, 2015 194
LESSON ROUND UP 198
GLOSSARY 198
TEST YOURSELF 198

Lesson 7
Accounting and Audit Related Issues, Related Party Transactions (RPTs) and Vigil Mechanism

Introduction 200
Strengthening Financial Reporting Standards 200
Improving Auditors’ Effectiveness 205
Auditor’s Independence 205
Mandatory Rotation of Auditors 207
Auditing Standards 208

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Internal Audit 208
Secretarial Audit 209
Constitution of National Financial Reporting Authority (NFRA) 210
Related Party Transactions 215
Identification of Related Parties 216
Identification of Related Party Transaction 217
Approval Process 218
Provisions under SEBI (LODR) Regulations, 2015 220
Vigil Mechanism / Whistle Blower-Meaning and Definition 221
Types of Whistle-Blowers 222
Whistle Blowing under Sarbanes-Oxley Act, 2002 (SOX) 222
Vigil Mechanism under Companies Act, 2013 223
Vigil Mechanism under SEBI Listing Obligations and Disclosure Requirements, 2015 223
Annexure A 224
LESSON ROUND UP 226
GLOSSARY 226
TEST YOURSELF 226

Lesson 8
Corporate Governance and Shareholder’s Rights

Introduciton 228
Rights of Shareholders under the Companies Act, 2013 229
Rights of Shareholder under SEBI (LODR) Regulations, 2015 234
Promoter / Controlling Shareholder 234
Role and Liabilities of Promoters 236
Majority and Minitory Sharehoders 238
Protection of Rights of Shareholder / Investors in India 238
Investor Education & Protection Fund 239
Investor Associations 240
Protection of Rights of Majority Sharehoders 241
Institutional Investors and their Role in Promoting Good Corporate Governance 245
UK Stewardship Code 247
Principles for Responsible Investment (PRI) 249
Code for Responsible Investing in South Africa (CRISA) 251
California Public Employees’ Retirement System (CalPERS) 254

xxii
Dealing with Institutional Investors 256
Role of Proxy Advisory Firms 257
Governance of Group Entities / Subsidiaries 257
Corporate Governance in Family Owned Enterprises 259
Conclusion 261
LESSON ROUND UP 261
GLOSSARY 261
TEST YOURSELF 262

Lesson 9
Corporate Governance and Other Stakeholders

Introduction 264
Definition and Evolution of Stakeholder Theory 264
Recognition of Stakeholder Concept in Law:
Under the UK Companies Act, 2006 266
Under the UK Corporate Governance Code, 2018 268
Under the UAE Corporate Governance Rules, 2016 270
Under the South Africa, King IV Report on Corporate Governance, 2016 274
Under the Code of Corporate Governance for Listed Companies in China 276
Under the German Corporate Governance Code, 2019 277
Under the Japan’s Corporate Governance Code, 2018 279
Under the Indian Companies Act, 2013 285
Under the Principles Articulated under SEBI (LODR) Regulations, 2015 287
Stakeholder Engagement 287
Stakeholder Analysis 288
Better Stakeholder Engagement Ensures Good Governance 289
Types of Stakeholders 289
The Caux Round Table 289
CRT Stakeholder Management Guidelines 291
The Clarkson Principles of Stakeholder Management 293
Governance Paradigm and Various Stakeholders 293
Conclusion 296
LESSON ROUND UP 296
GLOSSARY 296
TEST YOURSELF 297

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 Lesson 10
Governance and Compliance Risk

Introduction 300
Regulatory Framework 301
Compliance 301
Compliance Obligations 301
Need for Compliance 302
Types of Compliances 302
Compliance Risk 303
Elements of Effective Compliance Program 304
Regulatory Technology (Regtech) 304
Consequences/ Risks of Non-Compliance 306
Compliance Risk Management 312
Steps in Compliance Risk Management 313
Compliance Risk Mitigation 314
Essentials of A Successful Compliance-Risk Management Program 316
New Developments- Governance, Risk Management and Compliance (GRC) 317
Conclusion 319
LESSON ROUND UP 320
GLOSSARY 320
TEST YOURSELF 320

Lesson 11
Corporate Governance Forums

Introduction 322
Regulatory Framework:
A. Institute of Company Secretaries of India (ICSI) 322
ICSI’s Philosophy on Corporate Governance 322
ICSI Initiatives 322
B. National Foundation for Corporate Governance (NFCG) 324
C. Organization for Economic Co-Operation and Development (OECD) 325
D. the Institute of Directors (IOD), UK 327
E. International Corporate Governance Network (ICGN) 327

xxiv
F. European Corporate Governance Institute (ECGI) 329
G. Conference Board 330
H. Asian Corporate Governance Association (ACGA) 330
I. Corporate Secretaries International Association Limited (CSIA) 331
J. International Integrated Reporting Council (IIRC) 331
CG Forums at a Glance 332
Conclusion 333
LESSON ROUND UP 333
GLOSSARY 333
TEST YOURSELF 333

Lesson 12
Risk Management

Risk 336
Classification of Risks 336
Types of Risks on the basis of Impact on Finance 336
Risk Management 340
Advantages of Risk Management 341
Steps in Risk Management Process 341
I. Risk Identification 341
II. Risk Analysis 342
II. Risk Assessment 344
IV. Handling of Risk 346
Risk Mitigation Strategy 346
Maintaining the Risk Strategy 348
Fraud Risk Management 348
Reporting of Fraud under Companies Act, 2013 349
Reputation Risk Management 349
Responsibility of Risk Management 350
Risk Governance 351
Risk Management Frameworks and Standards 352
1. Enterprise Risk Management – Integrated Framework (2004) 352
Case Study 354

xxv
2. ISO 31000: International Standard for Risk Management 356
Strategic Risk Management 358
Risk Management and Internal Controls 359
Risk Matrix 360
LESSON ROUND UP 361
GLOSSARY 362
TEST YOURSELF 362

Lesson 13
Internal Control

Introduction 364
Objectives of Internal Control 364
Nature of Internal Control 365
Classification of Internal Control 365
Elements of Internal Control 366
Components of Internal Control 367
Limitations of Internal Control 370
Considerations Specific to Smaller Entities 371
Division of Internal Control Into Components 371
Techniques of Internal Control System 373
Internal Check 373
Internal Audit 375
Steps for Internal Control 377
COSO’s Internal Control Framework 377
Difference Between Internal Control, Internal Check and Internal Audit 379
Components of Internal Control As Defined by COSO 380
Control Testing and Evaluation 381
Efficiency of Internal Controls and Its Review 381
Limitation of Internal Control 381
Role and Responsibilities with Regard to Internal Control 382
Conclusion 385
LESSON ROUND UP 385
GLOSSARY 386
TEST YOURSELF 386

xxvi
 Lesson 14
Reporting

Introduction 388
Financial Reporting 388
Objectives of Financial Reporting 388
Importance of Financial Reporting 389
Limitations of Financial Reporting 389
Non-Financial Reporting 390
Board’s Report 390
Corporate Social Responsibility Report 391
Corporate Sustainability Reporting 395
Global Reporting Initiative - Sustainability Reporting Framework 397
Sustainability Reporting Framework in India 399
Challenges in Mainstreaming Sustainability Reporting 400
Towards Integrated Reporting 400
Key Stakeholders of Integrated Reporting 401
Integrated Reporting and Governance 402
International Integrated Reporting Council (IIRC) 402
Benefits of Integrated Reporting 405
Integrated Reporting by Listed Entities in India 405
Relation Between Integrated Reporting and Sustainability Reporting 407
LESSON ROUND UP 409
GLOSSARY 409
TEST YOURSELF 409

Lesson 15
Ethics and Business

Introduction 412
What Is Ethics 412
Business Ethics 412
Context and Relevance of Business Ethics in Today’s Business 412
Five Bottom Lines of the Future 414
Importance of Business Ethics 415
Organisation Structure and Ethics 415
Four Fundamental Ethical Principles 416
Ethical Dilemma 417

xxvii
Addressing Ethical Dilemmas 417
Case Studies on Ethical Dilemma 418
Steps to Resolving An Ethical Dilemma 421
Code of Ethics 423
Indian Ethos 424
Code of Conduct 425
Advantages of Business Ethics 426
Conclusion 427
LESSON ROUND UP 428
GLOSSARY 428
TEST YOURSELF 428

Lesson 16
CSR and Sustainability

Introduction 430
Corporate Social Responsibility (CSR) 431
Why CSR At All? 432
Factors Influencing CSR 433
Triple Bottom Line Approach of CSR 434
Corporate Citizenship – Beyond the Mandate of Law 436
Case Study: Tata Steel – A Company That Also Makes Steel 437
Global Principles and Guidelines 439
Corporate Sustainability 440
United Nations Global Compact’s Ten Principles, 2000 441
CSR and Sustainability in India 445
Corporate Social Responsibility Voluntary Guidelines, 2009 447
National Guidelines on Responsible Business Conduct (NGRBC) 2019 447
CSR under the Companies Act, 2013 451
The Companies (Corporate Social Responsibility Policy) Rules, 2014 452
SEBI (LODR) Regulations, 2015 457
Sustainable Development 458
1. United Nations Conference on Human Environment 460
2. United Nations Environment Programme 460
3. Brundtland Commission 461
4. United Nations Conference on Environment and Development (UNCED) 461
5. Kyoto Protocol 462

xxviii
6. Bali Roadmap 463
7. United Nations Conference on Sustainable Development, Rio+20 464
8. Paris Agreement on Climate Change, 2015 465
The 2030 Agenda for Sustainable Development 465
Sustainability Indices 467
Measuring Business Sustainability 468
Altman Z-Score 469
Risk-Adjusted Return on Capital - RAROC 469
Economic Value Added (EVA) 470
Market Value Added (MVA) 471
Sustainable Value Added (SVA) 472
Environmental, Social and Governance (ESG) 473
Focus on ESG Issues- the Global Trend 474
LESSON ROUND UP 476
GLOSSARY 476
TEST YOURSELF 477

Lesson 17
Anti-Corruption and Anti-Bribery Laws in India

Introduction 480
Forceful and Regulatory Ethics 480
Bribery and Corruption - Global Scenarios 480
Brief Information on the Laws and Enforcement Regime in India 481
(A) Delhi Special Police Establishment Act, 1946 481
(B) Unlawful Activities (Prevention) Act, 1967 483
(C) Foreign Corrupt Practices Act, 1977 (The FCPA) 494
(D) Prevention of Corruption Act, 1988 (The PCA) 495
Offence Relating to Public Servant being Bribed [Section 7] 496
Offence Relating to Bribing of A Public Servant [Section 8] 497
Offence Relating to Bribing A Public Servant by A Commercial Organisation [Section 9] 498
Person in Charge of Commercial Organization to Be Guilty of Offence [Section 10] 498
Punishment for Abetment of Offences [ Section 12] 499
Criminal Misconduct by A Public Servant [Section 13] 499
Punishment for Habitual Offender [Section 14] 499
Punishment for Attempt [Section 15] 499

xxix
Matters to Be Taken Into Consideration for Fixing Fine [Section 16] 499
Chapter IV Investigation into cases under the Act 500
Persons Authorised to Investigate [Section 17] 500
Power to Inspect Bankers’ Books [Section 18] 500
Chapter IVA Attachment and Forfeiture of Property 501
Chapter V Sanction for Prosecution and Other Miscellaneous Provisions 501
Previous Sanction Necessary for Prosecution [Section 19] 501
Presumption Where Public Servant Accepts Any Undue Advantage [Section 20] 502
Accused Person to be a Competent Witness [Section 21] 502
The Code of Criminal Procedure, 1973 to Apply Subject to Certain Modifications [Section 22] 503
Particulars in a Charge in Relation to an Offence under Section 13(1)(A) – [Section 23] 503
Military, Naval and Air Force or other law not to be Affected [Section 25] 503
Appeal and Revision [Section 27] 504
Act to be in Addition to Any Other Law [Section 28] 504
Amendment of the Ordinance 38 of 1944 [Section 29] 504
(E) Central Vigilance Commission Act, 2003 504
The Central Vigilance Commission - Chapter II 505
Functions and Powers of the Central Vigilance Commission (Chapter III) 507
Expenses and Annual Report (Chapter IV) 510
Miscellaneous (Chapter V) 510
(F) Lokpal and Lokayukta Act, 2013 (LLA) 514
Powers of Lokpal (Chapter VIII) 521
Complaints Against Chairperson, Members and Officials of Lokpal (Chapter X) 524
Assessment of Loss and Recovery Thereof by Special Court ( Chapter XI) 525
Offences and Penalties (Chapter XIV) 525
Chapter xv Miscellaneous 526
Establishment of the Lokayukta (Part III) 528
(G) Fugitive Economic Offender Act, 2018 529
(H) ICSI Anti Bribery Code 531
LESSON ROUND UP 533
GLOSSARY 533
TEST YOURSELF 534
TEST PAPER 535

xxx
 Conceptual Framework of
Lesson 1
Corporate Governance

Key Concepts One Learning Objectives

Should Know
To understand the:
• Corporate • Concept of Corporate Governance,
Performance
• Developments across jurisdictions
• Theories of Corporate • Historic origin of Corporate Governance
Governance
• Need and importance of corporate governance
• Triple Bottom line
• Evolution of Corporate Governance across countries including India
• Board Independence • Corporate governance framework and its evolution in the Indian Ethos
• Management vs
Ownership
• Corporate Governance
Code
• Accountability
• Investor trust Lesson Outline
• Meaning and Definitions of Corporate Governance
• Advantages of Corporate Governance
• Need for Corporate Governance
• Elements/Scope of Corporate Governance
• Evolution of Corporate Governance
– Theories of Corporate Governance
– Concept of Management vs. Ownership
– Concept of Majority vs. Minority
• Roots of Corporate Governance in Indian Ethos
• Corporate Governance in India- Contemporary Developments
• History of development of Corporate Governance
– Stages of Development of corporate governance in USA
– Development of corporate governance in UK
• Corporate Governance Codes in Major Jurisdictions of the world
• OECD Principles of Corporate Governance
• LESSON ROUND UP
• GLOSSARY
• TEST YOURSELF
2 Lesson 1 • PP-GRMCE

MEANING AND DEFINITIONS OF CORPORATE GOVERNANCE

The phrase “corporate governance” describes “the framework of
rules, relationships, systems and processes within and by which “Corporate Governance is the application of
authority is exercised and controlled within corporations. It best management practices, compliance of
encompasses the mechanisms by which companies, and those in law in true letter and spirit and adherence to
control, are held to account.” ethical standards for effective management
and distribution of wealth and discharge
Corporate governance is the broad term used to describe the
of social responsibility for sustainable
processes, customs, policies, laws and institutions that direct the
development of all stakeholders.”
organizations and corporations in the way they act or administer
and control their operations. It works to achieve the goal of the The Institute of Company Secretaries of
organization and manages the relationship with the stakeholders India
including the board of directors and the shareholders.
Corporate governance means to steer an organization in the desired direction by determining ways to take effective
strategic decisions. It also deals with the accountability of the individuals through a mechanism which reduces the
principal-agent problem in the organization.
Corporate Governance has a broad scope. It includes both social
and institutional aspects. Corporate Governance encourages “Corporate Governance is concerned with
a trustworthy, moral, as well as ethical environment. In other the way corporate entities are governed,
words, the heart of corporate governance is transparency, as distinct from the way business within
disclosure, accountability and integrity. It is to be borne in mind those companies are managed. Corporate
that mere legislation does not ensure good governance. Good governance addresses the issues facing
governance flows from ethical business practices even when Board of Directors, such as the interaction
there is no legislation. with top management and relationships
with the owners and others interested in
Good corporate governance promotes investor confidence, which
the affairs of the company” RobertIan
is crucial to the ability of entities listed on stock exchanges to
(Bob) Tricker (who introduced the words
compete for capital. Good corporate governance is essential
corporate governance for the first time in his
to develop additional values to the stakeholders as it ensures
book in 1984)
transparency which ensures strong and balanced economic
development. This also ensures that the interests of all
shareholders (majority as well as minority shareholders) are safeguarded. It ensures that all shareholders fully
exercise their rights and that the organization fully recognizes their rights.
Corporate Governance is managing, monitoring and overseeing various corporate systems in such a manner that
corporate reliability, reputation are not put at stake. Corporate Governance pillars on transparency and fairness in
action satisfying accountability and responsibility towards the stakeholders.
 Lesson 1 • Conceptual Framework of Corporate Governance 3
The long term performance of a corporate is judged by a wide constituency of stakeholders. Various stakeholders
affected by the governance practices of the company include:

Advantages of Corporate Governance

1. Good corporate governance ensures corporate success and economic growth.
2. Strong corporate governance maintains investors’ confidence, as a result of which, company can raise capital
efficiently and effectively.
3. There is a positive impact on the share price.
4. It provides proper inducement to the owners as well as managers to achieve objectives that are in interests of
the shareholders and the organization.
5. Good corporate governance also minimizes wastages, corruption, risks and mismanagement.
6. It helps in brand formation and development.
7. It ensures organization is managed in a manner that fits the best interests of all.
8. It reduces cost and aids in long term sustenance and growth of the Company.

NEED FOR CORPORATE GOVERNANCE

Corporate Governance is integral to the existence of the company. Corporate Governance is needed to create a
corporate culture of transparency, accountability and disclosure.
 4 Lesson 1 • PP-GRMCE

(a) Corporate Performance

Improved governance structures and processes ensure quality decision-making, encourage effective succession
planning for senior management and enhance the long-term prosperity of companies, independent of the type
of company and its sources of finance. This can be linked with improved corporate performance- either in
terms of share price or profitability.
(b) Enhanced Investor Trust
As individuals and institutions invest capital directly or through intermediary funds, they look to see if well-
governed corporate boards are there to protect their interests. Investors who are provided with high levels
of disclosure and transparency such as relating to data on matters such as pay governance, pay components,
performance goals, and the rationale for pay decisions etc. are likely to invest openly in those companies.
On Apple’s investor relations site, for example, the firm outlines its leadership and governance, including its
executive team, its board of directors and also the firm’s committee charters and governance documents, such
as bylaws, stock ownership guidelines etc.
(c) Better Access to Global Market
Good corporate governance systems attract investment from global investors, which subsequently leads
to greater efficiencies in the financial sector. The relation between corporate governance practices and the
increasing international character of investment is very important. International flows of capital enable
companies to access financing from a much larger pool of investors. In order to reap the full benefits of the
global capital market and attract long-term capital, corporate governance arrangements must be credible, well
understood across borders and should adhere to internationally accepted principles. On the other hand, even
if corporations do not rely primarily on foreign sources of capital, adherence to good corporate governance
practices helps improve the confidence of domestic investors, reduces the cost of capital, enables good
functioning of financial markets and ultimately leads to more stable sources of finance.
(d) Combating Corruption
Companies that are transparent, and have sound system that provide full disclosure of accounting and auditing
procedures, allow transparency in all business transactions, provide environment where corruption would
certainly fade out. Corporate Governance enables a corporation to compete more efficiently and prevent fraud
and malpractices within the organization.
(e) Easy Finance from Institutions
Several structural changes like increased role of financial intermediaries and institutional investors, size of the
enterprises, investment choices available to investors, increased competition, and increased risk exposure have
made monitoring the use of capital more complex thereby increasing the need of Good Corporate Governance.
Evidences indicate that well-governed companies receive higher market valuations. The credit worthiness of a
company can be trusted on the basis of corporate governance practiced in the company.
(f) Enhancing Enterprise Valuation
Improved management accountability and operational transparency fulfill investors’ expectations and
confidence on management and corporations, and in return, increase the value of corporations.
(g) Reduced Risk of Corporate Crisis and Scandals
Effective Corporate Governance ensures efficient risk mitigation system in place. A transparent and accountable
system makes the Board of a company aware of the majority of the mask risks involved in a particular strategy,
thereby, placing various control systems in place to facilitate the monitoring of the related issues.
(h) Accountability
Investor relations are essential part of good corporate governance. Investors directly/ indirectly entrust
management of the company to create enhanced value for their investment. The company is hence obliged to
make timely disclosures on regular basis to all its shareholders in order to maintain good investor relation. Good
Corporate Governance practices create the environment whereby Boards cannot ignore their accountability to
these stakeholders.
 Lesson 1 • Conceptual Framework of Corporate Governance 5

ELEMENTS / SCOPE OF GOOD CORPORATE GOVERNANCE

Some of the important elements of good corporate governance are discussed as under:

1. Role and powers of Board

Board of Directors is the primary interface between the Company and its various stake holders. Directors are
elected by shareholders to represent them and are tasked with making important decisions, such as corporate
officer appointments, executive compensation and dividend policy. In some instances, board obligations stretch
beyond financial optimization, when shareholder resolutions call for certain social or environmental concerns
to be prioritized.
The Board as a main functionary is primary responsible to ensure value creation for its stakeholders. The
absence of clearly designated role and powers of Board weakens accountability mechanism and threatens
the achievement of organizational goals. Therefore, the foremost requirement of good governance is the clear
identification of powers, roles, responsibilities and accountability of the Board, CEO, and the Chairman of the
Board. The role of the Board should be clearly documented in a Board Charter.

2. Legislation
Clear and unambiguous legislation and regulations are fundamental to effective corporate governance.
Legislation that requires continuing legal interpretation or is difficult to interpret on a day-to-day basis can be
subject to deliberate manipulation or inadvertent misinterpretation.

3. Management environment
Management environment includes setting-up of clear objectives and appropriate ethical framework,
establishing due processes, providing for transparency and clear enunciation of responsibility and accountability,
implementing sound business planning, encouraging business risk assessment, having right people and right
skill for the jobs, establishing clear boundaries for acceptable behavior, establishing performance evaluation
measures and evaluating performance and sufficiently recognizing individual and group contribution within
the organisation.

4. Board skills
To be able to undertake its functions efficiently and effectively, the Board must possess the necessary blend
of qualities, skills, knowledge and experience. Each of the directors should make quality contribution to the
organizations policies, operations and management. Illustratively, a Board should have a mix of the following
skills, knowledge and experience:

– Operational or technical expertise, commitment to establish leadership;

– Financial skills;

– Legal skills; and

– Knowledge of Government and regulatory requirement.

5. Board appointments
To ensure that the most competent people are appointed on the Board, the Board positions should be filled only
after making an extensive search. A well-defined and open procedure must be in place for re-appointments as well
as for appointment of new directors. Appointment mechanism should satisfy all statutory and administrative
requirements. High on the priority should be an understanding of skill requirements of the Board particularly
at the time of making a choice for appointing a new director. All new directors should be provided with a letter
of appointment setting out in detail their duties and responsibilities. Orientation program for new directors
should also be provided to apprise them about the company, its internal and external management and the
expectations from the directors and the Board.
6 Lesson 1 • PP-GRMCE

The role of the board of directors was summarized by the King Report (a South African report on corporate
governance) as:

6. Board induction and training

Directors must have a broad understanding of the area of operation of the company’s business, corporate
strategy and challenges being faced by the Board. Attendance at continuing education and professional
development programmes is essential to ensure that directors remain abreast of all developments, which are
or may impact their corporate governance and other related duties.
7. Board independence
Independent Board is essential for sound corporate governance. This goal may be achieved by associating
sufficient number of independent directors with the Board. Independence of directors would ensure that there
are no actual or perceived conflicts of interest. It also ensures that the Board is effective in supervising and,
where necessary, challenging the activities of management. The Board needs to be capable of assessing the
performance of managers with an objective perspective. Accordingly, a portion of the Board members should
be independent of both the management team and any commercial dealings with the company. At the same
time a proper balance between independent and non-independent directors is also very important.
8. Board meetings
Directors must devote sufficient time and give due attention to meet their obligations. Attending Board meetings
regularly and preparing thoroughly before entering the Boardroom increases the quality of interaction at
Board meetings. Board meetings are the forums for Board decision-making. These meetings enable directors
to discharge their responsibilities. The effectiveness of Board meetings is dependent on carefully planned
agendas and providing relevant papers and material to directors sufficiently prior to Board meetings.
9. Code of conduct
It is essential that the organization’s explicitly prescribed norms of ethical practices and code of conduct are
communicated to all concerned and are clearly understood and followed by each member of the organization.
Systems should be in place to periodically measure, evaluate and if possible recognize the adherence to code of
conduct.
10. Strategy setting
The objectives of the company must be clearly documented in a long-term corporate strategy including an
annual business plan together with achievable and measurable performance targets and milestones.
11. Business and community obligations
Though basic activity of a business entity is inherently commercial yet it must also take care of community’s
obligations. Commercial objectives and community service obligations should be clearly documented after
approval by the Board. The stakeholders must be informed about the proposed and ongoing initiatives taken
to meet the community obligations. Corporate Social Responsibility is rapidly becoming an integral part of the
management’s role and responsibility.
 Lesson 1 • Conceptual Framework of Corporate Governance 7

12. Financial and operational reporting

The Board requires comprehensive, regular, reliable, timely, correct and relevant information in a form and of
a quality that is appropriate to discharge its function of monitoring corporate performance. For this purpose,
clearly defined performance measures - financial and non-financial should be prescribed which would add to
the efficiency and effectiveness of the organization.
The reports and information provided by the management must be comprehensive but not so extensive and
detailed as to hamper comprehension of the key issues. The reports should be available to Board members
well in advance to allow informed decision-making. Reporting should include status report about the state of
implementation to facilitate the monitoring of the progress of all significant Board approved initiatives.
13. Monitoring the Board performance
The Board must monitor and evaluate its combined performance and also that of individual directors at periodic
intervals, using key performance indicators besides peer review. The Board should establish an appropriate
mechanism for reporting the results of Board’s performance evaluation. Companies Act, 2013 mandates Board
evaluation of specified classes of Companies.
14. Audit Committee
The Audit Committee is inter alia responsible for liaison with the management; internal and statutory auditors,
reviewing the adequacy of internal control and compliance with significant policies and procedures, reporting
to the Board on the key issues. The quality of Audit Committee significantly contributes to the governance of
the company.
15. Risk management “Corporate governance deals with laws,
procedures, practices and implicit rules
Risk is an important element of corporate functioning that determine a company’s ability to take
and governance. There should be a clearly established informed managerial decisions vis-a-vis its
process of identifying, analyzing and treating risks, which claimants-in particular, its shareholders,
could prevent the company from effectively achieving its creditors, customers, the State and
objectives. It also involves establishing a link between employees. There is a global consensus about
risk-return and resourcing priorities. Appropriate control the objective of ‘good’ corporate governance:
procedures in the form of a risk management plan must be maximizing long-term shareholder value.”
put in place to manage risk throughout the organization. Confederation of Indian Industry (CII)–
The plan should cover activities as diverse as review Desirable Corporate Governance Code
of operating performance, effective use of information (1998)
technology, contracting out and outsourcing.

EVOLUTION OF CORPORATE GOVERNANCE

The following theories elucidate the basis of evolution of corporate governance.
8 Lesson 1 • PP-GRMCE

(a) Agency Theory

According to this theory, managers act as ‘Agents’ of the corporation. The owners set the central objectives of
the corporation. Managers are responsible for carrying out these objectives in day-to-day work of the company.
Corporate Governance is control of management through designing the structures and processes.
In agency theory, the owners are the principals. But principals may not have knowledge or skill for getting the
objectives executed. Thus, principal authorizes the mangers to act as ‘Agents’ and a contract between principal
and agent is made. Under the contract of agency, the agent should act in good faith. He should protect the
interest of the principal and should remain faithful to the goals.
In modern corporations, the shareholding is widely spread. The management (the agent) directly or indirectly
selected by the shareholders (the Principals), pursue the objectives set out by the shareholders. The main thrust
of the Agency Theory is that the actions of the management differ from those required by the shareholders to
maximize their return.
The principals who are widely scattered may not be able to counter this in the absence of proper systems
in place as regards timely disclosures, monitoring and oversight. Corporate Governance puts in place such
systems of oversight.
(b) Shareholder Theory
According to this theory, it is the corporation which is considered as the property of shareholders. They can
dispose off this property as they like. They want to get maximum return from this property.
The owners seek a return on their investment and that is why they invest in a corporation. But this narrow
role has been expanded into overseeing the operations of the corporations and its mangers to ensure that
the corporation is in compliance with ethical and legal standards set by the government. So the directors
are responsible for any damage or harm done to their property i.e., the corporation. The role of managers
is to maximise the wealth of the shareholders. They, therefore should exercise due diligence, care and avoid
conflict of interest and should not violate the confidence reposed in them. The agents must be faithful to
shareholders.
(c) Stakeholder Theory
According to this theory, the company is seen as an input-output model and all the interest groups which
include creditors, employees, customers, suppliers, local-community and the government are to be considered.
From their point of view, a corporation exists for them and not the shareholders alone.
Different stakeholders have different self-interest. The interests of these different stakeholders are at times
conflicting. The managers and the corporation are responsible to mediate between these different stakeholders
interest. The stake holders have solidarity with each other. This theory assumes that stakeholders are capable
and willing to negotiate and bargain with one another. This results in long term self interest.
The role of shareholders is reduced in the corporation. But they should also work to make their interest
compatible with the other stake holders. This requires integrity and managers play an important role here.
They are faithful agents but of all stakeholders, not just stockholders.
(d) Stewardship Theory
The word ‘steward’ means a person who manages another’s property or estate. Here, the word is used in the
sense of guardian in relation to a corporation (this theory is value based). The managers and employees are to
safeguard the resources of corporation and its property and interest when the owner is absent. They are like a
caretaker. They have to take utmost care of the corporation. They should not use the property for their selfish
ends. This theory thus makes use of the social approach to human nature.
The managers should manage the corporation as if it is their own corporation. They are not agents as such
but occupy a position of stewards. The managers are motivated by the principal’s objective and the behavior
Lesson 1 • Conceptual Framework of Corporate Governance 9

pattern is collective, pro-organizational and trustworthy. Thus, under this theory, first of all values as standards
are identified and formulated. Second step is to develop training programmes that help to achieve excellence.
Thirdly, moral support is important to fill any gaps in values.

CONCEPT OF MANAGEMENT VS. OWNERSHIP

Theoretically, shareholders own the company and hence the company ought to work according to the dictates
of the shareholders. However, it is not practically possible for each shareholder to participate in the decision-
making process on a day-to-day basis. Further shareholders generally cannot know and manage the full details of a
corporation’s business (nor do many wish to), they elect a board of directors to make broad corporate policy.
Companies allow for the separation of ownership and management. That means that owners don’t need to be managers
and managers don’t need to be owners. In most small corporations, the owners typically manage the company but it is
not necessary that owners run the company or are even involved in the day-to- day operations of the company.

CONCEPT OF MAJORITY RULE VS. MINORITY INTEREST

As a company is an artificial person with no human existence, it functions through the instrumentality of the board
of directors who is guided by the wishes of the majority, subject, of course, to the welfare of the company as a whole.
It is, therefore, a cardinal rule of company law that prima facie a majority of
members of the company are entitled to exercise the powers of the company The concept of Majority Rule
and generally to control its affairs. Vs. Minority Interest has been
The rule of majority was established way back in 1843 in the case of Foss v. explained in detail in Paper
Harbottle [1843] 67 ER 189 wherein it was held that the Courts would not No. 6: Resolution of Corporate
Disputes, Non-Compliances
generally interfere with the decisions of the company which it was empowered
and Remedies, under Lesson 1:
to take insofar they had been approved of by the majority and made exceptions
Shareholders’ Democracy.
to breaches of charter documents, fiduciary duties and frauds or oppression
and inadequate notice to the shareholders.

ROOTS OF CORPORATE GOVERNANCE IN INDIAN ETHOS

The concept of corporate governance in India has ancient connections. There is a great deal of similarity in the
governance structures of the ancient kingdoms and modern corporations as is evident from our ancient text and
scriptures like Vedas, Manu Smriti, Somadevaneetistuti, Baharspatya Neetistuti, Arthashastra etc. which focuses
on good governance. All Upanishads, Vedas, and the Epic Kavyas like Mahabharata, Ramayana and Bhagwad Gita
emphasize the essence of ethics being followed from within, be it Individual or be it the King or be it the whole
kingdom. Further, all religious teachings or philosophical writing contain some directives on governance.
Ramayana: The Ramayana, the saga of Rama’s life written by Valmiki, is widely acclaimed as among the greatest of
all Indian epics. In fact, this famous Grantha carries useful tips on ethics and values, statecraft and politics, and even
general and human resources management. With Rama Rajya as a model for good governance, the Ramayana is a
must read for practitioners of statecraft.
Bhagwad Gita: In Bhagwad Gita, Lord Krishna details the divine treasure as fearlessness, purity of heart, steadfastness
in knowledge and yoga, charity, self control, and sacrifice, study of scriptures, austerity and uprightness. The
Bhagavad Gita emphasized the concept of duty and its importance for good leadership.
Mahabharata: Shanti Parva which is the part of Indian Epic Mahabharata recites the duties of the ruler, dharma
and good governance, as counselled by the dying Bhishmato Yudhishthira and various Rishis. Shanti parva recites
a theory of governance and duties of a leader. The Shanti parva dedicates over 100 chapters on duties of a king and
rules of proper governance. A prosperous kingdom must be guided by truth and justice. The duty of a ruler and
his cabinet is to enable people to be happy, pursue truth and act sincerely. The proper function of a ruler is to rule
according to dharma; he should lead a simple life and he should not use his power to enjoy the luxuries of life. Shanti
10 Lesson 1 • PP-GRMCE

parva asserts rulers have a dharma (duty, responsibility) to help the upliftment of all living beings. The best law,
claims Shanti parva, is one that enhances the welfare of all living beings, without injuring any specific group.
Arthashastra: Kautilya’s Arthashastra maintains that for good governance, all administrators, including the king
are considered servants of the people. Good governance and stability are completely linked. If rulers are responsive,
accountable, removable, recallable, there is stability. If not there is instability. These tenets hold good even today.
Kautilya’s fourfold duty of a The substitution of the state with the corporation, the king with the CEO or
king– the board of a corporation, and the subjects with the shareholders, bring out
the quintessence of corporate governance, because central to the concept of
corporate governance is the belief that public good should be ahead of private
good and that the corporation’s resources cannot be used for personal benefit.
Raksha Raksha – literally means protection, in the corporate scenario it can be
equated with the risk management aspect.
Vriddhi Vriddhi – literally means growth, in the present day context can be equated
to stakeholder value enhancement
Palana Palana – literally means maintenance/compliance, in the present day context
it can be equated to compliance to the law in letter and spirit.
Yogakshema Yogakshema – literally means well being and in Kautilya’s Arthashastra it is
used in context of a social security system. In the present day context it can be
equated to corporate social responsibility.

CORPORATE GOVERNANCE – CONTEMPORARY DEVELOPMENTS IN INDIA

“Corporate Governance is the acceptance by management of the in a lienable rights of shareholders as the
true owners of the corporation and of their own role as trustees on behalf of the shareholders. It is about
commitment to values, about ethical business conduct and about making a distinction between personal
and corporate funds in the management of a company.”
Report of N. R. Narayana Murthy Committee on Corporate Governance constituted by SEBI (2003)

The initiatives taken by Government of India in 1991, aimed at economic liberalization, privatization and globalisation
of the domestic economy, led India to initiate reform process in order to suitably respond to the developments taking
place world over. On account of the interest generated by Cadbury Committee Report, the Confederation of Indian
Industry (CII), the Associated Chambers of Commerce and Industry (ASSOCHAM) and, the Securities and Exchange
Board of India (SEBI) constituted Committees to recommend initiatives in Corporate Governance.

1998 CII took a special initiative on Corporate Governance, the first

Desirable Corporate Governance: A Code institution initiative in Indian Industry. The objective was to develop
and promote a code for Corporate Governance to be adopted and
followed by Indian companies, whether in the Private Sector, the
Public Sector, Banks or Financial Institutions, all of which are
corporate entities. The final draft of the said Code was widely
circulated in 1997. In April 1998, the Code was released. It was called
Desirable Corporate Governance: A Code.
1999 The Securities and Exchange Board of India (SEBI) had set up a Committee
Kumar Mangalam Birla Committee on May 7, 1999 under the Chairmanship of Kumar Mangalam Birla to
promote and raise standards of corporate governance. The Report of the
committee was the first formal and comprehensive attempt to evolve a
Code of Corporate Governance, in the context of prevailing conditions of
governance in Indian companies, as well as the state of capital markets at
that time. The recommendations of the Report, led to inclusion of Clause
49 in the Listing Agreement in the year 2000.
Lesson 1 • Conceptual Framework of Corporate Governance 11

2000 In May 2000, the Department of Company Affairs [now Ministry of

Task Force on Corporate Excellence Corporate Affairs (MCA)] formed a broad-based study group under
through Governance the chairmanship of Dr. P.L. Sanjeev Reddy, Secretary, DCA. The group
was given the ambitious task of examining ways to “operationalise
the concept of corporate excellence on a sustained basis”, so as to
“sharpen India’s global competitive edge and to further develop
corporate culture in the country”. In November 2000, a Task Force
on Corporate Excellence set up by the group produced a report
containing a range of recommendations for raising governance
standards among all companies in India. It also suggested the setting
up of a Centre for Corporate Excellence.

2002 The Enron debacle of 2001 involving the hand-in-glove relationship

Naresh Chandra Committee between the auditor and the corporate client, the scams involving
the fall of the corporate giants in the U.S. like the WorldCom, Qwest,
Global Crossing, Xerox and the consequent enactment of the stringent
Sarbanes Oxley Act in the U.S. were some important factors which
led the Indian Government to wake up and in the year 2002, Naresh
Chandra Committee was appointed to examine and recommend inter
alia amendments to the law involving the auditor-client relationships
and the role of independent directors.

2003 In the year 2002, SEBI analyzed the statistics of compliance with the
N. R. Narayana Murthy Committee clause 49 by listed companies and felt that there was a need to look
beyond the mere systems and procedures if corporate governance
was to be made effective in protecting the interest of investors. SEBI
therefore constituted a Committee under the Chairmanship of Shri N.
R. Narayana Murthy, for reviewing implementation of the corporate
governance code by listed companies and for issue of revised clause
49 based on its recommendations.

2004 The Government constituted a committee under the Chairmanship

Dr. J. J. Irani Committee on Company Law of Dr. J. J. Irani, Director, Tata Sons, with the task of advising the
Government on the proposed revisions to the Companies Act, 1956
with the objective to have a simplified compact law that would be able
to address the changes taking place in the national and international
scenario, enable adoption of internationally accepted best practices
as well as provide adequate flexibility for timely evolution of new
arrangements in response to the requirements of ever- changing
business models.
The Committee recommended that effective measures be initiated
for protecting the interests of stakeholders and investors,
including small investors, through legal basis for sound corporate
governance practices. With a view to protect the interest of various
stakeholders, the Committee also recommended the constitution
of a “Stakeholders’ Relationship Committee” and provision of
duties of directors in the Act with civil consequences for non-
performance.

2009 In 2009, CII’s Task Force on Corporate Governance gave its report
CII’s Task Force on Corporate Governance and suggested certain voluntary recommendations for industry to
adopt.
12 Lesson 1 • PP-GRMCE

2009 Inspired by the industry recommendations, the MCA, in late 2009,

Corporate Governance Voluntary released a set of voluntary guidelines on corporate governance. The
Guidelines Guidelines were derived out of the unique challenges of the Indian
economy, and took cognizance of the fact that all agencies need to
collaborate together, to ensure that businesses flourish, even as
they contribute to the wholesome and inclusive development of the
country. The Guidelines emphasized that responsible businesses
alone will be able to help India meet its ambitious goal of inclusive
and sustainable all round development. It urged businesses to
embrace the “triple bottom-line” approach whereby their financial
performance could be harmonized with the expectations of society,
the environment and the many stakeholders in a sustainable manner.
2010 Corporate Governance and Ethics Committee of the National
NASSCOM Recommendations Association of Software and Services Companies (NASSCOM) issued
recommendations in mid-2010, focusing on the stakeholders of the
company.
2012 The Ministry of Corporate Affairs constituted a Committee to
Policy Document on Corporate formulate a Policy Document on Corporate Governance under the
Governance chairmanship of Mr. Adi Godrej with the President ICSI as Member
Secretary/ Convenor.
The Policy Document sought to synthesize the disparate elements
in the diverse guidelines, draw on innovative best practices adopted
by specific companies, incorporate current international trends and
anticipate emerging demands on corporate governance in enterprises
in various classes and scale of operations.
The Adi Godrej Committee submitted its report which was articulated
in the form of 17 Guiding Principles of Corporate Governance.
2013 The Companies Act, 2013 brought with it radical changes in the
Companies Act sphere of Corporate Governance in India. It provided a major overhaul
in Corporate Governance norms and sought to have far-reaching
implications on the manner in which corporate operates in India.
The Act has since been amended thrice – in 2015, 2017 and 2019.
The Amendments impacts different aspects of business management
in India, including key structuring, disclosure, and compliance
requirements.
2015 With a view to consolidate and streamline the provisions of the
SEBI (Listing Obligations and Disclosure erstwhile listing agreements for different segments of the capital
Requirements) Regulations market and the provisions pertaining to listed entities with the
Companies Act, 2013, the SEBI notified SEBI (Listing Obligations and
Disclosure Requirements) Regulations, 2015 for the listed entities
having listed designated securities on recognized stock exchanges.
The provisions of Corporate Governance in SEBI (LODR) Regulations,
2015 are discussed at relevant places in this study material.
Lesson 1 • Conceptual Framework of Corporate Governance 13

2017 Uday Kotak Committee The SEBI Committee on corporate governance was formed in June
2017 under the Chairmanship of Mr.Uday Kotak with the aim of
improving standards of corporate governance of listed companies in
India.
With the aim of improving standards of Corporate Governance of
listed companies in India, the Committee was requested to make
recommendations to SEBI on the following issues:
• Ensuring independence in spirit of Independent Directors and
their active participation in functioning of the company;
• Improving safeguards and disclosures pertaining to Related
Party Transactions;
• Issues in accounting and auditing practices by listed companies;
• Improving effectiveness of Board Evaluation practices;
• Addressing issues faced by investors on voting and participation
in general meetings;
• Disclosure and transparency related issues, if any;
• Any other matter, as the Committee deems fit pertaining to
corporate governance in India.
The Committee submitted its report to SEBI in October 2017. The
recommendations of the Committee were given in 11 Chapters as
follows:
• Composition and Role of the Board of Directors
• The Institution of Independent Directors
• Board Committees
• Enhanced Monitoring of Group Companies
• Promoters/Controlling Shareholders and Related Party
Transactions
• Disclosures and Transparency
• Accounting and Audited related Issues
• Investors participation in Meetings of Listed Entities
• Governance aspects of Public Sector Enterprises
• Leniency Mechanism
• Capacity building in SEBI for enhancing Corporate Governance
in Listed Entities
In its board meeting on March 27, 2018, SEBI, after detailed
consideration and due deliberation, accepted several
recommendations of the Kotak Committee without any modifications
and accepted a few other recommendations with certain modifications
as to timelines for implementation, applicability thresholds among
others. Some of the major changes accepted relate to:
• Increasing Transparency -Enhanced Disclosure Requirements
• Disclosure of Utilization of Funds from Qualified Institutional
Placement (QIP) /Preferential Issues
14 Lesson 1 • PP-GRMCE

• Disclosures of Auditor Credentials, Audit Fee, Reasons for

Resignation of Auditors
• Disclosure of Expertise/Skills of Directors
• Enhanced Disclosure of Related Party Transactions (RPT)-A
• Mandatory Disclosure of Consolidated Quarterly Results with
effect from Financial Year 2019-2020-
• Reshaping the Institution of the Board of Directors and
Enhancing the Role of Committees of the Board
• Separation of the office of the chairperson (i.e. the leader of the
board) and CEO/MD (i.e. the leader of the management)
• Augmenting board strength and diversity
• Enhanced Quorum
• Capping the Maximum Number of Directorships
• Expanded Eligibility Criteria for Independent Directors
• Enhanced Role of committees
• Down-streaming Corporate Governance
• Enhanced Obligations on Listed Entities with Respect to
Subsidiaries
• Secretarial Audit to be Mandatory for Listed Entities and their
Material Unlisted Subsidiaries

INTERNATIONAL REGULATORY FRAMEWORK

Sl. Description
No.
1. U.K Stewardship Code 2020
2. Sarbanes-Oxley Act, 2002
3. U.K Corporate Governance Code, 2018
4. Corporate Governance Principles and Recommendations, Australia, 2019
5. Code of Corporate Governance, Singapore, 2018
6. King IV Report on Corporate Governance, South Africa, 2016
7. OECD Principles of Corporate Governance
8. Finnish Corporate Governance Code 2020
9. Italian Corporate Governance Code
10. Principles of Responsible Institutional Investors- Japanese Stewardship Code

STAGES OF CORPORATE GOVERNANCE ACROSS GLOBE

Stages of Development of Corporate Governance in USA

After World War II, the United States of America (USA) experienced strong economic growth, which had a strong
impact on the history of corporate governance. Corporations were thriving and growing rapidly. In the 1970s, the
Securities and Exchange Commission (SEC) brought the issue of corporate governance to the forefront when they
Lesson 1 • Conceptual Framework of Corporate Governance 15

took a stance on official corporate governance reforms. In 1976, the term “corporate governance” first appeared in
the Federal Register, the official journal of the federal government.

Years Developments

1977 Provided for specific provisions regarding establishment, maintenance

The Foreign Corrupt Practices Act and review of systems of internal control.

1979 Prescribed mandatory reporting on internal financial controls.

US Securities Exchange Commission

1985 Emphasized the need of putting in place a proper control environment,

Treadway commission desirability of constituting independent boards and its committees
and objective internal audit function. As a consequence, the Committee
of Sponsoring Organisations (COSO) took birth.

1992 The Committee of Sponsoring Organizations of the Treadway

COSO issued Internal Control – Integrated Commission (COSO) issued Internal Control – Integrated Framework.
Framework. It is a framework “to help businesses and other entities assess and
enhance their internal control systems”.

2002 The Act made fundamental changes in virtually every aspect of

Sarbanes – Oxley (SOX) Act corporate governance in general and auditor independence, conflict
of interests, corporate responsibility, enhanced financial disclosures
and severe penalties for willful default by managers and auditors, in
particular.

The Dodd-Frank Wall Street Reform and The Dodd-Frank Act places strict regulations on lenders and banks in
Consumer Protection Act, 2010 an effort to protect consumers and prevent another all-out economic
recession. Dodd-Frank also created several new agencies to oversee
the regulatory process and implement certain changes.

Development of Corporate Governance in Union Kingdom (UK)

1992 The Committee on the Financial Aspects of Corporate Governance

Cadbury Report under the chairmanship of Sir Adrian Cadbury was set up in May
1991 by the Financial Reporting Council, the Stock Exchange and the
accountancy profession in response to continuing concerns about
standards of financial reporting and accountability, particularly in
light of the BCCI and Maxwell cases. The Committee submitted its
report in 1992 and developed a set of principles of good corporate
governance which were incorporated into the London Stock Exchange
(LSE)’s Listing Rules. It also introduced the principle of ‘comply or
explain’. It made the following three basic recommendations:
• the CEO and Chairman of companies should be separated;
• boards should have at least three non-executive directors, two of
whom should have no financial or personal ties to executives; and
• each board should have an audit committee composed of non-
executive directors.
16 Lesson 1 • PP-GRMCE

1995 The Confederation of British Industry constituted a group under the

Greenbury Report chairmanship of Sir Richard Greenbury to make recommendations on
Directors’ Remuneration. The group submitted its report in 1995, its
major findings were as under:
• Constitution of a Remuneration Committee comprising of Non-
Executive Directors
• Responsibility of this committee in determining the remuneration
of CEO and executive directors
• Responsibility of the committee in determining the remuneration
policy.
• Level of disclosure to shareholders regarding the remuneration
of directors’.
• Remuneration should be linked more explicitly to performance.
These findings were incorporated in Code of Best Practice on Directors’
Remuneration of the Report. The majority of the recommendations
were incorporated in Listing Rules of London Stock Exchange.

1998 The Hampel Committee was established in November, 1995 to

Hampel Report review and revise the earlier recommendations of the Cadbury and
Greenbury Committees. An important development was in the area
of accountability and audit. The Board was identified as having
responsibility to maintain a sound system of internal control, thereby
safeguarding shareholders’ investments. Further, the Board was to be
held accountable for all aspects of risk management. Recommendations
of this Report and further consultations by the London Stock Exchange
became the Combined Code on Corporate Governance.

1998 The resulting Hampel Report led to the publication of Combined Code
Combined Code Corporate Governance which applied to all listed companies. It added that:
• the Chairman of the board should be seen as the “leader” of the
non- executive directors;
• institutional investors should be responsible to make considered
use of their vote; and
• all kinds of remuneration including pensions should be disclosed.

1999 The Turnbull Committee was established to provide direction on the

Turnbull Report internal control requirements of the Combined Code, including how
to carry out risk management. The report informs directors of their
obligations under the Combined Code with regard to keeping good
“internal controls” in their companies, or having good audits and
checks to ensure the quality of financial reporting and catch any fraud
before it becomes a problem. Turnbull Committee published “Internal
Control Guidance for Directors on Combined Code”.

2001 Paul Myners ‘Institutional Investment in the UK: A Review’

Myners : Review of Institutional published in 2001, was commissioned by the Government, ‘to consider
Investment whether there were factors distorting the investment decision-making
of institutions.’ The analysis contained in the Report pointed to a
number of problems with the existing structures used by the various
types of institutional investors to make investment decisions.
Lesson 1 • Conceptual Framework of Corporate Governance 17

2003 Sir Derek Higgs was commissioned by the UK Government to review

Higgs Report the roles of independent directors and of audit committees. The
resulting Report proposed that:
• at least half of a board (excluding the Chair) be comprised of
non- executive directors;
• that the non-executives should meet at least once a year in
isolation to discuss company performance;
• that a senior independent director be nominated and made
available for shareholders to express any concerns to; and
• that potential non-executive directors should satisfy themselves
that they possess
the knowledge, experience, skills and time to carry out their duties
with due diligence.

2003 The Financial Reporting Council published the Smith Report,

“Guidance on Audit Committees”.
The Tyson Report on the recruitment and development of non-
executive directors commissioned by the Department of Trade and
Industry.

2009 The principal focus of this Review was on banks, but many of the
Walker Review of Corporate Governance issues arising, and associated, conclusions and recommendations, are
of UK Banking Industry relevant – if in a lesser degree – for other major financial institutions
such as life assurance companies. The terms of reference were as
follows:
“To examine corporate governance in the UK banking industry
and make recommendations, including in the following areas: the
effectiveness of risk management at board level, including the incentives
in remuneration policy to manage risk effectively; the balance of skills,
experience and independence required on the boards of UK banking
institutions; the effectiveness of board practices and the performance
of audit, risk, remuneration and nomination committees; the role of
institutional shareholders in engaging effectively with companies and
monitoring of boards; and whether the UK approach is consistent with
international practice and how national and international best practice
can be promulgated.”

2011 The Financial Reporting Council announced the launch of an enquiry

Sharman Inquiry led by Lord Sharman to identify lessons for companies and auditors
addressing going concern and liquidity risk.

2018 In November 2016, the Department for Business, Energy and Industrial
UK Corporate Governance Code Strategy (BEIS) published a Green Paper on corporate governance
reforms which focused on executive pay and strengthening the voice
of employees and other stakeholders in the boardroom. Consequently,
FRC made an announcement in February 2017 to take account of the
issues raised in the BEIS Green Paper by undertaking a fundamental
review of UK Code of Corporate Governance.
18 Lesson 1 • PP-GRMCE

On 29 August 2017, the Government identified a number of

proposals that it intended to take forward, including inviting the FRC
to initiate a consultation with the aim of revising the UK Corporate
Governance Code in a number of key areas. On 5 December, 2017
the FRC published for consultation proposed revisions to the UK
Corporate Governance Code and Guide on Board Effectiveness.
The Financial Reporting Council (FRC) published its new 2018 UK
Corporate Governance Code (2018 Code) on July 16, 2018, together
with revised Guidance on Board Effectiveness (Guidance) which
supplements the 2018 Code by suggesting good practice to assist
companies in applying the 2018 Code’s Principles and reporting on
that application.
The 2018 Code sets higher standards of corporate governance in
the UK so as to promote transparency and integrity in business and,
at the same time, attract investment in the UK in the long-term,
benefiting the economy and wider society.
The 2018 Code emphasizes the importance of positive relationships
between companies, shareholders and stakeholders, a clear purpose
and strategy aligned with healthy corporate culture, high quality
board composition and a focus on diversity, and remuneration
which is proportionate and supports long-term success.

2020 Stewardship is the responsible allocation, management and

The UK Stewardship Code 2020 oversight of capital to create long-term value for clients and
beneficiaries leading to sustainable benefits for the economy, the
environment and society.
The UK Stewardship Code 2020 is a substantial and ambitious
revision to the 2012 edition of the Code which took effect from 1
January 2020.The UK Stewardship Code 2020 (the Code) sets high
stewardship standards for asset owners and asset managers, and
for service providers that support them. The Code comprises a
set of ‘apply and explain’ Principles for asset managers and asset
owners, and a separate set of Principles for service providers. The
Code does not prescribe a single approach to effective stewardship.
Instead, it allows organisations to meet the expectations in a
manner that is aligned with their own business model and strategy.
The Code consists of 12 Principles for asset managers and asset
owners, and 6 Principles for service providers.
The code has specified the following principles for asset owners
and asset managers:

Purpose and Governance:

Principle 1
Signatories’ purpose, investment beliefs, strategy, and culture enable
stewardship that creates long-term value for clients and beneficiaries
leading to sustainable benefits for the economy, the environment and
society.
Principle 2
Signatories’ governance, resources and incentives support
stewardship.
Lesson 1 • Conceptual Framework of Corporate Governance 19

Principle 3
Signatories manage conflicts of interest to put the best interests of
clients and beneficiaries first.
Principle 4
Signatories identify and respond to market-wide and systemic risks to
promote a well-functioning financial system.
Principle 5
Signatories review their policies, assure their processes and assess
the effectiveness of their activities.
Investment Approach:
Principle 6
Signatories take account of client and beneficiary needs and
communicate the activities and outcomes of their stewardship and
investment to them.
Principle 7
Signatories systematically integrate stewardship and investment,
including material environmental, social and governance issues, and
climate change, to fulfil their responsibilities.
Principle 8
Signatories monitor and hold to account managers and/or service
providers.
Engagement:
Principle 9
Signatories engage with issuers to maintain or enhance the value of
assets.
Principle 10
Signatories, where necessary, participate in collaborative engagement
to influence issuers.
Principle 11
Signatories, where necessary, escalate stewardship activities to
influence issuers.
Exercising Rights and Responsibilities:
Principle 12
Signatories actively exercise their rights and responsibilities.
PRINCIPLES FOR SERVICE PROVIDERS
Principle 1
Signatories’ purpose, strategy and culture enable them to promote
effective stewardship.
Principle 2
Signatories’ governance, workforce, resources and incentives enable
them to promote effective stewardship.
20 Lesson 1 • PP-GRMCE

Principle 3
Signatories identify and manage conflicts of interest and put the best
interests of clients first.
Principle 4
Signatories identify and respond to market-wide and systemic risks to
promote a well-functioning financial system.
Principle 5
Signatories support clients’ integration of stewardship and investment,
taking into account, material environmental, social and governance
issues, and communicating what activities they have undertaken.
Principle 6
Signatories review their policies and assure their processes.

CORPORATE GOVERNANCE CODES IN MAJOR JURISDICTIONS ACROSS THE WORLD

Corporate governance is a critical factor in economic stability and organisational success. In the last few
decades, many emerging markets, international bodies, governments, financial institutions, public and private
sector bodies have reformed their corporate governance systems and are encouraging debate and spearheading
initiatives towards good corporate governance. Better regulatory and self-regulatory corporate governance
frameworks and enforcement mechanisms are being implemented through tougher legislations and Corporate
Governance Codes.
The legislative framework of corporate governance adopted by some countries like USA, UK, Australia, Singapore
and South Africa are discussed below.

Corporate Governance Framework in USA

The companies in U.S are governed by a variety of legal regimes relating to corporate governance matters. These
consist of state laws and federal statutory rules and regulations of various government agencies including
rules promulgated by U.S. Securities and Exchange Commission (the SEC) and self regulatory organizations
such as stock exchanges that impose requirements on companies whose securities are listed on such stock
exchanges.
The primary sources of federal rules and regulations include the Securities Act of 1933 and the Securities Exchange
Act of 1934 and the regulations framed under those Acts.
Other regulations imposing disclosure and compliance requirements include the Sarbanes Oxley Act of 2002 and the
Dodd-Frank Wall Street reform and Consumer Protection Act of 2010.
Also, major stock exchanges like NYSE and NASDAQ provides for the rules pertaining to corporate governance
matters which companies must comply as a condition to being listed on the stock exchange.
U.S. Securities and Exchange Commission (SEC): The aim of U.S. Securities and Exchange Commission is to
protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation. The SEC oversees the
key participants in the securities world, including securities exchanges, securities brokers and dealers, investment
advisors, and mutual funds. The SEC is concerned primarily with promoting the disclosure of important market-
related information, maintaining fair dealing, and protecting against fraud.
Sarbanes-Oxley Act of 2002
In 2002, the United States Congress passed the Sarbanes-Oxley Act (SOX) to protect shareholders and the general
public from accounting errors and fraudulent practices in enterprises, and to improve the accuracy of corporate
disclosures. Congressmen Paul Sarbanes and Michael Oxley drafted the act with the goal of improving corporate
Lesson 1 • Conceptual Framework of Corporate Governance 21

governance and accountability, in light of the financial scandals that occurred at Enron, WorldCom, and Tyco, among
others.
The act sets deadlines for compliance and publishes rules on requirements. The Act mandated a number of reforms
to enhance corporate responsibility, enhance financial disclosures and combat corporate and accounting fraud, and
also created the “Public Company Accounting Oversight Board,” also known as the PCAOB, to oversee the activities of
the auditing profession. The Act became effective since 2006 for all publicly- traded companies which are required
to implement and report to the SEC for compliance. In addition, certain provisions of Sarbanes-Oxley also apply to
privately-held companies.
The summary highlights of the most important Sarbanes-Oxley sections for compliance are listed below.

SOX Section 302 a) CEO and CFO must review all financial reports.
Corporate Responsibility for Financial b) Financial report does not contain any misrepresentations.
Reports c) Information in the financial report is “fairly presented”.
d) CEO and CFO are responsible for the internal accounting controls.
e) CEO and CFO must report any deficiencies in internal accounting
controls, or any fraud involving the management of the audit
committee.
f) CEO and CFO must indicate any material changes in internal
accounting controls.
SOX Section 401 All financial statements and their requirement to be accurate and
Disclosures in Periodic Reports presented in a manner that does not contain incorrect statements or
admit to state material information. Such financial statements should
also include all material off-balance sheet liabilities, obligations, and
transactions.
SOX Section 404 All annual financial reports must include an Internal Control
Management Assessment of Internal Report stating that management is responsible for an “adequate”
Controls internal control structure, and an assessment by management of
the effectiveness of the control structure. Any shortcomings in these
controls must also be reported. In addition, registered external
auditors must attest to the accuracy of the company management’s
assertion that internal accounting controls are in place, operational
and effective.
SOX Section 409 Companies are required to disclose on a almost real-time basis
Real Time Issuer Disclosures information concerning material changes in its financial condition or
operations.
SOX Section 802 This section specifies the penalties for knowingly altering documents
Criminal Penalties for Altering in an ongoing legal investigation, audit, or bankruptcy proceeding.
Documents
SOX Section 806 This section deals with whistleblower protection.
Protection for Employees of Publicly
Traded Companies Who Provide
Evidence of Fraud
SOX Section 902 It is a crime for any person to corruptly alter, destroy, mutilate, or
Attempts & Conspiracies to Commit conceal any document with the intent to impair the object’s integrity
Fraud Offenses or availability for use in an official proceeding.

SOX Section 906 Section 906 addresses criminal penalties for certifying a misleading or
Corporate Responsibility for Financial fraudulent financial report. Under SOX 906, penalties can be upwards
Reports of $5 million in fines and 20 years in prison.
22 Lesson 1 • PP-GRMCE

UK Corporate Governance Code, 2018

The Financial Reporting Council (FRC), an independent regulator in the UK and Ireland, is responsible for regulating
auditors, accountants and actuaries and promotes transparency and integrity in business. The FRC sets the UK
Corporate Governance and Stewardship Codes and UK standards for accounting and actuarial work; monitors and
takes action to promote the quality of corporate reporting; and operates independent enforcement arrangements
for accountants and actuaries.
The FRC published its new 2018 UK Corporate Governance Code (2018 Code) on July 16, 2018, together with
revised Guidance on Board Effectiveness which supplements the 2018 Code by suggesting good practice to assist
companies in applying the 2018 Code’s Principles and reporting on that application.
The Code is applicable to all companies with a premium listing, whether incorporated in the UK or elsewhere. The
new Code applies to accounting periods beginning on or after 1 January 2019.
The 2018 Code sets out the principles by which the board of directors should promote the purpose, values and
future success of the company. The Code sets out standards of good practice in relation to issues such as leadership,
effectiveness, accountability, remuneration, and relations with shareholders. The Code does not set out a rigid set
of rules; instead it offers flexibility through the application of Principles and through ‘comply or explain’ Provisions
and supporting guidance. It is the responsibility of boards to use this flexibility wisely and of investors and their
advisors to assess differing company approaches thoughtfully.
The Listing Rules require companies to explain how they have applied the main principles of the Code and the
extent to which they have complied with the detailed provisions. The main principles provided in the code are given
hereunder.

Heading Principles
BOARD LEADERSHIP AND A. A successful company is led by an effective and entrepreneurial board,
COMPANY PURPOSE whose role is to promote the long-term sustainable success of the
company, generating value for shareholders and contributing to wider
society.
B. The board should establish the company’s purpose, values and strategy,
and satisfy itself that these and its culture are aligned. All directors must
act with integrity, lead by example and promote the desired culture.
C. The board should ensure that the necessary resources are in place for the
company to meet its objectives and measure performance against them.
The board should also establish a framework of prudent and effective
controls, which enable risk to be assessed and managed.
D. In order for the company to meet its responsibilities to shareholders and
stakeholders, the board should ensure effective engagement with, and
encourage participation from, these parties.
E. The board should ensure that workforce policies and practices are
consistent with the company’s values and support its long-term
sustainable success. The workforce should be able to raise any matters
of concern.
DIVISION OF F. The chair leads the board and is responsible for its overall effectiveness
RESPONSIBILITIES in directing the company. They should demonstrate objective judgement
throughout their tenure and promote a culture of openness and debate.
In addition, the chair facilitates constructive board relations and the
effective contribution of all non-executive directors, and ensures that
directors receive accurate, timely and clear information.
Lesson 1 • Conceptual Framework of Corporate Governance 23

G. The board should include an appropriate combination of executive and

non-executive (and, in particular, independent non-executive) directors,
such that no one individual or small group of individuals dominates
the board’s decision-making. There should be a clear division of
responsibilities between the leadership of the board and the executive
leadership of the company’s business.
H. Non-executive directors should have sufficient time to meet their board
responsibilities. They should provide constructive challenge, strategic
guidance, offer specialist advice and hold management to account.
I. The board, supported by the company secretary, should ensure that it
has the policies, processes, information, time and resources it needs in
order to function effectively and efficiently.
COMPOSITION, SUCCESSION J. Appointments to the board should be subject to a formal, rigorous
AND EVALUATION and transparent procedure, and an effective succession plan should be
maintained for board and senior management.4 Both appointments and
succession plans should be based on merit and objective criteria5 and,
within this context, should promote diversity of gender, social and ethnic
backgrounds, cognitive and personal strengths.
K. The board and its committees should have a combination of skills,
experience and knowledge. Consideration should be given to the length
of service of the board as a whole and membership regularly refreshed.
L. Annual evaluation of the board should consider its composition, diversity
and how effectively members work together to achieve objectives.
Individual evaluation should demonstrate whether each director
continues to contribute effectively.
AUDIT, RISK AND INTERNAL M. The board should establish formal and transparent policies and
CONTROL procedures to ensure the independence and effectiveness of internal and
external audit functions and satisfy itself on the integrity of financial and
narrative statements.
N. The board should present a fair, balanced and understandable assessment
of the company’s position and prospects.
O. The board should establish procedures to manage risk, oversee the
internal control framework, and determine the nature and extent of the
principal risks the company is willing to take in order to achieve its long-
term strategic objectives.
REMUNERATION P. Remuneration policies and practices should be designed to support
strategy and promote long-term sustainable success. Executive
remuneration should be aligned to company purpose and values, and
be clearly linked to the successful delivery of the company’s long-term
strategy.
Q. A formal and transparent procedure for developing policy on executive
remuneration and determining director and senior management10
remuneration should be established. No director should be involved in
deciding their own remuneration outcome.
R. Directors should exercise independent judgement and discretion when
authorising remuneration outcomes, taking account of company and
individual performance, and wider circumstances.
24 Lesson 1 • PP-GRMCE

Corporate Governance Principles and Recommendations, Australia - 2019

The ASX Corporate Governance Council (“Council”), convened in August 2002 is the organisation which brings
together various business, shareholder and industry groups, each offering valuable insights and expertise on
governance issues from the perspective of their particular stakeholders. Its primary work has been the development
of the Principles and Recommendations.
The Corporate Governance Principles and Recommendations (“Principles and Recommendations”) were first
introduced in 2003. A second edition was published in 2007 and a third in 2014. In 2017, the Council agreed that it
was an appropriate time to commence work on a fourth edition of the Principles and Recommendations to address
emerging issues around culture, values and trust, fuelled by recent examples of conduct by some listed entities
falling short of community standards and expectations.
The fourth edition comes into force for financial years commencing on or after 1 January 2020.
These Principles and Recommendations set out recommended corporate governance practices for entities admitted
to the ASX official list as an ASX listing, regardless of the legal form they take, whether they are established in Australia
or elsewhere, and whether they are internally or externally managed. The Principles and Recommendations are not
mandatory and do not seek to prescribe the corporate governance practices that a listed entity must adopt.
The “if not, why not” approach is fundamental to the operation of the Principles and Recommendations. This approach
ensures that the market receives an appropriate level of information about the entity’s governance arrangements
so that investors and other stakeholders can have a meaningful dialogue with the board and management on
governance matters and can factor the information provided into their decision on whether or not to invest in the
entity and how to vote on particular resolutions.
The Principles and Recommendations are structured around, and seek to promote, 8 central principles. There are 35
specific recommendations of general application intended to give effect to these principles, as well as 3 additional
recommendations that only apply in certain limited cases.
8 Central Principles
1. Lay solid foundations for management and oversight: A listed entity should clearly delineate the respective
roles and responsibilities of its board and management and regularly review their performance.
2. Structure the board to be effective and add value: The board of a listed entity should be of an appropriate
size and collectively have the skills, commitment and knowledge of the entity and the industry in which it
operates, to enable it to discharge its duties effectively and to add value.
3. Instill a culture of acting lawfully, ethically and responsibly: A listed entity should instill and continually
reinforce a culture across the organisation of acting lawfully, ethically and responsibly.
4. Safeguard the integrity of corporate reports: A listed entity should have appropriate processes to verify the
integrity of its corporate reports.
5. Make timely and balanced disclosure: A listed entity should make timely and balanced disclosure of all
matters concerning it that a reasonable person would expect to have a material effect on the price or value of
its securities.
6. Respect the rights of security holders: A listed entity should provide its security holders with appropriate
information and facilities to allow them to exercise their rights as security holders effectively.
7. Recognise and manage risk: A listed entity should establish a sound risk management framework and
periodically review the effectiveness of that framework.
8. Remunerate fairly and responsibly: A listed entity should pay director remuneration sufficient to attract
and retain high quality directors and design its executive remuneration to attract, retain and motivate high
quality senior executives and to align their interests with the creation of value for security holders and with
the entity’s values and risk appetite.
 Lesson 1 • Conceptual Framework of Corporate Governance 25

Code of Corporate Governance, Singapore - 2018

The Code of Corporate Governance which is applicable to listed companies in Singapore on a comply-or-explain
basis, first came into effect on 1 January 2003.
The Code aims to promote high levels of corporate governance in Singapore by putting forth Principles of good
corporate governance and Provisions with which companies are expected to comply. The Practice Guidance
complements the Code by providing guidance on the application of the Principles and Provisions and setting out
best practices for companies. Adoption of the Practice Guidance is voluntary.
This version of the Code, has at its core broad Principles of corporate governance. Compliance with, and observation
of, these Principles is mandatory. These Principles set out broadly accepted characteristics of good corporate
governance. Companies are required to describe their corporate governance practices with reference to both the
Principles and Provisions, and how the company’s practices conform to the Principles.
Principles
1. The company is headed by an effective Board which is collectively responsible and works with Management for
the long-term success of the company.
2. The Board has an appropriate level of independence and diversity of thought and background in its composition
to enable it to make decisions in the best interests of the company.
3. There is a clear division of responsibilities between the leadership of the Board and Management, and no one
individual has unfettered powers of decision-making.
4. The Board has a formal and transparent process for the appointment and reappointment of directors, taking
into account the need for progressive renewal of the Board.
5. The Board undertakes a formal annual assessment of its effectiveness as a whole, and that of each of its board
committees and individual directors.
6. The Board has a formal and transparent procedure for developing policies on director and executive
remuneration, and for fixing the remuneration packages of individual directors and key management personnel.
No director is involved in deciding his or her own remuneration.
7. The level and structure of remuneration of the Board and key management personnel are appropriate and
proportionate to the sustained performance and value creation of the company, taking into account the
strategic objectives of the company.
8. The company is transparent on its remuneration policies, level and mix of remuneration, the procedure for
setting remuneration, and the relationships between remuneration, performance and value creation.
9. The Board is responsible for the governance of risk and ensures that Management maintains a sound system of
risk management and internal controls, to safeguard the interests of the company and its shareholders.
10. The Board has an Audit Committee (“AC”) which discharges its duties objectively.
11. The company treats all shareholders fairly and equitably in order to enable them to exercise shareholders’
rights and have the opportunity to communicate their views on matters affecting the company. The company
gives shareholders a balanced and understandable assessment of its performance, position and prospects.
12. The company communicates regularly with its shareholders and facilitates the participation of shareholders
during general meetings and other dialogues to allow shareholders to communicate their views on various
matters affecting the company.
13. The Board adopts an inclusive approach by considering and balancing the needs and interests of material
stakeholders, as part of its overall responsibility to ensure that the best interests of the company are served.
26 Lesson 1 • PP-GRMCE

King IV Report on Corporate Governance, South Africa – 2016

The King Committee, a private-sector body comprising of former South African Supreme Court Judge, Mervyn King
was formed in 1992, to draft corporate governance guidelines. Four reports have been issued by the King Committee
since then –
• (King I), 1994
• (King II), 2002
• (King III), 2009 and
• (King IV) 2016.
King IV is structured as a Report that includes a Code, with additional, separate sector supplements for SME’s,
NPO’s, State-Owned Entities, Municipalities and Retirement Funds. The King Code contains both principles and
recommended practices aimed at achieving governance outcomes.
King IV requires an “Apply AND Explain” approach to disclosure, as opposed to King III which was ‘Apply or Explain’.
This means that application of the principles is assumed and that an explanation is disclosed on the practices that
have been implemented and how these support achieving the associated governance principle.
Whilst King IV is voluntary (unless prescribed by law or a stock exchange Listings Requirement) it is envisaged that
it will be applicable to all organisations irrespective of their form or manner of incorporation.
The objectives of King IV are to:
• Promote corporate governance as integral to running an organisation and delivering governance outcomes
such as ethical culture, good performance, effective control and legitimacy.
• Broaden the acceptance of the King IV by making it accessible and fit for implementation across a variety of
sectors and organisational types.
• Reinforce corporate governance as a holistic and interrelated set of arrangements to be understood and
implemented in an integrated manner.
• Encourage transparent and meaningful reporting to stakeholders.
• Present corporate governance as concerned with not only structure and process, but also with an ethical and
consciousness and conduct.

King IV Principles
GOVERNANCE ELEMENT PRINCIPLES
LEADERSHIP, ETHICS AND 1. The governing body should lead ethically and effectively.
CORPORATE CITIZENSHIP 2. The governing body should govern the ethics of the organisation in a way
that supports the establishment of an ethical culture.
3. The governing body should ensure that the organisation is and is seen to
be a responsible corporate citizen.
STRATEGY, PERFORMANCE 4. The governing body should appreciate that the organisation’ score
AND REPORTING purpose, its risks and opportunities, strategy, business model,
performance and sustainable development are all inseparable elements
of the value creation process.
5. The governing body should ensure that reports issued by the organisation
enable stakeholders to make informed assessments of the organisation’s
performance, and its short, medium and long-term prospects.
Lesson 1 • Conceptual Framework of Corporate Governance 27

GOVERNING STRUCTURES AND 6. The governing body should serve as the focal point and custodian of
DELEGATION corporate governance in the organisation.
7. The governing body should comprise the appropriate balance of
knowledge, skills, experience, diversity and independence for it to
discharge its governance role and responsibilities objectively and
effectively.
8. The governing body should ensure that its arrangements for delegation
within its own structures promote independent judgement, and assist
with balance of power and the effective discharge of its duties.
9. The governing body should ensure that the evaluation of its own
performance and that of its committees, its chair and its individual
members, support continued improvement in its performance and
effectiveness.
10. The governing body should ensure that the appointment of, and
delegation to, management contribute to role clarity and the effective
exercise of authority and responsibilities.
GOVERNANCE FUNCTIONAL 11. The governing body should govern risk in a way that supports the
AREAS organisation in setting and achieving its strategic objectives.
12. The governing body should govern technology and information in a
way that supports the organisation setting and achieving its strategic
objectives.
13. The governing body should govern compliance with applicable laws and
adopted, non-binding rules, codes and standards in a way that supports
the organisation being ethical and a good corporate citizen.
14. The governing body should ensure that the organisation remunerates
fairly, responsibly and transparently so as to promote the achievement of
strategic objectives and positive outcomes in the short, medium and long
term.
15. The governing body should ensure that assurance services and functions
enable an effective control environment, and that these support
the integrity of information for internal decision-making and of the
organisation’s external reports.
STAKEHOLDER 16. In the execution of its governance role and responsibilities, the governing
RELATIONSHIPS body should adopt a stakeholder-inclusive approach that balances the
needs, interests and expectations of material stakeholders in the best
interests of the organisation over time.
17. The governing body of an institutional investor organisation should
ensure that responsible investment is practiced by the organisation to
promote the good governance and the creation of value by the companies
in which it invests.

OECD PRINCIPLES OF CORPORATE GOVERNANCE

Good corporate governance is not an end in itself. It is a means to create market confidence and business integrity,
which in turn is essential for companies that need access to equity capital for long term investment. Access to equity
capital is particularly important for future oriented growth companies and to balance any increase in leveraging.
The updated G20/OECD Principles of Corporate Governance (the Principles) therefore provide a very timely and
tangible contribution to the G20 priority in 2015 to support investment as a powerful driver of growth.
 28 Lesson 1 • PP-GRMCE

The Principles are also about inclusiveness. Today, millions of

“Corporate governance involves a set
households around the world have their savings in the stock
of relationships between a company’s
market, directly or indirectly. And publicly listed companies
management, its board, its shareholders and
provide for more than 200 million jobs. The Principles also address
other stakeholders. Corporate governance
the rights of these stakeholders and their ability to participate in
also provides the structure through which
corporate wealth creation.
the objectives of the company are set, and
The Principles were originally developed by the OECD in 1999 and the means of attaining those objectives and
further updated in 2004. Following the request by the G20 Finance monitoring performance are determined.”
Ministers and Central Bank Governors at their meeting on 9-10
G20/OECD Principles of Corporate
February 2015 in Istanbul, a draft of the revised Principles was
Governance
presented and discussed at the G20/OECD Corporate Governance
Forum in Istanbul on 10 April 2015 where they found broad
support among participants. The Principles were subsequently
presented at the May and August 2015 meetings of the G20 Investment and Infrastructure Working Group. The OECD
Council adopted the Principles on 8 July 2015. The Principles were then submitted to the G20 Finance Ministers
and Central Bank Governors meeting in Ankara 4-5 September for endorsement as joint G20/OECD Principles and
transmission to the G20 Leaders Summit in November 2015.
The Principles provide guidance through recommendations and annotations across six chapters.
I. Ensuring the basis for an effective corporate governance framework:
The corporate governance framework should promote transparent and fair markets, and the efficient allocation
of resources. It should be consistent with the rule of law and support effective supervision and enforcement:
A. The corporate governance framework should be developed with a view to its impact on overall economic
performance, market integrity and the incentives it creates for market participants and the promotion of
transparent and well-functioning markets.
B. The legal and regulatory requirements that affect corporate governance practices should be consistent
with the rule of law, transparent and enforceable.
C. The division of responsibilities among different authorities should be clearly articulated and designed to
serve the public interest.
D. Stock market regulation should support effective corporate governance
E. Supervisory, regulatory and enforcement authorities should have the authority, integrity and resources
to fulfil their duties in a professional and objective manner. Moreover, their rulings should be timely,
transparent and fully explained.
F. Cross-border co-operation should be enhanced, including through bilateral and multilateral arrangements
for exchange of information.
II. The rights and equitable treatment of shareholders and key ownership functions:
The corporate governance framework should protect and facilitate the exercise of shareholders’ rights
and ensure the equitable treatment of all shareholders, including minority and foreign shareholders. All
shareholders should have the opportunity to obtain effective redress for violation of their rights:
A. Basic shareholder rights should include the right to: 1) secure methods of ownership registration; 2)
convey or transfer shares; 3) obtain relevant and material information on the corporation on a timely and
regular basis; 4) participate and vote in general shareholder meetings; 5) elect and remove members of
the board; and 6) share in the profits of the corporation.
B. Shareholders should be sufficiently informed about, and have the right to approve or participate in,
decisions concerning fundamental corporate changes such as: 1) amendments to the statutes, or articles
of incorporation or similar governing documents of the company; 2) the authorisation of additional
shares; and 3) extraordinary transactions, including the transfer of all or substantially all assets, that in
effect result in the sale of the company.
 Lesson 1 • Conceptual Framework of Corporate Governance 29

C. Shareholders should have the opportunity to participate effectively and vote in general shareholder
meetings and should be informed of the rules, including voting procedures, that govern general
shareholder meetings:
1. Shareholders should be furnished with sufficient and timely information concerning the date,
location and agenda of general meetings, as well as full and timely information regarding the issues
to be decided at the meeting.
2. Processes and procedures for general shareholder meetings should allow for equitable treatment of
all shareholders. Company procedures should not make it unduly difficult or expensive to cast votes.
3. Shareholders should have the opportunity to ask questions to the board, including questions relating
to the annual external audit, to place items on the agenda of general meetings, and to propose
resolutions, subject to reasonable limitations.
4. Effective shareholder participation in key corporate governance decisions, such as the nomination
and election of board members, should be facilitated. Shareholders should be able to make their
views known, including through votes at shareholder meetings, on the remuneration of board
members and/or key executives, as applicable. The equity component of compensation schemes for
board members and employees should be subject to shareholder approval.
5. Shareholders should be able to vote in person or in absentia, and equal effect should be given to
votes whether cast in person or in absentia.
6. Impediments to cross border voting should be eliminated.
D. Shareholders, including institutional shareholders, should be allowed to consult with each other on
issues concerning their basic shareholder rights as defined in the Principles, subject to exceptions to
prevent abuse.
E. All shareholders of the same series of a class should be treated equally. Capital structures and arrangements
that enable certain shareholders to obtain a degree of influence or control disproportionate to their
equity ownership should be disclosed.
1. Within any series of a class, all shares should carry the same rights. All investors should be able to
obtain information about the rights attached to all series and classes of shares before they purchase.
Any changes in economic or voting rights should be subject to approval by those classes of shares
which are negatively affected.
2. The disclosure of capital structures and control arrangements should be required.
F. Related-party transactions should be approved and conducted in a manner that ensures proper
management of conflict of interest and protects the interest of the company and its shareholders.
1. Conflicts of interest inherent in related-party transactions should be addressed.
2. Members of the board and key executives should be required to disclose to the board whether they,
directly, indirectly or on behalf of third parties, have a material interest in any transaction or matter
directly affecting the corporation.
G. Minority shareholders should be protected from abusive actions by, or in the interest of, controlling
shareholders acting either directly or indirectly, and should have effective means of redress. Abusive self
dealing should be prohibited.
H. Markets for corporate control should be allowed to function in an efficient and transparent manner.
1. The rules and procedures governing the acquisition of corporate control in the capital markets, and
extraordinary transactions such as mergers, and sales of substantial portions of corporate assets,
should be clearly articulated and disclosed so that investors understand their rights and recourse.
Transactions should occur at transparent prices and under fair conditions that protect the rights of
all shareholders according to their class.
2. Anti-take-over devices should not be used to shield management and the board from accountability.
 30 Lesson 1 • PP-GRMCE

III. Institutional investors, stock markets, and other intermediaries:

The corporate governance framework should provide sound incentives throughout the investment chain and
provide for stock markets to function in a way that contributes to good corporate governance:
A. Institutional investors acting in a fiduciary capacity should disclose their corporate governance and
voting policies with respect to their investments, including the procedures that they have in place for
deciding on the use of their voting rights.
B. Votes should be cast by custodians or nominees in line with the directions of the beneficial owner of the
shares.
C. Institutional investors acting in a fiduciary capacity should disclose how they manage material conflicts
of interest that may affect the exercise of key ownership rights regarding their investments.
D. The corporate governance framework should require that proxy advisors, analysts, brokers, rating
agencies and others that provide analysis or advice relevant to decisions by investors, disclose and
minimise conflicts of interest that might compromise the integrity of their analysis or advice.
E. Insider trading and market manipulation should be prohibited and the applicable rules enforced.
F. For companies who are listed in a jurisdiction other than their jurisdiction of incorporation, the
applicable corporate governance laws and regulations should be clearly disclosed. In the case of cross
listings, the criteria and procedure for recognising the listing requirements of the primary listing should
be transparent and documented.
G. Stock markets should provide fair and efficient price discovery as a means to help promote effective
corporate governance.
IV. The role of stakeholders in corporate governance:
The corporate governance framework should recognise the rights of stakeholders established by law or
through mutual agreements and encourage active co-operation between corporations and stakeholders in
creating wealth, jobs, and the sustainability of financially sound enterprises:
A. The rights of stakeholders that are established by law or through mutual agreements are to be respected.
B. Where stakeholder interests are protected by law, stakeholders should have the opportunity to obtain
effective redress for violation of their rights.
C. Mechanisms for employee participation should be permitted to develop.
D. Where stakeholders participate in the corporate governance process, they should have access to relevant,
sufficient and reliable information on a timely and regular basis.
E. Stakeholders, including individual employees and their representative bodies, should be able to freely
communicate their concerns about illegal or unethical practices to the board and to the competent public
authorities and their rights should not be compromised for doing this.
F. The corporate governance framework should be complemented by an effective, efficient insolvency
framework and by effective enforcement of creditor rights.
V. Disclosure and transparency:
The corporate governance framework should ensure that timely and accurate disclosure is made on all material
matters regarding the corporation, including the financial situation, performance, ownership, and governance
of the company:
A. Disclosure should include, but not be limited to, material information on:
1. The financial and operating results of the company.
2. Company objectives and non-financial information.
3. Major share ownership, including beneficial owners, and voting rights.
 Lesson 1 • Conceptual Framework of Corporate Governance 31

4. Remuneration of members of the board and key executives.

5. Information about board members, including their qualifications, the selection process, other
company directorships and whether they are regarded as independent by the board.
6. Related party transactions.
7. Foreseeable risk factors.
8. Issues regarding employees and other stakeholders.
9. Governance structures and policies, including the content of any corporate governance code or
policy and the process by which it is implemented.
B. Information should be prepared and disclosed in accordance with high quality standards of accounting
and financial and non-financial reporting.
C. An annual audit should be conducted by an independent, competent and qualified, auditor in accordance
with high-quality auditing standards in order to provide an external and objective assurance to the board
and shareholders that the financial statements fairly represent the financial position and performance of
the company in all material respects.
D. External auditors should be accountable to the shareholders and owe a duty to the company to exercise
due professional care in the conduct of the audit.
E. Channels for disseminating information should provide for equal, timely and cost-efficient access to
relevant information by users.
VI. The responsibilities of the board:
The corporate governance framework should ensure the strategic guidance of the company, the effective
monitoring of management by the board, and the board’s accountability to the company and the shareholders:
A. Board members should act on a fully informed basis, in good faith, with due diligence and care, and in the
best interest of the company and the shareholders.
B. Where board decisions may affect different shareholder groups differently, the board should treat all
shareholders fairly.
C. The board should apply high ethical standards. It should take into account the interests of stakeholders.
D. The board should fulfil certain key functions, including:
1. Reviewing and guiding corporate strategy, major plans of action, risk management policies and
procedures, annual budgets and business plans; setting performance objectives; monitoring
implementation and corporate performance; and overseeing major capital expenditures, acquisitions
and divestitures.
2. Monitoring the effectiveness of the company’s governance practices and making changes as needed.
3. Selecting, compensating, monitoring and, when necessary, replacing key executives and overseeing
succession planning.
4. Aligning key executive and board remuneration with the longer term interests of the company and
its shareholders.
5. Ensuring a formal and transparent board nomination and election process.
6. Monitoring and managing potential conflicts of interest of management, board members and
shareholders, including misuse of corporate assets and abuse in related party transactions.
7. Ensuring the integrity of the corporation’s accounting and financial reporting systems, including the
independent audit, and that appropriate systems of control are in place, in particular, systems for risk
management, financial and operational control, and compliance with the law and relevant standards.
32 Lesson 1 • PP-GRMCE

8. Overseeing the process of disclosure and communications.

E. The board should be able to exercise objective independent judgement on corporate affairs.
1. Boards should consider assigning a sufficient number of nonexecutive board members capable of
exercising independent judgement to tasks where there is a potential for conflict of interest. Examples
of such key responsibilities are ensuring the integrity of financial and non-financial reporting, the
review of related party transactions, nomination of board members and key executives, and board
remuneration.
2. Boards should consider setting up specialised committees to support the full board in performing
its functions, particularly in respect to audit, and, depending upon the company’s size and risk
profile, also in respect to risk management and remuneration. When committees of the board
are established, their mandate, composition and working procedures should be well defined and
disclosed by the board.
3. Board members should be able to commit themselves effectively to their responsibilities.
4. Boards should regularly carry out evaluations to appraise their performance and assess whether
they possess the right mix of background and competences.
F. In order to fulfil their responsibilities, board members should have access to accurate, relevant and timely
information.
G. When employee representation on the board is mandated, mechanisms should be developed to facilitate
access to information and training for employee representatives, so that this representation is exercised
effectively and best contributes to the enhancement of board skills, information and independence.

The Finnish Corporate Governance Code, 2020

The new Corporate Governance Code for Finnish listed companies (“2020 CG Code”) entered into force from 01
January 2020 replacing the previous CG Code applied since 2016 (“2015 CG Code”). The purpose of the Corporate
Governance Code is to harmonise the procedures of listed companies and to promote openness with regard to
corporate governance and remuneration. From the perspective of a shareholder and an investor, the Corporate
Governance Code increases the transparency of corporate governance and the ability of shareholders and investors
to evaluate the practices applied by individual companies. The Corporate Governance Code also provides investors
with an overview of the kinds of corporate governance practices that are acceptable for Finnish listed companies.
While the number of recommendations in the 2020 CG Code has decreased, the 2020 CG Code introduces additional
requirements on listed companies, in particular in relation to remuneration and related party transactions as required by
the Shareholders’ Rights Directive and the national rules implementing the Directive. The 2020 CG Code also introduces
changes to the recommendation concerning the audit committee and clarifications to the recommendation concerning
the assessment and disclosure of independence of board members. For example, the company’s remuneration statement
has been replaced by the remuneration policy for governing bodies (“remuneration policy”) and remuneration report
for governing bodies (“remuneration report”), which are supplemented by information provided on the company’s
website. The remuneration policy and report concern the company’s board of directors, supervisory board, if any, and
the managing director and deputy managing director. Information on the remuneration of the rest of the management
team will in future be provided on the company’s website. The remuneration reporting section also includes a
checklist to clarify the reporting obligations. Similarly, the board must in future report which of the board members
are independent of the company and which are independent of the company’s significant shareholders. In addition, the
reasoning for determining that a board member is not independent must also be reported. The criteria to be taken into
account in the overall assessment of independence have also been supplemented so that under the interpretation of
the criteria, the benefits paid and offered to a member of the board by a shareholder otherwise than on the basis of an
employment or service relationship may require assessment.
The Finnish Securities Market Association’s board adopted the amended and updated CG Code in September 2019.
As a result of which the new 2020 CG Code came into force in January 2020 replacing the previous Finnish CG Code.
 Lesson 1 • Conceptual Framework of Corporate Governance 33

The ‘comply or explain’ principle applies to the CG Code. Thus, the starting point is that the company must comply
with all recommendations set out in the CG Code.

The Italian Corporate Governance Code

The Italian Corporate Governance Code applies to all companies with shares listed on the Italian main market
(“Mercato Telematico Azionario”) managed by Borsa Italiana (“companies”).
Adoption of this Code is voluntary and is disclosed in the report on corporate governance and ownership structures
(“corporate governance report”).
The code has 6 articles and each article of the Code is divided into principles, which define the objectives of good
governance, and into recommendations, which indicate the behaviour that the Code deems appropriate to achieve
the objectives indicated in the principles.
The Code is neutral with respect to the governance model specifically adopted by the company (traditional; “one-
tier”, which includes the so-called “modello monistico” for Italian companies; “two-tier”, which includes the so-called
“modello dualistico” for Italian companies). For companies adopting the “two-tier” model, the Code requires that the
supervisory board is to be assigned the task of deliberating on the company’s strategic guidelines and transactions
of strategic importance (so-called “high level” management powers).
Companies apply the Code according to the principle of substance over form and the recommendations thereof on
a “comply or explain” basis.
Companies adopting the Code provide in their corporate governance report accurate, easily understandable and
exhaustive, albeit concise, information on how the Code is applied.
The application of the Code is based on principles of flexibility and proportionality.
Companies disclose in their corporate governance report how they have specifically applied the Code’s principles.
The choice to depart from one or more recommendations of the Code may depend on factors internal and external
to the company, whereby the practice recommended by the Code may not be functional or compatible with its
governance model. The application of the Code implies, however, that each deviation is clearly indicated in the
corporate governance report and that companies: (a) explain how the best practice recommended by the Code
has been disregarded; (b) describe the reasons for the deviation; (c) describe how the decision to depart from the
recommendations has been made within the company; (d) if the deviation is limited in time, indicate when they plan
to apply the related best practice; (e) describe any action adopted as an alternative to the best practice which they
have not implemented and explain how this choice helps the company achieving the objective underlying the Code’s
principles and in any case contributes to good corporate governance.
In order to ensure a proportional application of the Code, some recommendations are calibrated according to the
company’s size and ownership structure, providing for:
– a set of recommendations intended only for larger companies ( “large companies” category contained in the
Code’s “definitions”);
– a simplified application of some recommendations by companies other than the “large” ones;
– the adaptation of some recommendations to companies with concentrated ownership (cf. the category of
“companies with concentrated ownership” contained in the Code’s “definitions”).
In the presence of primary or secondary regulations incompatible with the application of certain recommendations
of the Code, disclosure of the reasons for their failed or partial application is not required.
The Committee monitors the state of the Code’s application, the evolution of the applicable regulatory framework
and the international best practices, and is responsible for updating the Code. To this end, it evaluates a possible
revision of the Code usually every two years.
The application of the Code is facilitated by a set of Q&As, periodically updated also in consideration of any requests
that might be submitted by those companies that apply the Code.
34 Lesson 1 • PP-GRMCE

The present Code was approved by the Committee in January 2020.

The companies adopting the Code are required to apply it starting from the first financial year that begins after
31 December 2020, while the disclosure shall be provided in the corporate governance report to be published
during 2022.
“Large companies” apply the recommendations regarding the presence of independent directors in the board of
directors starting from the first renewal of the board of directors following 31 December 2020.

Japan’s Stewardship Code - Principles for Responsible Institutional Investors

In this Code, “stewardship responsibilities” refers to the responsibilities of institutional investors to enhance the
medium- to long-term investment return for their clients and beneficiaries (including ultimate beneficiaries; the
same shall apply hereafter) by improving and fostering the investee companies’ corporate value and sustainable
growth through constructive engagement, or purposeful dialogue, based on in-depth knowledge of the companies
and their business environment and consideration of sustainability (medium- to long-term sustainability including
ESG factors) consistent with their investment management strategies.
This Code defines principles considered to be helpful for institutional investors who behave as responsible
institutional investors in fulfilling their stewardship responsibilities with due regard both to their clients and
beneficiaries and to investee companies. By fulfilling their stewardship responsibilities properly in line with this
Code, institutional investors will also be able to contribute to the growth of the economy as a whole.
Activities by institutional investors done to discharge their stewardship responsibilities (hereafter, “stewardship
activities”) should not be seen to be confined to voting, although voting is an essential element of stewardship
activities. Stewardship activities include proper monitoring of the investee companies and constructive engagement
with them done to discharge the stewardship responsibilities to foster sustainable growth of the companies
In the Code, two categories of institutional investors are identified: “institutional investors as asset managers”
(hereafter, “asset managers”), which are entrusted to manage funds and invest in companies; and “institutional
investors as asset owners” (hereafter, “asset owners”), including providers of funds.
The asset managers are expected to contribute to the enhancement of the corporate value of investee companies
through day-to-day constructive dialogue with them.
The asset owners are expected to disclose their policies on fulfilling their stewardship responsibilities and contribute
to the enhancement of the corporate value of investee companies through their own actions and/or the actions of
the asset managers, to which they outsource their asset management activities.
The asset managers should aim to know the intention of the asset owners so that they can provide services as
expected, and the asset owners should aim to assess the asset managers in line with the Code, not placing undue
emphasis on short-term performance.
Parties such as proxy advisors and investment consultants for pensions which provide services at the request of
institutional investors, etc. to contribute to the institutional investors’ effective execution of stewardship activities
(hereafter “service providers for institutional investors”) are expected to play important roles in enhancing the
functions of the entire investment chain running from their clients and beneficiaries to the investee companies.

LESSON ROUND UP
• The root of the word Governance is from ‘gubernate’, which means to steer. Corporate governance would
mean to steer an organization in the desired direction. The responsibility to steer lies with the board of
directors/governing board. Governance is concerned with the intrinsic nature, purpose, integrity and
identity of an organization with primary focus on the entity’s relevance, continuity and fiduciary aspects.
Lesson 1 • Conceptual Framework of Corporate Governance 35

• Corporate Governance Basic theories: Agency Theory; Stock Holder Theory; Stake Holder Theory; Stewardship
Theory.

• OECD has defined corporate governance to mean “A system by which business corporations are directed and
controlled”.

• As per CII “Corporate governance deals with laws, procedures, practices and implicit rules that determine a
company’s ability to take informed managerial decisions vis-à-vis its claimants - in particular, its shareholders,
creditors, customers, the State and employees. There is a global consensus about the objective of ‘good’
corporate governance: maximising long-term shareholder value.”

• The Kumar Mangalam Birla Committee constituted by SEBI has observed that: “Strong corporate governance
is indispensable to resilient and vibrant capital markets and is an important instrument of investor protection.
It is the blood that fills the veins of transparent corporate disclosure and high quality accounting practices. It
is the muscle that moves a viable and accessible financial reporting structure.”

• N.R. Narayana Murthy Committee on Corporate Governance constituted by SEBI has observed that: “Corporate
Governance is the acceptance by management of the inalienable rights of shareholders as the true owners
of the corporation and of their own role as trustees on behalf of the shareholders. It is about commitment to
values, about ethical business conduct and about making a distinction between personal and corporate funds
in the management of a company.”

• The Institute of Company Secretaries of India has also defined the term Corporate Governance to mean
“Corporate Governance is the application of best management practices, compliance of law in true letter and
spirit and adherence to ethical standards for effective management and distribution of wealth and discharge
of social responsibility for sustainable development of all stakeholders.”

• Initiated by Cadbury Committee, corporate governance has grown multifold in UK. UK Corporate Governance
Code, 2016 is a revised version of earlier code with few new recommendations.
• With the introduction of Sarbanes–Oxley Act, 2002 Corporate Governance practices have been fundamentally
altered – auditor independence, conflict of interests, financial disclosures, severe penalties for willful default
by managers and auditors in particular.

• Good governance is integral to the very existence of a company. It inspires and strengthens investor’s confidence
by ensuring company’s commitment to higher growth and profits.

• Ancient Indian scriptures contain learning on governance. Kautilya’s Arthashastra maintains that for good
governance, all administrators, including the king were considered servants of the people.

GLOSSARY
Governance Relates to “the processes of interaction and decision-making among the actors involved in a collective
problem that lead to the creation, reinforcement, or reproduction of social norms and institutions.”

Corporate It is a composite assessment of how well an organization executes on its most important
Performance parameters, typically financial, market and shareholder performance.

Triple Bottom It is an accounting framework with three parts: social, environmental and financial. Organizations
Line have adopted the TBL framework to evaluate their performance in a broader perspective to create
greater business value.

Sarbanes An American federal law, 2002, which substantially revised and strengthened securities laws and
Oxley Act their administration in the aftermath of high profile corporate accounting scandals such as that
involving Enron.
36 Lesson 1 • PP-GRMCE

TEST YOURSELF
(These are meant for recapitulation only. Answers to these questions are not to be submitted for evaluation)
1. Discuss in brief the development of the concept of Corporate Governance in U.K.
2. Discuss briefly the Corporate Governance developments in India.
3. Explain why Corporate Governance is gaining importance.
4. What are the elements of Good Corporate Governance?
5. What are the basic theories that led to the evolution of concept of the Corporate Governance?
 Legislative Framework of
Lesson 2
Corporate Governance in India

Key Concepts One Learning Objectives Regulatory Framework

Should Know
To understand the: • Companies Act, 2013
• Board of Directors
• Legislative framework of Corporate • SEBI (LODR) Regulations, 2015
• Transparency
Governance for: • Basel Committee – Guidelines on
• Audit Committee
– Listed and unlisted Companies Corporate Governance for Banks
• Key Managerial
– Banks • IRDAI- Guidelines on Corporate
Persons
– Insurance Companies and Governance for Insurance
• Whistle blower policy Companies
– Public Sector Undertakings
• Chief Risk Officer • Stewardship Code for Insurers in
• Fit and proper criteria India
• Guidelines on Corporate Governance
for Central Public Sector Enterprises,
2010
• Guidelines for Corporate Social
Responsibility for Central Public
Sector Enterprises
• Master Directions/Circulars issued
by RBI

Lesson Outline
• Introduction & Legislative Framework
• Provisions of Companies Act, 2013 related to Corporate Governance
• Regulation 4 of SEBI (LODR) Regulations 2015
• Corporate Governance in Banks/Financial Institutions
• Basel Committee on Corporate Governance
• RBI Guidelines on Corporate Governance for NBFCs
• IRDAI Guidelines on Corporate Governance for Insurance Companies
• Stewardship Code for Insurers
• Guidelines on Corporate Governance for CPSE
• LESSON ROUND UP
• GLOSSARY
• TEST YOURSELF
38 Lesson 2 • PP-GRMCE

INTRODUCTION
The initiatives taken by Government of India in 1991, aimed at economic liberalization, privatization and globalisation
of the domestic economy, led to various initiatives by the Government of India to improve corporate governance
mechanism. Today we have a strong mechanism for governing the activities of companies, all listed entities, banks,
NBFCs and Insurance Companies.

The companies in our country are formed, registered and regulated majorly by the Companies Act, 2013 or under
the previous Companies Act. The erstwhile Companies Act 1956 was completely revamped in 2013 and new Act was
framed which is landmark legislation with regard to improving corporate governance of companies. The Companies
Act, 2013 clearly indicates focus of regulators toward enhancing the responsibility and accountability of boards. The
Act outlines various requirements for Governance, disclosures and enhanced roles, responsibilities and liabilities of
the board, its committees and independent directors.

Some of the Provisions of Companies Act, 2013 related to Corporate Governance are:
• Appointment and maximum tenure of Independent Directors;
• Appointment of Woman Director;
• Appointment of Whole time Key Managerial Personnel;
• Performance Evaluation of the Directors and Committee & Board as a whole;
• Enhanced disclosures and assertions in Board Report, Annual Return and Boards’ Report with regard to Managerial
Remuneration, risk management, internal control for financial reporting, legal compliance, Related Party
Transactions, Corporate Social Responsibility, shareholding pattern, public money lying unutilised, etc.
• Stricter yet forward-looking procedural requirements for Secretarial compliances and Secretarial Standards made
mandatory;
• Enhanced compliances of Related Party Transactions and introduction of concept of arm’s length pricing;
• Enhanced restrictions on appointment of Auditors and mandatory rotation of Auditors;
• Separation of role of Chairperson and Chief Executive Officer;
• Mandatory provisions regarding vigil mechanism;
• Constitution of Audit Committee and Nomination and Remuneration Committee;
• Constitution of CSR Committee;
• Secretarial Audit;
• Constitution of NFRA;
• Mandatory provision of E-voting by certain class of Companies;
• Mandatory Vigil Mechanism.
 Lesson 2 • Legislative Framework of Corporate Governance in India 39

All such provisions of new Company Law are instrumental in providing a good Corporate Governance structure.
Further, the Companies (Amendment)Act, 2017 and the Companies (Amendment) Act, 2019 introduced several
amendments to the Companies Act 2013, realigning provisions to improve corporate governance and ease of doing
business in India while continuing to strengthen compliance and investor protection.
All the listed entities are regulated by the Securities and Exchange Board of India. SEBI is a regulatory authority
established on April 12, 1992. SEBI was established with the main purpose of curbing the malpractices and
protecting the interest of its investors. Its main objective is to regulate the activities of Stock Exchange and at
the same time ensuring the healthy development in the financial market. In order to ensure good corporate
governance SEBI had issued detailed Corporate Governance Norms in form of Clause 49 of Listing Agreement
which has been now revised and notified as the SEBI (Listing Obligations and Disclosure Requirements)
Regulations, 2015.
Apart from these, a gamut of legislations like the Competition Act, 2002, the Consumer Protection Act, 2019, the
Code on Wages, 2019, the Code on Social Security, 2020, the Industrial Relations Code, 2020, the Occupational
Safety, Health and Working Conditions Code, 2020 the environment laws, the Prevention of Money Laundering
Act, 2002, Insolvency and Bankruptcy Code, 2016 etc, seeks to ensure good governance practices among the
corporate.

NOTE: The Companies Act, 2013 and SEBI (LODR) Regulations, 2015 together deals with virtually all
areas affecting Corporate Governance like Board Processes, Board Committees, Corporate Policies and
Disclosures, Accounting and Audit related issues, RPTs and Vigil Mechanism, Accounting and Audit
related issues, RPTs and Vigil Mechanism, Shareholders and other stakeholders Rights, Compliance
risk etc. are discussed at relevant places in the entire study material.

REGULATORY FRAMEWORK

Regulation 4 of SEBI(LODR) Regulations, 2015

Chapter II of the SEBI (LODR) Regulations, 2015 provides broad principles for periodic disclosures and obligations of
listed entities. The SEBI (LODR) Regulations 2015 covers obligations of listed entities with respect to aspects including
• Board Composition Requirements
• Board Committee Requirements
• Obligation w.r.t. intimations and disclosures to stock exchange
• Requirement w.r.t. Board process and meetings
• Website requirements
• Advertisement mandates
• Requirement w.r.t. polices
• Requirements on share holding pattern
• Requirements w.r.t. corporate actions etc.
These mandates are cores in detail in different chapters of this study material. The principles for periodic disclosures
are based on the principles given by International Organization of Securities Commissions (IOSCO) and also have
incorporated the principles for corporate governance (in line with OECD principles). These principles underlie
specific requirements prescribed in different chapters of the Regulations. In the event of the absence of specific
requirements or ambiguity, these principles would serve to guide the listed entities.

Principles governing disclosures and obligations – Regulation 4

(1) The listed entity which has listed its securities shall make disclosures and abide by its obligations under these
regulations, in accordance with the following principles:
 40 Lesson 2 • PP-GRMCE

(a) Information shall be prepared and disclosed in accordance with applicable standards of accounting and
financial disclosure.
(b) The listed entity shall implement the prescribed accounting standards in letter and spirit in the preparation
of financial statements taking into consideration the interest of all stakeholders and shall also ensure that
the annual audit is conducted by an independent, competent and qualified auditor.
(c) The listed entity shall refrain from misrepresentation and ensure that the information provided to
recognised stock exchange(s) and investors is not misleading.
(d) The listed entity shall provide adequate and timely information to recognised stock exchange(s) and
investors.
(e) The listed entity shall ensure that disseminations made under provisions of these regulations and
circulars made thereunder, are adequate, accurate, explicit, timely and presented in a simple language.
(f) Channels for disseminating information shall provide for equal timely and cost-efficient access to relevant
information by investors.
(g) The listed entity shall abide by all the provisions of the applicable laws including the securities laws and
also such other guidelines as may be issued from time to time by the Board and the recognised stock
exchange(s) in this regard and as may be applicable.
(h) The listed entity shall make the specified disclosures and follow its obligations in letter and spirit taking
into consideration the interest of all stakeholders.
(i) Filings, reports, statements, documents and information which are event based or are filed periodically
shall contain relevant information.
(j) Periodic filings, reports, statements, documents and information reports shall contain information that
shall enable investors to track the performance of a listed entity over regular intervals of time and shall
provide sufficient information to enable investors to assess the current status of a listed entity.
(2) The listed entity which has listed its specified securities shall comply with the corporate governance provisions
as specified in chapter IV which shall be implemented in a manner so as to achieve the objectives of the
principles as mentioned below:
The rights of shareholders: The listed entity shall seek to protect and facilitate the exercise of the
(a)
following rights of shareholders:
(i) Right to participate in, and to be sufficiently informed of, decisions concerning fundamental
corporate changes.
(ii) Opportunity to participate effectively and vote in general shareholder meetings.
(iii) being informed of the rules, including voting procedures that govern general shareholder meetings.
(iv) opportunity to ask questions to the board of directors, to place items on the agenda of general
meetings, and to propose resolutions, subject to reasonable limitations.
(v) effective shareholder participation in key corporate governance decisions, such as the nomination
and election of members of board of directors.
(vi) exercise of ownership rights by all shareholders, including institutional investors.
(vii) adequate mechanism to address the grievances of the shareholders.
(viii) protection of minority shareholders from abusive actions by, or in the interest of, controlling
shareholders acting either directly or indirectly, and effective means of redress.
Timely information: The listed entity shall provide adequate and timely information to shareholders,
(b)
including but not limited to the following:
(i) sufficient and timely information concerning the date, location and agenda of general meetings, as
well as full and timely information regarding the issues to be discussed at the meeting.
 Lesson 2 • Legislative Framework of Corporate Governance in India 41

(ii) Capital structures and arrangements that enable certain shareholders to obtain a degree of control
disproportionate to their equity ownership.
(iii) rights attached to all series and classes of shares, which shall be disclosed to investors before they
acquire shares.
Equitable treatment: The listed entity shall ensure equitable treatment of all shareholders, including
(c)
minority and foreign shareholders, in the following manner:
(i) All shareholders of the same series of a class shall be treated equally.
(ii) Effective share holder participation in key corporate governance decisions, such as the nomination
and election of members of board of directors, shall be facilitated.
(iii) Exercise of voting rights by foreign shareholders shall be facilitated.
(iv) The listed entity shall devise a framework to avoid insider trading and abusive self-dealing.
(v) Processes and procedures for general shareholder meetings shall allow for equitable treatment of
all shareholders.
(vi) Procedures of listed entity shall not make it unduly difficult or expensive to cast votes.
Role of stakeholders in corporate governance: The listed entity shall recognise the rights of its
(d)
stakeholders and encourage co-operation between listed entity and the stakeholders, in the following
manner:
(i) The listed entity shall respect the rights of stakeholders that are established by law or through
mutual agreements.
(ii) Stakeholders shall have the opportunity to obtain effective redress for violation of their rights.
(iii) Stakeholders shall have access to relevant, sufficient and reliable information on a timely and regular
basis to enable them to participate in corporate governance process.
(iv) The listed entity shall devise an effective whistle blower mechanism enabling stakeholders, including
individual employees and their representative bodies, to freely communicate their concerns about
illegal or unethical practices.
Disclosure and transparency: The listed entity shall ensure timely and accurate disclosure on all
(e)
material matters including the financial situation, performance, ownership, and governance of the listed
entity, in the following manner:
(i) Information shall be prepared and disclosed in accordance with the prescribed standards of
accounting, financial and non-financial disclosure.
(ii) Channels for disseminating information shall provide for equal, timely and cost-efficient access to
relevant information by users.
(iii) Minutes of the meeting shall be maintained explicitly recording dissenting opinions, if any.
Responsibilities of the board of directors: The board of directors of the listed entity shall have the
(f)
following responsibilities:
(i) Disclosure of information:
(1) Members of board of directors and key managerial personnel shall disclose to the board of
directors whether they, directly, indirectly, or on behalf of third parties, have a material interest
in any transaction or matter directly affecting the listed entity.
(2) The board of directors and senior management shall conduct themselves so as to meet
the expectations of operational transparency to stakeholders while at the same time
maintaining confidentiality of information in order to foster a culture of good decision-
making.
42 Lesson 2 • PP-GRMCE

(ii) Key functions of the board of directors:

(1) Reviewing and guiding corporate strategy, major plans of action, risk policy, annual
budgets and business plans, setting performance objectives, monitoring implementation
and corporate performance, and overseeing major capital expenditures, acquisitions and
divestments.
(2) Monitoring the effectiveness of the listed entity’s governance practices and making changes as
needed.
(3) Selecting, compensating, monitoring and, when necessary, replacing key managerial personnel
and overseeing succession planning.
(4) Aligning key managerial personnel and remuneration of board of directors with the longer
term interests of the listed entity and its shareholders.
(5) Ensuring a transparent nomination process to the board of directors with the diversity of
thought, experience, knowledge, perspective and gender in the board of directors.
(6) Monitoring and managing potential conflicts of interest of management, members of the board
of directors and shareholders, including misuse of corporate assets and abuse in related party
transactions.
(7) Ensuring the integrity of the listed entity’s accounting and financial reporting systems,
including the independent audit, and those appropriate systems of control are in place, in
particular, systems for risk management, financial and operational control, and compliance
with the law and relevant standards.
(8) Overseeing the process of disclosure and communications.
(9) Monitoring and reviewing board of director’s evaluation framework.
(iii) Other responsibilities:
(1) The board of directors shall provide strategic guidance to the listed entity, ensure effective
monitoring of the management and shall be accountable to the listed entity and the
shareholders.
(2) The board of directors shall set a corporate culture and the values by which executives
throughout a group shall behave.
(3) Members of the board of directors shall act on a fully informed basis, in good faith, with Due
diligence and care, and in the best interest of the listed entity and the shareholders.
(4) The board of directors shall encourage continuing directors training to ensure that the
members of board of directors are kept up to date.
(5) Where decisions of the board of directors may affect different shareholder groups differently,
the board of directors shall treat all shareholders fairly.
(6) The board of directors shall maintain high ethical standards and shall take in to account the
interests of stakeholders.
(7) The board of directors shall exercise objective in dependent judgement on corporate affairs.
(8) The board of directors shall consider assigning a sufficient number of non-executive members
of the board of directors capable of exercising independent judgement to tasks where there is
a potential for conflict of interest.
(9) The board of directors shall ensure that, while rightly encouraging positive thinking, these
do not result in over-optimism that either leads to significant risks not being recognised or
exposes the listed entity to excessive risk.
 Lesson 2 • Legislative Framework of Corporate Governance in India 43

(10) The board of directors shall have ability to ‘step back’ to assist executive management by
challenging the assumptions underlying: strategy, strategic initiatives (such as acquisitions),
risk appetite, exposures and the key areas of the listed entity’s focus.
(11) When committees of the board of directors are established, their man date, composition and
working procedures shall be well defined and disclosed by the board of directors.
(12) Members of the board of directors shall be able to commit themselves effectively to their
responsibilities.
(13) In order to fulfil the irresponsibility, members of the board of directors shall have access to
accurate, relevant and timely information.
(14) The board of directors and senior management shall facilitate the independent directors to
perform their role effectively as a member of the board of directors and also a member of a
committee of board of directors.
(3) In case of any ambiguity or incongruity between the principles and relevant regulations, the principles specified
in this Chapter shall prevail.

CORPORATE GOVERNANCE IN BANKS/ FINANCIAL INSTITUTIONS

Banking and financial institutions are the strong back bone of any economy. Functioning of banking and financial
Institutions differs with other corporate entities in many ways which makes good corporate governance of banks
very critical and important. RBI had under taken several measures to strengthen the corporate governance in the
Indian banking sector. Various advisory groups and consultative groups were formed to deeply study banking sector
in the light of effective corporate governance.

Considering the recommendations of these advisory groups and the global corporate governance experiences,
various areas of governance which were potentially important and needed attention, were emphasized. It included
defined role of supervisors, ensuring an environment supportive to the sound corporate governance, effective
organizational structure to have responsible board of directors, etc. Another global initiative in1999 of the Basel
Committee also brought important principles on corporate governance for banks.
Presently Indian banking sector comprises of Scheduled and Non-Scheduled banks, co-operative banks, commercial
banks dominated by the government-managed banks including public sector banks, nationalized banks and rural
banks, etc. These banks in our country have been established under the different statutes.
44 Lesson 2 • PP-GRMCE

v Majorly banks are governed by the Banking Regulation Act 1949.

v The State Bank of India is governed by the State Bank of India Act, 1955.

v Nationalized banks are governed by the Banking Companies (Acquisition and Transfer of Undertaking)
Act, 1970 and the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980.

v The private sector banks came into being as company registered under the Companies Act (whether under
the Companies Act, 2013/1956 or under the Indian Companies Act,1913 or prior to that) and hence are
regulated by the Companies Act also to the extent applicable.

v The banks listed with the stock exchange have to additionally adhere to the requirement of the SEBI
(Listing Obligations and Disclosure Requirements) Regulations, 2015.

Additionally Foreign Exchange Management Act (FEMA), 1999, Payment and Settlement Systems Act, 2007, and other
directives/ regulations/ guidelines/ instructions issued by RBI and SEBI from time to time also need to be adhered.

Basel Committee on Corporate Governance

Growing size and complexity of India’s financial system underscores the significance of strengthening governance
standards in banks. Recent events in a dynamic and rapidly evolving financial landscape have led to increasing
scrutiny of the role of promoters, major shareholders and senior management vis-a-vis the role of a board. In the
context where management plays the role of an agent of a board and the board in turn plays the role of an agent of
shareholders, governance failures have brought to fore the impact of quality of governance on efficiency in allocation
of resources, protection of depositors’ interest as well as maintaining financial stability.
Effective corporate governance is critical to the proper functioning of the banking sector and the economy as a whole.
Banks perform a crucial role in the economy by intermediating funds from savers and depositors to activities that
support enterprise and help drive economic growth. Banks’ safety and soundness are key to financial stability, and
the manner in which they conduct their business, therefore, is central to economic health. Governance weaknesses
at banks that play a significant role in the financial system can result in the transmission of problems across the
banking sector and the economy as a whole.
The Basel Committee’s guidance draws from principles of corporate governance published by the Organisation for
Economic Co-operation and Development (OECD). The OECD’s widely accepted and long-established principles aim
to assist governments in their efforts to evaluate and improve their frameworks for corporate governance and to
provide guidance for participants and regulators of financial markets.
Basel Committee on Banking Supervision (BCBS) released Guidelines on Corporate Governance for banks were
released by the Basel Committee on Banking Supervision in July 2015.
The principles of corporate governance of these guidelines are as under:
• Principle 1: Board’s overall responsibilities: The board has overall responsibility for the bank, including
approving and overseeing the implementation of the bank’s strategic objectives, governance framework and
corporate culture. The board is also responsible for providing oversight of senior management.
• Principle 2: Board qualifications and composition: Board members should be and remain qualified,
individually and collectively, for their positions. They should understand their oversight and corporate
governance role and be able to exercise sound, objective judgment about the affairs of the bank.
• Principle 3: Board’s own structure and practices: The board should define appropriate governance
structures and practices for its own work, and put in place the means for such practices to be followed and
periodically reviewed for ongoing effectiveness.
• Principle 4: Senior management: Under the direction and oversight of the board, senior management should
carry out and manage the bank’s activities in a manner consistent with the business strategy, risk appetite,
remuneration and other policies approved by the board.
 Lesson 2 • Legislative Framework of Corporate Governance in India 45

• Principle 5: Governance of group structures: In a group structure, the board of the parent company
has the overall responsibility for the group and for ensuring the establishment and operation of a clear
governance framework appropriate to the structure, business and risks of the group and its entities. The
board and senior management should know and understand the bank group’s operational structure and the
risks that it poses.
• Principle 6: Risk management function: Banks should have an effective independent risk management
function, under the direction of a chief risk officer (CRO), with sufficient stature, independence, resources and
access to the board.
• Principle 7: Risk identification, monitoring and controlling: Risks should be identified, monitored
and controlled on an ongoing bank-wide and individual entity basis. The sophistication of the bank’s risk
management and internal control infrastructure should keep pace with changes to the bank’s risk profile, to
the external risk landscape and in industry practice.
• Principle 8: Risk communication: An effective risk governance framework requires robust communication
within the bank about risk, both across the organisation and through reporting to the board and senior
management.
• Principle 9: Compliance: The bank’s board of directors is responsible for overseeing the management of the
bank’s compliance risk. The board should approve the bank’s compliance approach and policies, including the
establishment of a permanent compliance function.
• Principle 10: Internal Audit: The internal audit function provides independent assurance to the board and
supports board and senior management in promoting an effective governance process and the long- term
soundness of the bank. The internal audit function should have a clear mandate, be accountable to the board,
be independent of the audited activities and have sufficient standing, skills, resources and authority within the
bank.
• Principle 11: Compensation: The bank’s compensation structure should be effectively aligned with sound
risk management and should promote long term health of the organisation and appropriate risk- taking
behavior.
• Principle 12: Disclosure and transparency: The governance of the bank should be adequately transparent
to its shareholders, depositors, other relevant stakeholders and market participants.
• Principle 13: The role of supervisors: Supervisors should provide guidance for and supervise corporate
governance at banks, including through comprehensive evaluations and regular interaction with boards
and senior management, should require improvement and remedial action as necessary, and should share
information on corporate governance with other supervisors.

The Reserve Bank of India plans to overhaul the corporate governance structure of Indian banking system,
limiting the terms of directors and chief executive officers and placing more responsibility on the board of
directors for a bank’s culture and compensation. Board of directors would be responsible for the remuneration
and the outcome or performance and would be accountable for the risk a bank takes. Related party transactions
and conflict of interest between various entities of a group to which the bank belongs also dominate the latest
set of governance rules that the regulator is proposing. Among other things, the new guidelines put the burden
of outcomes vis-a-vis the compensation on the board.

Master Direction - Reserve Bank of India (‘Fit and Proper’ Criteria for Elected Directors on the
Boards of PSBs) Directions, 2019
The RBI vide its Master Direction No. RBI/DBR/ 2019-20 / 71 .DBR. Appt. No. 9/29.67.001./ 2019-20 dated 2nd
August, 2019 (Updated as on 3rd June, 2020) issued the Master Direction – RBI ‘Fit and Proper’ Criteria for Elected
Directors on the Boards of PSBs ) Directions, 2019.
46 Lesson 2 • PP-GRMCE

These Directions shall be applicable to Public Sector Banks.

‘Fit and Proper’ Criteria for Elected Directors on the Boards of State Bank of India and Nationalised Banks:
Authority
All the banks are required to constitute a Nomination and Remuneration Committee consisting of a minimum of
three non-executive directors from amongst the Board of Directors, out of which not less than one-half shall be
independent directors and should include at least one member from Risk Management Committee of the Board, for
undertaking a process of due diligence to determine the ‘fit and proper’ status of the persons to be elected as directors
under sub-section (c) of Section 19 of the SBI Act/clause (i) of sub-section (3) of Section 9 of the Banking Companies
(Acquisition and Transfer of Undertakings) Act, 1970/1980. The Government of India nominee director and the
director nominated under section 19(f) of the SBI Act/section 9(3)(c) of the Banking Companies (Acquisition and
Transfer of Undertakings) Act, 1970/1980 shall not be part of the Committee. The non-executive Chairperson of the
bank may be appointed as a member of the Committee but shall not chair such Committee. The Board should also
nominate one among them as Chairman of the Committee. The quorum required is three, including the Chairman.
In case the absence of any nominated member results in want of quorum, the Board may nominate any other non-
executive director in his place for the meeting. At the time of constituting the Committee, the Board can decide on
its tenure.
Manner and procedure
The banks shall obtain necessary information, and a declaration & undertaking, in the prescribed form, from
the persons who file their nominations for election. The Committee shall meet after the last date prescribed for
acceptance of nominations and determine whether or not the person’s candidature should be accepted, based on
the criteria mentioned below. The Committee’s discussions shall be properly recorded as formal minutes of the
meeting and the voting, if done, shall also be noted. Based on the information provided in the signed declaration,
the Committee shall decide on the acceptance or otherwise of the candidature and shall make references, where
considered necessary, to the appropriate authority / persons, to ensure that the candidate conforms to the
requirements indicated.
Criteria
The Committee shall determine the ‘fit and proper’ status of the proposed candidates based on the broad criteria
mentioned hereunder:
• Age –  The candidate’s age should be between 35 to 67 years as on the cut-off date fixed for submission of
nominations for election.
• Educational qualification – The candidate should at least be a graduate.
• Experience and field of expertise – The candidate shall have special knowledge or practical experience in
respect of one or more of the matters enumerated in section 19A(a) of the SBI Act / section 9(3A)(A) of the
Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970/1980, as the case may be, read
with RBI Circular DBR .Appt .BC No 39/29.39.001/2016-17 dated November 24, 2016.
• Disqualifications - In addition to ‘Disqualifications of Directors’ as prescribed in Section 22 of the SBI Act,
1955 / Clause 10 of Nationalised Banks (Management and Miscellaneous Provisions) Scheme, 1970/80:
a. The candidate should not be a member of the Board of any bank or the Reserve Bank or a Financial
Institution (FI) or an Insurance Company or a Non-operative Financial Holding Company (NOFHC)
holding any other bank.
Explanation: For the purpose of this sub-para and sub-para (c), the expression “bank” shall include a
banking company, a corresponding new bank, State Bank of India, a co-operative bank and a regional
rural bank.
b. A person connected with hire purchase, financing, money lending, investment, leasing and other para
banking activities shall not be considered for appointment as elected director on the board of a PSB.
 Lesson 2 • Legislative Framework of Corporate Governance in India 47

However, investors of such entities would not be disqualified for appointment as directors if they do not
enjoy any managerial control in them.
c. No person may be elected/ re-elected on the Board of a bank if he/she has served as director in the
past on the board of any bank/FI/RBI/Insurance Company under any category for six years, whether
continuously or intermittently.
d. The candidate should not be engaging in the business of stock broking.
e. The candidate should not be holding the position of a Member of Parliament or State Legislature or
Municipal Corporation or Municipality or other local bodies.
f. The candidate should not be acting as a partner of a Chartered Accountant firm which is currently engaged
as a Statutory Central Auditor of any nationalised bank or State Bank of India.
g. The candidate should not be acting as a partner of a Chartered Accountant firm which is currently engaged
as Statutory Branch Auditor or Concurrent Auditor of the bank in which nomination for election is filed.
• Tenure – An elected director shall hold office for three years and shall be eligible for re-election: Provided that
no such director shall hold office for a period exceeding six years, whether served continuously or intermittently.
• Professional Restrictions –
(a) The candidate should neither have any business connection (including legal services, advisory services
etc.) with the concerned bank nor should be engaged in activities which might result in a conflict of
business interests with that bank.
(b) The candidate should not be having any professional relationship with a bank or any NOFHC holding any
other bank.
Provided that a candidate having any such relationship with a bank at the time of filing nomination for election
shall be deemed to be meeting the requirement under item (b), the candidate shall submit a declaration to the
Committee that such relationship with the bank shall be severed if he is elected as a director, and upon being
elected, severs such relationship before appointment as a director of the bank.
• Track record and integrity - The candidate should not be under adverse notice of any regulatory or supervisory
authority/agency, or law enforcement agency and should not be a defaulter of any lending institution.
The banks shall obtain from the elected director:
(a) a Deed of Covenant executed in the prescribed format before such person assumes office of director;
(b) a simple declaration every year as on 31st March to the effect that the information already provided by such
person has not undergone any change;
(c) Where the elected director informs that there is change in the information provided earlier, the bank shall
obtain from such director a fresh Annex 1 incorporating the changes.
The banks shall also:
Ensure compliance to Section 20 of the Banking Regulation Act, 1949. In addition,
(a) Put in place a system of safeguards, including proper disclosure of the elected CA director’s/his firm’s clients,
and not participating in bank’s credit/investment decisions involving his/firm’s clients. The elected CA director
should be required to compulsorily dissociate himself from the entire process and sign a covenant to this effect.
(b) Require the elected director to make a full and proper disclosure of his interests and directorships in business
entities, with the director personally distancing himself from and not participating in the bank’s credit/
investment decisions involving entities in which he is interested.
(c) Not allot any professional work to a person who was an elected director of that bank, for a period of two years
after demitting office as such director.
 48 Lesson 2 • PP-GRMCE

Where the elected director:

(a) fails to
(i) submit the Deed of Covenant or declaration; or
(ii) make proper disclosures; or
(iii) refrain from participating in credit/investment decisions, where he is interested; or
(b) makes incomplete or incorrect disclosures, or
(c) involves in such activities that render him/her ‘not fit and proper’ as per the criteria mentioned above, such
director shall be deemed to be not fulfilling the requirements of sub-section (2) of section 19A of the SBI
Act/ sub-section (3AA) of section 9 of the Banking Companies (Acquisition and Transfer of Undertakings) Act,
1970/1980 and shall be liable for the consequences thereof.
The Committee shall adopt the revised criteria stated above while scrutinizing the nomination of candidates
seeking election as new directors (appointment/re-appointment). However, existing elected directors may be
allowed to complete their current terms as per the pre-revised criteria.

GUIDELINES ON CORPORATE GOVERNANCE FOR NBFCS

In order to enable NBFCs to adopt best practices and greater transparency in their operations the RBI vide its Master
Direction No. RBI /DNBR/ 2016-17/45. DNBR.PD.008/03.10.119/2016-17 dated 1st September, 2016 (updated as
on 17th February, 2020 issued the guidelines. These guidelines are applicable for NBFC-Systematically Important
Non-Deposit taking Company and Deposit taking Company (Reserve Bank) Directions, 2016.
The provisions of these directions shall apply to the following:
i. every Systemically Important Non-Deposit taking Non-Banking Financial Company (NBFC-ND-SI) registered
with the Bank under the provisions of RBI Act, 1934;
ii. every Deposit taking Non-Banking Financial Company (NBFC-D) registered with the Bank under the provisions
of RBI Act, 1934;
iii. every NBFC-Factor registered with the Bank under section 3 of the Factoring Regulation Act, 2011 and having
an asset size of Rs. 500 crore and above;
iv. every Infrastructure Debt Fund – Non-Banking Finance Company (IDF-NBFC) registered with the Bank under
the provisions of RBI Act, 1934;
v. every Non-Banking Finance Company – Micro Finance Institutions (NBFC-MFIs) registered with the Bank
under the provisions of RBI Act, 1934 and having an asset size of Rs. 500 crore and above;
vi. every Non-Banking Finance Company - Infrastructure Finance Company (NBFCIFC) registered with the Bank
under the provisions of RBI Act, 1934 and having an asset size of Rs. 500 crore and above.
The Category of NBFCs as mentioned at points (i) to (vi) above are hereafter referred to as ‘applicable NBFCs’, for
the purpose of these Directions.
Chapter XI of the captioned Master Directions deals with the Corporate Governance and provides as under:
1. Audit Committee:
i. All Applicable NBFCs shall constitute an Audit Committee, consisting of not less than three members of its
Board of Directors.
Explanation I : The Audit Committee constituted by an on-banking financial company as required
under Section177 of the Companies Act, 2013 shall be the Audit Committee for the purposes of this
paragraph.
Explanation II : The Audit Committee constituted under this paragraph shall have the same powers,
functions and duties as laid down in Section 177 of the Companies Act, 2013.
 Lesson 2 • Legislative Framework of Corporate Governance in India 49

ii. The Audit Committee must ensure that an Information System Audit of the internal systems and processes
is conducted at least once in two years to assess operational risks faced by the NBFCs.
2. Nomination Committee: All Applicable NBFCs shall form a Nomination Committee to ensure ‘fit and proper’
status of proposed/ existing directors.
Explanation I: The Nomination Committee constituted under this paragraph shall have the same powers,
functions and duties as laid down in Section 178 of the Companies Act, 2013.
3. Risk Management Committee: To manage the integrated risk, all Applicable NBFCs shall form a Risk
Management Committee, besides the Asset Liability Management Committee.
Appointment of Chief Risk Officer
With the increasing role of NBFCs in direct credit intermediation, there is a need for NBFCs to augment risk
management practices. While Boards of NBFCs should strive to follow best practices in risk management, NBFCs
with asset size of more than Rs.50 billion in categories - Investment and Credit Companies, Infrastructure Finance
Companies, Micro Finance Institutions, Factors and Infrastructure Debt Funds shall appoint a CRO with clearly
specified role and responsibilities. The CRO is required to function independently so as to ensure highest standards
of risk management.
The NBFCs shall strictly adhere to the following instructions in this regard:
(a) The CRO shall be a senior official in the hierarchy of an NBFC and shall possess adequate professional
qualification/ experience in the area of risk management.
(b) The CRO shall be appointed for a fixed tenure with the approval of the Board. The CRO can be transferred/
removed from his post before completion of the tenure only with the approval of the Board and such premature
transfer/ removal shall be reported to the Department of Non-Banking Supervision of the regional office of the
Bank under whose jurisdiction the NBFC is registered. In case the NBFC is listed, any change in incumbency of
the CRO shall also be reported to the stock exchanges.
(c) The Board shall put in place policies to safeguard the independence of the CRO. In this regard, the CRO shall
have direct reporting lines to the MD & CEO/ Risk Management Committee (RMC) of the Board. In case the CRO
reports to the MD & CEO, the RMC/ Board shall meet the CRO without the presence of the MD & CEO, at least
on a quarterly basis. The CRO shall not have any reporting relationship with the business verticals of the NBFC
and shall not be given any business targets. Further, there shall not be any ‘dual hatting’ i.e. the CRO shall not
be given any other responsibility.
(d) The CRO shall be involved in the process of identification, measurement and mitigation of risks. All credit
products (retail or wholesale) shall be vetted by the CRO from the angle of inherent and control risks. The
CRO’s role in deciding credit proposals shall be limited to being an advisor.
(e) In NBFCs that follow committee approach in credit sanction process for high value proposals, if the CRO is one
of the decision makers in the credit sanction process, the CRO shall have voting power and all members who
are part of the credit sanction process, shall individually and severally be liable for all the aspects, including
risk perspective related to the credit proposal.
Fit and Proper Criteria
All applicable NBFCs shall -
(i) ensure that a policy is put in place with the approval of the Board of Directors for ascertaining the fit and
proper criteria of the directors at the time of appointment, and on a continuing basis;
(ii) obtain a declaration and undertaking from the directors giving additional information on the directors;
(iii) obtain a Deed of Covenant signed by the directors;
(iv) furnish to the Bank a quarterly statement on change of directors, and a certificate from the Managing Director
of the applicable NBFC that fit and proper criteria in selection of the directors has been followed. The statement
 50 Lesson 2 • PP-GRMCE

must reach the Regional Office of the Department of Non-Banking Supervision of the Bank where the company
is registered, within 15 days of the close of the respective quarter. The statement submitted by applicable NBFC
for the quarter ending March 31, shall be certified by the auditors.
Provided that the Bank, if it deems fit and in public interest, reserves the right to examine the fit and proper criteria
of directors of any NBFC irrespective of the asset size of such NBFC.
Disclosure and transparency:
(1) All Applicable NBFCs shall put upto the Board of Directors, at regular intervals ,as may be prescribed by the
Board in this regard, the following:
i. the progress made in putting in place a progressive risk management system and risk management policy
and strategy followed by the NBFC;
ii. conformity with corporate governance standards viz., in composition of various committees, their role
and functions, periodicity of the meetings and compliance with coverage and review functions, etc.
(2) All Applicable NBFCs shall also disclose the following in their Annual Financial Statements, with effect from
March 31, 2015:
i. registration/licence/authorisation, by whatever name called, obtained from other financial sector
regulators;
ii. ratings assigned by credit rating agencies and migration of ratings during the year;
iii. penalties, if any, levied by any regulator;
iv. information namely, area, country of operation and joint venture partners with regard to Joint ventures
and overseas subsidiaries; and
v. Asset-Liability profile, extent of financing of parent company products, NPAs and movement of NPAs,
details of all off-balance sheet exposures, structured products issued by the mas also securitization/
assignment transactions and other disclosures.
Rotation of partners of the Statutory Auditors Audit Firm
All applicable NBFCs shall rotate the partner/s of the Chartered Accountant firm conducting the audit, every three
years so that same partner shall not conduct audit of the company continuously for more than a period of three
years. However, the partner so rotated shall be eligible for conducting the audit of the applicable NBFC after an
interval of three years, if the applicable NBFC, so decides. The applicable NBFC shall incorporate appropriate terms
in the letter of appointment of the firm of auditors and ensure its compliance.
Framing of Internal Guidelines:
All applicable NBFCs shall frame their internal guidelines on corporate governance with the approval of the Board of
Directors, enhancing the scope of the guidelines without sacrificing the spirit underlying the above guidelines and it
shall be published on the company’s web-site, if any, for the information of various stakeholders.

CORPORATE GOVERNANCE GUIDELINES FOR INSURANCE COMPANIES

The Insurance Regulatory and Development Authority of India (IRDAI) issued Guidelines on Corporate
Governance for insurance companies vide circular dated 5th August, 2009. The Authority had also issued
separate guidelines for appointment /reappointment and remuneration of MD/CEO/WTD as well as other
Key Management Persons (KMPs) and also the Appointment of statutory auditors of insurers through various
circulars.
The IRDAI revised the existing Guidelines in the light of changes brought in by the Companies Act, 2013 vide Circular
Dated 18th May 2016 to ensure that the structure, responsibilities and functions of Board of Directors and the
 Lesson 2 • Legislative Framework of Corporate Governance in India 51

management of the company recognize the expectations of all stakeholders as well as those of the regulator. These
guidelines are applicable to all insurers granted registration by the Authority except:
(i) reinsurance companies may not be required to have the Policy holders ’Protection Committee; and
(ii) branches of foreigner insurers in India may not be required to constitute the Board and its mandatory
committees as indicated herein.
The guidelines address the various requirements broadly covering the following major structural elements of
Corporate Governance in insurance companies:-

1. General
1.1 Corporate Governance is understood as a system of financial and other controls in a corporate entity and
broadly defines the relationship between the shareholders, Board of Directors and management. In case of the
financial sector, where the entities accept public liabilities for fulfillment of certain contracts, the relationship
is fiduciary with enhanced responsibility to protect the interests of all stakeholders. The Corporate Governance
framework should clearly define the roles and responsibilities and accountability within an organization with
built-in checks and balances. The importance of Corporate Governance has received emphasis in recent times
since poor governance and weak internal controls have been associated with major corporate failures. It has
also been appreciated that the financial sector needs to have a more intensive governance structure in view of
its role in the economic development and since the safety and financial strength of the institutions are critical
for the overall strength of the financial sector on which the economic growth is built upon. As regards the
insurance sector, the regulatory responsibility to protect the interests of the policyholders demands that the
insurers have in place, good governance practices for maintenance of solvency, sound long term investment
policy and assumption of underwriting risks on a prudential basis. The emergence of insurance companies
as a part of financial conglomerates has added a further dimension to sound Corporate Governance in the
insurance sector with emphasis on overall risk management across the structure and to prevent any contagion
and to ensure financial stability.
1.2 The Insurance Regulatory and Development Authority of India (IRDAI) has outlined in general terms, governance
responsibilities of the Board in the management of the insurance functions under various Regulations
notified by it covering different operational areas. It has now been decided to put them together and to issue
the following comprehensive guidelines for adoption by an Insurer. In the light of changes brought in by the
Companies Act, 2013, the existing guidelines on Corporate Governance practices of insurers are being revised
as below. These revised Guidelines shall replace the existing guidelines on Corporate Governance issued by
the Authority and shall take effect from FY 2016-17. These guidelines shall also supercede the Guidelines on
Reporting of Key Persons dt. 9th October, 2013 and stipulations regarding appointment of Statutory Auditors
issued vide Circulars dt.25.07.2005 and 22.04.2009.

2. Objectives
2.1 The objective of the guidelines is to ensure that the structure, responsibilities and functions of Board of
Directors and the management of the company recognize the expectations of all stakeholders as well as those
of the regulator. The structure should take steps required to adopt sound and prudent principles and practices
for the governance of the company and should have the ability to quickly address issues of non-compliance
or weak oversight and controls. These guidelines therefore amplify on certain issues which are covered in
the Insurance Act, 1938 and the regulations framed thereunder and include measures which are additionally
considered essential by IRDAI for adoption by insurers.
2.2  The guidelines accordingly address the various requirements broadly covering the following major structural
elements of Corporate Governance in insurance companies:-
•  Governance structure
• Board of Directors
52 Lesson 2 • PP-GRMCE

• CEO
• Key Management functions
• Role of Appointed Actuaries
• External audit – Appointment of Statutory Auditors
• Disclosures
• Relationship with stakeholders
• Interaction with the Supervisor
• Whistle blower policy
2.3 In these guidelines, the reference to the “Board” would apply to the “Board of Directors” and the term “Key
Management Persons” shall be as defined in these guidelines.

3. Significant Owners, Controlling Shareholders – Role of Board

3.1  IRDAI prescribes a minimum lock-in period of 5 years from the date of certificate of commencement of business
of an insurer (R3) for the promoters of the insurance company and no transfer of shares of the promoters is
permitted within this period without the specific approval of the Authority.
3.2 Section 2 (7A) of the Insurance Act, 1938 has prescribed the ceiling of Foreign Investment in Indian Insurance
Companies at 49%, subject to the Indian Insurance Company being Indian owned and controlled. The manner
of computation of Foreign Investment to satisfy this requirement is specified in the Rules and Regulations
issued by the Government and IRDAI from time to time.
Explanation to sub-clause (b) of clause 7A of Sec 2 of the Insurance Act, 1938, which defines ‘Indian Insurance
Company’ provides that the expression “control” shall include the right to appoint a majority of directors or to
control the management or policy decisions including by virtue of their shareholding or management rights or
shareholders agreements or voting agreements.
Therefore, it has to be demonstrated through express provisions in the agreements between the promoters/
shareholders and/ or the Articles of Association of the Insurance companies that the ownership as well as
control does not lie with foreign entities but ultimately rests with resident Indian citizens at all times.
3.3 The Insurance Act, 1938 stipulates prior approval of the IRDAI for registration/transfer of shares, exceeding
one per cent and /or which involve holding of share capital, after such transfer, in excess of 5 per cent of the
paid-up capital of the company. The Board of Directors of the company shall ensure that the registration of
shares is in compliance with the above provisions of the Act, Regulations and circulars issued by IRDAI from
time to time.

3A. Conflict of Interest – Role of Board

1.  Where it is proposed to enter into a contract or arrangement with Related parties as defined in Companies Act
2013, the disclosures by Directors and necessary approvals as required under Sections 184, 177(4)(iv) and 188
of Companies Act 2013, read with the relevant Rules thereunder, shall be obtained. Adequate systems, policies
and procedures to address potential conflicts of interest and compliance with the provisions of Companies Act,
2013 need to be established by the insurers. These include Board level review of key transactions, disclosure
of any conflicts of interest to manage and control such issues. Where the transactions with related parties are
in the nature of transactions such as reinsurance arrangements or investment transactions or outsourcing to
related parties, for which specific regulations or guidelines have been notified, compliance with the respective
regulations or guidelines shall also be ensured.
The Board of Directors of an insurer shall formulate a Policy on Related Party Transactions laying down
the following:
(a)  Definition of Transactions in the ordinary course of the insurance business giving examples specific to the
insurance company.
 Lesson 2 • Legislative Framework of Corporate Governance in India 53

(b)  Method of determination of arm’s length pricing.

(c)  List of items requiring approvals from various authorities, Audit Committee, Board, Shareholders etc.
(d)  Any other matter relevant to the Related party transactions.
The Policy shall be reviewed by the Board on an yearly basis. In the case of insurance cover given by the
insurance company to the group companies, price/ premium quoted by the companies under F&U guidelines
should be considered as arm’s length. The disclosures about payments made to group entities of the insurer
out of the policyholders funds, shall be made as a part of the related party disclosures in terms of para 9 of
these guidelines; and all such transactions may be grouped together under the related party transactions.
2.  Auditors, Actuaries, Directors and Key Management Persons shall not simultaneously hold two positions in the
insurance company that could lead to conflict or potential conflicts of interest.
3.  The Board should ensure ongoing compliance with the statutory requirements on capital structure while
planning or examining options for capital augmentation of the Company.

4. Governance Structure
The insurance companies presently could have different structures with the Board of Directors headed by a Executive
or Non-executive Chairman with distinct oversight responsibilities over the other Directors and Key Management
Persons. It is expected that whatever form is taken, the broader elements of good Corporate Governance are present.
The governance structure of the insurer could also be influenced by its association with an insurance group or a
larger financial/ non-financial conglomerate. Insurers who are a part of a financial group could also be subject to
the regulatory requirements on governance policies and practices established for the group level and implemented
uniformly across the group.
However, these practices should be reoriented at the level of the in surer taking in to account its specific business and
risk profile and sectoral regulatory requirements. Such insurers should nevertheless strive to maintain consistency
in policies and practices in order tore in force controls across the group.

5. Board of Directors
5.1. Composition
• The Insurance Act stipulates that the insurance companies in India would be public companies and hence,
would require a properly constituted Board.
• Insurance companies should ensure that the Board comprises of competent and qualified Directors to
drive the strategies in a manner that would sustain growth and protect the interests of the stakeholders
in general and policyholders in particular.
• The size of the Board in addition to being compliant with legal requirements (where applicable), should
be consistent with scale, nature and complexity of business.
• It is expected that the shareholders of the companies elect or nominate Directors from various areas of
financial and management expertise such as accountancy, law, insurance, pension, banking, securities,
economics, etc., with qualifications and experience that is appropriate to the company.
• It is essential that the Directors possess the knowledge of group structure, organizational
structure, process and products of the insurer and the Board generally complies with the following
requirements-
– The Board of Directors and Key Management Persons should understand the operational structure
of the insurer and have a general understanding of the lines of business and products of the insurer,
more particularly as the insurer grows in size and complexity.
– The Board of Directors of an in surer be longing to a larger group structure/ conglomerate should
understand the material risks and issues that could affect the group entities, with attendant
implication on the insurer.
 54 Lesson 2 • PP-GRMCE

• The Board of Directors is required to have a minimum of three “Independent Directors”. However, this
requirement is relaxed to ‘two’ independent directors, for the initial five years from grant of Certificate b
of Registration to insurers. An independent Directors hall fulfill all the conditions specified under Section
149 of the Companies Act, 2013.
• In case the number of independent directors falls below the required minimum laid down, such vacancy
shall be filled up before the immediately following Board meeting or 3 months from the date of such
vacancy, whichever is later, under intimation to the Authority.
• Where the Chairman of the Board is non-executive, the Chief Executive Officer should be a wholetime
director of the Board.
As required under Section 149 of the Companies Act,2013, there shall be at least one Woman Director on the
Board of every Insurance company.
5.2. The Role and responsibility of the Board
The Role and Responsibilities of the Board of insurers are detailed as under:
Role and Responsibilities of the Board of Directors
1) The Board should ensure that the Governance principles set for the insurer comply with all relevant laws,
regulations and other applicable codes of conduct.
2) The Board should set the following policies in consultation with the Management of the Company.
(a) Define and periodically review the business strategy.
(b) Define the underwriting policy of the insurer.
(c) Determine the retention and reinsurance policy and in particular, the levels of retentions of
risk by the insurer and the nature and extent of reinsurance protection to be maintained by the
insurer.
(d) Define the policy of the insurer as regards investment of its assets consistent with an appropriate
asset liability management structure.
(e) Define the insurer’s policy on appointments and qualification requirements for human resources
and ensure that the incentive structure does not encourage imprudent behaviour.
3) The Board should define and set the following standards:-
(a) Define the standards of business conduct and ethical behaviour for directors and senior management.
(b) Define the standards to be maintained in policyholder servicing and in redressal of grievances of
policyholders.
4) The Board would be responsible to provide guidance for implementation of business strategy and review
the same periodically.
5) As an integral part of proper implementation of the business strategy, the Board should take action as under:-
(a) Establish appropriate systems to regulate the risk appetite and risk profile of the Company. It will
also enable identification and measurement of significant risks to which the company is exposed in
order to develop an effective risk management system.
(b) Ensure that all directions of IRDAI are submitted to the Board and the recommendations are
implemented as per the Board philosophy.
(c) Ensure that the IT systems in the company are appropriate and have built-in checks and balances to
produce data with integrity and put in place a business continuity and disaster recovery plan.
(d) Ensure that the company has put in place a robust compliance system for all applicable laws and
regulations.
 Lesson 2 • Legislative Framework of Corporate Governance in India 55

(e) Prescribe requirements and frequency of reporting in respect of each of the above areas of
responsibility as may be decided by the Board.
6) In discharge of the above and other Governance functions, the Board may delegate the responsibilities
to mandated/ other recommended Empowered Committees of Directors while retaining its primary
accountability.
The Board would primarily concentrate on the direction, control and governance of the insurer and
in particular should articulate and commit to a corporate philosophy and governance that will shape
the level of risk adoption, standards of business conduct and ethical behaviour of the company at
the macro level. The Board should also set clear and transparent policy framework for translation
of the corporate objectives. The Board can delegate its authority to the Board Committees in the
discharge of this responsibility but such delegation does not absolve the Board from its primary
responsibilities. In this regard, the Board should seek detailed and transparent information flow from
the senior management (CEO and other KMPs) through well documented agenda notes and also devise
appropriate systems to serve as effective monitoring arrangements. As the Boards generally do not
meet at frequent intervals, it is imperative that the senior management is clearly made accountable for
the two way information flow. The structure of the Board of Directors should be oriented to setting-
up of objectives to meet the expectations of various stakeholders, strategies for their fulfillment and
for monitoring the achievements. The Boards of insurance companies need to consider interests of all
stakeholders, and especially their policyholders as a specific group. Further, since there could arise
a conflict of interest amongst the various stakeholders, a key board function would be to establish
strategies and policies that define ethical individual and corporate behaviour and ongoing, effective
processes that ensure adherence to these strategies and policies.
Thus, with a view to being effective, the Board in active consultation with the Key Management Persons,
should establish and evaluate strategies and policies to address, at the minimum, a broad range of areas,
as indicated below. There should concurrently be arrangements to review the policies from time to time
to ensure that they are dynamic.
• Overall direction of the business of the insurance company, including policies, strategies and risk
management across all the functions;
• Projections on the capital requirements, revenue streams, expenses and the profitability. While
laying down the projections, the Board must address the expectations of the shareholders and the
policyholders;
• Obligation to fully comply with the Insurance Act and the regulations framed thereunder, and other
statutory requirements applicable to it;
• Addressing conflicts of interest;
• Ensuring fair treatment of policyholders and employees;
• Ensuring information sharing with and disclosures to stakeholders, including investors,
policyholders, employees, the regulators, consumers, financial analysts and/or rating agencies.
• Establishing channels for encouraging and facilitating employees raising concerns or reporting
a possible breach of law or regulations, with appropriate measures to protect whistle blowers;
• Developing a corporate culture that recognizes and rewards adherence to ethical standards.
5.3. Fit and Proper Criteria 
In line with the international and domestic norms, the Directors of insurers have to meet the “fit and proper”
criteria. The criteria to be satisfied, at a minimum, would relate to integrity demonstrated in personal behaviour
and business conduct, soundness of judgment and financial soundness. The Insurance Act prohibits (i) an
 56 Lesson 2 • PP-GRMCE

insurance intermediary/ agent to be the Director of an insurance company (except with prior approval of the
Authority); and (ii) the common directorship among life insurance companies. Currently, the fit and proper
requirements seek to ensure that the Director should not have been convicted or come under adverse notice
of the laws and regulations involving moral turpitude or of any professional body. With a view to ensuring that
the Directors comply with the above requirement, a due diligence enquiry should be undertaken on the person
to be appointed as Director or for the continuance of the existing Directors only after obtaining a declaration
from the proposed/existing Directors in the format given in Annexure 2, at the time of their appointment/re-
appointment.
5.4. Disclosures about Meetings of the Board and its Committees
Insurers shall ensure compliance with the provisions of the Companies Act, 2013 and the Secretarial Standards
issued by the ICSI from time to time as regards conduct of the meetings of the Board of Directors and their
committees. In addition to the above, all insurers shall disclose the following in the Director’s Report:
(a)  Number of meetings of the Board of Directors and Committees mandated under these Guidelines, in the
financial year
(b)  Details of the composition of the Board of Directors and Committees mandated, setting out name,
qualification, field of specialization, status of directorship held etc.
(c)  Number of meetings attended by the Directors and members of the Committee
(d)  Details of the remuneration paid, if any, to all directors (including Independent Directors)

6. Control Functions
Given the risks that an insurer takes in carrying out its operations, and the potential impact it has on its business, it
is important that the Board lays down the policy framework to put in place:
•  robust and efficient mechanisms for the identification, assessment, quantification, control, mitigation and
monitoring of the risks;
• appropriate processes for ensuring compliance with the Board approved policy, and applicable laws and
regulations;
• appropriate internal controls to ensure that the risk management and compliance policies are observed;
• an internal audit function capable of reviewing and assessing the adequacy and effectiveness of, and the
insurer’s adherence to its internal controls as well as reporting on its strategies, policies and procedures; and
• Independence of the control functions, including the risk management function, from business operations
demonstrated by a credible reporting arrangement.
The Board shall be responsible for the oversight over the control functions of an Insurer.
For insurers within a group, appropriate and effective group-wide risk control systems should be in place in addition
to the control systems at the level of the insurer. It is essential to manage risks appropriately on a group-wide basis
as well as at the level of the insurer. The Boards of the respective insurers are required to lay down requisite policy
framework to ensure that such risks are adequately addressed.

7. Delegation of Functions- Committees of the Board

With a view to providing adequate Board time for discharge of the significant corporate responsibilities, the Board
can consider setting up of various Committees of Directors by delegating the overall monitoring responsibilities
after laying down the roles and responsibilities of these Committees to the Board. In particular, the following aspects
need to be defined in respect of the role and functions of the Committees:
• Constitution
• Objectives
 Lesson 2 • Legislative Framework of Corporate Governance in India 57

• Responsibilities
• Frequency of meeting / quorum requirements
• Appointment and removal of members
• Reporting to the Board
Insurers may establish several Committees to undertake specific functions depending on the size and level of the
complexity of the operations. Typically, the Committees that assist the Board are Audit Committee, Risk Management
Committee, Nomination and Remuneration Committee, Investment Committee, Ethics Committee and Asset-Liability
Management Committee.
However, the Authority advises all insurers that it is mandatory to establish Committees for Audit, Investment, Risk
Management, Policyholder Protection, Nomination and Remuneration, Corporate Social Responsibility (only for
insurers earning profits).
In addition, Regulation 45d of the IRDA (Non-linked Insurance Products) Regulations, 2013 requires constitution of
a ‘With Profits’ Committee by Life Insurance Companies comprising of one Independent Director of the Board, the
Chief Executive Officer, the Appointed Actuary of the Company and an Independent Actuary. Establishment of the
other Committees is left to the option of the insurer. The role and responsibilities of the Committees would generally
be as detailed below:-
7.1. Audit Committee (Mandatory)
• Every Insurer shall constitute an Audit Committee as per Section 177 of the Companies Act, 2013.
• The Audit Committee shall oversee the financial statements, financial reporting, statement of cash flow
and disclosure processes both on an annual and quarterly basis. It shall set-up procedures and processes
to address all concerns relating to adequacy of checks and control mechanisms.
• The Chairperson of the Audit Committee should be an Independent Director of the Board with an
accounting/finance/audit experience and may be a Chartered Accountant or a person with a strong
financial analysis background. The association of the CEO in the Audit Committee should be limited
to occasions where the Audit Committee requires eliciting any specific information concerning audit
findings. As required under Section 177 of the Companies Act, 2013, the Audit Committee shall comprise
of a minimum of three directors, majority of whom shall be Independent Directors.
• The Audit Committee will oversee the efficient functioning of the internal audit department and review
its reports. The Committee will additionally monitor the progress made in rectification of irregularities
and changes in processes wherever deficiencies have come to notice.
• The Audit Committee shall be directly responsible for the recommendation of the appointment,
remuneration, performance and oversight of the work of the auditors (internal/statutory/Concurrent). In
case of statutory audit, the independence of the external auditors shall be ensured (although the approval
of appointment, remuneration and removal of the statutory auditors shall be done by the shareholders at
the general body meeting).
• The Audit Committee shall have the oversight on the procedures and processes established to attend to
issues relating to maintenance of books of account, administration procedures, transactions and other
matters having a bearing on the financial position of the insurer, whether raised by the auditors or by any
other person.
• The Audit Committee shall discuss with the statutory auditors before the audit commences, about the
nature and scope of audit as well as have post-audit discussions to address areas of concern.
• Act as a Compliance Committee to discuss the level of compliance in the Company and any associated
risks and to monitor and report to the Board on any significant compliance breaches.
• Any additional work other than statutory/internal audit that is entrusted to the auditor or any of its
associated persons or companies shall be specifically approved by the Board keeping in mind the necessity
to maintain the independence and integrity of the audit relationship. All such other work entrusted to the
 58 Lesson 2 • PP-GRMCE

auditor or its associates shall be specifically disclosed in the Notes to Accounts forming part of the annual
accounts of the insurance companies. However, it may be ensured that insurance companies comply with
Section 144 of the Companies Act, 2013 before deciding to provide any additional work to the Statutory
Auditors.
7.2.  Investment Committee (Mandatory)
The Board of every Insurer shall set up an Investment Committee comprising of at least two Non-Executive
Directors, the Chief Executive Officer, Chief of Finance, Chief of Investment, Chief Risk Officer and, the Appointed
Actuary.
The Committee shall be responsible to recommend investment policy and lay down the operational framework
for the investment operations of the insurer. The policy should focus on a prudential Asset Liability Management
(ALM) supported by robust internal control systems. The investment policy and operational framework
should, inter alia, encompass aspects concerning liquidity for smooth operations, compliance with prudential
regulatory norms on investments, risk management / mitigation strategies to ensure commensurate yield on
investments and above all protection of policyholders’ funds.
The Investment Committee shall be responsible for implementing the Investment Policy duly approved by the
Board.
Members of the Committee should familiarize themselves and be conversant with the various Acts, Rules,
Regulations, Guidelines, Circulars, etc., issued by the Authority as amended from-time-to-time.
For assessment of credit risk and market risk, the members of the Committee should not be influenced only
by the credit rating. The committee should independently review their investment decisions and ensure that
support by the internal due diligence process is an input in making appropriate investment decisions.
The Committee shall formulate an effective reporting system to ensure compliance with the policy set out by
it apart from Internal /Concurrent Audit mechanisms for a sustained and on-going monitoring of Investment
Operations.
The Committee shall meet at least once in a quarter to review investment operations and submit a report to the
Board on the performance of the investment portfolio with regard to its safety and soundness.
7.3. Risk Management Committee (Mandatory)
It is now well recognized that the sound management of an insurance company, as in the case of other financial
sector entities, is dependent on how well the various risks are managed across the organization. In pursuit of
development of a strong risk management system and mitigation strategies, insurers shall set up a separate
Risk Management Committee to implement the company’s Risk Management Strategy. The risk management
function should be under the overall guidance and supervision of the Chief Risk Officer (CRO) with a clearly
defined role. It shall be organized in such a way that it is able to monitor all the risks across the various lines
of business of the company and the operating head has direct access to the Board. It should not focus solely on
compliance; it should focus on adding value to rest of the business. Risk management function should work in
close co-ordination with the finance function, but independently assess and evaluate the capital, finance and
other operating decisions. Broadly, the Risk Management Committee shall:
• Establish effective Risk Management framework and recommend to the Board the Risk Management
policy and processes for the organization.
• Set the risk tolerance limits and assess the cost and benefits associated with risk exposure.
• Review the Company’s risk- reward performance to align with overall policy objectives.
• Discuss and consider best practices in risk management in the market and advise the respective
functions.
• Assist the Board in effective operation of the risk management system by performing specialized analyses
and quality reviews.
 Lesson 2 • Legislative Framework of Corporate Governance in India 59

• Maintain an aggregated view on the risk profile of the Company for all categories of risk including insurance
risk, market risk, credit risk, liquidity risk, operational risk, compliance risk, legal risk, reputation risk, etc.
• Advise the Board with regard to risk management decisions in relation to strategic and operational
matters such as corporate strategy, mergers and acquisitions and related matters.
• Report to the Board, details on the risk exposures and the actions taken to manage the exposures; review,
monitor and challenge where necessary, risks undertaken by the Company.
• Review the solvency position of the Company on a regular basis.
• Monitor and review regular updates on business continuity.
• Formulation of a Fraud monitoring policy and framework for approval by the Board.
• Monitor implementation of Anti-fraud policy for effective deterrence, prevention, detection and mitigation
of frauds.
• Review compliance with the guidelines on Insurance Fraud Monitoring Framework dt. 21st January,
2013, issued by the Authority.
7.4. Policy holder Protection Committee (Mandatory)
The Authority is mandated by statute to protect policy holders’ interests and therefore adoption of sound
and healthy market practices in terms of sales, marketing, advertisements, promotion, publicity, redressal of
customer grievances, consumer awareness and education is essential. The Authority has, therefore, notified
the following Regulations/Guidelines/Circulars:-
i) Protection of Policyholders’ Interests Regulations, 2002;
ii) Insurance Advertisements and Disclosure Regulations, 2002;
iii) Master Circular on Insurance Advertisements in August, 2015;
iv) Guidelines on Public Disclosure for insurance companies;
v) Guidelines on Advertisements, Promotion & Publicity of Insurance Companies and Insurance
Intermediaries in May 2007;
vi) Various Circulars on Handling and Disclosure of the Unclaimed Amounts pertaining to the Policyholders;
vii) Guidelines on Grievance Redressal by Insurance Companies in July 2010 and Handling of Complaints/
Grievances from Policyholders in April 2015; and
viii) Guidelines on Electronic Mode of Payments for Claims.
Indian Insurance companies are also required to report on the number and nature of complaints to the IRDAI
at monthly intervals to enable IRDAI to assess the governance and market conduct issues with respect to each
insurance company. With a view to addressing the various compliance issues relating to protection of the
interests of policyholders, as also relating to keeping the policyholders well informed of and educated about
insurance products and complaint-handling procedures, each insurer shall set up a Policyholder Protection
Committee.
Such Committee shall be headed by a Non-Executive Director and shall include an expert/representative
of customers as an invitee to enable insurers to formulate policies and assess compliance thereof. The
Committee shall recommend a policy on customer education for approval of the Board and ensure proper
implementation of the same. The Committee should put in place systems to ensure that policyholders have
access to redressal mechanisms and shall establish policies and procedures, for the creation of a dedicated unit
to deal with customer complaints and resolve disputes expeditiously. The functions and responsibilities of the
Policyholders’ Protection Committee shall include:-
• Adopt standard operating procedures to treat the customer fairly including time-frames for policy and
claims servicing parameters and monitoring implementation thereof.
 60 Lesson 2 • PP-GRMCE

• Establish effective mechanism to address complaints and grievances of policyholders including mis-
selling by intermediaries.
• Put in place a framework for review of awards given by Insurance Ombudsman/Consumer Forums. Analyze
the root cause of customer complaints, identify market conduct issues and advise the management
appropriately about rectifying systemic issues, if any.
• Review all the awards given by Insurance Ombudsman/Consumer Forums remaining unimplemented
for more than three (3) months with reasons therefor and report the same to the Board for initiating
remedial action, where necessary.
• Review the measures and take steps to reduce customer complaints at periodic intervals.
• Ensure compliance with the statutory requirements as laid down in the regulatory framework.
• Ensure adequacy of disclosure of “material information” to the policyholders. These disclosures shall
comply with the requirements laid down by the Authority both at the point of sale and at periodic
intervals.
• Provide details of grievances at periodic intervals in such formats as may be prescribed by the Authority.
• Ensure that details of insurance ombudsmen are provided to the policyholders.
• Review of Claims Report, including status of Outstanding Claims with ageing of outstanding claims.
• Reviewing Repudiated claims with analysis of reasons.
• Status of settlement of other customer benefit payouts like Surrenders, Loan, Partial withdrawal requests
etc.
• Review of unclaimed amounts of Policyholders, as required under the Circulars and guidelines issued by
the Authority.
The Board shall review the status report on policyholders’ protection issues, submitted by the Committee, in
each of its meeting.
7.5. Nomination and Remuneration Committee (Mandatory)
The Nomination and Remuneration Committee shall be constituted in line with the provisions of Section 178 of
the Companies Act, 2013. Indian Insurance Companies which have constituted two independent committees for
Nomination and Remuneration separately may merge these two Committees after seeking the Board approval,
under intimation to the Authority, within a period of 180 days from the date of issue of these guidelines.
The Nomination and Remuneration Committee shall scrutinize the declarations of intending applicants before
the appointment/reappointment/election of directors by the shareholders at the General Meetings. The
Committee shall also scrutinize the applications and details submitted by the aspirants for appointment as
the Key Management Persons. The Nomination and Remuneration Committee could also make independent/
discreet references, where necessary, well in time to verify the accuracy of the information furnished by the
applicant. The insurance companies are further advised that they should obtain an annual declaration from the
Directors/ KMPs that the information provided in the declaration at the time of appointment/ reappointment
has not undergone any change subsequently and the changes, if any, are apprised by the concerned Director to
the Board. The Directors are also required to enter into a Deed of Covenant. With the insurance company, duly
approved by the Board, pursuant to their terms of appointment to ensure that there is a clear understanding of
the mutual role of the company, the Directors and the Board in Corporate Governance.
It is pertinent to draw attention to the provisions of Section 34 (A) (1) of the Insurance Act, 1938 which
stipulates that the remuneration of CEOs/Whole-time Directors of Indian insurance companies is subject to
statutory approval of the IRDAI. Further, the overall management costs of the insurer are also additionally
governed by the limits prescribed statutorily in the Insurance Act and Regulations framed there under
in order to protect the interests of the policyholders. The setting up of a Nomination and Remuneration
Committee should keep the above requirements in view. Further, the envisaged role of the Committee
includes the following aspects:-
 Lesson 2 • Legislative Framework of Corporate Governance in India 61

The Nomination and Remuneration Committee is required to determine on behalf of the Board and on behalf
of the shareholders with agreed terms of reference, the insurance company’s policy on remuneration packages
and any compensation payment, for the CEO, the Executive Directors, Key management Persons of the company.
The remuneration package shall be aligned appropriately with the performance objectives laid down for the
Key Management Persons.
In order to avoid conflict of interest, the Nomination and Remuneration Committee, may comprise of at least
three non-executive directors, with the Chairman of the Committee being an independent director. At least
one-half of the Committee shall comprise of Independent Directors.
The Nomination and Remuneration Committee shall ensure that the remuneration packages of the Key
Management Persons of the company are as per the Remuneration Policy approved by the Board.
The Committee shall also ensure that the proposed appointments/ re-appointments of Key Management
Persons or Directors are in conformity with the Board approved policy on retirement/ superannuation.
7.6. Corporate Social Responsibility Committee (‘CSR Committee’) (Mandatory)
Section 135 of the Companies Act, 2013 requires constitution of a CSR Committee if certain conditions as
mentioned in the said Section are fulfilled. For Indian Insurance Companies, a CSR Committee is required to be
set up if the insurance company earns a Net Profit of Rs. 5 Crores or more during the preceding financial year.
Further the ‘Net Profit’ for this purpose shall be as under:-
“Net profit” means the “profit/(loss) before tax” as per its financial statements prepared in accordance with the
applicable provisions of the Insurance Act, 1938 and the Regulations framed thereunder, but shall not include the
following, namely
(i) Any profit arising from any overseas branch or branches of the company, whether operated as a separate
company or otherwise; and
(ii) any dividend received from other companies in India, which are covered under and complying with the
provisions of section 135 of the Companies Act.
Provided that net profit in respect of a financial year for which the relevant financial statements were prepared in
accordance with the provisions of the Insurance Act, 1938, shall not be required to be re-calculated in accordance
with the provisions of the Companies Act.
In line with Section 135(5) of Companies Act, 2013, the Board of Directors of the Company shall ensure that
the Company spends not less than 2% of the three years’ average Net Profits as defined above towards the CSR
activities.
(a) CSR will be based only on the average of the three years’ profit as per the Statement of Profit and Loss
Account as stated above.
(b) The CSR Committee shall formulate a CSR policy and get it approved by the Board. Constitution of CSR
Committee will be as per Companies Act, 2013.
(c) The expense incurred on CSR shall not be included for the purpose of calculation of ceilings on Expenses
of Management under Section 40B or Section 40C, as the case may be.
(d) The expenses incurred on CSR activities should not be charged to the Policyholders’ Account.
7.7. With Profits Committee
The Authority has issued IRDA (Non-Linked Insurance Products) Regulations 2013, which lay down the
framework about the With Profit Fund Management and Asset sharing, among other things. In terms of these
Regulations, every Insurer transacting life insurance business shall constitute a With Profits Committee
comprising of an Independent Director, the CEO, The Appointed Actuary and an independent Actuary. The
Committee shall meet as often as is required to transact the business and carry out the functions of determining
the following:
62 Lesson 2 • PP-GRMCE

• the share of assets attributable to the policyholders

• the investment income attributable to the participating fund of policyholders
• the expenses allocated to the policyholders.
The report of the With Profits Committee in respect of the above matters should be attached to the Actuarial
Report and Abstract furnished by the insurers to the Authority. The Board of an insurer shall ensure that any
other stipulations regarding the constitution and/ or functioning of the With Profits Committee as indicated in
the Regulations made by the Authority from time to time shall be complied with at all times.
7.8. Other Committees
The other Committees which can be set up by the Board, include the Ethics Committee and ALM Committee
(other than life insurers). In cases where Board decides not to constitute such Committees, their functions
and responsibilities can be addressed in such manner as the Board may deem fit. However, once these
Optional Committees are in place, the insurer is required to comply with the requirements on the “Role and
Responsibilities” of such Committees as laid down under these Guidelines.
Wherever the functions of the mandatory committees are capable of being merged without affecting the
independence and objectivity envisaged in the corporate governance structure, insurance companies may do so
under specific approval of their Boards and intimation to the Authority. However, the Audit Committee and the
Investment Committee shall not be merged with any other Committee of the Board under any circumstances.
7.8.1 Ethics Committee (not mandatory)
Functions and Responsibilities of the Ethics Committee shall include:
Monitoring the compliance function and the insurance company’s risk profile in respect of compliance
with external laws and regulations and internal policies, including its code of ethics or conduct.
Receiving reports on the above and on proactive compliance activities aimed at increasing the insurance
company’s ability to meet its legal and ethical obligations, on identified weaknesses, lapses, breaches or
violations and the controls and other measures in place to help detect and address the same.
Supervising and monitoring matters reported using the insurer’s whistle blowing or other confidential
mechanisms for employees and others to report ethical and compliance concerns or potential breaches
or violations.
Advising the board on the effect of the above on the insurer’s conduct of business and helping the board
set the correct “tone at the top” by communicating, or supporting the communication, at all levels of the
insurer of the importance of ethics and compliance.
Approving compliance programmes, reviewing their effectiveness on a regular basis and signing off on
any material compliance issues or matters.
7.8.2 Asset Liability Management (ALM) Committee
ALM is an ongoing process of formulating, implementing, monitoring and revising strategies related
to assets and liabilities to achieve an organization’s financial objectives, given the organization’s risk
appetite, risk tolerances and business profile. The need for ALM cannot be over-emphasized as it lays
down the framework to ensure that the insurer invests in a manner which would enable it to meet its cash
flow needs and capital requirements at a future date to mitigate liquidity risk and solvency stipulations.
The functions of the ALM Committee (wherever constituted) shall include:
• Setting the insurer’s risk/reward objectives and assessing policyholder expectations.
• Quantifying the level of risk exposure (eg. market, credit and liquidity) and assessing the expected
rewards and costs associated with the risk exposure.
• Formulating and implementing optimal ALM strategies and meeting risk-reward objectives at both
product and enterprise level.
 Lesson 2 • Legislative Framework of Corporate Governance in India 63

• Ensuring that liabilities are backed by appropriate assets and manage mismatches between assets
and liabilities to ensure they remain within acceptable monitored tolerances for liquidity, solvency
and the risk profile of the entity.
• Monitoring risk exposures at periodic intervals and revising ALM strategies where required.
Reviewing, approving and monitoring systems, controls and reporting used to manage balance
sheet risks including any mitigation strategies.
• Regular review and monitoring of mismatch between assets and liabilities and the acceptable
tolerance limits for mismatch, if any.
• Ensuring that management and valuation of all assets and liabilities comply with standards,
prevailing legislation and internal and external reporting requirements.
• Submitting the ALM information before the Board at periodic intervals. Annual review of strategic
asset allocation.
• Reviewing key methodologies and assumptions including actuarial assumptions, used to value
assets and liabilities.
• Managing capital requirements at the company level using the regulatory solvency requirements.
• Reviewing, approving and monitoring capital plans and related decisions over capital transactions
(e.g. dividend payments, acquisitions, disposals, etc).
Where an insurer does not constitute the Asset Liability Management (ALM) Committee, the functions of ALM
shall form part of the Risk Management Committee.
7.9. The mandatory committees, except Nomination and Remuneration Committee, the Corporate Social
Responsibility Committee and the With Profits Committee shall meet at least four times in a year and
not more than four months shall elapse between two successive meetings of such Committees. The quorum
shall be two members or one-third of the members of the Committee, whichever is greater, however in
case independent director(s) is/ are mandated to be in any of the Committees, at least one such independent
director or his alternate director, should necessarily be present to form the quorum.
As specified in the proviso to Section 161(2) of the Companies Act, 2013, no person shall be appointed as an
alternate director for an independent director unless he/she is qualified to be appointed as an independent
director under the provisions of this Act. This condition shall be applicable even while appointing an alternate
director to an Independent director in any of the Committees.
It is emphasized that the overall responsibility for directing the affairs of the insurers shall be with the Board
and it shall continue to exercise its oversight directly on matters that are not specifically delegated to any of its
Committees.

8. Key Managerial Persons

8.1 CEO/ Managing Director/ Whole-Time Director
The Chief Executive Officer / Whole Time Director/Managing Director of the company and other key functionaries
are responsible for the operations and day to day management of the company in line with the directions of the
Board and the Committees setup by the Board. Section 34A of the Insurance Act,1938 requires prior approval
of the Authority for appointment, re-appointment or termination of the Chief Executive Officer and the Whole
Time Directors. The Authority expects the CEO to be responsible for the conduct of the company’s affairs in a
manner which is not detrimental to the interests of the policyholders and which is consistent with the policies
and directions of the Board. The Board should, therefore, carry out effective due diligence to establish that the
new incumbent is ‘fit and proper’ before recommending the name for Authority’s approval. In case the CEO
resigns, the Authority should be kept informed of such resignation and the reasons therefor. The Insurance
Act also prohibits the Managing Director or other Officer of a life insurance company from being a Managing
Director or Other Officer of any other Life insurance company or of a Banking company or an Investment
Company. As the appointment of the CEO is made with the prior approval of the IRDAI the Board should take
 64 Lesson 2 • PP-GRMCE

proactive steps to decide on the continuance of CEO well in time before the expiry of his tenure or to identify
the new incumbent. The Authority requires the proposal to be submitted with the approval of the Board at
least a month before the completion of the tenure of the incumbent.  As a corollary, the insurers should also
have practices in place for succession planning for the key senior functionaries through a process of proper
identification and nurturing of individuals for taking over senior management positions.
8.2. Role of Appointed Actuaries
IRDAI has brought out detailed Regulations on Appointed Actuary vide IRDA (Appointed Actuary) Regulations,
2000, detailing the procedure for his appointment, qualifications, powers along with his duties and obligations.
The Regulations also stipulate that prior approval of the Authority shall be taken for the appointment of the
Appointed Actuary. The Board should ensure that the requirements are scrupulously complied with. In brief, it
is reiterated that:
• The Appointed Actuary should qualify and satisfy the ‘Fit & Proper’ criteria and other eligibility conditions
as mentioned in IRDA (Appointed Actuary) Regulations, 2000, as amended from time to time.
• The insurance companies shall clearly set forth the Appointed Actuary’s responsibilities and any advisory
role vis-à-vis the Board or the management as well as his/her rights and obligations. These Shall be in
addition to the duties of the Appointed Actuaries as specified in the IRDA Regulations and any other
directions of IRDA in the matter.
• As soon as the Appointed Actuary realizes that the entity does not comply or is likely to fail in complying
with the requirements of solvency and other parameters of sound operations, he/she shall inform the
Board of the insurer. If no viable/acceptable action is taken by the Board, then he/she has to inform the
same to IRDAI.
• The Board shall interact directly with the Appointed Actuary where verit considers it expedient to
secure his advice, it may do so in such manner as it may deem fit. The Appointed Actuary shall provide
professional advice or certification to the board with regard to:-
– Estimation of technical provisions in accordance with the valuation framework setup by the insurer
– Identification and estimation of material risks and appropriate management of the risks
– Financial condition testing
– Solvency margin requirements
– Appropriateness of premiums (and surrender value)
– Allocation of bonuses to with-profit insurance contracts
– Management of participating funds (including analysis of material effects caused by strategies and
policies)
– Product design, risk mitigation (including reinsurance) and other related risk management roles.
While the areas of advice/certification listed above are with specific reference to life companies, the appointed
actuaries in case of non-life insurance companies shall provide such advice/certification to the extent
applicable. In order to facilitate the Appointed Actuary in discharging his/her responsibilities, he/ she shall at
all times be provided access to the information as required.

8A. External Audit – Appointment of Statutory Auditors

The IRDAI (Preparation of Financial Statements and Auditors ’Report of Insurance Companies) Regulations, 2002
empower the Authority to issue directions/guidelines on appointment, continuance or removal of auditors of an
insurer. These guidelines/directions may include prescriptions on qualifications and experience of auditors, their
rotation, period of appointment, etc. as may be deemed necessary by the Authority.
 Lesson 2 • Legislative Framework of Corporate Governance in India 65

The detailed guidelines as regards appointment of auditors and the reporting about all the auditors appointed by
insurers are given in Annexure 7 to these guidelines. The Board should therefore ensure that the statutory auditors
are compliant with the regulatory requirements and there are no conflicts of interest in their appointment. The
auditors should possess the competence and integrity to alert the appropriate authorities promptly of any event that
could seriously affect the insurance company’s financial position or the organization structure of its administration
or accounting and of any criminal violations or material irregularities that come to his notice.
8A.1. Access to Board and Audit Committee
The Audit Committee should have discussions with the statutory auditors periodically about internal control
systems, the scope of audit including the observations of the auditors (where applicable) and review the
quarterly/half yearly and annual financial statements as the case may be before submission to the Board of
Directors and also ensure compliance with the internal control systems. The statutory auditors should also
have access to the Board of Directors through the Audit Committee.

9. Disclosure Requirements
The IRDAI (Preparation of Financial Statements and Auditors ’Report of Insurance Companies) Regulations, 2002,
have prescribed certain disclosures in the financial statements and the Authority is in the process of finalizing
additional disclosures to be made by insurers at periodical intervals. In the meantime, it may be ensured by the
Board that the information on the following, including the basis, methods and assumptions on which the information
is prepared and the impact of any changes therein are also disclosed in the annual accounts-
• Quantitative and qualitative information on the insurance company’s financial and operating ratios, viz.
incurred claim, commission and expenses ratios
• Actual solvency margin details vis-à-vis the required margin
• Insurers engaged in life insurance business shall disclose persistency ratio of policies sold by them
• Financial performance including growth rate and current financial position of the insurance company
• Description of the risk management architecture
• Details of number of claims intimated, disposed off and pending with details of duration
• All pecuniary relationships or transactions of the Non-Executive Directors vis-à-vis the insurance company
shall be disclosed in the Annual Report
• Elements of remuneration package (including incentives) of MD & CEO and all other directors and Key
Management Persons
• Payments made to group entities from the Policyholders Funds
• Any other matters, which have material impact on the insurer’s financial position.
Where finalization of annual accounts extends beyond 90 days from the end of the Financial Year, the status on
disclosure in the financial statements required under this clause may be made with in15days of adoption of annual
accounts by the Board of Directors of the Insurers.

10. Outsourcing Arrangements

All out sourcing arrangements of an Insurer shall have the approval of a Committee of Key Management Persons
and should meet the terms of the Board approved out sourcing policy. The Board or the Risk Management
Committee should be periodically apprised about the outsourcing arrangements entered into by the insurer and
also confirmation to the effect that they comply with the stipulations of the Authority as well as the internal policy
be placed before them. An insurer shall not outsource any of the company’s core functions other than those that have
been specifically permitted by the Authority. Every outsourcing contract shall contain explicit safeguards regarding
confidentiality of data and all outputs from the data, continuing ownership of the data with the insurer and orderly
handing over of the data and all related software programs on termination of the outsourcing arrangement.
66 Lesson 2 • PP-GRMCE

The management of the insurance company shall monitor and review the performance of agencies to whom
operations have been outsourced at least annually and report findings to the Board.
The Authority reserves the right to access the operations of the outsourced entity to the extent these are relevant to
the insurance company and for the protection of policyholder.

11. Interaction with the Regulator

Effective corporate governance practices in the office of the insurance company will enable IRDAI to have greater
confidence in the work and judgment of its board, Key Management Persons and control functions.
In assessing the governance practices in place, the IRDAI would:
• Seek confirmation that the insurance company has adopted and effectively implemented sound corporate
governance policies and practices;
• Assess the fitness and propriety of board members;
• Monitor the performance of boards;
• Assess the quality of insurance company’s internal reporting, risk management, audit and control functions;
• Evaluate the effects of the insurance company’s group structure on the governance strategies;
• Assess the adequacy of governance processes in the area of crisis management and business continuity.
The IRDAI would bring to the attention of the Board and senior rmanagement, concerns which have been detected
by it through supervisory activities.
Reporting to IRDAI
Insurers should examine to what extent they are currently complying with these guidelines and initiate immediate
action to achieve compliance (where not already in compliance) within a period of three months from the date of
notification of these guidelines. It is expected that all the arrangements should be in place to ensure full compliance
with the guidelines from the financial year 2016-2017. Where such compliance is not possible for any specific
reason, the insurance companies should write to the IRDAI for further guidance.
Each insurer should designate Company Secretary as the Compliance officer whose duty will be to monitor continuing
compliance with these guidelines.
Annual Report of insurers shall have a separate certification from the Compliance Officer.
All insurers are required to file are port on status of compliance with the Corporate Governance guidelines on an
annual basis. This report shall be filed within 3 months from the end of the financial year, i.e., before 30 June. The
report shall be filed as per the format in the Annexure 9.

12. Whistle Blower Policy

Insurers are well advised to put in place a “whistle blower” policy, where-by mechanism sexist for employees to
raise concerns internally about possible irregularities, governance weaknesses, financial reporting issues or other
such matters. These could include employee reporting in confidence directly to the Chairman of the Board or of a
Committee of the Board or to the Statutory Auditor.
The Policy illustratively covers the following aspects:
• Awareness of the employees that such channels are available, how to use them and how their report will be
handled.
• Handling of the reports received confidentially, for independent assessment, investigation and where necessary
for taking appropriate follow-up actions.
• A robust anti-retaliation policy to protect employees who make reports in good faith.
• Briefing of the board of directors.
Lesson 2 • Legislative Framework of Corporate Governance in India 67

The appointed actuary and the statutory / internal auditors have the duty to ‘whistle blow’,i.e .,to report in a timely
manner to the IRDAI if they are aware that the insurance company has failed to take appropriate steps to rectify a
matter which has a material adverse effect on its financial condition. This would enable the IRDAI to take prompt
action before policy holders’ interests are undermined.

13. Evaluation of Board of Directors including Independent Directors

As required under Schedule IV of the Companies Act, 2013, the independent directors shall meet at least once in a
year to evaluate the performance of other than independent Directors. Similarly, there shall be an evaluation of the
Independent Directors by the other members of the Board of Directors as required in the Schedule.

14. Applicability
These guidelines shall be applicable to all insurers granted registration by the Authority except that:
(i) reinsurance companies may not be required to have the Policyholders’ Protection Committee; and
(ii) branches of foreign reinsurers in India may not be required to constitute the Board and its mandatory
committees as indicated herein.

STEWARDSHIP CODE FOR INSURERS IN INDIA

Insurance companies are significant institutional investors in listed companies and the investments are held by
them as custodians of policy holders. The state of governance of the investee companies is an important aspect
and insurance companies must ensure that investee companies maintain corporate governance standards at high
level. Therefore, it is felt that insurance companies should play an active role in the general meetings of investee
companies and engage with the managements at a greater level to improve their governance. This will result in
informed decisions by the parties and ultimately improve the return on investments of insurers which will ultimately
benefit the policyholders..
The IRDAI had issued a code for Stewardship for the InsurersinIndiainMarch2017. The code was in the form of a
set of principles, which the insurance companies needed to adopt and made applicable from FY 2017-18.As per the
code, insurer should have a board approved stewardship policy which should identify and define the stewardship
responsibilities that the insurer wishes to undertake and how the policy intends to fulfill the responsibilities to
enhance the wealth of its policyholders who are ultimate beneficiaries.

The IRDAI vide its Circular No. IRDAI/ F&A/GDL/CPM/045/02/2020 dated 7th February, 2020 issued the
Revised Guidelines on Stewardship Code for Insurers in India.
All the insurers need to review and update their existing stewardship policy based on the Revised Guidelines
on Stewardship Code for Insurers in India within 3 months from the date of issue of the same and the updated
stewardship policy needs to be approved by the Board of Directors. The updated policy should be disclosed
on the website within 30 days of approval by the Board by all insurers, alongside the public disclosures.  Any
subsequent change / modification to the stewardship policy should be specifically disclosed at the time of
updating the policy document on the website.
All insurers shall comply with all the principles given in the guidelines and submit an Annual Certificate of
Compliance approved by the Board to the Authority as per Annexure B referred in the guidelines, duly certified
by CEO and Compliance Officer on or before 30th June every year.
These guidelines are issued under the provisions of Section 34 (1) of the Insurance Act, 1938 for compliance by
all insurers from FY 2020-21.

Revised Guidelines on Stewardship Code for Insurers in India

Insurers should formulate a policy for Stewardship based on the principles indicated in these guidelines and get the
approval of their Boards for implementation of the same.
68 Lesson 2 • PP-GRMCE

The principles and the guidance for the implementation are given below:
Stewardship Principles

Principle 1: Insurers should formulate a policy on the discharge of their stewardship responsibilities and
publicly disclose it.
Guidance: Stewardship activities include monitoring and engaging with investee companies on matters such as
strategy, performance of risk, capital structure, and corporate governance, including culture and remuneration.
The Stewardship policy should identify and define the stewardship responsibilities that the insurer wishes to
undertake and how it intends to fulfill the same to enhance the wealth of its clients. The policy should address all
the aspects relating to stewardship activity like Managing conflict of interest Training of personnel, l4onitoring of
investee companies, Intervention in investee companies, Collaboration with other institutional investors and Voting
activities. The policy should be approved by the Board of the insurer and should bring out how the insurer applies
 Lesson 2 • Legislative Framework of Corporate Governance in India 69

stewardship with the aim of enhancing and protecting the value for the ultimate beneficiary or client. While the
Boards of an insurer could decide to engage in all cases, it may also decide to selectively intervene based on its
extent or level of investment. In such case, the policy should clearly identify the threshold (level of investment or
any other criteria as may be determined by the Board) for intervention. The policy should clearly state whether the
insurer intends to use the services of external service providers such as institutional advisors. In case services of
any external service providers are used, the policy should provide for the mechanism to ensure that in such cases,
stewardship responsibilities are exercised diligently. Though core function of investment cannot be outsourced,
professional advices to arrive at voting decisions and research reports like Market survey data, Industry wide
anal)sis, Business valuation, etc. may be sought from external agencies. The policy should clearly provide that the
ultimate stewardship responsibilities shall be discharged by the insurer. The policy should be reviewed and updated
periodically and the updated policy should be publicly disclosed on the insurer’s website.
Principle 2: Insurers should have a clear policy on how they manage conflicts of interest in fulfilling their
stewardship responsibilities and publicly disclose it.
Guidance: The stewardship policy put in place by the insurers should also cover the aspects of identifying and
managing conflicts of interest with the aim of taking all reasonable steps to put the interests of their client or
beneficiary first. The policy should identify scenarios of likely conflict of interest as envisaged by the Board and
should also address how matters are handled when the interests of clients or beneficiaries diverge from each other.
Aspects covered in the stewardship policy with regard to conflict of interest may, amonq other issues, address the
following:
1. Identifying possible situations where conflict of interest may arise. If in case of investee companies being
associates of the entity.
2. Procedures put in place by the entity in case such conflicts of interest situations arise which may, inter alia,
include:
a. Blanket bans on investments in certain cases.
b. Referring such matters to Audit Committee.
c. Clear segregation of voting function and client relations / sales functions.
d. Policy for persons to recuse from decision making in case of the person having any actual / potential
conflict of interest in the transaction.
e. Maintenance of records of minutes of decisions taken to address such conflicts.
Principle 3: Insurers should monitor their investee companies.
Guidance: Insurers should have mechanisms for regular monitoring of their investee companies in respect of their
performance, leadership effectiveness, succession planning, corporate governance, reporting and other parameters
they consider important. Insurers may or may not wish to have more participation through nominations on the
Board for active involvement with the investee companies. An insurer who may be willing to have nominations on
the Board of an investee company should indicate in its stewardship statement the willingness to do so and the
mechanism by which this could be done.
Aspects covered in the stewardship policy with regard to monitoring shall address the following:
1. Different levels of monitoring in different investee companies.
E.g. companies where larger investments are made may involve higher levels of monitoring vis-a-vis companies
where amount invested is insignificant from the point of view of its assets under management (AUM).
2. Areas of monitoring which shall, inter-alia, include:
a. Company strategy and performance - operational and financial.
b. Industry level monitoring and possible impact on the investee companies.
 70 Lesson 2 • PP-GRMCE

c. Quality of company management and Board, leadership.

d. Corporate governance including remuneration, structure of the Board (including Board diversity and
independent directors) and related party transactions.
e. Risks including Environmental, Social and Governance (ESG) risks.
f. Shareholder rights and their grievances.
3. Identification of situations which may trigger communication of insider information and the procedures
adopted to ensure SEBI (Prohibition of Insider Trading) Regulation 2015 as amended time to time are complied
with in such cases.
Principle 4: Insurers should have a clear policy on intervention in their investee companies.
Guidance: Insurers may decide their own engagement strategy and the stewardship policy should clearly set out
the criteria/ circumstances in which they will actively intervene. The policy should provide for regular assessment
of the outcomes of intervention by the insurer. Intervention should be considered regardless of whether an active
or a passive investment policy is followed. Circumstances for intervention may, inter alia, include but not limited
to, poor financial performance of the company, corporate governance related practices, remuneration, strategy,
Environmental, Social and Governance (ESG) risks, leadership issues and litigations.
The mechanisms for intervention may include meetings / discussions with the management for constructive
resolution of the issue and in case of escalation thereof, meetings with the Boards, collaboration with other investors
and voting against decisions. Various levels of intervention and circumstances in which escalation is required may
be identified and disclosed in the stewardship policy. This may also include interaction with the companies through
the insurance councils in case of any industry level issues. Investment Committee of the insurer has to consider
which mechanism to be opted and escalation of matters in specified cases.
Principle 5: Insurers should have a clear policy for collaboration with other institutional investors, where
required, to preserve the interest of the policyholder (ultimate investors), which should be disclosed.
Guidance: For issues that require larger engagement with the investee company/ insurers may choose to act
collectively with other institutional investors in order to safeguard the interests of their investors. In such situations,
the stewardship policy should guide their actions and extent of engagement.
Principle 6: Insurers should have clear policy on voting and disclosure of voting activity.
Guidance: Insurers should exercise their own independent judgment as regards voting decisions on resolutions
and should not automatically support the proposals of the Board of the investee company. The decisions should be
aimed at promoting the overall growth of the investee companies and, in turn, enhance the value of their investors.
The stewardship policy should cover the aspects of voting activity. Audit Committee will monitor oversight on voting
mechanism. Insurers should disclose their approach to stock lending and recalling lent stock in their stewardship
policy.
Insurers should mandatorily undertake active participation and voting on resolutions/proposals of the investee
companies under the following circumstances:

Size of the AUM of the Insurers (Rs. in Crore) Compulsory voting required, if the insurer’s holding of the
paid up capital of investee company ( in %) is
Up to 2,50,000 3% and above
Above 2,50,000 5% and above
In other cases, insurers may voluntarily participate and vote if such resolutions/proposals are considered significant
and may have an impact on the value of investments of tie insurer. Disclosures have to be made by the insurers
regarding the voting activity in the investee companies in which the insurers have actively participated and voted
on resolutions/proposals. The disclosures will form part of Public Disclosures on website and have to be made on
Lesson 2 • Legislative Framework of Corporate Governance in India 71

quarterly basis as per the timelines prescribed for quarterly public disclosures on website, in the given format at
Annexure A.
Principle 7:Insurers should report periodically on their stewardship activities.
Guidance: In addition to the regular fulfilment of their stewardship activities, insurers should also provide a periodic
report to their ultimate beneficiaries (policyholders) of how they have discharged their responsibilities, in a format
which is easy to understand, as a part of public disclosures.
Compliance and Reporting
The compliance with the aforesaid principles does not constitute an invitation to manage the affairs of a company or
preclude a decision to sell a holding when this is considered in the best interest of clients or beneficiaries, The Board
shall ensure that there is effective oversight on the insurer’s stewardship activities and the Audit Committee of the
Board shall exercise the same. All insurers shall comply with all the principles given in the guidelines and submit an
Annual Certificate of Compliance approved by the Board to the Authority as per Annexure B duly certified by CEO
and compliance officer on or before 30th June every year.

CORPORATE GOVERNANCE IN CENTRAL PUBLIC SECTOR ENTERPRISES (CPSES)

Corporate Governance involves a set of relationships between a company’s management, its Board, its shareholders
and other stakeholders. Corporate Governance provides a principled process and structure through which the
objectives of the company, the means of attaining the objectives and systems of monitoring performance are also set.
Corporate Governance is a set of accepted principles by management of the inalienable rights of the shareholders as a
true owner of the corporation and of their own role as trustees on behalf of the shareholders. It is about commitment
to values, ethical business conduct, transparency and makes a distinction between personal and corporate funds in
the management of a company.
Department of Public Enterprises (DPE) is the nodal department for issuing the corporate governance guidelines for
the Public Sector Enterprises for both at center and state level. Since Government is the major shareholder in Public
Sector Undertakings (PSUs)/ Central Public Sector Enterprises (CPSEs), it is responsible to set the high standard of
governance to be followed by these public sector enterprises. As the government’s disinvestment strategy gathers
momentum, there is a genuine need to improve the levels of transparency, and accountability within PSUs.
The guidelines on Corporate Governance are formulated with the objective that the CPSEs follow the guidelines
in their functioning. Proper implementation of these guidelines would protect the interest of shareholders and
relevant stakeholders.
The Department of Public Enterprises (DPE) had issued guidelines on composition of Board of Directors of Central
Public Sector Enterprises (CPSEs) in 1992. According to these guidelines at least one-third of the Directors on
the Board of a CPSE should be non-official Directors. The Maharatna, Navratna and Miniratna schemes provide
that exercise of the enhanced powers delegated to these CPSEs is subject to the condition that their Boards are
professionalised by inducting adequate number of non-official Directors, with minimum of four in case of Maharatna,
Navratnas and minimum of three in case of Miniratnas. The schemes for Maharatna, Navratna and Miniratna CPSEs
also provide for setting up of Audit Committees.
In November 2001, DPE issued further guidelines on the composition of Board of Directors of listed CPSEs. It
provided that the number of Independent Directors should be at least one-third of the Board if the Chairman is non-
executive, and not less than 50% if the Board has an executive Chairman.
To bring in more transparency and accountability in the functioning of CPSEs, the Government in June, 2007
introduced, for an experimental period of one year, the Guidelines on Corporate Governance for CPSEs. These
Guidelines were of voluntary nature. Since the issue of these guidelines, the CPSEs have had the opportunity to
implement them for the whole of the financial year 2008-09. These Guidelines have been modified and improved
upon based on the experience gained during the experimental period of one year.
The Government have felt the need for continuing the adoption of good Corporate Governance Guidelines by CPSEs
for ensuring higher level of transparency and decided to make these Guidelines mandatory and applicable to all
CPSEs. Accordingly, revised Guidelines on Corporate Governance for Central Public Sector Enterprises was issued
by DPE in 2010.
72 Lesson 2 • PP-GRMCE

Apart from these instructions of DPE, the CPSEs are governed by the Companies Act, 2013 and regulations of
various authorities like Comptroller and Auditor General of India (C&AG), Central Vigilance Commission (CVC),
Administrative Ministries, other nodal Ministries, etc. The Right to Information Act 2005 is also applicable to the
CPSEs. The CPSEs fall under the definition of ‘State’ as provided in Article 12 of the Constitution of India. Further,
some principles of Corporate Governance are already in vogue in public sector because (a) the Chairman, Managing
Director and Directors are appointed independently through a prescribed procedure; (b) Statutory auditors are
appointed independently by the C&AG; (c) Arbitrary actions, if any, of the Management can be challenged through
writ petitions; (d) Remuneration of Directors, employees, etc. are determined on the basis of recommendations of
Pay Committees constituted for this purpose; etc.
In case of Listed CPSEs the Listing Regulations would also be applicable in addition to other applicable laws and
DPE Guidelines. For the purpose of DPE Guidelines on Corporate Governance, CPSEs have been categorised into two
groups, namely, (i) those listed on the Stock Exchanges; (ii) those not listed on the Stock Exchanges.
CPSEs listed on Stock Exchanges: In so far as listed CPSEs are concerned, they have to follow the SEBI (LODR)
Regulations, 2015. In addition, they shall follow those provisions in these Guidelines which do not exist in the SEBI
Guidelines and also do not contradict any of the provisions of the SEBI Guidelines.
Non-listed CPSEs: Each CPSE should strive to institutionalize good Corporate Governance practices broadly
in conformity with the SEBI Guidelines. The listing of the non-listed CPSEs on the stock exchanges may also be
considered within a reasonable time frame to beset by the Administrative Ministry concerned in consultation with
the CPSEs concerned. The non-listed CPSEs shall follow the Guidelines on Corporate Governance on a mandatory
basis.
DPE guidelines on Corporate Governance provide following governance parameters
• Board of Directors
• Audit Committee
• Remuneration Committee
• Subsidiary Companies
• Disclosures
• Report, Compliance and Schedule of Implementation.

Salient features of Guidelines on Corporate Governance for Central Public Sector Enterprises
2010
(a) Board of Directors
Composition of Board of Directors: The Board of Directors of the company shall have an optimum combination
of Functional, Nominee and Independent Directors. The number of Functional Directors (including CMD/
MD) should not exceed 50% of the actual strength of the Board. The number of Nominee Directors appointed
by Government/other CPSEs shall be restricted to a maximum of two. In case of a CPSE listed on the Stock
Exchanges and whose Board of Directors is headed by an Executive Chairman, the number of Independent
Directors shall be at least 50% of Board Members; and in case of all other CPSEs (i.e. listed on Stock Exchange
but without an Executive Chairman, or not listed CPSEs), at least one-third of the Board Members should be
Independent Directors.
Nominee Directors appointed by an institution which has invested in or lent to the company shall be deemed
to be Independent Directors.
Part-time Directors’ compensation and disclosures: All fees/compensation, if any, paid to part-time
Directors, including Independent Directors, shall be fixed by the Board of Directors subject to the provisions in
the DPE guidelines and the Companies Act, 2013.
 Lesson 2 • Legislative Framework of Corporate Governance in India 73

Number of Board meetings: The Board shall meet atleast once in every three months and atleast four such
meetings shall be held every year. Further, the time gap between any two meetings should not be more than
three months. A Director shall not be a member in more than 10 committees or act as Chairman of more than
five committees across all companies in which he is a Director. Furthermore it should be a mandatory annual
requirement for every Director to inform the company about the committee positions he occupies in other
companies and notify changes as and when they take place.
Compliance of Laws to be reviewed: The Board shall periodically review compliance reports of all laws
applicable to the company, prepared by the company as well as steps taken by the company to rectify instances
of non-compliances.
Code of Conduct: The Board shall lay down a code of conduct for all Board members and senior management
of the company. The code of conduct shall be circulated and also posted on the website of the company. All
Board members and senior rmanagement personnel shall affirm compliance with the code on an annual
basis. The Annual Report of the company shall contain a declaration to this effect signed by its Chief Executive.
Guidelines and policies evolved by the Central Government with respect to the structure, composition,
selection, appointment and service conditions of Boards of Directors and senior management personnel shall
be strictly followed. There shall be no extravagance in expenditure on the part of Board members and senior
management personnel. CPSEs executives shall be accountable for their performance in conformity with
established norms of conduct. Any external / internal changes made from time to time, due to addition of or
amendment to laws/regulatory rules, applicable to CPSEs, need to be dealt with carefully by the respective
Boards/senior management personnel.
Functional Role Clarity between Board of Directors and Management: A clear definition of the roles and
the division of responsibilities between the Board and the Management is necessary to enable the Board to
effectively performits role. The Board should have a formal statement of Board Charter which clearly defines the
roles and responsibilities of the Board and individual Directors. The Board of each CPSE may been courage to
articulate its Corporate Governance objectives and approach (within the broad parameters of these guidelines
and the general perception of business risk) to satisfy the expectations of its majority shareholders and other
stakeholders.
Risk Management: Enterprise risk management helps management in achieving CPSE’s performance and
profitability targets. It helps to ensure effective reporting and compliance with laws and regulations, and
helps avoid damage to the entity’s reputation and associated consequences. Considering the significance
of risk management in the scheme of corporate management strategies, its oversight should be one of the
main responsibilities of the Board/Management. The Board should ensure the integration and alignment of
the risk management system with the corporate and operational objectives and also that risk management is
undertaken as a part of normal business practice and not as a separate task at set times.
Training of Directors: The company concerned shall undertake training programme for its new Board
members (Functional, Government, Nominee and Independent) in the business model of the company including
risk profile of the business of company, responsibility of respective Directors and the manner in which such
responsibilities are to be discharged. They shall also be imparted training on Corporate Governance, model
code of business ethics and conduct applicable for the respective Directors.
(b) Audit Committee
Qualified and Independent Audit Committee: A qualified and independent Audit Committee shall be set
up, giving the terms of reference. The Audit Committee shall have minimum three Directors as members.
Two-thirds of the members of audit committee shall be Independent Directors. The Chairman of the Audit
Committee shall be an Independent Director .All members of Audit Committee shall have knowledge of financial
matters of Company, and at least one member shall have good knowledge of accounting and related financial
management expertise. The Chairman of the Audit Committee shall be present at Annual General Meeting
to answer shareholder queries; provided that in case the Chairman is unable to attend due to unavoidable
reasons, he may nominate any member of the Audit Committee.
 74 Lesson 2 • PP-GRMCE

The Audit Committee may invite such of the executives, as it considers appropriate (and particularly the head
of the finance function) to be present at the meetings of the Committee. The Audit Committee may also meet
without the presence of any executives of the company. The Finance Director, Head of Internal Audit and a
representative of the Statutory Auditor may be specifically invited to be present as invitees for the meetings of
the Audit Committee as may be decided by the Chairman of the Audit Committee. The Company Secretary shall
act as the Secretary to the Audit Committee.
Role of Audit Committee: The role of the Audit Committee shall include the following:
• Oversight 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.
• Recommending to the Board the fixation of audit fees.
• Approval of payment to statutory auditors for any other services rendered by the statutory auditors.
• Reviewing, with the management, the annual financial statements before submission to the Board for
approval ,with particular reference to:(a) Matters required to be included in the Directors ?Responsibility
Statement to be included in the Board’s report (b) Changes, if any, in accounting policies and practices
and reasons for the same; (c) Major accounting entries involving estimates based on the exercise of
judgment by management; (d) Significant adjustments made in the financial statements arising out of
audit findings; (e) Compliance with legal requirements relating to financial statements; (f) Disclosure of
any related party transactions; and (g) Qualifications in the draft audit report.
• Reviewing, with the management, the quarterly financial statements before submission to the Board for
approval.
• Reviewing, with the management, performance of internal auditors and adequacy of the internal control
systems.
• Reviewing the adequacy of internal audit function, if any, including the structure of the internal audit
department, staffing and seniority of the official heading the department, reporting structure, coverage
and frequency of internal audit.
• Discussion with internal auditors and/or auditors any significant findings and follow up there on.
• Reviewing the findings of any internal investigations by the internal auditors / auditors / agencies into
matters where there is suspected fraud or irregularity or a failure of internal control systems of a material
nature and reporting the matter to the Board.
• Discussion with statutory auditors before the audit commences, about the nature and scope of audit as
well as post-audit discussion to as certain any area of concern.
• To look into the reasons for substantial defaults in the payment to the depositors, debenture holders,
shareholders (in case of non-payment of declared dividends) and creditors.
• To review the functioning of the Whistle Blower Mechanism.
• To review the follow up action on the audit observations of the C&AG audit.
• To review the follow up action taken on there commendations of Committee on Public Undertakings
(COPU) of the Parliament.
• Provide an open avenue of communication between the independent auditor, internal auditor and the
Board of Directors.
• Review all related party transactions in the company. For this purpose, the Audit Committee may designate
a member who shall be responsible for reviewing related party transactions.
• Review with the independent auditor the co-ordination of audit efforts to assure completeness of
coverage, reduction of redundant efforts, and the effective use of all audit resources.
• Consider and review the following with the independent auditor and the management :(i) The adequacy
of internal controls including computerized information (ii) system controls and security, and -Related
 Lesson 2 • Legislative Framework of Corporate Governance in India 75

findings and recommendations of the independent auditor and internal auditor, together with the
management responses.
• Consider and review the following with the management, internal auditor and the independent auditor:
(i) Significant findings during the year ,including the status of previous audit recommendations (ii) Any
difficulties encountered during audit work including any restrictions on the scope of activities or access
to required information.
Powers of Audit Committee: Commensurate with its role, the Audit Committee should be invested by the
Board of Directors with sufficient powers, which should include the following:
• To investigate any activity within its terms of reference.
• To seek information on and from any employee.
• To obtain outside legal or other professional advice, subject to the approval of the Board of Directors.
• To secure attendance of outsiders with relevant expertise, if it considers necessary.
• To protect whistle blowers.
Meeting of Audit Committee: The Audit Committee should meet at least four times in a year and not more
than four months shall elapse between two meetings. The quorum shall be either two members or one third of
the members of the Audit Committee whichever is greater, but a minimum of two independent members must
be present.
Review of information by Audit Committee: The Audit Committee shall review the following information:
• Management discussion and analysis of financial condition and results of operations;
• Statement of related party transactions submitted by management;
• Management letters/letters of internal control weaknesses issued by the statutory auditors;
• Internal audit reports relating to internal control weaknesses;
• The appointment and removal of the Chief Internal Auditor shall be placed before the Audit Committee;
and Certification / declaration of financial statements by the Chief Executive/Chief Finance Officer.
(c) Remuneration Committee:
Each CPSE shall constitute a Remuneration Committee comprising of at least three Directors, all of whom should
be part-time Directors (i.e. Nominee Directors or Independent Directors). The Committee should be headed
by an Independent Director. CPSE will not be eligible for Performance Related Pay unless the Independent
Directors are onits Board. Remuneration Committee will decide the annual bonus/ variable pay pooland policy
for its distribution across the executives and nonunionized supervisors, within the prescribed limits.
(d) Subsidiary Companies:
At least one Independent Director on the Board of Directors of the holding company shall be a Director on the
Board of Directors of its subsidiary company. The Audit Committee of the holding company shall also review the
financial statements of its subsidiary company. The minutes of the Board meetings of the subsidiary company
shall be plac ed at the Board meeting of the holding company. The management should periodically bring to
the attention of the Board of Directors of the holding company, a statement of all significant transactions and
arrangements entered into by its subsidiary company.
Explanation: For the purpose of these guidelines, only those subsidiaries whose turnover or net worth is not
less than 20% of the turnover or net-worth respectively of the Holding company in the immediate preceding
accounting year may be treated as subsidiary companies.
(e) Disclosures:
Transactions: A statement in summary form of transactions with related parties in the norm al and ordinary
course of business shall be placed periodically before the Audit Committee. Details of material individual
transactions with related parties, which are not in the normal and ordinary course of business, shall be placed
before the Audit Committee. Details of material individual transactions with related parties or others , which
76 Lesson 2 • PP-GRMCE

are not on an arm’s length basis should be placed before the Audit Committee, together with Management’s
justification for the same.
Accounting Standards: Where in the preparation of financial statements, a treatment different from that
prescribed in an Accounting Standard has been followed, the fact shall be disclosed in the financial statements,
together with the management’s explanation in the Corporate Governance Report as to why it believes such
alternative treatment is more representative of the true and fair view of the underlying business transaction.
Board Disclosures–Risk management:
• The company shall lay down procedures to inform Board members about the risk assessment and
minimization procedures. These procedures shall be periodically reviewed to ensure that executive
management controls risk through means of a properly defined framework. Procedure will be laiddown
for internal risk management also.
• The Board should implement policies and procedures which should include:(a) staff responsibilities
in relation to fraud prevention and identification (b) responsibility of fraud investigation once a fraud
has been identified (c) process of reporting on fraud related matters to management (d) reporting and
recording processes to be followed to record allegations of fraud (e) requirements of training to be
conducted on fraud prevention and identification.
Remuneration of Directors:
• All pecuniary relationship or transactions of the part-time Directors vis-à-vis the company shall be
disclosed in the Annual Report.
• Further the following disclosures on the remuneration of Directors shall be made in the section on the
Corporate Governance of the Annual Report:(a) All elements of remuneration package of all the directors
i.e. salary, benefits, bonuses, stock options, pension, etc. (b) Details of fixed component and performance
linked incentives, alongwith the performance criteria (c) Service contracts, notice period, severance fees.
(d) Stock option details, if any–and whether issued at a discount as well as the period over which accrued
and over which exercisable.
Management: As part of the Directors Report or as an addition thereto, a Management Discussion and Analysis
Report should form part of the Annual Report. This Management Discussion and Analysis should include
discussion on the following matters within the limits set by the company’s competitive position: (a) Industry
structure and developments, (b) Strength and weakness (c) Opportunities and Threats (d) Segment–wise or
product-wise performance (e) Outlook (f) Risks and concerns (g) Internal control systems and their adequacy
(h) Discussion on financial performance with respect to operational performance (i) Material developments
in Human Resources, Industrial Relations front, including number of people employed. (j) Environmental
Protection and Conservation, Technological conservation, Renewable energy developments, Foreign Exchange
conservation (k) Corporate social responsibility.
Senior management shall make disclosures to the board relating to all material financial and commercial
transactions, where they have personal interest that may have apotential conflict with the interest of the
company (e.g. dealing in company shares, commercial dealings with bodies, which have shareholding of
management and their relatives, etc.)
Explanation: For this purpose, the term “senior management” shall mean personnel of the company who
are members of its core management team excluding Board of Directors .Normally, this would comprise all
members of management one level below the Functional Directors, including all functional heads.
Report on Corporate Governance: There shall be a separate section on Corporate Governance in each Annual
Report of company, with details of compliance on Corporate Governance.
Compliance: The company shall obtain a certificate from either the auditors or practicing Company Secretary
regarding compliance of conditions of Corporate Governance as stipulated in these Guidelines and Annexes.
The afore said certificate with the Directors ?Report, which is sent annually to all the shareholders of the
 Lesson 2 • Legislative Framework of Corporate Governance in India 77

company, should also be included in the Annual Report .Chairman’s speech in Annual General Meeting(AGM)
should also carry a section on compliance with Corporate Governance guidelines / norms and should form part
of the Annual Reports of the concerned CPSE. The grading of CPSEs may be done by DPE on the basis of the
compliance with Corporate Governance guidelines/norms.
Schedule of implementation: These Guidelines on Corporate Governance are mandatory. The CPSEs shall
submit quarterly progress reports, within 15 days from the close of each quarter, in the prescribed format
to respective Administrative Ministries / Departments. The Administrative Ministries will consolidate the
information obtained from the CPSEs and furnish a comprehensive report to the DPE by 31st May of every
financial year on the status of compliance of Corporate Governance Guidelines during the previous financial
year by the CPSEs under their jurisdiction. DPE will, from time to time, make suitable modifications to these
Guidelines in order to bring the minline with prevailing laws, regulations, acts, etc., DPE may also issue
clarifications to the concerned Administrative Ministries/CPSEs on issues relating to the implementation of
these Guidelines.

GUIDELINES ON CORPORATE SOCIAL RESPONSIBILITY AND SUSTAINABILITY FOR CPSES

Guidelines on Corporate Social Responsibility and Sustainability for Central Public Sector
Enterprises
Prior to the notification of CSR Rules under the Companies Act 2013, DPE Guidelines on CSR and Sustainability
issued in December 2012, were applicable to all CPSEs w.e.f. 01.04.2013.
After the enactment of the Companies Ac t2013, all CPSEs shall have to comply with the provisions of the Act and
the CSR Rules. Any amendment notified by the Ministry of Corporate Affairs in the CSR Rules, or in Schedule VII
of the Act will also be binding on the CPSEs. Along with these, Guidelines on Corporate Social Responsibility and
Sustainability for Central Public Sector Enterprises, 2014 have been notified by DPE which shall be applicable to all
CPSEs.
In earlier DPE guidelines, CSR and sustainable development were treated as complementary and, therefore, were
dealt with together. CSR was seen as an important constituent of the overarching framework of sustainability. The
present guidelines of DPE are also intended to rein force the complementarity of CSR and sustainability and to
advise the CPSEs not to overlook the larger objective of sustainable development in the conduct of business and in
pursuit of CSR agenda.

Guidelines on Corporate Social Responsibility And Sustainability For Central Public Sector
Enterprises w.e.f. 01.04.2014 (Issued by the Govt of India, Ministry of Heavy Industries and Public
Enterprises, vide Circular No. F. No. 15(13)/ 2013-DPE(GM), dated 21st October, 2014)1
Background
The Government of India enacted the Companies Act 2013 in August 2013. Section 135 of the Companies Act 2013
(hereinafter referred to as ‘the Act’) deals with the subject of Corporate Social Responsibility (CSR). It lays down
the qualifying criteria based on net worth, turnover, and net profit for companies which are required to undertake
CSR activities and, inter alia, specifies the broad modalities of selection, implementation and monitoring of the CSR
activities by the Boards of Directors of companies. The activities which may be included by companies in their CSR
policies are listed in Schedule VII of the Act. The provisions of Section 135 of the Act and Schedule VII of the Act apply
to all companies, including CPSEs.
The Ministry of Corporate Affairs has formulated CSR Rules (hereinafter referred to as the ‘CSR Rules’), under the
provisions of the Act and issued the same on 27.2.2014. The CSR Rules are applicable to all companies, including
CPSEs w.e.f. 1.4.2014.
All CPSEs shall have to comply with the provisions of the Act and the CSR Rules. Any amendment notified by the
Ministry of Corporate Affairs in the CSR Rules, or in Schedule VII of the Act will also be binding on the CPSEs.
1
https://dpe.gov.in/sites/default/files/Guidelines_on_CSR_SUS_2014.pdf
 78 Lesson 2 • PP-GRMCE

Prior to the notification of CSR Rules, DPE Guidelines on CSR and Sustainability issued in December 2012, were
applicable to CPSEs w.e.f. 01.04.2013. In DPE guidelines, CSR and sustainable development were treated as
complementary and, therefore, dealt with together. CSR was seen as an important constituent of the overarching
framework of sustainability. The present guidelines of DPE are also intended to reinforce the complementarity of
CSR and sustainability and to advise the CPSEs not to overlook the larger objective of sustainable development in the
conduct of business and in pursuit of CSR agenda.

DPE Guidelines on CSR and Sustainability for CPSEs

The Department of Public Enterprises (DPE) has formulated Guidelines on CSR and Sustainability (hereinafter
referred to as ‘the Guidelines’) which are applicable to CPSEs. These Guidelines do not supersede or override any
provision of the Companies Act, or Schedule VII of the Act, or the CSR Rules, but will only supplement them. In case
of any perceived conflict between the CSR Rules and the Guidelines, the former shall prevail in all circumstances.
In the Guidelines the need for taking sustainability initiatives is emphasised in addition to the requirement of
mandatory compliance with the CSR Rules. The Guidelines are aimed at providing an over arching framework of
Sustainability within which CSR is firmly embedded.
The CSR policy document of a CPSE should include a vision and mission statement of how the CPSE proposes to comply
with the Guidelines. The broad sustainability initiatives which a CSPE intends to undertake should also find mention
therein. Since CSR and Sustainability issues are complementary in nature, and both are to be mentioned in the policy
document, it may be referred to as `CSR and Sustainability’ policy. The Revised Guidelines applicable to all CPSEs are
generally in the nature of guiding principles. The guidelines contain certain additional requirements as mentioned below:
1. It is mandatory for all profit making CPSEs to undertake CSR activities as per the provisions of the Act and the
CSR Rules. Even the CPSEs which are not covered under the eligibility criteria base donthres hold limits of net-
worth, turnover, or net profit as specified by Section 135(1) of the Act, but which made profit in the preceding
year, would also be required to take up CSR activities as specified in the Act and the CSR Rules, and such CPSEs
would be expected to spend at least 2% of the profit made in the preceding year on CSR activities.
2. All CPSEs must adopt a CSR and Sustainability Policy specific to their company with the approval of the Board
of Directors. The philosophy and spirit of CSR and Sustainability must be firm lying rained in the policy and it
must be consistent with the CSR provisions of the Act, Schedule VII of the Act, CSR Rules, the Guidelines, and
the policy directions issued by the Government from time to time. The CSR and Sustainability policy of a CPSE
should serve as the referral document for planning its CSR activities in accordance with Schedule VII of the Act
and give a road map for formulation of actionable plans.
3. If the CPSEs feel the necessity of taking up new CSR activities /projects during the course of a year, which are
in addition to the CSR activities already incorporated in the CSR policy of the company, the Board’s approval of
such additional CSR activities would be treatedas amendment to the policy.
4. It would be mandatory for all CPSEs which meet the criteria as laid down in Section 135(1) of the Act, to spend
at least 2% of the average net profits of the three immediately preceding financial years in pursuance of their
CSR activities as stipulate din the Act and the CSR Rules. This stipulated percentage of average net profits is to
be spent every year in a manner specifiedinthe Act and CSR Rules.
In case a company fails to spend such amount, it shall have to specify the reasons for not spending it. However,
in case of CPSEs mere reporting and explaining there a sonsfornot spending this amount in a particular year
would not suffice and the unspent CSR amount in a particular year would not lapse. It would instead be carried
forward to the next year for utilisation for the purpose for which it was allocated.
5. While selecting CSR activities/projects from the activities listed in Schedule VII of the Act, CPSEs should give
priority to the issues which are of foremost concern in the national development agenda, like safe drinking
water for all, provision of toilets especially for girls, health and sanitation, education, etc. The main focus of
CSR and Sustainability policy of CPSEs should be on sustainable development and inclusive growth, and to
address the basic needs of the deprived, 5under privileged, neglected and weaker sections of the society which
comprise of SC, ST, OBCs, minorities ,BPL families, old and aged, women / girl child, physically challenged, etc.
 Lesson 2 • Legislative Framework of Corporate Governance in India 79

6. For CPSEs to fully exploit their core competence and mobilize their resource capabilities in the implementation
of CSR activities / projects, they are advised to align their CSR and Sustainability policy with their business
policies and strategies to the extent possible, and select such CSR activities/ projects which can be better
monitored through in-house expertise.
7. All CPSEs are expected to act in a socially, economically and environmentally sustainable manner at all times.
Even in their normal business activities, public sector companies should try to promote sustainable development
through sustainability initiatives by conducting business in a manner that is beneficial to both, business and
society. They are advised not to lose sight of their social and environmental responsibility and commitment
to sustainable development even in activities undertaken in pursuance of their normal course of business.
National and global sustainability standards which promote ethical practices, transparency and accountability
in business may be referred to as guiding frameworks to plan, mplement, monitor and report sustainability
initiatives .But the amounts penton sustainability initiatives in the pursuit of sustainable development while
conducting normal business activities would not constitute a part of the CSR spend from 2% of profits as
stipulated in the Act and the CSR Rules.
8. As a part of their sustainability initiatives CPSEs are expected to give importance to environmental sustainability
even in their normal mainstream activities by ensuring that their internal operations and processes promote
renewable sources of energy, reduce / re-use / recycle waste material, replenish ground water supply, protect/
conserve/restore the ecosystem, reduce carbone missions and help in greening the supply chain. CPSEs are
expected to be have in a responsible manner by producing goods and services which are safe and healthy for
the consumers and the environment, resource efficient, consumer friendly, and environmentally sustainable
throughout their life cycles i.e. from the stage of raw material extraction to production, use / consumption, and
final disposal. However, such sustainability initiatives will not be considered as CSR activities as specified in the
CSR Rules, and the expenditure incurred there on would also not constitute a part of the CSR spend. Never the
less, CPSEs are encouraged to take up such sustainability initiatives from their normal budgetary expenditure
as it would demonstrate their commitment to sustainable development.
9. Sustainability initiatives would also include steps taken by CPSEs to promote welfare of employees, especially
women, physically challenged, SC/ST /OBC categories, by addressing their concerns of safety, security,
professional enrichment and healthy working conditions beyond what is mandated by law. However,
expenditure on such sustainability initiatives would not qualify as CSR spend.
10. The philosophy and spirit of CSR and Sustainability should be understood and imbibed by the employees at all
levels and get embedded in the core values of the company.
11. CPSEs should extend their reach and oversight to the entire supply chain network to ensure that as far as
possible suppliers, vendors, service providers, clients, and partners are also committed to the same principles
and standards of corporate social responsibility and sustainability as the company itself. CPSEs are encouraged
to initiate and implement measures aimed at `greening’ the supply chain.
12. As mentioned in the Act, CPSEs should give preference the ‘local area’ in selecting the location of their CSR
activities. It is desirable that the Board of Directors of CPSEs define the scope of the ‘local area’ of their
commercial units/plants/projects, keeping in view the nature of their commercial operations, the extent of the
impact of their operations on society and environment, and the suggestions/demands of the key stakeholders,
especially those who are directly impacted by the company’s commercial operations/activities. The definition
of ‘local area’ may form part of the CSR policy of the CPSE.
13. After giving due preference to the local area, CPSEs may also under take CSR activities anywhere in the country.
The Board of Directors of each CPSE may also decide on an indicative ratio of CSR spend between the local
area and outside it, and this may be mentioned in the CSR policy of the CPSE. CPSEs, which by the very nature
of their business have no specific geographical area of commercial operations, may take up CSR activities /
projects at any location of their choice within the country.
14. As far as possible, CPSEs should take up the CSR activities in project, which entails planning the stages of
execution in advance by fixing targets at different milestones, with pre-estimation of quantum of resources
required with in the allocated budget, and having adefinite times pan for achieving desired outcomes.
 80 Lesson 2 • PP-GRMCE

15. CPSEs should devise a communication strategy for regular dialogue and consultation with key stakeholders to
ascertain their views and suggestions regarding the CSR activities and sustainability initiatives undertaken by
the company. However, the ultimate decision in the selection and implementation of CSR activities would be
that of the Board of the CPSE.
16. As per the CSR Rules, all companies are required to include an annual report on CSR in their Board’s Report.
The template/format for reporting CSR activities as provided by CSR Rules Should be strictly adhered to.
However, CPSEs shall also have to include in the Board’s Report a brief narrative on the action taken for the
implementation of the Guidelines so that the stakeholders are informed of not only the CSR activities but also of
the sustainability initiatives taken by the CPSEs. CPSEs are further advised to prepare an Annual Sustainability
Report, which would go a long way in imparting greater transparency and accountability to the company’s
operations, apart from improving the brand image.
17. It is desirable that CPSEs get a baseline/need assessment survey done prior to the selection of any CSR
activity. It is also desirable that CPSEs should get an impact assessment study done by external agencies
of the CSR activities/ projects undertaken by them. Impact assessment is mandatory for mega projects,
the threshold value of which can be determined by the Board of a CPSE and specified in its CSR and
Sustainability policy. However, the expenditure incurred on base line survey and impact assessment study
should be with in the overall limit of 5% of administrative over heads of CSR spend as provided for under
the CSR Rules.
18. Within the provisions of the Act, Schedule VII of the Act, and the CSR Rules, CPSEs are encouraged to take up
CSR activities / projects in collaboration with other CPSEs for greater social, economic and environmental
impact of their CSR activities/projects.
19. CPSEs which are statutory corporations should also comply with the provisions of the Companies Act, 2013,
CSR Rules and the Guidelines.

Guidelines for CSR expenditure of CPSES2

1. The Government of lndia, Ministry of Heavy lndustries & Public Enterprises Department of Public Enterprises,
vide its Circular No. CSR-08/0002/ 2018-Dir (CSR) dated 10th December, 2018. Issued the Guidelines for CSR
expenditure of CPSES.
2. One of the recommendations which emerged from the CPSEs Conclave held in April 2018 was related to
utilization of CSR funds in a focussed manner towards national priorities by adopting a theme based approach
every year. Detailed deliberations on this recommendation were held subsequently by Department of Public
Enterprises (DPE) with CPSEs, select Ministries/Departments, NITI Aayog and the Committee of Secretaries.
Based on the deliberations, the Competent Authority has approved the following course of actions for
undertaking CSR activities by Central Public Sector Enterprises (CPSES):
(i) A common theme may be identified for each year for undertaking CSR by CPSES.
(ii) For the current year 2018-19, school education and health care may be taken up as the theme for focussed
intervention.
(iii) CSR expenditure for thematic programme should be around 60% of annual CSR expenditure of CPSES.
(iv) Aspirational Districts may be given preference.
(v) The annual theme for the future will be decided by the Competent Authority separately.
3. The Competent Authority has further entrusted to NITI Aayog the responsibility to pilot the programme.
4. Accordingly, the CPSE undertaking CSR activity in Aspirational districts would. (i) designate a senior level
functionary as nodal officer to liaise closely with the District Administration of concerned Aspirational
district (ii) furnish the details of nodal officer along with the name of selected aspirational district(s)
to NITI Aayog, DPE and concerned administrative Ministry/Department of the CPSE (iii) furnish the
details of projects funded by CPSE under CSR in an aspirational district to NITI Aayog, DPE and concerned

2
https://dpe.gov.in/guidelines-csr-expenditure-cpses
 Lesson 2 • Legislative Framework of Corporate Governance in India 81

administrative Ministry/Department of CPSE (iv) brief the concerned Central Prabhari Officer of
Aspirational District (Joint Secretary/Additional Secretary nominated by GOI for aspirational district),
about the CSR project being funded by CPSE.
5. lt will be the responsibility of the concerned CPSE to ensure that all the CSR activities being undertaken are in
accordance with the relevant provisions of the Companies Act 2013, its Schedules and Rules issued under the
said Act and there is no deviation from statutory provisions.
6. These guidelines are in supersession of earlier advisory of DPE dated 1st August 2016 regarding utilisation of
33% of CSR funds by CPSEs towards Sanitation and SBM activities.
7. All the administrative Ministries/Departments are requested to bring these guidelines to the notice of CPSEs
under their jurisdiction for necessary action.

LESSON ROUND UP
• Legal and regulatory framework of corporate governance in India is mainly covered under the Companies
Act, 2013, Listing Regulations, 2015 and SEBI guidelines.
• The Securities and Exchange Board of India (SEBI) is the prime regulatory authority which regulates all
aspects of securities market enforces the Securities Contracts (Regulation) Act including the stock exchanges.
Companies that are listed on the stock exchanges are required to comply with the Listing Regulations, 2015.
• Corporate Governance’ as the application of best management practices compliance of lawin true Letter and
spirit and adherence to ethical standards for effective management and distribution of wealth and discharge
of social responsibility for sustainable development of all stakeholders.
• The companies listed with Stock Exchanges have to adhere to the SEBI(LODR) Regulations,2015 in addition
to the provisions of the Companies Act or the Act under which they been formed. The banks under governed
by the different statutes hence the respective Acts under which they have been incorporated have to comply
with that requirement along with the directives of the Regulatory Authorities (like RBI for Banks and IRDA
for Insurance).
• The inception of the Corporate Governance norms may for banks may firstly be treated when the RBI accepted
and published the Ganguly Committee Recommendations. Since India is also following the best practices as
enunciated by the Basel Committee and adopted by the banks in India as per the directions of the RBI, the
Corporate Governance Norms as suggested in Basel I, II and III has also been elaborated in the chapter.
• The Corporate Governance norms for insurance companies are governed by the IRDA guidelines.

GLOSSARY
Insurance A company that calculates the risk of occurrence then determines the cost to replace (pay for) the loss
Company to determine the premium amount. A business that provides coverage, in the form of compensation
resulting from loss, damages, injury, treatment or hardship in exchange for premium payments.
Banking “banking company” means a banking company as defined in clause(c) of section 5 of the Banking
Company Regulation Act, 1949.
NBFC’s A Non-Banking Financial Company(NBFC) is a company registered under the Companies Act, 1956
engaged in the business of loans and advances, acquisition of shares/stocks/bonds/ debentures/
securities issued by Govern mentor local authority oro the rmarketable securities of a like nature,
leasing, hire-purchase, insurance business, chit business but does not include any institution whose
principal business is that of agriculture activity, industrial activity, purchase or sale of any goods (other
than securities) or providing any services and sale/purchase/construction of immovable property. A
non-banking institution which is a company and has principal business of receiving deposits under
any scheme or arrangement in one lumpsum or in installments by way of contributions or in any other
manner, is also a non-banking financial company (Residuary non- banking company).
CPSEs Central Public Sector Enterprises(CPSEs) are those companies in which the direct holding of the
Central Government or other CPSEs is 51% or more.
82 Lesson 2 • PP-GRMCE

TEST YOURSELF
(These are meant for recapitulation only. Answers to these questions are not to be submitted for evaluation)
1. What do you mean by the Corporate Governance? How the governance norms are applicable in the banks.
2. Discuss the salient features of the Ganguly Committee Report applicable to Private Sector Banks.
3. IRDA has issued the guidelines on Corporate Governance Norms for the Insurance Companies. Please mention
the salient features of it.
4. Public Sector Under takings also have to adhere to the norms of the Corporate Governance. What guidelines
have been issued by the Ministry in this regard?
5. Comment on Corporate Social Responsibility as a part of Corporate Government.
6. DPE has issued the guidelines on Corporate Governance for the CPSEs. Discuss in Brief.
Lesson 3 Board Effectiveness

Key Concepts One Learning Objectives Regulatory Framework

Should Know
To understand the: Companies Act, 2013
• Board Evaluation
• Role, Powers and Duties of the Board • Section 149
• Lead Independent of Directors
Director • Types of Directors required to be • Section 166
appointed under the laws, Board • Section 179
• Board Diversity
Composition
• Board Composition • Role of Independent Directors in • Section 180
ensuring Board’s effectiveness • Schedule IV
• Board Effectiveness
• Various Provisions and Guidelines
• Code of conduct SEBI (LODR) Regulations, 2015
which improve the Board’s
effectiveness • Regulation 16
• Succession Planning
• Appointment of Lead Independent
• Regulation 17
Director, Separation of the role of
Chairman and CEO, Succession • Regulation 25(7)
Planning, Directors Training,
Performance Evaluation of the Board
and Management
• Importance of Director’s Induction
and Development Programmes,
Performance Review of Board &
Individual Director, Major Factors for
Evaluation, Parameters and Evaluation
Purpose.

Lesson Outline
• Introduction – Succession Planning
• Role of the Board of Directors – Director Training, Development and
• Meaning of Board of Directors Familiarisation
• Types of Director under Companies Act, – Performance Evaluation of the Board
2013 and Management
• Composition and Structure of Board • Guidance Note Board Evaluation issued
by SEBI
• Selection and Appointment of Directors
• Board’s Effectiveness and the Role of the
• Duties of the Directors Company Secretary
• Powers of the Board • Guidance on Board Effectiveness (Issued
• Independent Directors for better Board’s by FRC, UK-July 2018
effectiveness • MODEL Board Charter
• Other Good Practices to enhance Board’s • LESSON ROUND UP
effectiveness
• GLOSSARY
– Appointment of Lead Independent
Director • TEST YOURSELF
– Separation of role of Chairman and
CEO
84 Lesson 3 • PP-GRMCE

INTRODUCTION
The institution of board of directors was based on the premise that a group of trustworthy and respectable people
should look after the interests of the large number of shareholders who are not directly involved in the management
of the company. The position of the board of directors is that of trust as the board is entrusted with the responsibility
to act in the best interests of the company.
The contribution of board of directors of companies is critical for ensuring appropriate directions with regard to
leadership, vision, strategy, policies, monitoring, supervision, accountability to shareholders and other stakeholders,
and to achieving greater levels of performance on a sustained basis as well as adherence to the best practices of
corporate governance.
An effective board defines the company’s purpose and then sets a strategy to deliver it, shapes its culture and the
way it conducts its business. It sets the main trends and factors affecting the long-term success and future viability
of the company – for example technological change or environmental impacts – and how these and the company’s
principal risks and uncertainties have been addressed.
The board should have sound understanding of how value is created over time, key strategies and business models
towards a sustainable future. This is not limited to value that is found in the financial statements. An understanding
of how value for intangible sources are developed, managed and sustained – for example a highly trained workforce,
intellectual property or brand recognition – is increasingly relevant to an understanding of the company’s performance
and the impact of its activity. These are important considerations for boards when setting corporate strategy.
Boards have a responsibility for the health of the company and need to take a long-term view. This is in contrast to the
priorities of some investors, not all of whom will be aligned with the pursuit of success over the longterm. An effective
board will manage the conflict between short-term interests and the long-term impacts of its decisions; it will assess
shareholder and stakeholder interests from the perspective of the long-term sustainable success of the company.

ROLE OF THE BOARD OF DIRECTORS

The board’s role is to provide entrepreneurial leadership of the company within a framework of prudent and effective
controls which enables risk to be assessed and managed. An effective board develops and promotes its collective
vision of the company’s purpose, its culture, its values and the behaviour it wishes to promote in conducting its
business. The role of Board in particular includes:

T
 Lesson 3 • Board Effectiveness 85

MEANING OF BOARD OF DIRECTORS

As per Section 2(10) of the Companies Act, 2013, “Board Board of directors is a body of elected or appointed
of Directors’ or ‘Board’, in relation to a company means persons who jointly oversee the activities of a company.
the collective body of directors of the company. They are also referred to as board of governors, board of
managers, board of regents, board of trustees, or simply
referred to as “the board”.

DIRECTORS

As per Section 2(34) of the Companies Act, 2013, A Company being an artificial person it requires certain
‘director’ means a director appointed to the Board of natural persons to represent the company at various
the Company. fronts. The position of directors in their relationship to
the company is not only as the agents, but also trustees
of the company.

TYPES OF DIRECTORS UNDER COMPANIES ACT, 2013

1. Executive Director
The term executive director is usually used to describe a person who is both a member of the board and who also
has day to day responsibilities in respect of the affairs of the company. Executive directors perform operational and
strategic business functions such as:

• Managing People

• Looking after assets

• Timely discharge of the payment obligations

• Hiring, developing and retaining talent Entering into contracts, etc.

Executive directors are usually employed by the company and paid a salary, so are protected by employment law.
Examples of executive directors are production director, finance director or managing director or whole time director.
As per Rule 2(1)(k) of the Companies (Specification of definitions details) Rules, 2014 “Executive Director” means a
Whole Time Director as defined in clause (94) of section 2 of the Act”
86 Lesson 3 • PP-GRMCE

As per Clause 2(94) of Companies Act, 2013 “whole-time director” includes a Director in the whole-time employment
of the company.
Section 2(54) of the Companies Act, 2013 defines Managing Director as - “managing director” means a director
who, by virtue of articles of a company or an agreement with the company or of a resolution passed by the
company in general meeting or by its Board of directors,, is entrusted with substantial powers of management
of the affairs of the company and includes a director occupying the position of a managing director, by whatever
name called.
The explanation to section 2(54) excludes administrative acts of a routine nature when so authorised by the
Board such as the power to affix the common seal of the company to any document or to draw and endorse
any cheque on the account of the company in any bank or to draw and endorse any negotiable instrument or
to sign any certificate of share or to direct registration of transfer of any share, from the substantial powers of
management.

2. Non-Executive Director
Non executive directors are not in the employment of the company. They are the members of the Board, who normally
do not take part in the day-to-day implementation of the company policy. They are generally appointed to provide
the company with the benefits of professional expertise and outside perspective to the board. They play an effective
role in governance of listed companies, but they may or may not be independent directors.
Non-executive Director is nowhere described under Companies Act, 2013. However, meaning of non- executive
Director can be taken from the definition of Executive Director. A person who is not satisfying conditions of
definition of ‘Executive Director’ shall be considered as ‘Non-Executive Director’. Therefore, one can opine that all
the Directors except ‘Whole Time Director’ and “Managing Director’ may be considered as Non-Executive Director.
They are usually paid sitting fees for attending meetings of the Board and Committees

3. Shadow Director
Shadow Director is a person who is not formally appointed as a
A Shadow Director is termed as an ‘Officer’
director, but in accordance with whose directions or instructions
within the meaning of Section 2(59) of
the directors of a company are accustomed to act. This is a concept
the Companies Act, 2013. This section
adopted from English law. However, a person is not a shadow provides an inclusive definition of “officer”.
director merely because the directors act on advice given by him “Officer” includes any director, manager or
in a professional capacity. key managerial personnel or any person
Holder of controlling or majority share of a private company who in accordance with whose directions or
is not (technically) a director and does not openly participate in instructions the Board of Directors or
the Company’s governance, but whose directions or instructions any one or more of the directors is or are
accustomed to act.
are routinely complied with by the employees or other directors.
In the eyes of law, he or she is a de facto director and is held equally liable for the obligations of the company with
the other de facto and de jure directors. Though shadow director is not expressly mentioned in the Act, the Act has
references to it at various places.

4. Woman Director
A board composed of directors representing arrange of perspectives leads to an environment of collaborative
discussion which is the essence of good governance. Organizations that aim to deliver the highest standards of
leadership require a diversity of thought, skills, experience, working style and talent capability. It is increasingly
being recognized that by bringing together men and women from diverse background and giving each person
the opportunity to contribute their skills, experience and perspectives, the corporates are able to deliver the best
solutions to challenges and sustainable value to their stakeholders.
The Companies Act, 2013 in India recognized the importance of gender diversity and provides for mandatory
appointment of at least one woman director on the Board of listed and certain other specified class of companies.
 Lesson 3 • Board Effectiveness 87

Rule 3 of Companies (Appointment and Qualification of Directors) Rules, 2014, prescribes the following class of
companies which shall appoint at least onewoman director-
(i) every listed company;
(ii) every other public company having :-
(a) paid-up share capital of one hundred crore rupees or more; or
(b) turnover of three hundred crore rupees or more .
The First Proviso to the Rule provides that a company, which has been incorporated under the Act and is covered
under provisions of second proviso to sub-section (1) of section 149 shall comply with such provisions within a
period of six months from the date of its incorporation.
The Second Proviso to the Rule further provides that any intermittent vacancy of a woman director shall be filled-up
by the Board at the earliest but not later than immediate next Board meeting or three months from the date of such
vacancy whichever is later.
Explanation. For the purposes of this rule, it is hereby clarified that the paid up share capital or turnover, as the case
may be, as on the last date of latest audited financial statements shall be taken into account.

The interpretation of Rule 3:

Private Ltd companies are not required to appoint woman director.
Unlisted Public Companies not touching the threshold limit of paid-up share capital of 100 crore or turnover 300
crore, are not require to appoint woman director.
However, if the above mentioned companies are appointing woman director in their Board, it is appreciable to
promote the gender diversity in the Board Room.

Regulation17(1)(a) of the SEBI (LODR) Regulations, 2015 also requires that

atleast one woman director shall be appointed on the board of all listed In May 2018, SEBI mandated that the
entities. SEBI (LODR) (Amendment) Regulations, 2018 further requires top 1,000 listed companies must have
that the top 500 listed companies shall have atleast one independent at least one woman independent
woman director by 1st April 2019 and for the top 1000 listed entities by director by April 1, 2020.
1st April 2020.
The top 500 and 1000 entities shall be determined on the basis of market capitalisation, as at the end of the
immediate previous financial year.

5. Resident Director
Section 149 (3) of the Companies Act, 2013 provides that every company shall have at least one director who stays
in India for a total period of not less than 182 during the financial year. In case of a newly incorporated company
the requirement under this sub-section shall apply proportionately at the end of the financial year in which it is
incorporated.

6. Independent Director
Independent Directors play a pivotal role in maintaining a transparent working environment in the corporate regime.
Independent Directors constitute such category of Directors who are expected to have impartial and objective
judgment for the proper functioning of the company.
Section 2(47) of the Companies Act 2013 provides that “independent director” means an independent director referred
to in sub-section(6)of section149. (Details pertaining to independent directors are discussed later in this chapter).
Section 149(4) provides that every listed public company shall have at least one-third of the total number of directors
as independent directors and the Central Government may prescribe the minimum number of independent directors
88 Lesson 3 • PP-GRMCE

in case of any class or classes of public companies. For the purposes of this sub-section, any fraction contained in
such one-third number shall be rounded off as one.
According to Regulation 17(1) (b) of SEBI (LODR) Regulation,
2015, where the chairperson of the board of directors is a non- Explanation - For the purpose of this clause,
executive director, at least one-third of the board of directors shall the expression “related to any promoter”
shall have the following meaning: (i) if the
comprise of independent directors and where the listed entity
promoter is a listed entity, its directors
does not have a regular non-executive chairperson, at least half
other than the independent directors, its
of the board of directors shall comprise of independent directors: employees or its nominees shall be deemed
Provided that where the regular non-executive chairperson is to be related to it; (ii) if the promoter is an
a promoter of the listed entity or is related to any promoter or unlisted entity, its directors, its employees or
person occupying management positions at the level of board its nominees shall be deemed to be related
of director or at one level below the board of directors, at least to it.
half of the board of directors of the listed entity shall consist of
independent directors.

7. Nominee Director
Explanation to section 149(7) of the Act defines the meaning of “nominee director”. It means a director nominated
by any financial institution in pursuance of the provisions of any law for the time being in force, or of any agreement,
or appointed by any Government or any other person to represent its interests.
Regulation 16(1)(b) of the SEBI (LODR) Regulations, 2015 and section 149(6) of the Act specifically exclude nominee
director from being considered as Independent.

8. Small Shareholder Director

According to Section 151 of the Companies Act, 2013 every listed company may have one director elected by “small
shareholders”. For the purpose of this section, “small shareholder” means a shareholder holding shares of nominal
value of not more than twenty thousand rupees or such other sum as may be prescribed.
Rule 7 of Companies (Appointment and Qualifications of Directors) Rules, 2014 lays down the terms and conditions
for appointment of Small Shareholder’s Director. A listed company, may upon notice of not less than 1000 or one-tenth
of the total number of small shareholders, whichever is lower, have a Small Shareholders’ Director elected by the small
shareholders. A listed company may suo moto (on its own accord) opt to have a director representing small shareholders.
Thus the Small Shareholder’s Director’s appointment is optional and made available to listed companies only.

COMPOSITION AND STRUCTURE OF BOARD

Board composition is one of the most important determinants of board effectiveness. Beyond the legal requirement
of minimum directors, a board should have a judicious mix of internal and independent directors with a variety of
experience and core competence. The potential competitive advantage of a Board structure comprising executive
directors and independent non-executive directors lies in its combination of–the depth of knowledge of the business
of the executives and the breadth of experience of the non- executive/independent director.
The composition and structure of the Board as prescribed under the law is given hereunder-

Particulars Companies Act, 2013 SEBI (LODR) Regulations, 2015

Size of the Board Section 149(1) provides every company • Regulation17(1) (a) provides that
shall have a Board of Directors consisting Board of directors shall have an
of individuals as directors and shall have – optimum combination of executive
• A minimum number of 3 directors and non- executive directors with at
in the case of a public company, least one woman director and not
less than fifty percent. Of the board
of directors shall comprise of non-
executive directors;
Lesson 3 • Board Effectiveness 89

• Atleast 2 directors in the case of a • The top 500 listed companies shall
private company, and have atleast one independent woman
• Atleast one director in the case of a director by 1 April 2019 and for the
One Person Company; and top1000 listed entities by 1 April
2020.
• A maximum of 15 directors provided
that a company may appoint more • Regulation 17 (1) (c) provides that
than fifteen directors after passing a the board of directors of the top1000
special resolution. listed entities (with effect from April
1,2019) and the top 2000 listed
Note: Maximum directors’ clause is not
entities (with effect from April 1,
applicable to Government Company and
2020) shall comprise of not less than
Section 8 Company.
six directors.
Explanation: The top 500, 1000 and 2000
entities shall be determined on the basis of
market capitalisation, as at the end of the
immediate previous financial year.
Board Composition Section 149(4) provides that every Regulation 17 (1) (b) provides that the
public listed company shall have at- least composition of board of directors of the
one third of total number of directors listed entity shall be as follows:
as independent directors and Central • where the chairperson of the board
Government may prescribe the minimum of directors is a non-executive
number of independent directors for any director, at least one-third of the
class or classes of companies. board of directors shall comprise of
Note: Not applicable to Government independent directors;
Company and IFSC Public Company • where the listed entity does not have
Rule 4 of the Companies (Appointment a regular non-executive chairperson,
and Qualification of Directors) Rules, at least half of the board of directors
2014 prescribes that the following class or shall comprise of independent
classes of companies shall have at least two directors:
independent directors: Provided that where the regular non-
• Public Companies having paid- up executive chairperson is a promoter of the
share capital of 10 crore rupees or listed entity or is related to any promoter or
more; or person occupying management positions at
• Public Companies having turnover of the level of board of director or at one level
100 crore rupees or more; or below the board of directors, at least half
of the board of directors of the listed entity
• Public Companies which have,
shall consist of independent directors.
in aggregate, outstanding loans,
debentures and deposits, exceeding Explanation. – For the purpose of this clause,
50 crore rupees. the expression “related to any promoter”
shall have the following meaning: \
• However, the following classes of
unlisted public company shall not (i) if the promoter is a listed entity, its
be required to appoint Independent directors other than the independent
Directors, namely:- directors, its employees or its
nominees shall be deemed to be
(a) a joint venture;
related to it;
(b) a wholly owned subsidiary; and
(ii) if the promoter is an unlisted entity,
(c) a dormant company as defined its directors, its employees or its
under section 455 of the Act. nominees shall be deemed to be
related to it.
90 Lesson 3 • PP-GRMCE

Regulation 17 (1A) specifies that no

listed entity shall appoint a person or
continue the directorship of any person
as a non-executive director who has
attained the age of 75 years unless a
special resolution is passed to that
effect, in which case the explanatory
statement annexed to the notice for such
motion shall indicate the justification for
appointing such a person.

Board Composition under

SELECTION AND APPOINTMENT OF DIRECTORS

Board is critical to performance of the company and for this a robust selection and appointment process for directors
is must. The company must ensure that the Board consists of members with the range of skills and capabilities to
meet its primary responsibility for promoting the interest of the company in a way which ensures that the interests
of shareholders and stakeholders are promoted and protected.
Section 178 of the Companies Act, 2013:
(1) The Board of Directors of every listed public company and such other class or classes of companies, as may
be prescribed shall constitute the Nomination and Remuneration“Committee consisting of three or more non-
executive directors out of which not less than one-half shall be independent directors.
 Lesson 3 • Board Effectiveness 91

Provided that the chairperson of the company (whether executive or non-executive) may be appointed as a
member of the Nomination and Remuneration Committee but shall not chair such Committee.
Rule 6 of the Companies (Meetings of Board and its Powers) Rules, 2014 provides that the Board of directors
of every listed public company and a company covered under rule 4 of the Companies (Appointment
and Qualification of Directors) Rules, 2014 shall constitute an ‘Audit Committee’ and a ‘Nomination and
Remuneration Committee of the Board’.
(2) The Nomination and Remuneration Committee shall identify persons who are qualified to become directors
and who may be appointed in senior management in accordance with the criteria laid down, recommend to
the Board their appointment and removal and shall specify the manner for effective evaluation of performance
of Board, its committees and individual directors to be carried out either by the Board, by the Nomination
and Remuneration Committee or by an independent external agency and review its implementation and
compliance.
(3) The Nomination and Remuneration Committee shall formulate the criteria for determining qualifications,
positive attributes and independence of a director and recommend to the Board a policy, relating to the
remuneration for the directors, key managerial personnel and other employees.
(4) The Nomination and Remuneration Committee shall, while formulating the policy under sub-section (3) ensure
that—
(a) the level and composition of remuneration is reasonable and sufficient to attract, retain and motivate
directors of the quality required to run the company successfully;
(b) relationship of remuneration to performance is clear and meets appropriate performance benchmarks;
and
(c) remuneration to directors, key managerial personnel and senior management involves a balance between
fixed and incentive pay reflecting short and long-term performance objectives appropriate to the working
of the company and its goals.
Provided that such policy shall be placed on the website of the company, if any, and the salient features of the
policy and changes therein, if any, along with the web address of the policy, if any, shall be disclosed in the
Board’s report.
Regulation 19 of SEBI (LODR) Regulations, 2015
(1) The board of directors shall constitute the nomination and remuneration committee as follows:
(a) the committee shall comprise of at least three directors ;
(b) all directors of the committee shall be non-executive directors;
and
SR Equity shares are equity share
(c) at least fifty percent of the directors shall be independent of an issuer having superior voting
directors and in case of a listed entity having outstanding SR rights compared to all other equity
equity shares, two thirds of the nomination and remuneration shares issued by that issuer.
committee shall comprise of independent directors.
(2) The Chairperson of the nomination and remuneration committee shall be an independent director:
Provided that the chairperson of the listed entity, whether executive or non-executive, may be appointed as a
member of the Nomination and Remuneration Committee and shall not chair such Committee.
(2A) The quorum for a meeting of the nomination and remuneration committee shall be either two members or one
third of the members of the committee, whichever is greater, including at least one independent director in
attendance.
(3) The Chairperson of the nomination and remuneration committee may be present at the annual general meeting,
to answer the shareholders’ queries; however, it shall be up to the chairperson to decide who shall answer the
queries.
92 Lesson 3 • PP-GRMCE

(3A) The nomination and remuneration committee shall meet at least once in a year.
Role of Nomination and Remuneraton Committee (Part D of Schedule II of SEBI (LODR) Regulations,
2015):
(1) Formulation of the criteria for determining qualifications, positive attributes and independence of a director
and recommend to the board of directors a policy relating to, the remuneration of the directors, key managerial
personnel and other employees;
(2) Formulation of criteria for evaluation of performance of independent directors and the board of directors;
(3) Devising a policy on diversity of board of directors;
(4) Identifying persons who are qualified to become directors and who may be appointed in senior management
in accordance with the criteria laid down, and recommend to the board of directors their appointment and
removal.
(5) Whether to extend or continue the term of appointment of the independent director, on the basis of the report
of performance evaluation of independent directors.
(6) Recommend to the board, all remuneration, in whatever form, payable to senior management.

DUTIES OF DIRECTORS

A director is “bound to take such precautions and show such diligence in their office as a prudent man of business
would exercise in the management of his own affairs.”
– Trustees of the Orange River Land & Asbestos Company vs King (1892)

The Duties and Responsibilities can be broadly classified into two categories:

• The duties, liabilities and responsibilities which promote corporate governance through the
sincerest efforts of directors in efficient management and swift resolution of critical corporate issues
and sincere and mature decision making to avoid unnecessary risks to the corporate entity and its
shareholders.
• Keeping the interests of company and its stakeholders ahead of personal interests.

Duties of Directors under section 166 of the Companies Act, 2013:

The following duties of the directors have been provided under Section 166 of the Companies Act, 2013 and apply
to all types of directors including Independent Directors.
(1) Subject to the provisions of this Act, a director of a company shall act in accordance with the articles of the
company.
(2) A director of a company shall act in good faith in order to promote the objects of the company for the benefit
of its members as a whole, and in the best interests of the company, its employees, the shareholders, the
community and for the protection of environment.
(3) A director of a company shall exercise his duties with due and reasonable care, skill and diligence and shall
exercise independent judgment.
(4) A director of a company shall not involve in a situation in which he may have a direct or indirect interest that
conflicts, or possibly may conflict, with the interest of the company.
(5) A director of a company shall not achieve or attempt to achieve any undue gain or advantage either to himself
or to his relatives, partners, or associates and if such director is found guilty of making any undue gain, he shall
be liable to pay an amount equal to that gain to the company.
Lesson 3 • Board Effectiveness 93

(6) A director of a company shall not assign his office and any assignment so made shall be void.
(7) If a director of the company contravenes the provisions of this section such director shall be punishable with
fine which shall not be less than one lakh rupees but which may extend to five lakh rupees.

POWERS OF THE BOARD

In terms Section 179 of the Companies Act, 2013 the Board of directors of a company shall be entitled to exercise
all such powers, and to do all such acts and things, as the company is authorised to exercise and do. In exercising
such power or doing such act or thing, the Board shall be subject to the provisions contained in that behalf in this
Act, or in the memorandum or articles, or in any regulations not inconsistent therewith and duly made thereunder,
including regulations made by the company in general meeting.
The Board shall not exercise any power or do any act or thing which is required, whether by this or any other Act or
by the memorandum or articles of the company, to be exercised or done by the company in general meeting.
Section 179(2) provides that no regulation made by the company in general meeting shall invalidate any prior act of
the Board which would have been valid if that regulation had not been made.
As per Section 179(3) read with Rule 8 of Companies (Meetings of Board and its Powers) Rules, 2014, the Board of
Directors of a company shall exercise the following powers on behalf of the company only by means of resolutions
passed at meetings of the Board, namely:–

(1) to make calls on shareholders in respect of money unpaid on their shares;

(2) to authorise buy-back of securities under section 68;

(3) to issue securities, including debentures, whether in or outside India;

(4) to borrow monies;

(5) to invest the funds of the company;

(6) to grant loans or give guarantee or provide security in respect of loans;

(7) to approve financial statement and the Board’s report;

(8) to diversify the business of the company;

(9) to approve amalgamation, merger or reconstruction;

(10) to take over a company or acquire a controlling or substantial stake in another company;

(11) to make political contributions;

(12) to appoint or remove key managerial personnel (KMP);

(13) to appoint internal auditors and secretarial auditor.

The First Proviso to Section 179(3) provides that Board may, by a resolution passed at a meeting, delegate to any
committee of directors, the managing director, the manager or any other principal officer of the company or in the
case of a branch office of the company, the principal officer of the branch office, the powers specified in (4) to (6)
above on such conditions as it may specify.
The Second Proviso to Section 179(3) provides that the acceptance by a banking company in the ordinary course of
its business of deposits of money from the public repayable on demand or otherwise and withdrawable by cheque,
draft, order or otherwise, or the placing of monies on deposit by a banking company with another banking company
on such conditions as the Board may prescribe, shall not be deemed to be a borrowing of monies or, as the case may
be, a making of loans by a banking company within the meaning of this section.
 94 Lesson 3 • PP-GRMCE

Further Section 179(4) provides that nothing in this section shall be deemed to affect the right of the company in
general meeting to impose restrictions and conditions on the exercise by the Board of any of the powers specified
in this section.
Section 180 of the Act imposes restrictions on the powers of the Board. It provides that
(1) The board can exercise the following powers only with the consent of the company by special resolution:–
(a) to sell, lease or otherwise dispose of the whole or substantially the whole of the undertaking of the
company or where the company owns more than one undertaking, of the whole or substantially the
whole of any of such undertakings;
(b) to invest otherwise in trust securities the amount of compensation received by it as a result of any merger
or amalgamation;
(c) to borrow money, where the money to be borrowed, together with the money already borrowed
by the company will exceed aggregate of its paid-up share capital and free reserves and securities
premium, apart from temporary loans obtained from the company’s bankers in the ordinary course
of business;
Provided that the acceptance by a banking company, in the ordinary course of its business, of deposits of
money from the public, repayable on demand or otherwise, and withdrawable by cheque, draft, order or
otherwise, shall not be deemed to be borrowing of moneis by the banking company within the meaning
of this clause.
(d) to remit, or give time for the repayment of, any debt due from a director.
(2) The special resolution relating to borrowing money exceeding paid up capital and free reserves specify the
total amount up to which the money may be borrowed by Board.
(3) Nothing contained in clause (a) of sub-section (1) shall affect-
(a) the title of buyer or the person who takes on lease any property, investment or undertaking as is referred
to in that clause, in good faith; or
(b) the sale or lease of any property of the company where the ordinary business of such company consists
of, or compromise, such selling or leasing.
(4) The special resolution passed by the company consenting to the transaction as is referred to in clause (a) of
sub-section (1) may also stipulate the conditions as may be specified in such resolution, including conditions
regarding the use, disposal, investment of the sale proceeds, which may result from such transactions:
Provided that this sub-section shall not be deemed to authorise the company to affect any reduction in its
capital except in accordance with the provisions contained in this Act.
(5) No debt incurred by the company in excess of the limit imposed by clause (c) of sub-section (1) shall be valid
for effectual, unless the lender proves that the loan was advanced on good faith and without knowledge that
the limit imposed had been exceeded.

INDEPENDENT DIRECTORS FOR BETTER BOARD EFFECTIVENESS

Independent directors are known to bring an objective view in board deliberations. They also ensure that
there is no dominance of one individual or special interest group or the stifling of healthy debate. They act as
the guardians of the interest of all shareholders and stakeholders, especially in the areas of potential conflict
of interest.
Independent Directors bring a valuable outside perspective to the deliberations. They contribute significantly to
the decision-making process of the Board. They can bring on objective view to the evaluation of the performance
of Board and management. In addition, they can play an important role in areas where the interest of management,
the company and shareholders may converge such as executive remuneration, succession planning, changes in
corporate control, audit function etc.
 Lesson 3 • Board Effectiveness 95

Independent directors are required because they perform the following important role:

Section 149(6) of Companies Act, 2013 defines independent director as below:

An independent director in relation to a company, means a director other than a managing director or a whole-time
director or a nominee director, –
(a) who, in the opinion of the Board, is a person of integrity and possesses relevant expertise and experience;
(b) (i) who is or was not a promoter of the company or its holding, subsidiary or associate company; (ii) who is not
related to promoters or directors in the company, its holding, subsidiary or associate company;
(c) who has or had no pecuniary relationship, other than remuneration as such director or having transaction not
exceeding ten per cent. of his total income or such amount as may be prescribed, with the company, its holding,
subsidiary or associate company, or their promoters, or directors, during the two immediately preceding
financial years or during the current financial year; (This provision does not apply to Government Companies).

Clarification by MCA
1. Whether a transaction entered into by an Independent Director with the company concerned at par
with any member of the general public and at the same price as is payable/paid by such member of
public would attract the bar of ‘pecuniary relationship’ under section 149(6)(c).
It has been clarified that in view of the provisions of section 188 which take away transactions in the
ordinary course of business at arm’s length price, an Independent Director will not be said to have
‘pecuniary relationship’, under section 149(6)(c) in such cases.
2. Whether receipt of remuneration, (in accordance with the provisions of the Act) by an Independent
Director from a company would be considered as having pecuniary interest while considering his
appointment in the holding company, subsidiary company or associate company of such company.
The matter has been examined in consultation with SEBI and it has been clarified that ‘pecuniary
relationship’ provided in section 149(6)(c) of the Act does not include receipt of remuneration, from
one or more companies, by way of fee provided under sub-section (5) of section 197, reimbursement
of expenses for participation in the Board and other meetings and profit related commission approved
by the members, in accordance with the provisions of the Act.

(d) none of whose relatives –

(i) is holding any security of or interest in the company, its holding, subsidiary or associate company during
the two immediately preceding financial years or during the current financial year:
 96 Lesson 3 • PP-GRMCE

Provided that the relative may hold security or interest in the company of face value not exceeding fifty
lakh rupees or two per cent. of the paid-up capital of the company, its holding, subsidiary or associate
company or such higher sum as may be prescribed;
(ii) is indebted to the company, its holding, subsidiary or associate company or their promoters, or directors,
in excess of such amount as may be prescribed during the two immediately preceding financial years or
during the current financial year;
(iii) has given a guarantee or provided any security in connection with the indebtedness of any third person
to the company, its holding, subsidiary or associate company or their promoters, or directors of such
holding company, for such amount as may be prescribed during the two immediately preceding financial
years or during the current financial year; or
(iv) has any other pecuniary transaction or relationship with the company, or its subsidiary, or its holding or
associate company amounting to two per cent. or more of its gross turnover or total income singly or in
combination with the transactions referred to in sub-clause (i), (ii) or (iii).
(e) who, neither himself nor any of his relatives—
(i) holds or has held the position of a key managerial personnel or is or has been employee of the company
or its holding, subsidiary or associate company in any of the three financial years immediately preceding
the financial year in which he is proposed to be appointed;
Provided that in case of a relative who is an employee, the restriction under this clause shall not apply for
his employment during preceding three financial years.
(ii) is or has been an employee or proprietor or a partner, in any of the three financial years immediately
preceding the financial year in which he is proposed to be appointed, of—
(A) a firm of auditors or company secretaries in practice or cost auditors of the company or its holding,
subsidiary or associate company; or
(B) any legal or a consulting firm that has or had any transaction with the company, its holding, subsidiary
or associate company amounting to ten per cent. or more of the gross turnover of such firm.
(iii) holds together with his relatives two per cent or more of the total voting power of the company; or
(iv) is a Chief Executive or director, by whatever name called, of any nonprofit organisation that receives
twenty-five per cent. or more of its receipts from the company, any of its promoters, directors or its
holding, subsidiary or associate company or that holds two per cent. or more of the total voting power of
the company; or
(f) who possesses such other qualifications as may be prescribed.
Section 149(7) provides that every independent director shall at the first meeting of the Board in which he
participates as a director and thereafter at the first meeting of the Board in every financial year or whenever
there is any change in the circumstances which may affect his status as an independent director, give a
declaration that he meets the criteria of independence as provided in sub-section (6).
Explanation – For the purposes of this section, “nominee director” means a director nominated by any financial
institution in pursuance of the provisions of any law for the time being in force, or of any agreement, or
appointed by any Government, or any other person to represent its interests.
Number of Independent Directors – Rule 4 of the Companies (Appointment and Qualification of Directors) Rules,
2014
(1)  The following class or classes of companies shall have at least two directors as independent directors -
(i) the Public Companies having paid up share capital of ten crore rupees or more; or
(ii) the Public Companies having turnover of one hundred crore rupees or more; or
 Lesson 3 • Board Effectiveness 97

(iii) the Public Companies which have, in aggregate, outstanding loans, debentures and deposits, exceeding
fifty crore rupees:
Provided that in case a company covered under this rule is required to appoint a higher number of independent
directors due to composition of its audit committee, such higher number of independent directors shall be
applicable to it:
Provided further that any intermittent vacancy of an independent director shall be filled-up by the Board at
the earliest but not later than immediate next Board meeting or three months from the date of such vacancy,
whichever is later.
Provided also that where a company ceases to fulfil any of three conditions laid down in sub-rule (1) for three
consecutive years, it shall not be required to comply with these provisions until such time as it meets any of
such conditions.
Explanation. For the purposes of this rule, it is here by clarified that, the paid up share capital or turnover or
outstanding loans, debentures and deposits, as the case may be, as existing on the last date of latest audited
financial statements shall be taken into account.
Provided that a company belonging to any class of companies for which a higher number of independent
directors has been specified in the law for the time being in force shall comply with the requirements specified
in such law.
(2) The following classes of unlisted public company shall not be covered under sub-rule (1), namely:-.
(a) a joint venture;
(b) a wholly owned subsidiary; and
(c) a dormant company as defined under section 455 of the Act.
Qualifications of Independent Director - Rule 5 of the Companies (Appointment and Qualifications of Directors)
Rules, 2014.
(1) An independent director shall possess appropriate skills, experience and knowledge in one or more fields
of finance, law, management, sales, marketing, administration, research, corporate governance, technical
operations or other disciplines related to the company’s business.
(2) None of the relatives of an independent director, for the purposes of sub-clauses (ii) and (iii) of clause (d) of
sub-section (6) of section 149,-
(i) is indebted to the company, its holding, subsidiary or associate company or their promoters, or directors;
or
(ii) has given a guarantee or provided any security in connection with the indebtedness of any third person
to the company, its holding, subsidiary or associate company or their promoters, or directors of such
holding company, for an amount of fifty lakhs rupees, at any time during the two immediately preceding
financial years or during the current financial year.
Code for Independent Directors
Section 149 (8) of the Companies Act, 2013 states that the company and independent directors shall abide by the
provisions specified in Schedule IV.
The Code is a guide to professional conduct for independent directors. Adherence to these standards by independent
directors and fulfilment of their responsibilities in a professional and faithful manner will promote confidence
of the investment community, particularly minority shareholders, regulators and companies in the institution of
independent directors.
I. Guidelines of professional conduct:
“An independent director shall:
(1) uphold ethical standards of integrity and probity;
98 Lesson 3 • PP-GRMCE

(2) act objectively and constructively while exercising his duties;

(3) exercise his responsibilities in a bona fide manner in the interest of the company;
(4) devote sufficient time and attention to his professional obligations for informed and balanced decision
making;
(5) not allow any extraneous considerations that will vitiate his exercise of objective independent judgment
in the paramount interest of the company as a whole, while concurring in or dissenting from the collective
judgment of the Board in its decision making;
(6) not abuse his position to the detriment of the company or its shareholders or for the purpose of gaining
direct or indirect personal advantage or advantage for any associated person;
(7) refrain from any action that would lead to loss of his independence;
(8) where circumstances arise which make an independent director lose his independence, the independent
director must immediately inform the Board accordingly;
(9) assist the company in implementing the best corporate governance practices.
II. Role and functions:
“The independent directors shall:
(1) help in bringing an independent judgment to bear on the Board’s deliberations especially on issues of
strategy, performance, risk management, resources, key appointments and standards of conduct;
(2) bring an objective view in the evaluation of the performance of board and management;
(3) scrutinise the performance of management in meeting agreed goals and objectives and monitor the
reporting of performance;
(4) satisfy themselves on the integrity of financial information and that financial controls and the systems of
risk management are robust and defensible;
(5) safeguard the interests of all stakeholders, particularly the minority shareholders;
(6) balance the conflicting interest of the stakeholders;
(7) determine appropriate levels of remuneration of executive directors, key managerial personnel and
senior management and have a prime role in appointing and where necessary recommend removal of
executive directors, key managerial personnel and senior management;
(8) moderate and arbitrate in the interest of the company as a whole, in situations of conflict between
management and shareholder’s interest.
III. Duties:
The independent directors shall—
(1) undertake appropriate induction and regularly update and refresh their skills, knowledge and familiarity
with the company;
(2) seek appropriate clarification or amplification of information and, where necessary, take and follow
appropriate professional advice and opinion of outside experts at the expense of the company;
(3) strive to attend all meetings of the Board of Directors and of the Board committees of which he is a
member;
(4) participate constructively and actively in the committees of the Board in which they are chairpersons or
members;
(5) strive to attend the general meetings of the company;
(6) where they have concerns about the running of the company or a proposed action, ensure that these
are addressed by the Board and, to the extent that they are not resolved, insist that their concerns are
recorded in the minutes of the Board meeting;
 Lesson 3 • Board Effectiveness 99

(7) keep themselves well informed about the company and the external environment in which it operates;
(8) not to unfairly obstruct the functioning of an otherwise proper Board or committee of the Board;
(9) pay sufficient attention and ensure that adequate deliberations are held before approving related party
transactions and assure themselves that the same are in the interest of the company;
(10) ascertain and ensure that the company has an adequate and functional vigil mechanism and to ensure
that the interests of a person who uses such mechanism are not prejudicially affected on account of such
use;
(11) report concerns about unethical behaviour, actual or suspected fraud or violation of the company’s code
of conduct or ethics policy;
(12) “act within their authority”, assist in protecting the legitimate interests of the company, shareholders and
its employees;
(13) not disclose confidential information, including commercial secrets, technologies, advertising and sales
promotion plans, unpublished price sensitive information, unless such disclosure is expressly approved
by the Board or required by law.
IV. Manner of appointment:
(1) Appointment process of independent directors shall be independent of the company management;
while selecting independent directors the Board shall ensure that there is appropriate balance of skills,
experience and knowledge in the Board so as to enable the Board to discharge its functions and duties
effectively.
(2) The appointment of independent director(s) of the company shall be approved at the meeting of the
shareholders.
(3) The explanatory statement attached to the notice of the meeting for approving the appointment of
independent director shall include a statement that in the opinion of the Board, the independent director
proposed to be appointed fulfils the conditions specified in the Act and the rules made thereunder and
that the proposed director is independent of the management.
(4) The appointment of independent directors shall be formalised through a letter of appointment, which
shall set out :
(a) the term of appointment;
(b) the expectation of the Board from the appointed director; the Board-level committee(s) in which the
director is expected to serve and its tasks;
(c) the fiduciary duties that come with such an appointment along with accompanying liabilities;
(d) provision for Directors and Officers (D and O) insurance, if any;
(e) the Code of Business Ethics that the company expects its directors and employees to follow;
(f) the list of actions that a director should not do while functioning as such in the company; and
(g) the remuneration, mentioning periodic fees, reimbursement of expenses for participation in the
Boards and other meetings and profit related commission, if any.
(5) The terms and conditions of appointment of independent directors shall be open for inspection at the
registered office of the company by any member during normal business hours.
(6) The terms and conditions of appointment of independent directors shall also be posted on the company’s
website.
V. Re-appointment:
The re-appointment of independent director shall be on the basis of report of performance evaluation.
 100 Lesson 3 • PP-GRMCE

VI. Resignation or removal:

(1) The resignation or removal of an independent director shall be in the same manner as is provided in
sections 168 and 169 of the Act.
(2) An independent director who resigns or is removed from the Board of the company shall be replaced by a
new independent director within 2[“three months”] from the date of such resignation or removal, as the
case may be.
(3) Where the company fulfils the requirement of independent directors in its Board even without filling the
vacancy created by such resignation or removal, as the case may be, the requirement of replacement by a
new independent director shall not apply.“
VII. Separate meetings:
(1) The independent directors of the company shall hold at least one meeting “in a financial year”, without
the attendance of non-independent directors and members of management;
(2) All the independent directors of the company shall strive to be present at such meeting;
(3) The meeting shall:
(a) review the performance of non-independent directors and the Board as a whole;
(b) review the performance of the Chairperson of the company, taking into account the views of
executive directors and non-executive directors;
(c) assess the quality, quantity and timeliness of flow of information between the company management
and the Board that is necessary for the Board to effectively and reasonably perform their duties.
VIII. Evaluation mechanism:
(1) The performance evaluation of independent directors shall be done by the entire Board of Directors,
excluding the director being evaluated.
(2) On the basis of the report of performance evaluation, it shall be determined whether to extend or continue
the term of appointment of the independent director.
Note: The provisions of sub-paragraph (2) and (7) of paragraph II, paragraph IV, paragraph V, clauses (a) and (b)
of sub-paragraph (3) of paragraph VII and paragraph VIII shall not apply in the case of a Government company
as defined under clause (45) of section 2 of the Companies Act,2013 (18 of 2013), if the requirements in respect
of matters specified in these paragraphs are specified by the concerned Ministries or Departments of the Central
Government or as the case may be, the State Government and such requirements are complied with by the
Government companies.

Meaning of Independent Director under Regulation 16(1)(b) of SEBI (LODR) Regulations, 2015
The expression ‘independent director’ means a non-executive director, other than a nominee director of the listed
entity:
(i) who, in the opinion of the Board, is a person of integrity and possesses relevant expertise and experience;
(ii) who is or was not a promoter of the listed entity or its holding, subsidiary or associate company or member of
the promoter group of the listed entity;
(iii) who is not related to promoters or directors in the listed entity or its holding, subsidiary or associate company;
(iv) who, apart from receiving director’s remuneration, has or had no material pecuniary relationship with the
listed entity, its holding, subsidiary or associate company, or their promoters, or directors, during the two
immediately preceding financial years or during the current financial year;
(v) none of whose relatives has or had pecuniary relationship or transaction with the listed entity, its holding,
subsidiary or associate company, or their promoters, or directors, amounting to two per cent. or more of its
gross turnover or total income or fifty lakh rupees or such higher amount as may be prescribed, whichever is
lower, during the two immediately preceding financial years or during the current financial year;
 Lesson 3 • Board Effectiveness 101

(vi) who, neither himself nor any of his relatives –

(A) holds or has held the position of a key managerial personnel or is or has been employee of the listed entity
or its holding, subsidiary or associate company in any of the three financial years immediately preceding
the financial year in which he is proposed to be appointed;
(B) is or has been an employee or proprietor or a partner, in any of the three financial years immediately
preceding the financial year in which he is proposed to be appointed, of –
(1) a firm of auditors or company secretaries in practice or cost auditors of the listed entity or its
holding, subsidiary or associate company; or
(2)
any legal or a consulting firm that has or had any transaction with the listed entity, its holding, subsidiary
or associate company amounting to ten per cent or more of the gross turnover of such firm;
(C) holds together with his relatives two per cent or more of the total voting power of the listed entity; or
(D) is a Chief Executive or director, by whatever name called, of any non-profit organisation that receives
twenty-five per cent or more of its receipts or corpus from the listed entity, any of its promoters, directors
or its holding, subsidiary or associate company or that holds two per cent or more of the total voting
power of the listed company;
(E) is a material supplier, service provider or customer or a lessor or lessee of the listed company;
(vii) who is not less than 21 years of age.
(viii) who is not a non-independent director of another company on the board of which any non- independent
director of the listed entity is an independent director.

Liability of Independent Directors

Under the Companies Act, 2013: Section 149(12) of the Act provides that an independent director and a non-
executive director not being promoter or key managerial personnel, shall be held liable, only in respect of such
acts of omission or commission by a company which had occurred with his knowledge, attributable through Board
processes, and with his consent or connivance or where he had not acted diligently.
Under the SEBI (LODR) Regulations, 2015: Regulation 25(5) of SEBI (LODR) regulations, 2015 provides that an
independent director shall be held liable, only in respect of such acts of omission or commission by the listed entity
which had occurred with his knowledge, attributable through processes of board of directors, and with his consent
or connivance or where he had not acted diligently with respect to the provisions contained in these regulations. Also
Regulation 25(10) provides that with effect from October 1, 2018, the top 500 listed entities by market capitalization
calculated as on March 31 of the preceding financial year, shall undertake Directors and Officers insurance (‘D and
O insurance’) for all their independent directors of such quantum and for such risks as may be determined by its
board of directors.

Clarification provided by MCA vide General Circular No. 1/ 2020 dated 2nd March, 2020
Section 149 (12) is a non obstante clause which provides that the liability of an independent director (ID) or a
non-executive director (NED) not being promoter or key managerial personnel would be only in respect of such
acts of omission or commission by a company which had occurred with his knowledge, attributable through Board
processes, and with his consent or connivance or where he had not acted diligently. In View of the express provisions
of section 149(12), IDs and NEDs (non-promoter and non-KMP), should not be arrayed in any criminal or civil
proceedings under the Act, unless the above mentioned criteria is met, Typically, apart from IDs, non -promoter and
non-KMP, NEDs, would exist in the following cases:
(a) Directors nominated by the Government on the public sector undertakings;
(b) Directors nominated by Public Sector Financial Institutions, Financial Institutions or Banks having participation
in equity of a company, or otherwise;
(c) Directors appointed in pursuance to any statutory or regulatory requirement such as directors appointed by
the NCLT.
The nature of default is also crucial for arraigning officers of the company for defaults committed under the Act.
All instances of filing of information/ records with the registry, maintenance of statutory registers or minutes of
102 Lesson 3 • PP-GRMCE

the meetings, or compliance with the orders issued by the statutory authorities, including the NCLT under the Act
are not the responsibility of the IDs or the NEDs, unless any specific requirement is provided in the Act or in such
orders, as the case may be. The responsibility of the NEDs, ordinarily arise in such cases, where there are no WTDs
and KMPs.
At the time of serving notices to the company, during inquiry, inspection, investigation, or adjudication proceedings,
necessary documents may be sought so as to ascertain the involvement of the concerned officers of the company.
In case, lapses are attributable to the decisions taken by the Board or its Committees, all care must be taken to
ensure that civil or criminal proceedings are not unnecessarily initiated against the IDs or the NEDs, unless sufficient
evidence exists to the contrary.

CASE STUDIES
Securities Exchange Commission, USA, began a new era of scrutinizing liability of independent directors by
bringing an action against independent director. In SEC v. Raval, Civil Action No. 8:10-cv-00101 (D.Neb. filed
March15, 2010) it was alleged that Vasant Raval, former Chairman of the Audit Committee of Info Group Inc.
(now Info USA, Inc.) had failed to sufficiently investigate certain “red flags” surrounding the company’s former
CEO and Chairman of the Board, Vinod Gupta.
The SEC’s complaint alleged that Vasant Raval 70, resident of Nebraska, served on the board of directors for Info
Group in various positions from 2003 to 2008, including a stint as Chairman of the Audit Committee. During this
period, Raval allegedly turned a blind eye to allegations that Vinod Gupta directed the company to improperly
pay himself $9.5 million that he then spent on corporate jets, service for his yacht, life insurance premiums, and
payment of personal credit cards. In addition, the complaint alleged that Gupta directed the company to enter
into related party transactions totaling approximately $9.3 million with entities that he controlled or with whom
he was affiliated viz. Annapurna Corporation (now Everest Corporation), Aspen Leasing Services, LLC (“Aspen
Leasing”). These related party transactions were not disclosed in the company’s public filings.
The Commission also alleged that Raval failed to respond appropriately to various red flags concerning Gupta’s
expenses and Info’s related party transactions with Gupta’s entities. According to the complaint, Raval failed to
take appropriate action regarding the concerns expressed to him by two internal auditors of Infogroup Inc., that
Gupta was submitting requests for reimbursement of personal expenses. In a board meeting, Raval was tasked
with investigating the propriety of the transactions. Rather than seeking assistance from outside counsel or
rigorously scrutinizing the transactions, Raval began his “in depth investigation” and presented a report to the
company’s board merely in 12 days. The “Raval Report” however, omitted critical facts.
Despite numerous prompts by internal auditor, Raval failed to undertake a thorough investigation. As a
result, the company allegedly failed to disclose related party transactions and materially understated Gupta’s
compensation. Although Raval did not make any pecuniary benefits, he failed to discharge his duties and take
meaningful action to further investigate Gupta’s misconduct and misappropriation of company funds.
The SEC charged Raval for failing in his ‘affirmative responsibilities’ and thus violating the anti-fraud, proxy,
and reporting provisions of the US Exchange Act. To settle his case, Raval consented to the entry of a permanent
injunction prohibiting future violations of the related provisions of the federal securities laws, a $50,000 civil
penalty, and a five-year ban from serving as an officer or director of a company.
Indian scenario
In Bhopal Gas Tragedy verdict, the Bhopal Trial Court on 7th June 2010 has held Keshub Mahindra reputed
industrialist, the then non-executive chairman of Union Carbide India limited(UCIL), guilty and sentenced him to
two years of imprisonment along with seven others accused. He was charged of attending only a few meetings in
a year and took only macro view of the company’s developments. A non-vigilant act of non-executive chairman,
accounted for death of thousands. “Ignorance” of the system by the director of the company is unacceptable.
Role of non-executive director in this case is questionable. Later he was granted bail.
 Lesson 3 • Board Effectiveness 103

OTHER GOOD PRACTICES TO ENHANCE BOARD EFFECTIVENESS

APPOINTMENT OF LEAD INDEPENDENT DIRECTOR

Internationally, it is considered a good practice to designate an independent director as a lead independent director
or senior independent director. The lead independent director is a highly versatile intermediary between the chair,
the board and the board’s stakeholders. The lead independent director must keep a keen eye on whether the chair
is performing their role to the board’s satisfaction without losing objectivity or independence. They monitor the
relationship between the chair and the CEO, and ensure that it is a well-functioning working relationship without
becoming too close or powerful. The lead independent director also coordinates the activities of other non-employee
directors and advises the chairman on issues ranging from the schedule of board meetings to recommending
retention of advisors and consultants to the management.
Role of the lead independent director
• Acts as the principal liaison between the independent directors of the Board and the Chairman of the Board;
• Develops the agenda for and preside at executive sessions of the Board’s independent directors;
• Advises the Chairman of the Board as to an appropriate schedule for Board meetings, seeking to ensure that
the independent directors can perform their duties responsibly while not interfering with the flow of Company
operations;
• Approves with the Chairman of the Board the agenda for Board and Board Committee meetings and the need
for special meetings of the Board;
• Advises the Chairman of the Board as to the quality, quantity and timeliness of the information submitted by
the Company’s management that is necessary or appropriate for the independent directors to effectively and
responsibly perform their duties;
• Recommends to the Board the retention of advisors and consultants who report directly to the Board;
• Interviews, along with the chair of the Nominating and Corporate Governance Committee, all Board candidates,
and make recommendations to the Nominating and Corporate Governance Committee;
• Assists the Board and Company officers in better ensuring compliance with and implementation of the
Governance Guidelines;
• Serves as Chairman of the Board when the Chairman is not present; and
• Serves as a liaison for consultation and communication with shareholders.

SEPARATION OF ROLE OF CHAIRMAN AND CHIEF EXECUTIVE OFFICER

Chairman: Good boards are created by good chairmen. The chairman creates the conditions for overall board and
individual director effectiveness. The chairman should demonstrate the highest standards of integrity and probity,
and set clear expectations concerning the company’s culture, values and behaviours, and the style and tone of board
discussions. The chairman, with the help of the executive directors and the company secretary, sets the agenda for
the board’s deliberations.
The Companies Act, 2013 does not legally recognize chairman of a company. They are elected by the board to take the
chair at a particular meeting. Boards are not bound to continue with the same chairman for successive meetings. In
law, all directors have broadly equal responsibilities and chairmen are no more equal than any other board member.
Thus, under the law, chairman or chairperson is not legal position but a momentary position in meetings.
The chairman is responsible for leadership of the board, ensuring its effectiveness on all aspects of its role and
setting its agenda. The chairman is also responsible for ensuring that the directors receive accurate, timely and clear
information. The chairman should ensure effective communication with shareholders.
104 Lesson 3 • PP-GRMCE

The chairman’s role includes:

§ demonstrating ethical leadership;
§ setting a board agenda which is primarily focused on strategy, performance, value creation and
accountability, and ensuring that issues relevant to these areas are reserved for board decision;
§ ensuring a timely flow of high-quality supporting information; regularly considering succession planning
and the composition of the board etc.
Chief Executive Officer (CEO): The Board appoints the CEO based on the criterion of his capability and competence
to manage the company effectively.
As per Section 2(18) of the Companies Act, 2013, “Chief Executive Officer” means an officer of a company, who has
been designated as such by it.
His main responsibilities include developing and implementing high-level strategies, making major corporate
decisions, managing the overall operations and resources of a company, and acting as the main point of communication
between the board of directors and the corporate operations. He is involved with every aspect of the company’s
performance. The CEO is supported and advised by a skilled board and CEO is ultimately accountable to the board
for his actions. The most important skill of a CEO is to think strategically.
Separation of Role: It is perceived that separating the roles of chairman and chief executive officer (CEO) increases
the effectiveness of a company’s board. It is the board’s and chairman’s job to monitor and evaluate a company’s
performance. A CEO, on the other hand, represents the management team. If the two roles are performed by the
same person, then there is less accountability. A clear demarcation of the roles and responsibilities of the Chairman
of the Board and that of the Managing Director/CEO promotes balance of power.
The benefits of separation of roles of Chairman and CEO can be:
• Director Communication: A separate chairman provides a more effective channel for the board to
express its views on management l Guidance: A separate chairman can provide the CEO with guidance and
feedback on his/her performance
• Shareholders’ interest: The chairman can focus on shareholder interests, while the CEO manages the company
• Governance: A separate chairman allows the board to more effectively fulfill its regulatory requirements
• Long-Term Outlook: Separating the position allows the chairman to focus on the long-term strategy while
the CEO focuses on short-term profitability
• Succession Planning: A separate chairman can more effectively concentrate on corporate succession plans.
Provisions under Companies Act, 2013: First proviso to Section 203(1) of the Companies Act, 2013 provides for
the separation of role of Chairman and Chief Executive Officer subject to conditions thereunder. It specifies that an
individual shall not be appointed or reappointed as the chairperson of the company, in pursuance of the articles of
the company, as well as the managing director or Chief Executive Officer of the company at the same time after the
date of commencement of this Act unless,—
(a) the articles of such a company provide otherwise;
(b) the company does not carry multiple businesses.
This proviso does not apply to public companies having paid-up share capital of rupees one hundred crore or more
and annual turnover of rupees one thousand crore or more which are engaged in multiple businesses and have
appointed Chief Executive Officer for each such businesses. For the purposes of this, the paid-up share capital and
the annual turnover shall be decided on the basis of the latest audited balance sheet.
Provisions under SEBI (LODR) Regulations, 2015
Regulation 17(1B) of SEBI (LODR) Regulations, 2015 provides that effect from April 1, 2022, the top 500 listed
entities shall ensure that the Chairperson of the board of such listed entity shall -
(a) be a non-executive director;
(b) not be related to the Managing Director or the Chief Executive Officer as per the definition of the term “relative”
defined under the Companies Act, 2013.
 Lesson 3 • Board Effectiveness 105

Provided that this sub-regulation shall not be applicable to the listed entities which do not have any identifiable
promoters as per the shareholding pattern filed with stock exchanges.
The top 500 entities shall be determined on the basis of market capitalisation, as at the end of the immediate
previous financial year.

SUCCESSION PLANNING
With about 2/3rd of companies in the S&P BSE 500 index (considered as a broad-market index) classified as family-owned
businesses, they form the largest chunk of companies in India. CEO succession is a sensitive and crucial topic in these
companies where multiple generations of the family have managed the business in the past, and continue to do so even
now. A large proportion of these companies are still family-run and have not separated ownership from management.
Succession planning is a strategy for identifying and developing future leaders. Succession plans are used to address the
inevitable changes that occur when directors resign, retire or die. Attention to succession planning can help ensure the board
includes directors with a balanced level of institutional knowledge and fresh perspectives.
A well-prepared board should develop a succession plan that provides guidance on identifying and sourcing potential board
members who can fulfil key requirements. Succession planning is an ongoing process of identifying, assessing and developing
people to ensure the continuity of the Board. It is most important that boards of directors are prepared for resignation and/
or retirement of its members. The board should continually ensure that it has the right set of skills, talents, and attributes
represented.
Succession planning for the Board includes succession and renewal for the Board as a whole and the Board’s leadership
positions. The key to getting succession planning right is maintaining an ongoing and dynamic process. The nomination and
remuneration committee should review the skills required, identify the gaps, develop transparent appointment criteria and
inform succession planning. The nomination and remuneration committee should periodically assess whether the desired
outcome has been achieved, and propose changes to the process as necessary.
Executive directors may be recruited from external sources, but companies should also develop internal talent and capability.
Initiatives might include middle management development programmes, facilitating engagement from time to time with
non-executive directors, and partnering and mentoring schemes.

Some leading practices for board succession planning are:

• Using a skills matrix to proactively shape board composition that incorporates strategic direction and
opportunities, regulatory and industry developments, challenges, and transformation
• Conducting robust annual performance evaluations, including facilitation by an independent third party
• Establishing and enhancing written director qualification standards that align with the company’s business and
corporate strategy, and including these standards in corporate governance policies and bylaws as appropriate
• Reviewing evolving committee and board leadership needs, including the time commitments required
• Considering director election results and engagement by investors regarding board composition,
independence, leadership and diversity
• Prioritizing an independent mindset on boards, including through board diversity, to foster debate,
challenge norms and invigorate board oversight processes and strategy development
• Making sure mentoring and development opportunities are available for incoming directors.

Legal Provisions on Companies Act, 2013 SEBI (LODR) Regulations, 2015

Succession planning There is no specific provision. It is usually Regulation17(4)
included in terms of reference of NRC. The Board of Directors of the listed entity
shall satisfy itself that plans are in place for
orderly succession for appointment to the
board of directors and senior management.
106 Lesson 3 • PP-GRMCE

CASE STUDIES
Marico Limited - A case study in professionalizing of the board
Marico Limited is one of India’s leading companies in the fast-moving consumer goods (FMCG) and skin care
businesses, founded by Harsh Mariwala. Harsh Mariwala joined his family-owned commodities trading business
before eventually founding Marico in 1990 – completing a transformation of a traditional trading business into a
leading consumer products and services company.
Mariwala turned the family-owned company into one that is now perceived by the market to be a well-managed,
professionally run company. In 2014, Mariwala, who was till then, the Chairperson and Managing Director of the
company, inducted a professional MD on the board – Saugata Gupta. He proceeded to then make his role non-
executive – he would no longer look after the day-to-day operations, instead allowing a team of professionals to
run the company. He would remain the chairperson of the company.
Mariwala’s son Rishabh spent three years at Kaya, the beauty-salon business of the company, and then left to
start a venture of his own in 2011. His daughter, Rajvi, left the company after two years and is now a canine
behaviourist. His children are no longer part of the management or the board.
Mariwala has stated that he intends to make himself redundant in the company over time. By making an investment
in professional leadership and staying away from day-to-day management, he has sought to demonstrate to the
market that the interests of the promoter group are aligned with those of other stakeholders.
Marico’s case is an excellent example of the promoter handing over the leadership to a professional and distancing
themselves from day-to-day operations.
Godrej Group - Clear responsibilities for next generation promoters
The Godrej group is a large Indian conglomerate operating in the consumer products, real estate, consumer
durables and animal feed businesses among others. Adi Godrej is a third-generation promoter and the current
chairperson of Godrej Industries Limited, while his brother Nadir is the Managing Director for the same company.
His cousin, Jamshyd Godrej is the chairperson of Godrej and Boyce, the consumer durables arm of the group.
Adi Godrej has ensured that the companies are run by a combination of family members and industry professionals.
The group had appointed a facilitator in the past to oversee succession planning in the group. Family members
seeking to enter the businesses in management roles are required to be well qualified.
Adi Godrej has three children, of which his eldest daughter, Tanya Dubash, his daughter, is an Executive Director
of Godrej Industries Limited and the Chief Brand Officer for the group. She oversees the group’s branding efforts
and is also Chairperson of Godrej Nature’s Basket, the gourmet retail arm of the company.
Nisaba Godrej, his second daughter is the Executive Chairperson of Godrej Consumer Products Limited, the home
and personal care products division. Previously, she led the innovation strategy at the group company – Godrej
Industries Limited. She was also involved with Godrej Agrovet Limited, the agribusiness arm of the company.
Vivek Gambhir, a professional, serves as MD at Godrej Consumer Products Limited.
Pirojsha Godrej, Adi Godrej’s son, looks after the real estate business. He has served as Managing Director and
Chairperson at Godrej Properties since 2012. Effective April 2017, he serves as Executive Chairperson at the same
company, while handing over the MD role to Mohit Malhotra, a professional who joined the company in 2010.
The succession plan has ensured that there are specific and clearly defined roles for the next generation based
on individual strengths.

DIRECTORS TRAINING, DEVELOPMENT AND FAMILARISATION

Director’s Training: An important aspect of Board effectiveness would be appropriate attention to development
and training of directors. Director orientation/induction should be seen as the first step of the board’s continuing
improvement. Since the Board composition is getting more diverse, a system of formal training and evaluation is
very important to foster trust, cohesion and communication among board members. Investing in board development
strengthens the board and individual directors. As the Board of Directors is primarily responsible for good governance
practices, which is quite different from management, it calls for new areas of knowledge and different skills.
Training should encompass both a thorough induction programme and an ongoing training and development opportunities
for the board members. Training should focus on improving the knowledge and skills of the board and individual
 Lesson 3 • Board Effectiveness 107

members and on overall board performance. Training should be required for each board member and compliance with
the requirement used to assess individual board member performance for reappointment to additional terms of board
service. Requirements should be set forth in a board policy that describes the focus and type of education available.
Director Induction: Induction procedures should be in place to allow new directors to participate fully and actively
in board decision-making at the earliest opportunity. To be effective, new directors need to have a good deal of
knowledge about the company and the industry within which it operates. It involves introducing the new directors
to the people with whom they will be working and explaining how the board operates. It involves building up
rapport, trust, and credibility with the other directors so that the new director is accepted by and can work with
fellow directors. Common methods of induction include:
• Briefing papers
• Internal visits
• Introductions
An induction programme should be available to enable new directors to gain an understanding of:
• the company’s financial, strategic, operational and risk management position
• the rights, duties and responsibilities of the directors
• the roles and responsibilities of senior executives
• the role of board committees.
An induction kit should be given to new directors which should contain the following:
• Memorandum and Articles of Association with a summary of most important provisions
• Brief history of the company
• Current business plan, market analysis and budgets
• All relevant policies and procedures, such as a policy for obtaining independent professional advice for directors
• Protocol, procedures and dress code for Board meetings, general meetings, , staff social events, site visits etc
including the involvement of partners
• Press releases in the last one year
• Copies of recent press cuttings and articles concerning the company
• Annual report for last three years
• Notes on agenda and Minutes of last six Board meetings
• Board’s meeting schedule and Board committee meeting schedule
• Description of Board procedures.
Director’s Development: Professional development should not be treated as merely another training schedule
rather it must be more structured so as to sharpen the existing skills and knowledge of directors. It is a good practice
for boards to arrange for an ongoing up-dation of their members with changes in governance, technologies, markets,
products, and so on through:
• Ongoing education
• Site visits
• Seminars; and
• Various short term and long term Courses
Familiarisation Programme for Independent Directors: Regulation 25(7) of SEBI (LODR) regulations, 2015
provides that the listed entity shall familiarise the independent directors through various programmes about the
listed entity, including the following:
(a) nature of the industry in which the listed entity operates;
(b) business model of the listed entity;
108 Lesson 3 • PP-GRMCE

(c) roles, rights, responsibilities of independent directors; and

(d) any other relevant information.
Schedule IV of the Companies Act 2013 also provides that the Independent Directors shall undertake appropriate
induction and regularly update and refresh their skills, knowledge and familiarity with the company.

PERFORMANCE EVALUATION OF THE BOARD AND MANAGEMENT

Board evaluation is a key means by which boards can recognize and correct corporate governance problems and add
real value to their organizations. A properly conducted board evaluation can contribute significantly to performance
improvements on organisational; board and individual member level. Board evaluation typically examines the roles
of the Board and the entailing responsibilities, and assesses how effectively these are fulfilled by the Board.
The stakeholders and investors are interested to know whether the members of Board are effectively functioning
individually and collectively. The Board at many times requires new skills for promptly responding to the dynamic
changing business environment. Performance measurement, against the set benchmarks, in the form of Board
evaluation has the potential to significantly enhance Board effectiveness, maximize strengths, tackle weaknesses
and improve corporate relationships. Annual assessment is a powerful tool to convert good boards into great boards.
Evaluation provides the board and its committees with the opportunity to consider how group culture, cohesiveness,
composition, leadership, meetings information processes and governance policies influence performance. Board Evaluation
helps to identify areas for potential adjustment and provides an opportunity to remind directors of the importance of group
dynamics and effective board and committee processes in fulfilling board and committee responsibilities.
Thus, Board evaluation contributes significantly to improved performance at three levels - organizational, Board
and individual Board member level. It also improves the leadership, teamwork, accountability, decision-making,
communication and efficiency of the board. A commitment to annual evaluation is powerful change agent.
The Board evaluation sets the standards of performance and improves the culture of collective action by Board.
Evaluation also improves teamwork by creating better understating of Board dynamics, board-management
relations and thinking as a group within the board. It helps to maximize board/ director contribution by encouraging
participation in meetings and highlighting the skill gaps on the Board and those of individual members. Directors
demonstrate commitment to improvement, based on the feedback provided on individual and collective skill gaps.
Rule 8(4) of the Companies (Accounts) Rules, 2014 provides that every listed company and every other public company
having a paid up share capital of twenty five crore rupees or more calculated at the end of the preceding financial
year shall include, in the report by its Board of directors, a statement indicating the manner in which formal annual
evaluation has been made by the Board of its own performance and that of its committees and individual directors.
The purposes of the Board evaluation may be enumerated as under:
• Improving the performance of Board towards corporate goals and objectives.
• Assessing the balance of skills, knowledge and experience on the Board.
• Identifying the areas of concern and areas to be focused for improvement.
• Identifying and creating awareness about the role of Directors individually and collectively as Board.
• Building Team work among Board members.
• Effective Coordination between Board and Management.
• Overall growth of the organisation.
 Lesson 3 • Board Effectiveness 109

Main provisions under the Companies Act, 2013 with respect to Board Evaluation
1. The Role of the Nominations and Remuneration Committee in performance evaluation of directors
Section 178 (2): The Nomination and Remuneration Committee shall identify persons who are qualified to become
directors and who may be appointed in senior management in accordance with the criteria laid down, recommend
to the Board their appointment and removal and shall specify the manner for effective evaluation of performance
of Board, its committees and individual directors to be carried out either by the Board, by the Nomination and
Remuneration Committee or by an independent external agency and review its implementation and compliance.
2. Independent Directors’ role in performance evaluation of Boards, non-independent directors and
Chairperson
Schedule IV [Part II (2)] : Independent directors are required to bring an objective view in the evaluation of the
performance of board and management.
Schedule IV (Part VII) : The independent directors of the company shall hold at least one meeting in a financial
year, without the attendance of non-independent directors and members of management.
All the independent directors of the company shall strive to be present at such meeting. The meeting shall:
(a) review the performance of non-independent directors and the Board as a whole;
(b) review the performance of the Chairperson of the company, taking into account the views of executive
directors and non-executive directors;
(c) assess the quality, quantity and timeliness of flow of information between the company management and
the Board that is necessary for the Board to effectively and reasonably perform their duties.
3. Performance evaluation of Independent Directors
Schedule IV Part V: Re appointment - The reappointment of the independent directors would be based on their
report of performance evaluation.
Schedule IV Part VIII : Evaluation mechanism
The performance of the independent directors would have to be done by the entire Board excluding the director
to be evaluated.
On the basis of the report of performance evaluation, the continuance or extension of the term of appointment
of the independent director would be determined.
4. Inclusion of Performance evaluation in Board’ Report
According to Rule 8 (4) of the Companies (Accounts) Rules, 2014 Every listed company and every other
public company having a paid up share capital of twenty five crore rupees or more calculated at the end of
the preceding financial year shall include, in the report by its Board of directors, a statement indicating the
manner in which formal annual evaluation has been made by the Board of its own performance and that of its
committees and individual directors.

Main Provisions under the SEBI (Listing Obligations and Disclosure Requirements) Regulations,
2015 with respect to Board Evaluation
It also requires Boards to conduct an annual performance evaluation and its disclosure in the annual report through
the following provisions:
1. Regulation 4(2)(f)(ii) (9) states the Key functions of the board of directors which includes:
Monitoring and reviewing board of director’s evaluation framework.
2. Regulation 17(10) mandates that evaluation of independent directors shall be done by the entire board of
directors which shall include
a. performance of the directors; and
b. fulfilment of the independent criteria as specified in these regulations and their independence from the
management.
In the above evaluation process, the directors who are subject to evaluation shall not participate.
110 Lesson 3 • PP-GRMCE

3. Regulation 19(4) read with Part D of Schedule II - It provides that the role of Nomination and Remuneration
committee shall, inter-alia, include the following:
(1) formulation of the criteria for determining qualifications, positive attributes and independence of a
director and recommend to the board of directors a policy relating to, the remuneration of the directors,
key managerial personnel and other employees;
(2) formulation of criteria for evaluation of performance of independent directors and the board of directors;
(3) devising a policy on diversity of board of directors;
(4) identifying persons who are qualified to become directors and who may be appointed in senior
management in accordance with the criteria laid down, and recommend to the board of directors their
appointment and removal;
(5) whether to extend or continue the term of appointment of the independent director, on the basis of the
report of performance evaluation of independent directors;
(6) recommend to the board all remuneration, in whatever form, payable to senior management.
4. Disclosure on Performance evaluation criteria for independent directors has to be made under head Nomination
and Remuneration Committee in the section on the corporate governance of the annual report.

BROAD EVALUATION FRAMEWORK AND PARAMETERS

Boards should understand the framework under which board and committee evaluations are conducted, and take
steps to ensure evaluations are carried out effectively. As per the Companies Act 2013 or SEBI (Listing Obligations
and Disclosure Requirements) Regulations, 2015, Board evaluation would generally include following:
1. Evaluation of the Board as a whole
2. Evaluation of the Committees
3. Evaluation of Individual Directors
• Managing Director / Whole time Director / Executive Director
• Independent Directors
• Non- executive Directors
4. Evaluation of the Chairperson.
1. Evaluation of the Board as a whole:
The performance of the Board as a whole may be evaluated either from the reviews/ feedback of the directors
themselves or by some external source. The Independent Directors at their separate meeting shall also
assess the quality, quantity and timeliness of flow of information between the company management and the
Board that is necessary for the Board to effectively and reasonably perform their duties. The evaluation of
the performance of the Boards is essentially an assessment of how the Board has performed on following
parameters which determines the effectiveness of boards.
• Board Structure : its composition, constitution and diversity and that of its Committees, competencies of
the members, Board and Committee charters, frequency of meetings, procedures;
• Dynamics and Functioning of the Board : annual Board calendar, information availability, interactions
and communication with CEO and senior executives, Board agenda, cohesiveness and the quality of
participation in Board meetings;
• Business Strategy Governance: Board’s role in company strategy;
• Financial Reporting Process, Internal Audit and Internal Controls: The integrity and the robustness
of the financial and other controls regarding abusive related party transactions, vigil mechanism and risk
management;
 Lesson 3 • Board Effectiveness 111

• Monitoring Role: Monitoring of policies, strategy implementation and systems;

• Supporting and Advisory Role; and
• The Chairperson’s Role.
2. Evaluation of the Committees
The Board is responsible for the evaluation of the performance of the Committees of the Board. The performance
of the committees may be evaluated by the Directors, on the basis of the terms of reference of the committee
being evaluated. Alternatively, the evaluation may be externally facilitated. The broad parameters of reviewing
the performance of the Committees, inter alia, are:
• Discharge of its functions and duties as per its terms of reference;
• Process and procedures followed for discharging its functions;
• Effectiveness of suggestions and recommendations received;
• Size, structure and expertise of the Committee;
• Conduct of its meetings and procedures followed in this regard; and
• Recommendations made to the Board.
3. Evaluation of Individual Director(s)
(a) Evaluation of Managing Director / Whole time Director / Executive Director
The performance evaluation of Managing Director, Executive Director of the Company may be done by
all the directors. External facilitation may also serve as an efficient tool for evaluation. The Code for
Independent Directors also provides that Independent Directors should review the performance of non-
independent Directors, which include Managing Director / Whole time Director/Executive Director. The
broad parameters for reviewing the performance of Managing Director/Executive Director are:
• Achievement of financial/business targets prescribed by the Board;
• Developing and managing / executing business plans, operational plans, risk management, and
financial affairs of the organization;
• Display of leadership qualities i.e. correctly anticipating business trends, opportunities, and
priorities affecting the Company’s prosperity and operations;
• Development of policies, and strategic plans aligned with the vision and mission of Company and
which harmoniously balance the needs of shareholders, clients, employees, and other stakeholders;
• Establishment of an effective organization structure to ensure that there is management focus on key
functions necessary for the organization to align with its mission; and Managing relationships with
the Board, management team, regulators, bankers, industry representatives and other stakeholders.
(b) Evaluation of Independent Directors:
The performance evaluation of independent directors should be done by the entire Board of Directors,
excluding the director being evaluated. On the basis of the report of performance evaluation, it shall be
determined whether to extend or continue the term of appointment of the independent director.
The Nomination Committee shall lay down the evaluation criteria for performance evaluation of
independent directors. The company should disclose the criteria for performance evaluation, as laid
down by the Nomination Committee, in its Annual Report.
Major Factors for Evaluation
• The quality of the issues that get raised, discussed and debated at the meetings of the Board and its
Committees.
• The guidance provided by the Board in the light of changing market conditions and their impact on
the organisation.
 112 Lesson 3 • PP-GRMCE

• The methodology adopted by the Board to solve issues referred to them.

• The effectiveness of the directions provided by the Board on the issues discussed in meetings.
Parameters: In addition to the parameters laid down for Directors, which shall be common for evaluation
to both Independent and Non- executive directors, an Independent director shall also be evaluated on the
following parameters:
• Exercise of objective independent judgment in the best interest of Company;
• Ability to contribute to and monitor corporate governance practice; and
• Adherence to the code of conduct for independent directors;
• Performance of the Board against the benchmark performance set;
• Overall value addition by the discussions taking place at the Board meetings;
• The regularity and quality of participation in the deliberations of the Board and its Committees;
• The answerability of the top management to the Board on performance related matters.
(c) Evaluation of Non-Executive Directors
In terms of the Code for Independent Directors, the Independent director(s) on the Board of the
Company should evaluate the performance of Non-independent director(s) which include non-
executive director(s). Peer Review method or external evaluation may also facilitate the purpose of
evaluating Non-executive directors. The broad parameters for reviewing the performance of Non-
executive Directors are:
• Participation at the Board / Committee meetings;
• Commitment (including guidance provided to senior management outside of Board/ Committee meetings);
• Effective deployment of knowledge and expertise;
• Effective management of relationship with stakeholders;
• Integrity and maintaining of confidentiality;
• Independence of behaviour and judgment; and
• Impact and influence.
4. Evaluation of Chairperson of the Board
The performance of the Chairperson is linked to both the functioning of the Board as a whole as well as the
performance of each director. The Code for Independent Directors provides that the Independent Directors
should review the performance of the Chairperson of the company taking into account the views of the
executive directors and non-executive directors.
Therefore, all the directors of the Board of the company thereof contribute in evaluating the performance of the
Chairperson of the Board. External agencies may also be involved in evaluating the Chairperson.
The broad parameters for reviewing the performance of Chairperson of the Board are:
• Managing relationship with the members of the Board and management;
• Demonstration of leadership qualities;
• Relationship and communication within the Board;
• Providing ease of raising of issues and concerns by the Board members; and
• Promoting constructive debate and effective decision making at the board;
• Relationship and effectiveness of communication with the shareholders and other stakeholders;
• Promoting shareholder confidence in the Board and;
• Personal attributes i.e. Integrity, Honesty, Knowledge, etc.
 Lesson 3 • Board Effectiveness 113

BOARD EFFECTIVENESS AND THE ROLE OF THE COMPANY SECRETARY

A Company Secretary acts as a vital link between the company and its Board of Directors, shareholders and other
stakeholders and regulatory authorities. A Company Secretary is a close confidante of the board and commands
confidence of individual directors so as to ensure that the culture of independence is promoted at the board and
committee meetings and at the level of individual directors.
As per Section 2(24) of the Companies Act, 2013, “company secretary” or “secretary” means a company secretary
as defined in clause (c) of sub-section (1) of section 2 of the Company Secretaries Act, 1980 who is appointed by a
company to perform the functions of a company secretary under this Act;
Under Section 2(60) of the Companies Act, 2013, the company secretary has also been included in the category of the officer
of the company and shall be considered to be in default in complying with any provisions of the Companies Act, 2013.
Company Secretary:
• acts as a vital link between the company and its Board of Directors, shareholders and other stakeholders
and regulatory authorities
• plays a key role in ensuring that the Board procedures are followed and regularly reviewed
• provides the Board with guidance as to its duties, responsibilities and powers under various laws, rules
and regulations
• acts as a compliance officer as well as an in-house legal counsel to advise the Board and the functional
departments of the company on various corporate, business, economic and tax laws
• is an important member of the corporate management team and acts as conscience keeper of the company.

The Companies Act, 2013 confers a special status to Company Secretary as the key managerial personnel and
has bracketed him along with Managing Director (MD) or Chief Executive Officer (CEO) or Manager, Whole-time
director(s) and Chief Financial Officer (CFO).
According to Section 203(1) of the Companies Act, 2013, read with Rule 8 of the Companies (Appointment and
Remuneration of Managerial Personnel) Rules, 2014, it is mandatory for every listed company and every other
public company having a paid up share capital of ten crore rupees or more to appoint a whole time Key Managerial
Personnel (KMP) including a whole time Company Secretary. Also a company other than a company covered above
which has a paid up share capital of ten crore rupees or more shall have a whole-time company secretary.
The company secretaries have also been empowered as secretarial auditors under section 204 of the Companies
Act, 2013. The Company Secretaries are recognised as advisors to the Board on the affairs of the Company and all
matters to ensure good Corporate Governance by the Companies Act itself. They are also required to guide the Board
of its own role, responsibilities and duties.
Regulation 6(1) of SEBI (LODR) Regulations, 2015 also provides that every listed entity shall appoint a qualified
company secretary as the compliance officer.
In order to enhance effectiveness of board functioning, the company secretary should report to the chairman on all board
governance matters. The company secretary should ensure the presentation of high-quality information to the board and
its committees. The company secretary can also add value by fulfilling, or procuring the fulfillment of, other requirements
of the Code on behalf of the chairman, in particular director induction and development. This should be in a manner that
is appropriate to the particular director, and which has the objective of enhancing that director’s effectiveness in the board
or board committees, consistent with the results of the board’s evaluation processes. The chairman and the company
secretary should periodically review whether the board and the company’s other governance processes, for example
board and committee evaluation, are fit for purpose, and consider any improvements or initiatives that could strengthen
the governance of the company. The company secretary’s effectiveness can be enhanced by his or her ability to build
relationships of mutual trust with the chairman, the senior independent director and the non-executive directors, while
maintaining the confidence of executive director colleagues.
114 Lesson 3 • PP-GRMCE

GUIDANCE ON BOARD EFFECTIVENESS

(Issued by FRC, UK – July 2018)
The primary purpose of the Guidance on Board Effectiveness (the Guidance) is to stimulate boards’ thinking on
how they can carry out their role and encourage them to focus on continually improving their effectiveness. The
Guidance on Board Effectiveness is includes commentary on areas such as culture, relations with the workforce
and wider shareholders and diversity. It also incorporates new sections on the workings of board committees,
notably the remuneration committee. Helpfully, the Guidance includes questions for boards to ask themselves
or, in some cases, to ask management, about effectiveness in key areas.
The Guidance is not mandatory and is not prescriptive. It contains suggestions of good practice to support
directors and their advisors in applying the Code.
The Guidance also includes some of the procedural aspects of governance and is intended to act as a reminder to
boards and their support teams that good practice and procedure should continue to be followed. The tools and
techniques for board effectiveness are suggested in the Guidance to assist companies in applying the Principles
of good corporate governance.

BOARD EFFECTIVENESS INDICATORS

Sample questions which can be used as a quick check for board effectiveness in any organization.
Are the majority of your board members independent from the organization?
• Do you have a set of required competencies articulated for your board (and committees), and do your
current board members as a whole display the entire set of required competencies?
• Do you have a board manual that articulates terms of reference for the board, board committees, individual
directors, and the code of conduct? Does it have a forward list of topics for the year?
• Does at least one member of the board have extensive experience in the industry of your organization?
• Does each director get a comprehensive orientation on the business of the organization and meet key
senior staff before the first board meeting?
• Are directors offered continuing education in governance or a program of director certification?
• Does each director display a keen interest or passion in the undertaking of the organization?
• Do directors regularly attend both board and committee meetings?
• Are directors encouraged and supported when asking difficult or awkward questions of management?
• Does the Chairman solicit views from each director specifically?
• Does the Chairman ask board members to refrain from expressing their personal views at the outset of a discussion?
• Does the Chair manage the timing of the board meetings to ensure there is sufficient time for discussion
after each topic addressed by management?
• Does the board regularly have outside experts attend to present on specific topics?
• Does the board have an in-camera meeting both before and after each board meeting? ? Does the board
retain an independent consultant to help evaluate director and board performance?
• At the beginning of a board meeting, do the committee chairs have an opportunity to summarize (verbally
or in writing) the issues addressed and decisions taken at prior committee meetings?
• Does the board have an effective system to provide board members with timely, relevant and reliable
financial and strategic information about the organization?
• Does the board review the risk identification and management system of the organization?
• Does the board approve the business plan and major expenditures?
• Does the board work with the CEO and senior staff to develop and review the strategic plan?
 Lesson 3 • Board Effectiveness 115

MODEL BOARD CHARTER

As a good practice companies may have a Board Charter which is intended as a tool to assist directors in fulfilling
their responsibilities as Board members. It sets out the respective roles, responsibilities and authorities of the
Board and of Management in the governance, management and control of the organization. This charter should
be read in conjunction with the Company’s Memorandum and Articles.
A Model Charter may include the following:
• The Role of the Board
• The Role of the CEO and Chairman
• The Role of the Company Secretary
• Directors Code of Conduct
• Conflicts of Interests
• Related Party transactions
• Board Members Qualifications, skills, etc.
• Board Meetings
• Delegation of Authority by the Board
• Role & power of Committees
• Committee Meetings
• Protocol for media contact and comment
• Hospitality and Gifts
• Board Evaluation
• Directors liability insurance
• Director Induction, training and familiarisation
• Non-Executive Director Remuneration
• Reimbursement of expenses.

LESSON ROUND UP
• The Board of Directors plays a pivotal role in ensuring good governance. The contribution of directors on the
Board is critical to the way a corporate conducts itself.
• Responsibilities of Board - to establish an organizational vision and mission, giving strategic direction and
advice, overseeing strategy implementation and performance, developing and evaluating the CEO, to ensure
the organization has sufficient and appropriate human resources, ensuring effective stakeholder relations,
risk mitigation, procuring resources.
• The board functions on the principle of majority or unanimity. A decision is taken on record if it is accepted
by the majority or all of the directors. A single director cannot take a decision.
• Executive director or ED is a common post in many organisations, but the Companies Act, 2013 does not
define the phrase.
• Non-executive directors do not get involved in the day-to-day running of the business.
• Independent directors are known to bring an objective view in board deliberations. They also ensure that
there is no dominance of one individual or special interest group or the stifling of healthy debate. They act as
the guardians of the interest of all shareholders and stakeholders, especially in the areas of potential conflict.
116 Lesson 3 • PP-GRMCE

• Board composition is one of the most important determinants of board effectiveness. A board should have a
mix of inside/Independent Directors with a variety of experience and core competence if it is to be effective
in setting policies and strategies and for judging the management’s performance objectively.
• The effectiveness of the board depends largely on the leadership skills, capabilities and commitment to
corporate governance practices of each individual director.
• The Chairman’s primary responsibility is for leading the Board and ensuring its effectiveness.
• Induction and continuous training of Directors is of utmost importance to keep them updated with latest
happenings in the company and major developments that impact the company.
• A formal evaluation of the board and of the individual directors is one potentially effective way to respond to
the demand for greater board accountability and effectiveness.
• An effective board evaluation requires the right combination of timing, content, process, and individuals.

GLOSSARY
Globalization Globalization implies the opening of local and nationalistic perspectives to a broader outlook of
an interconnected and interdependent world with free transfer of capital, goods, and services
across national frontiers. However, it does not include unhindered movement of labor and, as
suggested by some economists, may hurt smaller or fragile economies if applied indiscriminately.
Accountability The obligation of an individual or organization to account for its activities, accept responsibility
for them, and to disclose the results in a transparent manner. It also includes the responsibility
for money or other entrusted property.
Corporate The legal status of a corporation in the jurisdiction in which it was incorporated.
Citizen

Familiarization The Familiarization Programmes are aimed to familiarize the independent directors with the
Programmes company, their roles responsibilities in the company, nature of industry in which the company
operates and business model of the company by imparting suitable training sessions.

TEST YOURSELF
(These are meant for recapitulation only. Answers to these questions are not to be submitted for evaluation)
1. Mr. Dutta is the Chairman and CEO of ABC Ltd. Mr. Ramesh, Company Secretary of ABC Ltd. is of the opinion
that the role of Chairman and CEO be separated. Should the role of Chairman and CEO be separated?
2. ABC Ltd. is a FMCG company. You as a company Secretary are required to prepare a draft of valid questions
for the purpose of Board evaluation.
3. Write Short Notes on –
(a) Board Composition
(b) Training of Directors
(c) Board Charter
(d) Lead Independent Director
(e) Board Evaluation
 Board Processes Through
Lesson 4
Secretarial Standards
Key Concepts One Learning Objectives Regulatory Framework
Should Know
To understand the: • Section 118(10) of the Companies
• Agenda
• Board Processes like Convening a Act, 2013
• Minutes Meeting, • Secretarial Standard 1 ‘Meetings of
• Quorum • Frequency of Meetings, The Board of Directors’
• Timestamp • Quorum, • Section 173(2) of the Companies
• Electronic Mode • Attendance at Meetings, Act, 2013
• Secretarial Auditor • Passing of Resolution by • Rule 3 of the Companies (Meeting
Circulation, of Board and its Powers) Rules,
• Minutes Book
• Minutes, Preservation of Minutes 2014
• Secure Computer
and other Records, and
System
• Disclosures through Secretarial
Standard-1.

Lesson Outline
• Introduction
• SS-1: Meetings of the Board of Directors
• Board processes through Secretarial Standards
• Convening a Meeting
• Frequency of Meetings
• Quorum
• Attendance at Meetings
• Chairman
• Passing of Resolution by Circulation
• Minutes
• Preservation of Minutes and other Records
• Disclosures
• Meeting through Video Conferencing
• Relaxations granted due to covid-19
• LESSON ROUND-UP
• GLOSSARY
• TEST YOURSELF
118 Lesson 4 • PP-GRMCE

INTRODUCTION
There have been significant developments with regard to conduct of board meetings in the Companies Act
2013. The use of electronic mode for sending notice of meetings, passing of resolution by circulation and
other areas have been allowed. The Act has permitted directors to participate in board meetings through
video conferencing or other audio visual means. Certain new actions like issuance of securities, grant of loans,
guarantee or security, approval of financial statement and board’s report, diversification of business have been
identified for approval by directors in a board meeting. Requirement for holding board meeting every quarter
has been discontinued.
One significant development with regard to conduct of board meetings is observance of secretarial standards.
Secretarial Standards are a codified set of good governance practices which seek to integrate, harmonize and
standardise the diverse secretarial practices followed by companies with respect to conduct of Meetings and play
indispensable role in enhancing the corporate culture and governance across the organisations. According to Section
118 (10) of the Companies Act 2013, every company shall observe secretarial standards with respect to General
and Board meetings specified by the Institute of Company Secretaries of India and approved as such by the Central
Government.

Section 118 (10) of Companies Act 2013 - Every company shall observe secretarial standards with respect
to general and Board meetings specified by the Institute of Company Secretaries of India constituted
under section 3 of the Company Secretaries Act, 1980 (56 of 1980), and approved as such by the Central
Government.
(In case of Specified IFSC Public Company and Private Company- Sub-section (10) of section 118 Shall not apply.
- Notification Date 4th January, 2017)
In order to ensure high corporate governance standards, the Ministry of Corporate Affairs (MCA) has accorded its
approval to the following Secretarial Standards (“SS”) specified by the Institute of Company Secretaries of India
namely –
(i) SS-1: Meetings of the Board of Directors and;
(ii) SS-2: General Meetings
The Secretarial Standards were notified by the Institute of Company Secretaries of India in the Official Gazette and
were effective from July 1, 2015. In 2017, the ICSI has issued the Revised Secretarial Standards which has been
approved by the Central Government under Section 118(10) of the Companies Act, 2013 and were effective from
October 1st, 2017.
The ICSI has also issued Guidance Note based on the revised SS-1 effective from 1st October, 2017, incorporating the
amendments upto 31st December, 2020.
Prior to the promulgation of the Companies Act, 2013, the secretarial standards were recommendatory in nature.
With the historical moment of launching the Secretarial Standards by the MCA has marked a new era of healthy
secretarial practices among corporates.

SS-1: Meetings of the Board of Directors

Decisions relating to the policy and operations of the company are arrived at meetings of the Board held periodically.
Meetings of the Board enable discussions on matters placed before them and facilitate decision making based on
collective judgment of the Board. The fundamental principles with respect to Board Meetings are laid down in the
Act.
SS-1 facilitates compliance with these principles by endeavouring to provide further clarity where there is
ambiguity and establishing benchmark standards to harmonise prevalent diverse practices. For the benefit
of companies, SS-1 provides necessary flexibility in many cases viz. with respect to calling Meeting at shorter
notice, transacting any other business not contained in the agenda and passing of Resolutions by circulation.
Complying with SS-1 ensures a reliable Board process which protects the interests of the company and its
stakeholders.
Lesson 4 • Board Processes Through Secretarial Standards 119

Companies follow diverse secretarial practices which have evolved over a period of time through varied usages and
as a response to differing business cultures. With a view to integrate, harmonise and standardise such practices,
the ICSI has formulated Secretarial Standards. The objective of such standards is to make certain uniform corporate
practice, procedures and dealings relating to conduct of board meetings. Further, the Secretarial Standards has also
clarified certain provisions of the Act, where the law was either silent or ambiguous. However, these standards do
not overstep or modify the law in any way.
SS-1 requires Company Secretary to oversee the vital process of recording and facilitating implementation of the
decisions of the Board. Where there is no Company Secretary in the company or in the absence of the Company
Secretary, any Director or other Key Managerial Personnel (KMP) or any other person authorised by the Board for
this purpose may discharge such of the functions of the Company Secretary as given in SS-1.
This Standard is applicable to the Meetings of Board of Directors of all companies incorporated under the Act except
One Person Company.
The SS-1 seeks to ensure that a healthy and transparent procedure is followed for convening a board meeting. It
contains the detailed practices and procedures with regard to conduct of board meetings in companies.

Board processes through Secretarial Standards (SS-1)

1. Convening of a Meeting
Authority [Para 1.1 ] Any Director of a company may, at any time, summon a Meeting of the Board,
and the Company Secretary or where there is no Company Secretary, any person
authorised by the Board in this behalf, on the requisition of a Director, shall convene
a Meeting of the Board, in consultation with the Chairman or in his absence, the
Managing Director or in his absence, the Whole-time Director, where there is any,
unless otherwise provided in the Articles. [Para 1.1.1]
The Chairman may, unless dissented to or objected by the majority of Directors
present at a Meeting at which a Quorum is present, adjourn the Meeting for any
reason, at any stage of the Meeting. [Para 1.1.2]
Notes:
Upon consultation by the Company Secretary or the person authorised by the Board in this behalf, if the Chairman/
Managing Director/Whole-time Director, as the case may be, refuses to convene the Meeting as requisitioned,
the Company Secretary or the person authorised by the Board in this behalf, should act in accordance with the
provisions of the Articles in this regard.
In case the Articles are silent, the Company Secretary or the person authorised by the Board in this behalf cannot
convene a Meeting requisitioned by the Director and he should communicate the same to the Director concerned.
In any case, the Director may, on his own, convene a Meeting.
The authority to summon a meeting of the Board vest with the directors only. The Company Secretary cannot
summon a Meeting on his own, unless authorised by the Board of Directors or the Articles to do so.
Adjournment of a Meeting otherwise than for want of Quorum may be necessitated for paucity of time to complete
the Agenda or for any other reason viz. curfew, earthquakes or other events of force majeure etc.
Day, Time, Place, Mode and Every Meeting shall have a serial number. [Para 1.2.1]A Meeting may be convened
Serial Number of Meeting at any time and place, on any day. [Para 1.2.2]
[Para 1.2] (Notice of the Meeting shall clearly mention a venue, whether registered office or
otherwise, to be the venue of the Meeting and all the recordings of the proceedings
of the Meeting, if conducted through Electronic Mode, shall be deemed to be made
at such place.)
Any Director may participate through Electronic Mode in a Meeting unless the Act
or any other law specifically prohibits such participation through Electronic Mode
in respect of any item of business. [Para 1.2.3]
120 Lesson 4 • PP-GRMCE

Notes:
Numbering of meetings: While numbering serially, the company may choose to follow its existing system of
numbering, if any, or any new system of numbering, which should be distinct and enable ease of reference and/ or
cross reference. The company should follow a uniform and consistent system.
For example: 1/ 2020, 2/2020 and so on… and in next year 1/2021, 2/2021 and so on. Alternatively continuous
serially numbering across years viz: 120th Meeting, 121st Meeting and so on… Further the serial number of the
original and adjourned meeting should be same, viz: Original meeting No. is 12th Meeting, the serial number of the
adjourned Meeting should be 12th Meeting (Adjourned).
Board Meeting on Public Holiday: The Board Meeting may be convened on any day including the public
holiday, unless the Articles provide otherwise. Sub–section (4) of Section 174 of the Act prohibits holding of Board
Meetings adjourned for want of Quorum on National Holidays. However, law is not specifically prohibiting the
original meeting to be held on a National Holiday.
Adjourned Meeting: Unless the Articles of the company provide
Illustration
otherwise, a Meeting adjourned for want of Quorum should be held
on the same day at the same time and same place in the next week. A Meeting is convened on 8th August
If that day happens to be a National Holiday, then such adjourned at 4:00 p.m. at the Registered Office of
Meeting should be held on the next succeeding day which is not a the company. On that day, the required
National Holiday at the same time and place, unless the Articles of Quorum is not present. In the absence
the company provide otherwise. A notice in regard to the adjourned of any provisions to the contrary in the
Meeting should be given to all the Directors. Articles, the Meeting is automatically
adjourned to the same day in the next
Time of Meeting: A Meeting may be held at any time. However, week, i.e. 15th August, at the same time
this should be practically construed to mean a convenient time. As and place. However, since 15th August
detailed deliberations are expected to take place in Board Meetings, is a National Holiday, the adjourned
it is desirable to have Meetings during working hours, though the Meeting should be held on 16th August.
Meeting may continue beyond working hours.
Venue of Meeting: A Meeting may be held at the Registered Office of the company or at any other place, including
a remote place. A Meeting may be held in India or abroad. In case the Articles provide for a specific place or city in
which the Meetings should be held, the Meetings should be held only at that place or city. If a Meeting of the Board
is held elsewhere, contrary to such clause in the Articles, none of the decisions taken by the Board at such Meeting
can be put into operation in any manner.
Meeting conducted through Electronic Mode: With respect to every meeting conducted through video
conferencing or other audio visual means authorised under these rules, the scheduled venue of the meeting as set
forth in the notice convening the meeting, shall be deemed to be the place of the said meeting and all recordings of
the proceedings at the meeting shall be deemed to be made at such place. [Rule 3(6) of the Companies (Meetings
of Board and its Powers) Rules, 2014.
Participation of a Director in a Meeting via telephone or tele-conferencing or any other Mode which does not
conform to the requirements of the relevant provisions of the Act cannot be considered as participation of a
Director through Electronic Mode. If due to any technical issue emerged during the Meeting held through Electronic
Mode, a Director chooses to participate through telephone or tele-conferencing for remaining Meeting, then such
participation cannot be considered as participation of a Director through Electronic Mode and his presence should
not be counted for the purpose of quorum.
Communication by a Director of his intention to participate through Electronic Mode: If the director intends
to participate through video conferencing or other audio visual means, he shall give prior intimation to that effect
sufficiently in advance so that company is able to make suitable arrangements in this behalf. [Rule 3(3)(d) of the
Companies (Meetings of Board and its Powers) Rules, 2014].
Lesson 4 • Board Processes Through Secretarial Standards 121

A Director cannot participate in a Board Meeting through Electronic Mode from his end, since it is necessary for
the company to take due and reasonable care to safeguard the integrity of the Meeting held through Electronic
Mode by ensuring sufficient security and identification procedures.
Participation by all Directors through Electronic Mode: All the Directors may participate in a Meeting
through Electronic Mode. In such a case, at least one person, who may either be the Chairman or the Company
Secretary or in the absence of the Company Secretary, any other person duly authorised in this behalf by the
Chairman, should be physically present at the scheduled venue of the Meeting given in the Notice to enable
proper recording, to safeguard the integrity of the Meeting and to fulfil other requirements of law in this
regard.
Meetings of the Committee and the Board on the same day: There are no restrictions on Meetings of Committees
and of the Board being held on the same day, provided reasonable time gap is kept between the two Meetings.
Meetings of Audit Committee of Board and Board of Directors to consider the Financial Statements: In case
of equity listed companies, the gap between clearance of accounts by audit committee and board meeting should
be as narrow as possible and preferably on the same day to avoid leakage of material information. [Schedule B to
SEBI (Prohibition of Insider Trading) Regulations, 2015.
Notice [Para 1.3] Notice in writing of every Meeting shall be given to every Director by hand or
by speed post or by registered post or by facsimile or by e-mail or by any other
electronic means. [Para 1.3.1]
Notice shall be issued by the Company Secretary or where there is no Company
Secretary, any Director or any other person authorised by the Board for the
purpose. [Para 1.3.2]

The Notice shall specify the serial number, day, date, time and full address of the
venue of the Meeting.
The Notice shall inform the Directors about the option available to them
to participate through Electronic Mode and provide them all the necessary
information. [Para 1.3.3]
The Notice shall specify the serial number, day, date, time and full address of the
venue of the Meeting. [Para 1.3.3]
The Notice shall inform the Directors about the option available to them
to participate through Electronic Mode and provide them all the necessary
information. [Para 1.3.4]
The Notice of a Meeting shall be given even if Meetings are held on pre- determined
dates or at pre-determined intervals. [Para 1.3.5]
Notice convening a Meeting shall be given at least seven days before the date of
the Meeting, unless the Articles prescribe a longer period. [Para 1.3.6]
Notes:
A Meeting of the Board should be called by giving a Notice in writing to every Director [Sub–section (3) of Section
173 read with Rule 3(3)(a) of the Companies (Meetings of Board and its Powers) Rules, 2014].
“Electronic mail” means the message sent, received or forwarded in digital form using any electronic communication
mechanism that the message so sent, received or forwarded is storable and retrievable [Definition in Rule 2(1)(g)
of Companies (Specification of Definitions Details) Rules, 2014].
122 Lesson 4 • PP-GRMCE

Notice-where to send: The Notice shall be sent to the postal

address or e-mail address, registered by the Director with the
Illustration:
company or in the absence of such details or any change thereto,
any of such addresses appearing in the Director Identification The Articles of Association of XYZ Ltd.
Number (DIN) registration of the Director. Notice of the Meeting provides that all Notices of the Meetings
should be sent to the Directors at their address registered with of the Board and Committees thereof shall
be sent to all the members of the Board/
the company [Sub–section (3) of Section 173 of the Act read
Committees by e-mail or through speed post
with Rule 3(3) (a) of the Companies (Meetings of Board and its
or registered post with acknowledgment.
Powers) Rules, 2014].
Accordingly, the company is sending Notices
Notice Period: In line with sub–section (3) of Section 173 through speed post to all Directors.
of the Act, the requirement is to send seven days’ Notice However, Mr. A, Independent Director on the
and not seven clear days’ Notice. Thus, for the purpose of Board of XYZ Ltd. requested the company to
computing the period of seven days, the date of the Meeting send all such Notices to him through courier
should be excluded but the date of Notice need not be at his office.
excluded. Since, Mr. A has specified a particular means
Section 173(3) of the provides that a meeting of the Board shall of delivery of Notice, the company should
be called by giving not less than seven days’ notice in writing send Notice of the Meetings through such
to every director at his address registered with the company means to him.
and such notice shall be sent by hand delivery or by post or by
electronic means:
Provided that a meeting of the Board may be called at shorter notice to transact urgent business subject to the
condition that at least one independent director, if any, shall be present at the meeting:
Provided further that in case of absence of independent directors from such a meeting of the Board, decisions
taken at such a meeting shall be circulated to all the directors and shall be final only on ratification thereof by at
least one independent director, if any.
Agenda and Notes on Agenda The Agenda, setting out the business to be transacted at the Meeting, and Notes
[Para 1.3] on Agenda shall be given to the Directors at least seven days before the date of the
Meeting, unless the Articles prescribe a longer period. [Para 1.3.7]

Each item of business requiring approval at the Meeting shall be supported

by a note setting out the details of the proposal, relevant material facts that enable
the Directors to understand the meaning, scope and implications of the proposal
and the nature of concern or interest, if any, of any Director in the proposal, which
the Director had earlier disclosed. [Para 1.3.8]
Each item of business to be taken up at the Meeting shall be serially numbered.
[Para 1.3.9]
Any item not included in the Agenda may be taken up for consideration with the
permission of the Chairman and with the consent of a majority of the Directors
present in the Meeting. [Para 1.3.10]
To transact urgent business, the Notice, Agenda and Notes on Agenda may be given
at shorter period of time than stated above, if at least one Independent Director, if
any, shall be present at such Meeting. [Para 1.3.11]
Notes:
Notes on items of business which are in the nature of Unpublished Price Sensitive Information may be given at a
shorter period of time than stated above, with the consent of a majority of the Directors, which shall include at
least one Independent Director, if any.
If no Independent Director is present, decisions taken at such a Meeting shall be circulated to all the Directors and
shall be final only on ratification thereof by at least one Independent Director, if any.
Lesson 4 • Board Processes Through Secretarial Standards 123

In case the company does not have an Independent Director, the decisions shall be final only on ratification thereof
by a majority of the Directors of the company, unless such decisions were approved at the Meeting itself by a
majority of Directors of the company.
Where approval by means of a Resolution is required, the draft of such Resolution shall be either set out in the note
or placed at the Meeting. However, any other decision taken at the Meeting may also be recorded in the Minutes
in the form of Resolution. The items of business that are required by the Act or any other applicable law to be
considered at a Meeting of the Board shall be placed before the Board at its Meeting. An illustrative list of such
items is given at Annexure ‘A’.
There are certain items which shall be placed before the Board at its first Meeting. An illustrative list thereof is
given at Annexure ‘B’.

Illustration
Assume there are 9 Directors and 5 have given their general consent at the beginning of the financial year to
give Notes on items of Agenda which are in the nature of UPSI at shorter Notice. If 1 new Director is appointed,
consent from the new Director to circulate Agenda items which are in the nature of UPSI at a shorter Notice
may be obtained individually.
If this Director gives his consent, no fresh consent from the Board would be needed. In case, this Director
dissents or does not give his consent, fresh consent should be taken from the Board.

2. Frequency of Meetings [Para 2]

Meetings of the Board The company shall hold at least four Meetings of its Board in each Calendar
[Para 2.1] Year with a maximum interval of one hundred and twenty days between any
two consecutive Meetings. [Para 2.1]
Meetings of the Committees Committees shall meet as often as necessary subject to the minimum number
[Para 2.2] and frequency prescribed by any law or any authority or as stipulated by the
Board. [Para 2.2]
Meeting of Independent Directors Where a company is required to appoint Independent Directors under the
[Para 2.3] Act, such Independent Directors shall meet at least once in a Calendar Year.
[Para 2.3]
Notes:

The Meeting shall be held to review the performance of Non-Independent Directors and the Board as a whole; to
review the performance of the Chairman and to assess the quality, quantity and timeliness of flow of information
between the company management and the Board and its members that is necessary for the Board to effectively
and reasonably perform their duties.

The Company Secretary, wherever appointed, shall facilitate convening and holding of such Meeting, if so desired
by the Independent Directors.

Illustration:
If a company is incorporated on 15th June, the first Meeting should be held within thirty days i.e. latest
by 14th July. if the meeting is held say on 10th July, then the next Meeting should be held within 120 days
from 10th July.
124 Lesson 4 • PP-GRMCE

3. Quorum [Para 3]
General Provisions Quorum shall be present throughout the Meeting. [Para 3.1]
[Para 3] Quorum shall be present not only at the time of commencement of the Meeting but
also while transacting business.
A Director shall neither be reckoned for Quorum nor shall be entitled to participate
in respect of an item of business in which he is interested. However, in case of a
private company, a Director shall be entitled to participate in respect of such item
after disclose of this interest. [Para 3.2]
Directors participating through Electronic Mode in a Meeting shall be counted for
the purpose of Quorum, unless they are to be excluded for any items of business
under the provisions of the Act or any other law. [ Para 3.3]
Meetings of the Board The Quorum for a Meeting of the Board shall be one-third of the total strength of
[Para 3.4] the Board, or two Directors, whichever is higher. [Para 3.4.1]
Where the number of Directors is reduced below the minimum fixed by the
Articles, no business shall be transacted unless the number is first made up by the
remaining Director(s) or through a General Meeting. [Para 3.4.2]
Illustration
If, out of a total strength of fifteen Directors as fixed by the company in General
Meeting, four places are vacant, then the actual strength of the Board for the
purpose of computing the Quorum should be eleven and not fifteen.

Meetings of Committees Unless otherwise stipulated in the Act or the Articles or under any other law,
[Para 3.5] the Quorum for Meetings of any Committee constituted by the Board shall be
as specified by the Board. If no such Quorum is specified, the presence of all the
members of any such Committee is necessary to form the Quorum. [Para 3.5]
4. Attendance at Meetings [Para 4]
Attendance Register Every company shall maintain attendance register for the Meetings of the Board
[Para 4.1] and Meetings of the Committee. [Para 4.1.1]
The attendance register shall contain the following particulars: serial number and
date of the Meeting; in case of a Committee Meeting name of the Committee; place
of the Meeting; time of the Meeting; names and signatures of the Directors, the
Company Secretary and also of persons attending the Meeting by invitation and
their mode of presence, if participating through Electronic Mode. [ Para 4.1.2]
The attendance register shall be deemed to have been signed by the Directors
participating through Electronic Mode, if their attendance is recorded in the
attendance register and authenticated by the Company Secretary or where there
is no Company Secretary, by the Chairman or by any other Director present at the
Meeting, if so authorised by the Chairman and the fact of such participation is also
recorded in the Minutes. [Para 4.1.3]
The attendance register shall be maintained at the Registered Office of the company
or such other place as may be approved by the Board.[Para 4.1.4]
The attendance register is open for inspection by the Directors. Even after a person
ceases to be a Director, he shall be entitled to inspect the attendance register of the
Meetings held during the period of his Directorship.[Para 4.1.5]
The attendance register shall be preserved for a period of at least eight financial
years from the date of last entry made therein and may be destroyed thereafter
with the approval of the Board. [Para 4.1.6]
The attendance register shall be in the custody of the Company Secretary.[Para 4.1.7]
Lesson 4 • Board Processes Through Secretarial Standards 125

Notes:
The pages of the attendance register shall be serially numbered.
If an attendance register is maintained in loose-leaf form, it shall be bound periodically, atleast once in every three
years.
In case of Directors participating through Electronic Mode, the Chairman shall confirm the attendance of such
Directors.
Where there is no Company Secretary, the attendance register shall be in the custody of any other person authorised
by the Board for this purpose.

Illustration
In case the attendance register contains the attendance record of a Meeting held on 5th May, 2010 as the first
entry and 18th March, 2015 as the last entry, the attendance register should be preserved at least up to 31st
March, 2023 i.e. for eight financial years from 31st March, 2015 since the last entry therein is 18th March,
2015.

Leave of absence Leave of absence shall be granted to a Director only when a request for such leave
[Para 4.2] has been communicated to the Company Secretary or to the Chairman or to any
other person authorised by the Board to issue Notice of the Meeting. [Para 4.2]
Notes: The office of a Director shall become vacant in case the Director absents himself from all the Meetings of
the Board held during a period of twelve months with or without seeking leave of absence of the Board.

5. Chairman [Para 5]
Meetings of the Board The Chairman of the company shall be the Chairman of the Board. If the company
[Para 5.1] does not have a Chairman, the Directors may elect one of themselves to be the
Chairman of the Board. [Para 5.1.1]
The Chairman of the Board shall conduct the Meetings of the Board. If no such
Chairman is elected or if the Chairman is unable to attend the Meeting, the
Directors present at the Meeting shall elect one of themselves to chair and conduct
the Meeting, unless otherwise provided in the Articles. [Para 5.1.2]
Notes:
If the Chairman is interested in an item of business, he shall entrust the conduct of the proceedings in respect of
such item to any Non-Interested Director with the consent of the majority of Directors present and resume the
chair after that item of business has been transacted. However, in case of a private company, the Chairman may
continue to chair and participate in the Meeting after disclosure of his interest.
If the item of business is a related party transaction, the Chairman shall not be present at the Meeting, whether
physically or through Electronic Mode, during discussions and voting on such item.
Meetings of Committees A member of the Committee appointed by the Board or elected by the Committee
[Para 5.2] as Chairman of the Committee, in accordance with the Act or any other law or the
Articles, shall conduct the Meetings of the Committee. If no Chairman has been so
elected or if the elected Chairman is unable to attend the Meeting, the Committee
shall elect one of its members present to chair and conduct the Meeting of the
Committee, unless otherwise provided in the Articles. [Para 5.2]
126 Lesson 4 • PP-GRMCE

6. Passing of Resolution by Circulation [Para 6]

Authority The Chairman of the Board or in his absence, the Managing Director or in their absence,
[Para 6.1] any Director other than an Interested Director, shall decide, before the draft Resolution
is circulated to all the Directors, whether the approval of the Board for a particular
business shall be obtained by means of a Resolution by circulation. [Para 6.1.1]
Where not less than one-third of the total number of Directors for the time being
require the Resolution under circulation to be decided at a Meeting, the Chairman
shall put the Resolution for consideration at a Meeting of the Board. [Para 6.1.2]
Notes:
An illustrative list of items which shall be placed before the Board at its Meeting and shall not be passed by
circulation is given at Annexure A.
Interested Directors shall not be excluded for the purpose of determining the above one-third of the total number
of Directors.
Illustration:
A company has 9 Directors, out of which say, 3 Directors are interested in the Resolution. In such a case, for
the purpose of reckoning the 1/3rd stipulation as above, the total number of Directors should be taken as 9
and not 6 (9-3 Interested Directors). Thus, if 3 Directors (1/3rd of 9), (which number may include Interested
Directors), require the Resolution under circulation to be decided at a Meeting, the Resolution by circulation
should not be proceeded with. However, this does not mean that Interested Directors shall be entitled to
participate and vote when the said item of business is taken up at a Meeting of the Board.

Procedure A Resolution proposed to be passed by circulation shall be sent in draft, together

[Para 6.2] with the necessary papers, to all the Directors including Interested Directors on
the same day. [Para 6.2.1]
The draft of the Resolution to be passed and the necessary papers shall be
circulated amongst the Directors by hand, or by speed post or by registered post or
by courier, or by e-mail or by any other recognised electronic means. [Para 6.2.2]
Each business proposed to be passed by way of Resolution by circulation shall be
explained by a note setting out the details of the proposal, relevant material facts
that enable the Directors to understand the meaning, scope and implications of the
proposal, the nature of concern or interest, if any, of any Director in the proposal,
which the Director had earlier disclosed and the draft of the Resolution proposed.
The note shall also indicate how a Director shall signify assent or dissent to the
Resolution proposed and the date by which the Director shall respond. [Para 6.2.3]
Notes:
The draft of the Resolution and the necessary papers shall be sent to the postal address or e-mail address registered
by the Director with the company or in the absence of such details or any change thereto, any of the addresses
appearing in the Director Identification Number (DIN) registration of the Director.
Approval The Resolution is passed when it is approved by a majority of the Directors entitled
[Para 6.3] to vote on the Resolution, unless not less than one-third of the total number of
Directors for the time being require the Resolution under circulation to be decided
at a Meeting. [Para 6.3.1]
The Resolution, if passed, shall be deemed to have been passed on the earlier of:
(a) the last date specified for signifying assent or dissent by the Directors, or
(b) the date on which assent has been received from the required majority,
provided that on that date the number of Directors, who have not yet
responded on the resolution under circulation, along with the Directors who
have expressed their desire that the resolution under circulation be decided
at a Meeting of the Board, shall not be one third or more of the total number
of Directors; and shall be effective from that date, if no other effective date is
specified in such Resolution. [Para 6.3.2]
Lesson 4 • Board Processes Through Secretarial Standards 127

Notes:
An Interested Director shall not be entitled to vote. For this purpose, a Director shall be treated as interested in a
contract or arrangement entered or proposed to be entered into by the company: (a) with any body corporate, if
such Director, along with other Directors holds more than two percent of the paid-up share capital of that body
corporate, or he is a promoter, or manager or chief executive officer of that body corporate; or (c) with a firm or
other entity, if such Director is a partner, owner or Member, as the case may be, of that firm or other entity.
Directors shall signify their assent or dissent by signing the Resolution to be passed by circulation or by e-mail or
any other electronic means.
In case the Director does not respond on or before the last date specified for signifying assent or dissent, it shall
be presumed that the Director has abstained from voting.
If the approval of the majority of Directors entitled to vote is not received by the last date specified for receipt of
such approval, the Resolution shall be considered as not passed.
Illustration:
If, out of the Board strength of 10 Directors, 6 Directors communicate their assent, the Resolution shall not be
considered as passed until the stipulated last date has expired, or, if ahead of the said date, 2 more Directors
have also signified their assent/dissent so that the possibility of 1/3rd asking for a physical Meeting is no
longer possible.
Recording [Para 6.4] Resolutions passed by circulation shall be noted at a subsequent Meeting of the
Board and the text thereof with dissent or abstention, if any, shall be recorded in
the Minutes of such Meeting.[Para 6.4]
Validity [Para 6.5] Passing of Resolution by circulation shall be considered valid as if it had been
passed at a duly convened Meeting of the Board. [Para 6.5]

7. Minutes [Para 7]
Maintenance of Minutes Minutes shall be recorded in books maintained for that purpose. [Para 7.1.1]
[Para 7.1] A distinct Minutes Book shall be maintained for Meetings of the Board and each of
its Committees. [Para 7.1.2]
A company may maintain its Minutes in physical or in electronic form. [Para 7.1.3]
The pages of the Minutes Books shall be consecutively numbered. [Para 7.1.4]
Minutes shall not be pasted or attached to the Minutes Book, or tampered with in
any manner. [Para 7.1.5]
Minutes Books, if maintained in loose-leaf form, shall be bound periodically
depending on the size and volume and coinciding with one or more financial years
of the company. [Para 7.1.6]
Minutes Books shall be kept at the Registered Office of the company or at such
other place as may be approved by the Board. [Para 7.1.7]
Notes:
Minutes may be maintained in electronic form in such manner as prescribed under the Act and as may be decided
by the Board. Minutes in electronic form shall be maintained with Timestamp.
General Contents of Minutes Minutes shall state, at the beginning the serial number and type of the Meeting,
[Para 7.2.1] name of the company, day, date, venue and time of commencement of the Meeting.
[Para 7.2.1.1]
Minutes shall record the names of the Directors present physically or through
Electronic Mode, the Company Secretary who is in attendance at the Meeting and
Invitees, if any, including Invitees for specific items. [Para 7.2.1.2]
Minutes shall contain a record of all appointments made at the Meeting. [Para 7.2.1.3]
128 Lesson 4 • PP-GRMCE

Notes:
In respect of a Meeting adjourned for want of Quorum, a statement to that effect by the Chairman or in his absence,
by any other Director present at the Meeting shall be recorded in the Minutes.
The names of the Directors shall be listed in alphabetical order or in any other logical manner, but in either case
starting with the name of the person in the Chair.
Specific Contents of Minutes Minutes shall inter-alia contain:
[Para 7.2.2] (a) The name(s) of Directors present and their mode of attendance, if through
Electronic Mode.
(b) In case of a Director participating through Electronic Mode, his particulars,
the location from where he participated and wherever required, his consent
to sign the statutory registers placed at the Meeting.
(c) The name of Company Secretary who is in attendance and Invitees, if any, for
specific items and mode of their attendance if through Electronic Mode.
(d) Record of election, if any, of the Chairman of the Meeting.
(e) Record of presence of Quorum.
(f) The names of Directors who sought and were granted leave of absence.
(g) Noting of the Minutes of the preceding Meeting.
(h) Noting the Minutes of the Meetings of the Committees.
(i) The text of the Resolution(s) passed by circulation since the last Meeting,
including dissent or abstention, if any.
(j) The fact that an Interested Director did not participate in the discussions
and did not vote on item of business in which he was interested and in case
of a related party transaction such director was not present in the meeting
during discussions and voting on such item.
(k) The views of the Directors particularly the Independent Director, if
specifically insisted upon by such Directors, provided these, in the opinion of
the Chairman, are not defamatory of any person, not irrelevant or immaterial
to the proceedings or not detrimental to the interests of the company.
(l) If any Director has participated only for a part of the Meeting, the Agenda
items in which he did not participate.
(m) The fact of the dissent and the name of the Director who dissented from the
Resolution or abstained from voting thereon.
(n) Ratification by Independent Director or majority of Directors, as the case
may be, in case of Meetings held at a shorter Notice.
(o) Consideration of any item other than those included in the Agenda with the
consent of majority of the Directors present at the Meeting and ratification
of the decision taken in respect of such item by a majority of Directors of the
company.
(p) The time of commencement and conclusion of the Meeting. [Para 7.2.2.1]
Apart from the Resolution or the decision, Minutes shall mention the brief
background of all proposals and summarise the deliberations thereof. In case of
major decisions, the rationale thereof shall also be mentioned. [Para 7.2.2.2]
Lesson 4 • Board Processes Through Secretarial Standards 129

Recording of Minutes Minutes shall contain a fair and correct summary of the proceedings of the Meeting.
[Para 7.3] [Para 7.3.1]
Minutes shall be written in clear, concise and plain language. [Para 7.3.2]
Wherever the decision of the Board is based on any unsigned documents including
reports or notes or presentations tabled or presented at the Meeting, which
were not part of the Notes on Agenda and are referred to in the Minutes, shall
be identified by initialling of such documents by the Company Secretary or the
Chairman. [Para 7.3.3]
Where any earlier Resolution(s) or decision is superseded or modified, Minutes
shall contain a specific reference to such earlier Resolution(s) or decision or state
that the Resolution is in supersession of all earlier Resolutions passed in that
regard. [Para 7.3.4]
Minutes of the preceding Meeting shall be noted at a Meeting of the Board held
immediately following the date of entry of such Minutes in the Minutes Book. [Para
7.3.5]

Illustration:
A Board Meeting was held on 1st July 2020 and the next Board Meeting is
scheduled to be held on 25th July 2020.
If the minutes of the first Board Meeting are entered in the minutes books
before the date of next Board Meeting i.e. 25th July, 2020, the same should be
placed for noting thereat. If the minutes are yet to be entered in the minutes
books, the same should be placed at the subsequent Board Meeting following
the entry of minutes in the minutes books.

Finalisation of Minutes Within fifteen days from the date of the conclusion of the Meeting of the Board or
[Para 7.4] the Committee, the draft Minutes thereof shall be circulated by hand or by speed
post or by registered post or by courier or by e-mail or by any other recognised
electronic means to all the members of the Board or the Committee, as on the date
of the Meeting, for their comments. [Para 7.4]

Illustration
If the Meeting is held and concluded on 1st September, 2015, the Minutes
should be circulated latest by 15th September, 2015 and the receipt of the
same by the Directors thereafter would be in compliance.

Entry in the Minutes Book Minutes shall be entered in the Minutes Book within thirty days from the date of
[Para 7.5] conclusion of the Meeting. [Para 7.5.1]
The date of entry of the Minutes in the Minutes Book shall be recorded by the
Company Secretary. [Para 7.5.2]
Minutes, once entered in the Minutes Book, shall not be altered. Any alteration in
the Minutes as entered shall be made only by way of express approval of the Board
at its subsequent Meeting at which the Minutes are noted by the Board and the fact
of such alteration shall be recorded in the Minutes of such subsequent Meeting.
[Para 7.5.3]
130 Lesson 4 • PP-GRMCE

Signing and Dating of Minutes of the Meeting of the Board shall be signed and dated by the Chairman of
Minutes [Para 7.6] the Meeting or by the Chairman of the next Meeting. [Para 7.6.1]
The Chairman shall initial each page of the Minutes, sign the last page and append
to such signature the date on which and the place where he has signed the Minutes.
[Para 7.6.2]
Minutes, once signed by the Chairman, shall not be altered, save as mentioned in
this Standard. [Para 7.6.3]
Within fifteen days of signing of the Minutes, a copy of the said signed Minutes,
certified by the Company Secretary or where there is no Company Secretary by
any Director authorised by the Board, shall be circulated to all the Directors, as on
the date of the Meeting and appointed thereafter, except to those Directors who
have waived their right to receive the same either in writing or such waiver is
recorded in the Minutes. [Para 7.6.4]
Inspection and Extracts of The Minutes of Meetings of the Board and any Committee thereof can be inspected
Minutes [Para 7.7.] by the Directors. [Para 7.7.1]
Extracts of the Minutes shall be given only after the Minutes have been duly
entered in the Minutes Book. However, certified copies of any Resolution passed at
a Meeting may be issued even earlier, if the text of that Resolution had been placed
at the Meeting. [Para 7.7.2]
Notes:
A Director is entitled to receive, a copy of the Minutes of a Meeting held before the period of his Directorship.
A Director is entitled to receive a copy of the signed Minutes of a Meeting held during the period of his Directorship,
even if he ceases to be a Director.

8. Preservation of Minutes and other Records [Para 8]

Preservation of Minutes and Minutes of all Meetings shall be preserved permanently in physical or in electronic
other Records [Para 8] form with Timestamp. [Para 8.1]
Office copies of Notices, Agenda, Notes on Agenda and other related papers shall
be preserved in good order in physical or in electronic form for as long as they
remain current or for eight financial years, whichever is later and may be destroyed
thereafter with the approval of the Board. [Para 8.2]
Minutes Books shall be in the custody of the Company Secretary. [Para 8.3]
Notes:
Where, under a scheme of arrangement, a company has been merged or amalgamated with another company,
Minutes of all Meetings of the transferor company, as handed over to the transferee company, shall be preserved
permanently by the transferee company, notwithstanding that the transferor company might have been dissolved.

9. Disclosures:
Disclosures [Para 9] The Report of the Board of Directors shall include a statement on compliances of
applicable Secretarial Standards. [Para 9]
Lesson 4 • Board Processes Through Secretarial Standards 131

Annexure ‘A’
[Refer Para 1.3.8]
Illustrative list of items of business which shall not be passed by circulation and shall be placed before the
Board at its Meeting
General Business Items
• Noting Minutes of Meetings of Audit Committee and other Committees.
• Approving financial statements and the Board’s Report.
• Considering the Compliance Certificate to ensure compliance with the provisions of all the laws applicable
to the company.
• Specifying list of laws applicable specifically to the company.
• Appointment of Secretarial Auditors and Internal Auditors.
Specific Items
• Borrowing money otherwise than by issue of debentures.
• Investing the funds of the company.
• Granting loans or giving guarantee or providing security in respect of loans.
• Making political contributions.
• Making calls on shareholders in respect of money unpaid on their shares.
• Approving Remuneration of Managing Director, Whole-time Director and Manager.
• Appointment or Removal of Key Managerial Personnel.
• Appointment of a person as a Managing Director / Manager in more than one company.
• In case of a public company, the appointment of Director(s) in casual vacancy subject to the provisions in the
Articles of the company.
• According sanction for related party transactions which are not in the ordinary course of business or which
are not on arm’s length basis.
• Sale of subsidiaries.
• Purchase and Sale of material tangible/intangible assets not in the ordinary course of business.
• Approve Payment to Director for loss of office.
• Items arising out of separate Meeting of the Independent Directors if so decided by the Independent Directors.
Corporate Actions
• Authorise Buy-Back of securities.
• Issue of securities, including debentures, whether in or outside India.
• Approving amalgamation, merger or reconstruction.
• Diversify the business.
• Takeover another company or acquiring controlling or substantial stake in another company.
Additional list of items in case of listed companies
• Approving Annual operating plans and budgets.
• Capital budgets and any updates.
• Information on remuneration of Key Managerial Personnel.
• Show cause, demand, prosecution notices and penalty notices which are materially important.
132 Lesson 4 • PP-GRMCE

• Fatal or serious accidents, dangerous occurrences, any material effluent or pollution problems.
• Any material default in financial obligations to and by the company, or substantial non-payment for goods
sold by the company.
• Any issue, which involves possible public or product liability claims of substantial nature, including any
judgement or order which, may have passed strictures on the conduct of the company or taken an adverse
view regarding another enterprise that can have negative implications on the company.
• Details of any joint venture or collaboration agreement.
• Transactions that involve substantial payment towards goodwill, brand equity, or intellectual property.
• Significant labour problems and their proposed solutions. Any significant development in Human
Resources/ Industrial Relations front like signing of wage agreement, implementation of Voluntary
Retirement Scheme etc.
• Quarterly details of foreign exchange exposures and the steps taken by management to limit the risks of
adverse exchange rate movement, if material.
• Non-compliance of any regulatory, statutory or listing requirements and shareholder services such as non-
payment of dividend, delay in share transfer etc.

Annexure ‘B’
(Para 1.3.8)
Illustrative list of items of business for the Agenda for the First Meeting of the Board of the company
1. To appoint the Chairman of the Meeting.
2. To note the Certificate of Incorporation of the company, issued by the Registrar of Companies.
3. To take note of the Memorandum and Articles of Association of the company, as registered.
4. To note the situation of the Registered Office of the company and ratify the registered document of the
title of the premises of the registered office in the name of the company or a Notarised copy of lease / rent
agreement in the name of the company.
5. To note the first Directors of the company.
6. To read and record the Notices of disclosure of interest given by the Directors.
7. To consider appointment of Additional Directors.
8. To consider appointment of the Chairman of the Board.
9. To consider appointment of the first Auditors.
10. To adopt the Common Seal of the company, if any.
11. To appoint Bankers and to open bank accounts of the company.
12. To authorise printing of share certificates and correspondence with the depositories, if any.
13. To authorise the issue of share certificates to the subscribers to the Memorandum and Articles of Association
of the company.
14. To approve and ratify preliminary expenses and preliminary agreements.
15. To approve the appointment of the Key Managerial Personnel, if applicable and other senior officers.
 Lesson 4 • Board Processes Through Secretarial Standards 133

Some Good Practices in Convening Board Meetings

Maintaining Annual Calendar: An Annual calendar that schedules the Board and committee meetings
and accordingly dates by which action required is accomplished is an effective planner for the year. The
planner schedules in advance the events so that both the providers of inputs and receivers of inputs can
plan their work systematically.
Directors’ Time Commitment: Directors typically should allocate at least as much time for preparation
as for the board meeting itself. With strategy retreats or “away days,” travel, reading, meeting preparation
time, and attendance at ad hoc and committee meetings, directors usually spend three or four days
per month for a single, non-executive director position. The time spent to prepare for audit committee
meetings is normally longer than that for most other board meetings. Directors should always evaluate the
demands on their time before allowing themselves to be considered for an appointment. Directors should
disclose any other board or external appointment to the nomination committee before their appointment,
and regularly update the board after appointment.

MEETING THROUGH VIDEO CONFERENCING

Section 173(2) of Companies Act, 2013 read with Rule 3 of the Companies (Meetings of Board and its Powers) Rules,
2014, provides that the participation of directors in a meeting of the Board may be either in person or through video
conferencing or other audio visual means as may be prescribed, which are capable of recording and recognizing the
participation of the directors and of recording and storing the proceedings of such meetings along with date and
time.
Provided that the Central Government may, by notification, specify such matters which shall not be dealt with in a
meeting through video conferencing or other audio visual means.
Provided further that where there is quorum in a meeting through physical presence of directors, any other director
may participate through video conferencing or other audio visual means in such meeting on any matter specified
under the first proviso.
The Complete process for conducting of Board Meeting through video conferencing is prescribed under
Rule 3 of the Companies (Meetings of Board and its Powers) Rules, 2014 read with Secretarial Standard – 1.

Rule 3 of The Companies (Meetings of Board and its Powers) Rules, 2014
Meetings of Board Through Video Conferencing or Other Audio Visual Means 
A company shall comply with the following procedure, for convening and conducting the Board meetings
through video conferencing or other audio visual means.
1. Every Company shall make necessary arrangements to avoid failure of video or audio visual connection.
2. The Chairperson of the meeting and the company secretary, if any, shall take due and reasonable care –
(a) to safeguard the integrity of the meeting by ensuring sufficient security and identification procedures;
(b) to ensure availability of proper video conferencing or other audio visual equipment or facilities for
providing transmission of the communications for effective participation of the directors and other
authorised participants at the Board meeting;
(c) to record proceedings and prepare the minutes of the meeting;
(d) to store for safekeeping and marking the tape recording(s) or other electronic recording mechanism
as part of the records of the company at least before the time of completion of audit of that particular
year;
(e) to ensure that no person other than the concerned director are attending or have access to the
proceedings of the meeting through video conferencing mode or other audio visual means; and
134 Lesson 4 • PP-GRMCE

(f) to ensure that participants attending the meeting through audio visual means are able to hear and see
the other participants clearly during the course of the meeting.
Provided that the persons, who are differently abled, may make request to the Board to allow a person to
accompany him.
3. (a) The notice of the meeting shall be sent to all the directors in accordance with the provisions of sub-
section (3) of section 173 of the Act.
(b) The notice of the meeting shall inform the directors regarding the option available to them to
participate through video conferencing mode or other audio visual means, and shall provide all the
necessary information to enable the directors to participate through video conferencing mode or
other audio visual means.
(c) A director intending to participate through video conferencing or audio visual means shall
communicate his intention to the Chairperson or the company secretary of the company.
(d) If the director intends to participate through video conferencing or other audio visual means, he shall
give prior intimation to that effect sufficiently in advance so that company is able to make suitable
arrangements in this behalf.
(e) Any director who intends to participate in the meeting through electronic mode may intimate about
such participation at the beginning of the calendar year and such declaration shall be valid for one year.
Provided that such declaration shall not debar him from participation in the meeting in person in which
case he shall intimate the company sufficiently in advance of his intention to participate in person.”
(f) In the absence of any intimation under clause (c), it shall be assumed that the director shall attend the
meeting in person.
4. At the commencement of the meeting, a roll call shall be taken by the Chairperson when every director
participating through video conferencing or other audio visual means shall state, for the record, the
following namely:-
(a) name;
(b) the location from where he is participating; 
(c) that he has received the agenda and all the relevant material for the meeting; and
(d) that no one other than the concerned director is attending or having access to the proceedings of the
meeting at the location mentioned in clause (b).
5. (a) After the roll call, the Chairperson or the Company Secretary shall inform the Board about the names
of persons other than the directors who are present for the said meeting at the request or with the
permission of the Chairperson and confirm that the required quorum is complete.
Explanation.- A director participating in a meeting through video conferencing or other audio visual
means shall be counted for the purpose of quorum, unless he is to be excluded for any items of
business under any provisions of the Act or the rules.
(b) The Chairperson shall ensure that the required quorum is present throughout the meeting.
6. With respect to every meeting conducted through video conferencing or other audio visual means
authorised under these rules, the scheduled venue of the meeting as set forth in the notice convening
the meeting 1[Omitted], shall be deemed to be the place of the said meeting and all recordings of the
proceedings at the meeting shall be deemed to be made at such place.
 Lesson 4 • Board Processes Through Secretarial Standards 135

7. The statutory registers which are required to be placed in the Board meeting as per the provisions of the Act
shall be placed at the scheduled venue of the meeting and where such registers are required to be signed by
the directors, the same shall be deemed to have been signed by the directors participating through electronic
mode, if they have given their consent to this effect and it is so recorded in the minutes of the meeting. 
8. (a) Every participant shall identify himself for the record before speaking on any item of business on the agenda.
(b) If a statement of a director in the meeting through video conferencing or other audio visual means is
interrupted or garbled, the Chairperson or Company Secretary shall request for a repeat or reiteration
by the Director.
9. If a motion is objected to and there is a need to put it to vote, the Chairperson shall call the roll and note the
vote of each director who shall identify himself while casting his vote.
10. From the commencement of the meeting and until the conclusion of such meeting, no person other than
the Chairperson, Directors, Company Secretary and any other person whose presence is required by the
Board shall be allowed access to the place where any director is attending the meeting either physically or
through video conferencing without the permission of the Board.
11. (a) At the end of discussion on each agenda item, the Chairperson of the meeting shall announce the
summary of the decision taken on such item along with names of the directors, if any, who dissented
from the decision taken by majority “and the draft minutes so recorded shall be preserved by the
company till the confirmation of the draft minutes in accordance with sub-rule (12)”.
(b) The minutes shall disclose the particulars of the directors who attended the meeting through video
conferencing or other audio visual means.
12. (a) The draft minutes of the meeting shall be circulated among all the directors within fifteen days of the
meeting either in writing or in electronic mode as may be decided by the Board. 
(b) Every director who attended the meeting, whether personally or through video conferencing or other
audio visual means, shall confirm or give his comments in writing, about the accuracy of recording of the
proceedings of that particular meeting in the draft minutes, within seven days or some reasonable time
as decided by the Board, after receipt of the draft minutes failing which his approval shall be presumed.
(c) After completion of the meeting, the minutes shall be entered in the minute book as specified
under section 118 of the Act and signed by the Chairperson.
Explanation.- For the purposes of this rule, “video conferencing or other audio visual means” means audio-
visual electronic communication facility employed which enables all the persons participating in a meeting
to communicate concurrently with each other without an intermediary and to participate effectively in the
meeting.

LESSON ROUND UP
• According to Section 118 (10) of the Companies Act 2013, every company shall observe secretarial standards
with respect to General and Board meetings specified by the Institute of Company Secretaries of India and
approved as such by the Central Government.
• The Ministry of Corporate Affairs (MCA) has accorded its approval to the Secretarial Standards (“SS”)
specified by the Institute of Company Secretaries of India.
• The Secretarial Standards were notified by the Institute of Company Secretaries of India in the Official
Gazette and were effective from July 1, 2015. The SS-1 was revised and the rievised SS-1 came into effect
from 1st Octo, 2017.
136 Lesson 4 • PP-GRMCE

• SS-1 facilitates compliance with these principles by endeavouring to provide further clarity where there
is ambiguity and establishing benchmark standards to harmonise prevalent diverse practices.
• SS-1 requires Company Secretary to oversee the vital process of recording and facilitating implementation
of the decisions of the Board.
• SS-1 is applicable to the Meetings of Board of Directors of all companies incorporated under the Act
except One Person Company having only one director and Section 8 Company.
• SS-1 provides for some of the best standard practices to be followed for conduct of meetings by the companies.

GLOSSARY
Electronic in relation to Meetings means Meetings through video conferencing or other audio-visual means.
Mode “Video conferencing or other audiovisual means” means audio-visual electronic communication
facility employed which enables all the persons participating in a Meeting to communicate
concurrently with each other without an intermediary and to participate effectively in the Meeting.
Secretarial means a Company Secretary in Practice or a firm of Company Secretary(ies) in Practice appointed
Auditor in pursuance of the Act to conduct the secretarial audit of the company.
Maintenance means keeping of registers and records either in physical or electronic form, as may be permitted
under any law for the time being in force, and includes the making of appropriate entries therein, the
authentication of such entries and the preservation of such physical or electronic records.
Minutes means a Book maintained in physical or in electronic form for the purpose of recording of Minutes.
Book
Secured means computer hardware, software, and procedure that –
Computer (a) are reasonably secure from unauthorized access and misuse;
System
(b) provide a reasonable level of reliability and correct operation;
(c) are reasonably suited to performing the intended functions; and
(d) adhere to generally accepted security procedures.

TEST YOURSELF
(These are meant for recapitulation only. Answers to these questions are not to be submitted for evaluation)
1. As a company secretary can you explain what is the frequency of meetings as per Secretarial Standard 1.
2. Companies follow diverse secretarial practices. In the light of this statement explain the importance of
Secretarial Standards.
3. What are the Secretarial Standards specified in respect of Notice and Notes on Agenda?
4. Can you explain the following:
a) General Content of Minutes
b) Specific Content of minutes
5. Is there any role of Secretarial Standards in enhancing corporate governance practices of the Board of
Directors? Explain.
Lesson 5 Board Committees

Key Concepts One Learning Objectives Regulatory Framework

Should Know
To understand the: Companies Act, 2013
• Audit Committee
• Need and advantages of • Section 135
• Nomination and management through board
Remuneration • Section 177
committees and the constitution
Committee • Section 178
• Scope of various Committees.
• Stakeholders • Power and responsibilities to • Table F of Schedule I of the
Relationship various board committees. Companies Act, 2013
Committee • SS-1 (Board Meeting)
• CSR Committee The Companies (Meetings of Board
• Risk Management and its Powers) Rules, 2014
Committee • Rule 6
• Regulatory, SEBI (LODR) Regulation, 2015
Compliance and
Government Affairs • Regulation 18
Committee • Regulation 19
• Regulation 20
• Regulation 21

Lesson Outline
• Introduction
• Regulatory Framework
• Need for Committees
• Rationale behind Board Committees
• Committee Management
• Selection of Committee Members
• Appointment of Committee Chairman
• Mandatory Committees of the Board
• Audit Committee
• Nomination and Remuneration Committee
• Stakeholders Relationship Committee
• CSR Committee
• Risk Management Committee
• Vigil Mechanism
• Other Committees
• LESSON ROUND-UP
• GLOSSARY
• TEST YOURSELF
138 Lesson 5 • PP-GRMCE

INTRODUCTION
A board committee is a small working group identified by the board, consisting primarily of board members, for
the purpose of supporting the board’s work. Committees are generally formed to perform some specified work.
Members of the committee are expected to have expertise in the specified field.
Committees are usually formed as a means of improving board effectiveness and efficiency, in areas where more
focused, specialized and technical discussions are required. These committees prepare the groundwork for decision-
making and report at the subsequent board meeting. Committees enable better management of full board’s time and
allow in-depth scrutiny and focused attention.
However, the Board of Directors is ultimately responsible for the acts of the committee. Board is responsible for
defining the committee role and structure.
The structure of a board and the planning of the board’s work are key elements to effective governance. Establishing
committees is one way of managing the work of the board, thereby strengthening the board’s governance role.
Boards should regularly review its own structure and performance and whether it has the right committee structure
and an appropriate scheme of delegation from the board.
Committees may be formed for a range of purposes, including:
• Selection Committee/Nomination Committee: To select Board members, to select a CEO, to select key
managerial and senior management personnel succession planning and remuneration advisory.
• Board development or Governance Committee: To look after/ administer/support Board members and
committee members and other executive positions.
• Investment Committee: For advising to the board for investments of surplus finds of the Company.
• Risk Management Committee: To report to the board about potential risks factor and to suggest action point
for risk mitigation.
• Safety, Health & Environment Committee: To take care of the safety measures, prevention and effective
disposal of the hazardous materials during the course of manufacturing and taking of care of sustainability
development.
• Committee of Inquiry: To inquire into particular questions (disciplinary, technical, etc.)
• Finance or Budget Committees: To be responsible for financial reporting, organising audits, etc.
• Marketing and Public Relations Committees: To identify new markets; build relationship with media and
public, etc.

NEED FOR COMMITTEES

With increasing business complexities and time commitment of Board members, constituting committees has
become inevitable for organization of any significant size.
The Companies Act, 2013 and SEBI (LODR) Regulations, 2015 have provided a very robust regulatory framework to
emphasize that effectiveness of Board Committees as key to an effective Board.
Committees keep the number of participants manageable; in larger groups, either many people do not get to speak
or discussion gets quite lengthy. Committees can be set up for a specific purpose or to deal with general issues such
as ‘development’. They can be established on a short-term or temporary basis, or they can be formed as a permanent
body for ongoing work.
 Lesson 5 • Board Committees 139

A Board can either delegate some of its powers to the committee, enabling it to act directly, or can require the
recommendations of the committee to be approved by the Board. The Board will normally depend heavily on the
findings and recommendations of its committees, although final decisions to accept or reject these recommendations
will be made by the Board.

Committees need clear goals, objectives, and terms of reference in order to function efficiently, and Boards should
ensure that these are developed before establishing the committee. Many committees have been known to work
outside their intended purpose due to a lack of precise objectives.

Committees thus have an important role -

• to strengthen the governance arrangements of the company and support the Board in the achievement of
the strategic objectives of the company ;
• to strengthen the role of the Board in strategic decision making and supports the role of non-executive
directors in challenging executive management actions;
• to maximise the value of the input from non-executive directors, given their limited time commitment;
• to support the Board in fulfilling its role, given the nature and magnitude of the agenda.

RATIONAL BEHIND BOARD COMMITTEES

(a) To improve Board effectiveness and efficiency.
(b) Minor details need to be evaluated/ analysed to arrive at a logical conclusion. This requires body having
expertise in subject matter, a Board Committee shall in such cases assist the Board and give well considered
recommendations to the Board. e.g. Audit Committee go through minor details of internal audit reports which
is not possible and give suitable recommendations, this is not possible for entire Board to consider.
(c) Insulate Board from potential undue influence of controlling shareholders and managers.
(d) Committees prepare groundwork for decision making and submit their recommendations to the Board for
decision making.
(e) Enables better management of Board’s time and allows in-depth scrutiny of proposals.
(f) Establishing committees is one way of managing the work of the Board and strengthening the Board’s
governance role.

COMMITTEE MANAGEMENT
• Committees function in accordance with the terms of reference established by the board.
• Committees may be standing committees; or ad-hoc committees that cease when the activities are completed.
Standing committees should be included in the articles or bylaws.
• Committees recommend policy for approval by the entire board.
• Committees make full use of board members’ expertise, time and commitment, and ensure diversity of opinions
on the board.
• They do not supplant responsibility of each board member; they operate at the board level and not the staff level.
• Minutes should be recorded for all Committee meetings and final minutes are required to be placed before the Board.
140 Lesson 5 • PP-GRMCE

Table F of Schedule I of the Companies Act, 2013 provides that articles of association of a company
limited by shares shall contain the following:

71. (i) The Board may, subject to the provisions of the Act, delegate any of its powers to committees
consisting of such member or members of its body as it thinks fit.

(ii) Any committee so formed shall, in the exercise of the powers so delegated, conform to any
regulations that may be imposed on it by the Board.

72. (i) A committee may elect a Chairperson of its meetings.

(ii) If no such Chairperson is elected, or if at any meeting the Chairperson is not present within five
minutes after the time appointed for holding the meeting, the members present may choose one
of their members to be Chairperson of the meeting.

73. (i) A committee may meet and adjourn as it thinks fit.

(ii) Questions arising at any meeting of a committee shall be determined by a majority of votes of
the members present, and in case of an equality of votes, the Chairperson shall have a second or
casting vote.

74. All acts done in any meeting of the Board or of a committee thereof or by any person acting as a
director, shall, notwithstanding that it may be afterwards discovered that there was some defect in
the appointment of any one or more of such directors or of any person acting as aforesaid, or that they
or any of them were disqualified, be as valid as if every such director or such person had been duly
appointed and was qualified to be a director.

75. Save as otherwise expressly provided in the Act, a resolution in writing, signed by all the members of
the Board or of a committee thereof, for the time being entitled to receive notice of a meeting of the
Board or committee, shall be valid and effective as if it had been passed at a meeting of the Board or
committee, duly convened and held.

SELECTION OF COMMITTEE MEMBERS

Specific committee members may be appointed by either the Board or the committee Chairman. Area of knowledge
and expertise domain and time commitment of the Board member should be considered as the criteria for the
selection on any specific committee. The committee members should be selected with following questions in mind:
What tasks are the committee responsible for and who among the members possess the skills and experience
needed to complete those tasks. Every effort should be made to match the needs and requirements of the committee
and the skills, knowledge and interests of prospective committee members.
It is very important that members have a clear view of the committee’s goals and the chairman should have flair to
utilize the committee member’s knowledge exponentially well to achieve those goals.

APPOINTMENT OF COMMITTEE CHAIRMAN

The Board may appoint the committee chairman or the committee members can choose/elect the chairman. The
committee chairman is the key to an effective committee, he sets the tone, pace and strategies of the committees’
functioning, hence chairman selected should have motivational and leadership skills and time commitment expected
of him.
Lesson 5 • Board Committees 141

In seeking an effective chairman, most important things are knowledge and experience relevant to the work of the
committee, proven leadership and behavioral skills that will be essential if the committee is to work effectively. The
role of committee chairman requires extra work, time for communication with committee members and senior
management so that he remains informed about the developments and a willingness to resolve conflicts among
members.
The committee chairman co-ordinates work and establishes an environment of thoughtful deliberation. The
chairman is expected to stimulate the members and help the group use all the abilities and experiences its members
possess and new skills that they develop as they work together. The committee’s goal must be aligned to achieve the
objectives of the organization as a whole. The committee chairman will be responsible for preparing agendas for the
meetings, assigning responsibilities to committee members and doing some of the follow-up to make sure that the
assigned work is being done by members.

According to “Articles of Association” under Table F of Schedule I of the Companies Act, 2013, committee may
elect a Chairperson of its meetings. Where no such Chairperson is elected, or if at any meeting the Chairperson
is not present within five minutes after the time appointed for holding the meeting, the members present may
choose one of their members to be Chairperson of the meeting.
The Secretarial Standards (SS-1) provides that a member of the Committee appointed by the Board or elected by
the Committee as Chairman of the Committee, in accordance with the Act or any other law or the Articles, shall
conduct the Meetings of the Committee. If no Chairman has been so elected or if the elected Chairman is unable
to attend the Meeting, the Committee shall elect one of its members present to chair and conduct the Meeting of
the Committee, unless otherwise provided in the Articles.

Suggested Content of the Terms of References of Committees

1. Objectives

2. Composition

3. Secretary

4. Quorum

5. Meetings

6. Annual General Meeting

7. Authority

8. General Responsibilities

9. Specific Responsibilities

10. Reporting

11. Evaluation

12. Review of Committee

142 Lesson 5 • PP-GRMCE

MANDATORY COMMITTEES OF THE BOARD

AUDIT COMMITTEE
Audit Committee is one of the main pillars of the corporate governance mechanism in any company. The Committee
is charged with the principal oversight of financial reporting and disclosure and aims to enhance the confidence
in the integrity of the company’s financial reporting, the internal control processes and procedures and the risk
management systems.
The constitution of Audit Committee is mandated under the Companies Act 2013 and SEBI (Listing Obligations
and Disclosure Requirements) Regulations, 2015.
Under the Companies Act, 2013, the Audit Committee’s mandate is significantly different from what was laid down
under Section 292A of the Companies Act 1956, and its scope and constitution have also been broadened.
Lesson 5 • Board Committees 143

Constitution under Companies Act, 2013

Section 177(1) of the Companies Act, 2013 read with rule 6 of the Companies (Meetings of the Board and is Powers)
Rules, 2014 provides that the Board of directors of every listed public company and a company covered under
4 of the Companies (Appointment and Qualifications of Directors) Rule, 2014 are required to constitute an Audit
Committee of the Board. The rule 4 of the Companies (Appointment and Qualifications of Directors), Rules, 2014
provides the following class or classes of companies-
(i) All public companies with a paid up capital of 10 crore rupees or more;
(ii) All public companies having turnover of 100 crore rupees or more;
(iii) All public companies, having in aggregate, outstanding loans or borrowings or debentures or deposits exceeding
50 crore rupees or more.
The paid up share capital or turnover or outstanding loans or borrowings or debentures or deposits, as the case
may be, as existing on the date of last audited financial statements shall be taken into account for the purposes of
this rule.

Note: As per Notification No. GSR 8(E), dated 4-1-2017: In case of an unlisted public company which is licensed
to operate by RBI or SEBI or IRDA from the International Financial Services Centre located in an approved multi
services SEZ set-up under the SEZ Act, section 177 shall not apply.

Under SEBI (LODR) Regulation, 2015

Regulation 18(1) of SEBI Listing Regulations, 2015 provides that every listed entity shall constitute a qualified and
independent audit committee in accordance with the terms of reference, subject to conditions specified.

Case Law : In the case of Shruti Power Projects (P.) Ltd., In re, the National Company Law Tribunal,
Ahmedabad Bench, CP No. 5/441/NCLT/AHM/2017, dated April 13, 2017, opined that where company
had constituted audit committee and complied with requirement under section 177 though belatedly and
punishment provided for said violation was fine only, application of company for compounding offence under
said section was to be allowed.

Composition of the Audit Committee

Section 177(2) of the Companies Act, 2013 Regulation 18(1) of the SEBI (Listing Obligations
and Disclosure Requirement) Regulations, 2015
Audit Committee shall consist of a minimum of three Every listed entity shall constitute a qualified and
directors with independent directors forming a independent audit committee in accordance with the
majority. terms of reference, subject to the following:
(a) Audit Committee shall have minimum three
directors as members.
Independent directors should form a majority. (Not (b) Two-thirds of the members of audit committee
applicable for Section 8 companies vide notification no. shall be independent directors and in case
GSR 466(E), dated 5-6-2015) of a listed entity having outstanding SR equity
shares, the audit committee shall only comprise of
independent directors.
Majority of members of Audit Committee including its (c) All members of audit committee shall be financially
Chairperson shall be persons with ability to read and literate and at least 1 (one) member shall have
understand the financial statement. accounting or related financial management
expertise.
144 Lesson 5 • PP-GRMCE

Explanation (1) - For the purpose of this regulation,

“financially literate” shall mean the ability to
read and understand basic financial statements
i.e. balance sheet, profit and loss account, and
statement of cash flows.
Explanation (2)- For the purpose of this regulation,
a member shall be considered to have accounting
or related financial management expertise if
he or she possesses experience in finance or
accounting, or requisite professional certification
in accounting, or any other comparable experience
or background which results in the individual’s
financial sophistication, including being or having
been a chief executive officer, chief financial officer
or other senior officer with financial oversight
responsibilities.
(d) The chairperson of the audit committee shall be
an independent director and he shall be present at
AGM to answer shareholder queries.
(e) The Company Secretary shall act as the secretary
to the audit committee.
(f) The audit committee at its discretion shall invite
the finance director or head of the finance function,
head of internal audit and a representative of the
statutory auditor and any other such executives to
be present at the meetings of the committee.
Provided that occasionally the audit committee may
meet without the presence of any executives of the
listed entity.

Functions / Role of the Audit Committee

(1) Under Section 177(4) of the Companies Act, 2013
Every Audit Committee shall act in accordance with the terms of reference specified in writing by the Board.
Terms of reference as prescribed by the board shall inter alia, include, -
(i) the recommendation for appointment, remuneration and terms of appointment of auditors of the
company;
In case of Government Companies, in Clause (1) of sub-section (4) of the section 177, for the words
“recommendation for appointment, remuneration and terms of appointment” the words “recommendation
for remuneration” shall be substituted- Notification No. GSR 463(E) dated 05-06-2015.
(ii) review and monitor the auditor’s independence and performance, and effectiveness of audit process;
(iii) examination of the financial statement and the auditors’ report thereon;
(iv) approval or any subsequent modification of transactions of the company with related parties;
Provided that the Audit Committee may make omnibus approval for related party transactions proposed
to be entered into by the company subject to such conditions as prescribed under rule 6A of the Companies
(Meetings of Board and its Powers) Rules, 2014;
 Lesson 5 • Board Committees 145

Provided further that in case of transaction, other than transactions referred to in section 188, and where
Audit Committee does not approve the transaction, it shall make its recommendations to the Board:
Provided also that in case any transaction involving any amount not exceeding one crore rupees is entered
into by a director or officer of the company without obtaining the approval of the Audit Committee and it is
not ratified by the Audit Committee within three months from the date of the transaction, such transaction
shall be voidable at the option of the Audit Committee and if the transaction is with the related party to
any director or is authorised by any other director, the director concerned shall indemnify the company
against any loss incurred by it:
Provided also that the provisions of this clause shall not apply to a transaction, other than a transaction
referred to in section 188, between a holding company and its wholly owned subsidiary company.
(v) scrutiny of inter-corporate loans and investments;
(vi) valuation of undertakings or assets of the company, wherever it is necessary;
(vii) evaluation of internal financial controls and risk management systems;
(viii) monitoring the end use of funds raised through public offers and related matters.
(2) Under Regulation 18(3) SEBI Listing Regulations, 2015
The role of the audit committee and the information to be reviewed by the audit committee shall be as specified
in Part C of Schedule II. The Part C of Schedule II is as under: -
A. The role of the audit committee shall include the following:
1. Oversight of the listed entity’s financial reporting process and the disclosure of its financial
information to ensure that the financial statement is correct, sufficient and credible;
2. Recommendation for appointment, remuneration and terms of appointment of auditors of the listed
entity;
3. Approval of payment to statutory auditors for any other services rendered by the statutory auditors;
4. Reviewing, with the management, the annual financial statements and auditor’s report thereon
before submission to the board for approval, with particular reference to:
(a) matters required to be included in the director’s responsibility statement to be included in the
board’s report in terms of clause (c) of sub-section (3) of Section 134 of the Companies Act,
2013;
(b) changes, if any, in accounting policies and practices and reasons for the same;
(c) major accounting entries involving estimates based on the exercise of judgment by management;
(d) significant adjustments made in the financial statements arising out of audit findings;
(e) compliance with listing and other legal requirements relating to financial statements;
(f) disclosure of any related party transactions;
(g) modified opinion(s) in the draft audit report.
5. Reviewing, with the management, the quarterly financial statements before submission to the board
for approval;
6. Reviewing, with the management, the statement of uses / application of funds raised through an
issue (public issue, rights issue, preferential issue, etc.), the statement of funds utilized for purposes
other than those stated in the offer document / prospectus / notice and the report submitted by the
monitoring agency monitoring the utilisation of proceeds of a public or rights issue, and making
appropriate recommendations to the board to take up steps in this matter;
7. Reviewing and monitoring the auditor’s independence and performance, and effectiveness of audit
process;
8. Approval or any subsequent modification of transactions of the listed entity with related parties;
146 Lesson 5 • PP-GRMCE

9. Scrutiny of inter-corporate loans and investments;

10. Valuation of undertakings or assets of the listed entity, wherever it is necessary;
11. Evaluation of internal financial controls and risk management systems;
12. Reviewing, with the management, performance of statutory and internal auditors, adequacy of the
internal control systems;
13. Reviewing the adequacy of internal audit function, if any, including the structure of the internal
audit department, staffing and seniority of the official heading the department, reporting structure
coverage and frequency of internal audit;
14. Discussion with internal auditors of any significant findings and follow up there on;
15. Reviewing the findings of any internal investigations by the internal auditors into matters where
there is suspected fraud or irregularity or a failure of internal control systems of a material nature
and reporting the matter to the board;
16. Discussion with statutory auditors before the audit commences, about the nature and scope of audit
as well as post-audit discussion to ascertain any area of concern;
17. To look into the reasons for substantial defaults in the payment to the depositors, debenture holders,
shareholders (in case of non-payment of declared dividends) and creditors;
18. To review the functioning of the whistle blower mechanism;
19. Approval of appointment of chief financial officer after assessing the qualifications, experience and
background, etc. of the candidate;
20. Carrying out any other function as is mentioned in the terms of reference of the audit committee.
21. Reviewing the utilization of loans and/or advances from/investment by the holding company in the
subsidiary exceeding rupees 100 crore or 10% of the asset size of the subsidiary, whichever is lower
including existing loans/advances/investments existing as on the date of coming into force of this
provision.
B. The audit committee shall mandatorily review the following information:
1. management discussion and analysis of financial condition and results of operations;
2. statement of significant related party transactions (as defined by the audit committee), submitted
by management;
3. management letters / letters of internal control weaknesses issued by the statutory auditors;
4. internal audit reports relating to internal control weaknesses; and
5. the appointment, removal and terms of remuneration of the chief internal auditor shall be subject to
review by the audit committee.
6. statement of deviations:
a. quarterly statement of deviation(s) including report of monitoring agency, if applicable,
submitted to stock exchange(s) in terms of Regulation 32(1).
b. annual statement of funds utilized for purposes other than those stated in the offer document/
prospectus/notice in terms of Regulation 32(7).

Remarks : The role of audit committee as prescribed in Regulation 18(3) of Part A of SEBI(LODR)
Regulations is of inclusive functions and not exhaustive. Any other functions may be entrusted by the Board of
Directors to the Audit Committee. However, Part B prescribes the mandatory functions, which are essentially
to be addressed by the Audit Committee of Board.
 Lesson 5 • Board Committees 147

Powers of the Audit Committee

Section 177 (5), (6) and (7) of the Companies Act, Regulation 18(2)(c) of the SEBI Listing Regulations,
2013 2015
The Audit Committee has the power to call for the The audit committee shall have powers to investigate any
comments of the auditors about internal control activity within its terms of reference, seek information
systems, the scope of audit, including the observations from any employee, obtain outside legal or other
of the auditors and review of financial statement before professional advice and secure attendance of outsiders
their submission to the Board and may also discuss any with relevant expertise, if it considers necessary.
related issues with the internal and statutory auditors
and the management of the company. [Section 177(5)]
The Audit Committee shall have authority to investigate
into any matter in relation to the items specified in terms
of reference or referred to it by the Board and for this
purpose the Committee has power to obtain professional
advice from external sources. The Committee for this
purpose shall have full access to information contained
in the records of the company. [Section 177(6)]
The auditors of a company and the key managerial
personnel shall have a right to be heard in the meetings
of the Audit Committee when it considers the auditor’s
report but shall not have the right to vote. [Section
177(7)]

Number of Meetings and Quorum of the Audit Committee

SEBI Listing Regulations, 2015 provides for the minimum number of meetings and quorum of the audit committee.
(i) The Audit Committee of a listed entity shall meet at least four (4) times in a year and not more than 120 shall
elapse between two meetings. [Regulation 18(2)(a)]
(ii) The quorum for audit committee meeting shall either be:
• Two (2) members or
• One-third (1/3rd) of the members of the audit committee, whichever is greater; with at least 2
independent directors. [Regulation 18(2)(b)]

Disclosure in Board’s Report

Section 177(8) of the Act provides that the Board’s report under section 134(3) shall disclose following -
• Composition of an Audit Committee
• Where the Board had not accepted any recommendation of the Audit Committee, the same shall be disclosed
in the report along with the reasons therefor.
SEBI (LODR), Regulations, 2015 inter alia provide as below:
The following disclosures shall be made in the section on the corporate governance of the annual report:
Audit committee:
(a) brief description of terms of reference;
(b) composition, name of members and chairperson;
(c) meetings and attendance during the year.
Further, as per Regulation 46, the website of the Company shall disclose at all times composition of various
committees of board of directors.
148 Lesson 5 • PP-GRMCE

NOMINATION AND REMUNERATION COMMITTEE

The Companies Act, 1956 had not mandated any committee relating to the appointment, nomination or remuneration
of a director. However, there was a provision where public companies having no profits or inadequate profits and
intending to remunerate the directors had to constitute a remuneration committee and such committee was to
approve such remuneration to directors. The Companies Act, 2013 has introduced the provision of constitution of
Nomination and Remuneration Committee.

Constitution of Nomination and Remuneration Committee

Under the Companies Act 2013: Section 178(1) of the Act read with rule 6 of the Companies (Meetings of the
Board and its Powers) Rules, 2014 and Rule 4 of the Companies (Appointment and Qualification of Directors) Rules,
2014, provides that the board of directors of following classes of companies is required to constitute a Nomination
and Remuneration Committee of the Board-
(i) every listed public companies;
(ii) All public companies with a paid up capital of 10 crore rupees or more;
(iii) All public companies having turnover of 100 crore rupees or more;
(iv) All public companies, having in aggregate, outstanding loans or borrowings or debentures or deposits exceeding
50 crore rupees or more.
Note : Section 178 shall not apply to Section 8 companies and specified IFSC public companies.
Under SEBI (LODR) Regulations, 2015: Regulation 19(1) of the SEBI Listing Regulations, 2015 provides that the
Board of all listed entity shall constitute the Nomination and Remuneration Committee.

Composition
Section 178 of the Act Regulation 19 of SEBI (LODR) Regulations, 2015
(1) The Board of Directors of every listed public (1) The board of directors shall constitute the
company and such other class or classes of nomination and remuneration committee as
companies, as may be prescribed shall constitute follows:
the Nomination and Remuneration Committee a. the Committee shall comprise of at least
consisting of three or more non-executive three (3) directors;
directors out of which not less than one half
b. all directors of the committee shall be non-
shall be independent directors:
executive directors; and
Provided that the chairperson of the company
c. at least 50% of the directors shall be
(whether executive or non-executive) may be
independent directors and in case of a
appointed as a member of the Nomination and
listed entity having outstanding SR equity
Remuneration Committee but shall not chair such
shares, two thirds of the nomination and
Committee.
remuneration committee shall comprise of
independent directors.
(2) The Chairperson of the nomination and
remuneration committee shall be an independent
director.
Provided that the chairperson of the listed entity,
whether executive or non-executive, may be
appointed as a member of the Nomination and
Remuneration Committee and shall not chair such
Committee.
 Lesson 5 • Board Committees 149

(2A) The quorum for a meeting of the nomination

and remuneration committee shall be either two
members or one third of the members of the
committee, whichever is greater, including at least
one independent director in attendance.
(3) The Chairperson of the nomination and
remuneration committee may be present at
the annual general meeting, to answer the
shareholders’ queries; however, it shall be up to
the chairperson to decide who shall answer the
queries.
(3A)
The nomination and remuneration committee
shall meet at least once in a year.
(4) The role of the nomination and remuneration
committee shall be as specified as in Part D of the
Schedule II.

Functions of the Nomination and Remuneration Committee

(1) Under Companies Act, 2013
The Nomination and Remuneration Committee shall perform following functions:
• Identify persons who are qualified to become directors and who may be appointed in senior management
in accordance with the criteria laid down, recommend to the Board their appointment and removal and
shall specify the manner for effective evaluation of performance of Board, its committees and individual
directors to be carried out either by the Board, by the Nomination and Remuneration Committee or by an
independent external agency and review its implementation and compliance [Section 178(2)]
• Formulate the criteria for determining qualifications, positive attributes and independence of a director
and recommend to the Board a policy, relating to the remuneration for the directors, key managerial
personnel and other employees. [Section 178(3)]
• While formulating the policy, the Committee shall consider the following:
(a) the level and composition of remuneration is reasonable and sufficient to attract, retain and motivate
directors of the quality required to run the company successfully;
(b) relationship of remuneration to performance is clear and meets appropriate performance
benchmarks; and
(c) remuneration to directors, key managerial personnel and senior management involves a balance
between fixed and incentive pay reflecting short and long-term performance objectives appropriate
to the working of the company and its goals. Provided that such policy shall be placed on the website
of the company,if any, and the salient features of the policy and changes therein, if any, along with the
web address of the policy, if any, shall be disclosed in the Baord’s report. [Section 178(4)]
Disclosure in Board’s Report and website as per Companies Act, 2013
Proviso to Section 178(4) provides that the policy relating to the remuneration of the directors, KMP and other
employees shall be placed on the website of the company, if any, and the salient features of the policy and
changes therein, if any, along with the web address of the policy, if any, shall be disclosed in the Board’s report.
[Section 178(4)]
 150 Lesson 5 • PP-GRMCE

Note: In case of Government Companies, section 178(2)/(3)/(4) shall not apply to Government company
except with regard to appointment of ‘senior management’ and other employees - Notification No. GSR
463(E), dated 5-6-2015.

As per Section 134(3)(e), the Board report shall contain in case of a company covered under sub-section (1) of
section 178, company’s policy on directors’ appointment and remuneration including criteria for determining
qualifications, positive attributes, independence of a director and other matters provided under sub-section
(3) of section 178.
Provided that where disclosures referred to in sub-section (3) of Section 134 have been included in
the financial statements, such disclosures shall be referred to instead of being repeated in the Board’s
report.
Provided further that where the policy referred to in clause (e) of sub-section (3) of Section 134 is made available
on company’s website, if any, it shall be sufficient compliance of the requirement if the salient features of the
policy and any change therein are specified in brief in the Board’s report and the web-address is indicated
therein at which the complete policy is available.
(2) Under Regulation 19(4) of SEBI (LODR) Regulations, 2015
The role of the Nomination and Remuneration Committee shall include the following- (Part D, Schedule II)

(1) formulation of the criteria for determining qualifications, positive attributes and independence of
a director and recommend to the board of directors a policy relating to, the remuneration of the
directors, key managerial personnel and other employees;

(2) formulation of criteria for evaluation of performance of independent directors and the board of
directors;

(3) devising a policy on diversity of board of directors;

(4) identifying persons who are qualified to become directors and who may be appointed in senior
management in accordance with the criteria laid down, and recommend to the board of directors
their appointment and removal;

(5) whether to extend or continue the term of appointment of the independent director, on the basis of
the report of performance evaluation of independent directors;

(6) recommend to the board, all remuneration, in whatever form, payable to senior management.

Disclosure in Board’s Report and website as per SEBI LODR

SEBI (LODR), Regulations, 2015 interalia provide as below:
The following disclosures shall be made in the section on the corporate governance of the annual report:
Nomination and Remuneration Committee:
(a) brief description of terms of reference;
(b) composition, name of members and chairperson;
(c) meeting and attendance during the year;
(d) performance evaluation criteria for independent directors.
Further, as per Regulation 46, the website of the Company shall disclose at all times composition of various
committees of board of directors.
Lesson 5 • Board Committees 151

STAKEHOLDERS RELATIONSHIP COMMITTEE

Constitution / Composition of the Stakeholders Committee

Section 178(5) of the Companies Act 2013 Regulation - 20 of SEBI (Listing Obligations and
Disclosure Requirements) Regulations, 2015
The Board of Directors of a company which consists of (1) The listed entity shall constitute a Stakeholders
more than one thousand shareholders, debenture- Relationship Committee to specifically look
holders, deposit-holders and any other security holders into various aspects of interest of shareholders,
at any time during a financial year shall constitute a debenture holders and other security holders.
Stakeholders Relationship Committee consisting of a (2) The chairperson of this committee shall be a non-
chairperson who shall be a non-executive director and executive director.
such other members as may be decided by the Board.
(2A) At least three directors, with at least one being
an independent director, shall be members of the
Committee and in case of a listed entity having
outstanding SR equity shares, at least two thirds
of the Stakeholders Relationship Committee shall
comprise of independent directors.
(3) The Chairperson of the Stakeholders Relationship
Committee shall be present at the annual general
meetings to answer queries of the security holders.
(3A) The stakeholders’ relationship committee shall
meet at least once in a year.
(4) The role of the Stakeholders Relationship
Committee shall be as specified as in Part D of the
Schedule II. (See below)

Role of Stakeholders Relationship Committee

The role of the Stakeholders Relationship Committee shall be to consider and resolve the grievances of the security
holders of the listed entity including complaints related to transfer of shares, non-receipt of annual report and non-
receipt of declared dividends.
Part D of Schedule II of SEBI (LODR) Regulations, 2015 provides the role of the Stakeholders Relationship Committee,
which is as under:

(1) Resolving the grievances of the security holders of the listed entity including complaints related to
transfer/transmission of shares, non-receipt of annual report, non-receipt of declared dividends, issue
of new/duplicate certificates, general meetings etc.
(2) Review of measures taken for effective exercise of voting rights by shareholders.
(3) Review of adherence to the service standards adopted by the listed entity in respect of various services
being rendered by the Registrar & Share Transfer Agent.
(4) Review of the various measures and initiatives taken by the listed entity for reducing the quantum of
unclaimed dividends and ensuring timely receipt of dividend warrants/annual reports/statutory notices
by the shareholders of the company. [Part B of Schedule II is substituted by the SEBI (Listing Obligations
and Disclosure Requirements) (Amendment) Regulations, 2018, w.e.f. 1-4-2019]
Disclosure in Board’s Report and website as per SEBI LODR
SEBI (LODR), Regulations, 2015 interalia provide as below:
The following disclosures shall be made in the section on the corporate governance of the annual report:
 152 Lesson 5 • PP-GRMCE

Stakeholders’ Grievance Committee [Schedule IV(2)(C)(6)]:

(a) name of non-executive director heading the committee;
(b) name and designation of compliance officer;
(c) number of shareholders’ complaints received so far;
(d) number not solved to the satisfaction of shareholders;
(e) number of pending complaints.
Further, as per Regulation 46, the website of the Company shall disclose at all times composition of various
committees of board of directors.

CORPORATE SOCIAL RESPONSIBILITY COMMITTEE

Under Companies Act, 2013

Section 135 (1) read with rule 3 of Companies (Corporate Social Responsibility Policy) Rules, 2014, mandates that
every company which fulfils any of the following criteria during the immediately preceding financial year shall
constitute a Corporate Social Responsibility Committee of Board consisting of three or more directors, out of which
at least one director shall be an independent director-

• Companies having net worth of rupees five hundred crore or more, or

• Companies having turnover of rupees one thousand crore or more or
• Companies having a net profit of rupees five crore or more

Composition of the CSR Committee

• The CSR Committee shall consist of three or more directors.
• Atleast one director shall be an independent director.
Provided that where a company is not required to appoint an independent director under sub-section (4)
of section 149, it shall have in its Corporate Social Responsibility Committee with two or more directors.
• Rule 5(1) of the Companies (Corporate Social Responsibility Policy) Rules, 2014, which deals with the matter
relating to the CSR Committee, provides that-
(i) a company covered under sub-section (1) of section 135 which is not required to appoint an independent
director pursuant to section 149(4), shall have its CSR Committee without such director.
(ii) a private company having only two directors on its Board shall constitute its CSR Committee with two
such directors.
(iii) with respect to a foreign company covered under these rules, the CSR Committee shall comprise of at
least two persons of which one person shall be as specified under clause (d) of subsection (1) of section
380 of the Act,(i.e. the person resident in India authorized to accept on behalf of the company, service
of process and any notices or other documents) and another person shall be nominated by the foreign
company.
• In terms of Section 134(3), there shall be attached to statement laid before a company in general meeting, a
report by its Board of Director which shall include the details about the policy developed and implemented by
the company on Corporate Social Responsibility initiatives taken during the year.
Lesson 5 • Board Committees 153

Section 135(9) provides that where the amount to be

Issue: Under section 135(9) of the Act, the CSR
spent by a company under sub-section (5) does not
obligation of RS. 50 lakh is to be checked for the previous
exceed fifty lakh rupees, the requirement under year or for the current financial year?
sub-section (1) for constitution of the Corporate
Social Responsibility Committee shall not be View: From the language of section 135(9) of the Act, CSR
applicable and the functions of such Committee obligation for the previous year is not relevant. Depending
on the liability of company for a particular financial year,
provided under this section shall, in such cases,
whether CSR Committee requirement is applicable for that
be discharged by the Board of Directors of such
particular financial year or not needs to be determined.
company.

Functions of the CSR Committee

In accordance with Section 135(3), the functions of the CSR committee shall :
Further the rules provide that the CSR Committee shall institute a transparent monitoring mechanism for
implementation of the CSR projects or programs or activities undertaken by the company.

CSR Expenditure
Amount of CSR to be spent
Section 135(5) provides that-
The Board of every company referred to in section 135(1), shall ensure that the company spends, in every financial
year, at least two per cent of the average net profits of the company made during the three immediately preceding
financial years or where the company has not completed the period of three financial years since its incorporation,
during such immediately preceding financial years, in pursuance of its Corporate Social Responsibility Policy.
The first proviso to sub-section (5) provides that
the company shall give preference to the local area Issue: If a company has only partly spent its CSR
and areas around it where it operates, for spending obligation during preceding three financial years, which
the amount earmarked for Corporate Social is less than Rs. 50 lakh in each of these three financial
Responsibility activities. years, though the quantum of prescribed 2% CSR was
more than Rs 50 lakh, will section 135(9) of the Act be
The second proviso further provides that if the applicable to the company?
company fails to spend such amount, the Board shall,
View: Section 135(9) of the Act uses the words “amount
in its report made under clause (o) of sub-section (3)
to be spent by a Company”, which contemplates about CSR
of section 134, specify the reasons for not spending
obligation under section 135(5) of the Act. Hence, in this
the amount and, unless the unspent amount relates case, the exemption from constituting the CSR committee
to any ongoing project referred to in sub-section (6), as provided under section 135(9) of the Act will not be
transfer such unspent amount to a Fund specified available to the company.
in Schedule VII, within a period of six months of the
expiry of the financial year.
154 Lesson 5 • PP-GRMCE

The third proviso states that if the company spends an amount in excess of the requirements provided under this
sub-section, such company may set off such excess amount against the requirement to spend under this sub-section
for such number of succeeding financial years and in such manner, as may be prescribed.
Explanation. For the purposes of this section “net profit” shall not include such sums as may be prescribed, and shall
be calculated in accordance with the provisions of section 198.
Transfer of amount to Specified Fund
Section 135(6) provides that-
Any amount remaining unspent under sub-section (5), pursuant to any ongoing project, fulfilling such conditions
as may be prescribed, undertaken by a company in persuance of its Corporate Social Responsibility Policy, shall
be transferred by the company within a period of
thirty days from the end of the financial year to a Illustration: ABC Private Ltd. did not spend as per
special account to be opened by the company in the provisions of section 135(5) of the Act on the CSR
that behalf for that financial year in any scheduled activities by 31st March, 2021 pursuant to the ongoing
bank to be called the Unspent Corporate Social project undertaken in pursuance of its CSR Policy. In this
case ABC Private Ltd. should:
Responsibility Account, and such amount shall be
spent by the company in pursuance of its obligation • Open a bank account with any scheduled bank under
towards the Corporate Social Responsibility Policy the name, “Unspent Corporate Social Responsibility
within a period of three financial years from the Account for financial year 2020-21”;
date of such transfer, failing which, the company • Transfer the unspent amount within thirty days i.e.
shall transfer the same to a Fund specified in Schedule by 30th April, 2021 to such account and
VII, within a period of thirty days from the date of
• Spend such amount, in pursuance of its obligations
completion of the third financial year. towards the CSR Policy, latest by 31st March, 2024.
Penal Provisions for non-compliance
Section 135(7) provides that-
If a company is in default in complying with the provisions of sub-section (5) or sub-section (6), the company shall
be liable to a penalty of twice the amount required to be transferred by the company to the Fund specified
in Schedule VII or the Unspent Corporate Social Responsibility Account, as the case may be, or one crore rupees,
whichever is less, and every officer of the company who is in default shall be liable to a penalty of one-tenth of
the amount required to be transferred by the company to such Fund specified in Schedule VII, or the Unspent
Corporate Social Responsibility Account, as the case may be, or two lakh rupees, whichever is less.

Penal Provisions for non-compliance of Section 135(6) / (7)

For Company in default For Officer in default
Twice of the amount required to be transferred to the One-tenth of the amount required to be transferred to
Fund OR Unspent CSR Account the Fund or Unspent CSR Account
OR OR
One CroreRupees Two lakh Rupees
Whichever is less Whichever is less

Issue: Can a company spend in projects or programmes relating to activities mentioned in Schedule VII to the
Act, but not specifically covered in CSR Policy?
View: As provided in section 135(5) of the Act, the Board shall ensure that the company spends at least 2%
of the average net profits in pursuance of its CSR Policy. If a company wishes to spend CSR funds on activities
mentioned in Schedule VII to the Act, but not specifically covered in CSR Policy, it may do so by suitably amending
its CSR Policy with the approval of the Board to include such activities.
 Lesson 5 • Board Committees 155

CASE LAW
Technicolor India (P.) Ltd. v/s Registrar of Companies, CP NO. 124 (BB) OF 2019, JANUARY 31, 2020.
In the instant case, the Company has spent some amount as per the CSR Policy of the Company during the fiscal
year 2017-18, which remain below the threshold mentioned in Section 135(5) of Companies Act, 2013 read
with Companies Rules, 2014. Due to human lapse, the concerned department misreported the amounts spent
on CSR, which mentioned in the CSR Annexure to the Directors’ report for the fiscal year ended Company 31st
March, 2018 as against the amount reported in the audited financials. Therefore, the Board of Directors of the
Company, in their meeting held on 21st September, 2018 approved the draft Directors’ report for the year ended
31st March, 2018 which mentioned the amount spent on CSR and associated details incorrectly, due to receipt
of an incorrect input from the relevant department.
In the AGM held on 28-9-2018, the shareholders have adopted the audited financial statements for the year
ended 31st March, 2018 including the audited balance sheet as on 31st March 2018, the statement of profit and
loss account with the report of the board of directors and auditors. The amount spent on the CSR and associated
detail is incorrectly captured in the annexure to the Director’s report for the fiscal year ended 31st March, 2018
as against the amount recorded in the Audited financial against CSR activity and the issue was discovered during
the pre-scrutiny stage of filing of the audited financials of the year. Therefore, the Board has taken a call to set
the things right with the suomotu intent to make application under section 131(1)(b) to rectify the error in the
Board’s report. The Board thus has authorised to make this application.
The NCLT passed the following order:
• The Petitioner Company is permit to revise the Board’s report, as sought for, as per Annexure-4 and with a
direction to follow all the extant provisions of section 135 of the Companies Act, 2013, the Company (CSR)
Rules, 2014 amended from time to time, and also rule 77 of NCLT Rules, 2016.
• This order is passed without prejudice rights of the Statutory Authorities to initiate any proceedings
against the Company, for violation of any provisions of the Companies Act, which includes alleged violation
of section 135 of the Companies Act, 2013.

Schedule VII
(See Section 135)
Activities which may be included by companies in their Corporate Social Responsibility Policies Activities
relating to:-
(i) Eradicating hunger, poverty and malnutrition, ‘’promoting health care including preventinve health care’’
and sanitation including contribution to the Swach Bharat Kosh set-up by the Central Government for the
promotion of sanitation and making available safe drinking water.
(ii) promoting education, including special education and employment enhancing vocation skills especially
among children, women, elderly and the differently abled and livelihood enhancement projects.
(iii) promoting gender equality, empowering women, setting up homes and hostels for women and orphans;
setting up old age homes, day care centres and such other facilities for senior citizens and measures for
reducing inequalities faced by socially and economically backward groups.
(iv) ensuring environmental sustainability, ecological balance, protection of flora and fauna, animal welfare,
agro forestry, conservation of natural resources and maintaining quality of soil, air and water including
contribution to the Clean Ganga Fund set-up by the Central Government for rejuvenation of river Ganga.
(v) protection of national heritage, art and culture including restoration of buildings and sites of historical
importance and works of art; setting up public libraries; promotion and development of traditional art and
handicrafts.
(vi) measures for the benefit of armed forces veterans, war widows and their dependents, Central Armed Police
Forces (CAPF) and Central Para Military Forces (CPMF) veterans, and their dependents including widows.
156 Lesson 5 • PP-GRMCE

(vii) training to promote rural sports, nationally recognised sports, paralympic sports and olympic sports.
(viii) contribution to the prime minister’s national relief fund or Prime Minister’s Citizen Assistance and Relief
in Emergency Situations Fund (PM CARES Fund) or any other fund set up by the central govt. for socio
economic development and relief and welfare of the schedule caste, tribes, other backward classes,
minorities and women.
(ix) (a) Contribution to incubators or research and development projects in the field of science, technology,
engineering and medicine, funded by the Central Government or State Government or Public Sector
Undertaking or any agency of the Central Government or State Government; and
(b) Contributions to public funded Universities; Indian Institute of Technology (IITs); National
Laboratories and autonomous bodies established under Department of Atomic Energy (DAE);
Department of Biotechnology (DBT); Department of Science and Technology (DST); Department
of Pharmaceuticals; Ministry of Ayurveda, Yoga and Naturopathy, Unani, Siddha and Homoeopathy
(AYUSH); Ministry of Electronics and Information Technology and other bodies, namely Defense
Research and Development Organisation (DRDO); Indian Council of Agricultural Research (ICAR);
Indian Council of Medical Research (ICMR) and Council of Scientific and Industrial Research (CSIR),
engaged in conducting research in science, technology, engineering and medicine aimed at promoting
Sustainable Development Goals (SDGs).
(x) rural development projects.
(xi) slum area development.
Explanation.- For the purposes of this item, the term ‘slum area’ shall mean any area declared as such by
the Central Government or any State Government or any other competent authority under any law for the
time being in force.
(xii) disaster management, including relief, rehabilitation and reconstruction activities.

RISK MANAGEMENT COMMITTEE (RMC)

The Companies Act, 2013 do not find place for constitution of the Risk Management Committee. However, Section
134(3)(n) only describes about the Risk Management Policy.
SEBI (LODR) Regulations: Regulation 21 of the SEBI (LODR) Regulations, 2015 deals with the Risk Management
Committee and provides as under:
(1) The board of directors shall constitute a Risk Management Committee.
(2) The majority of members of Risk Management Committee shall consist of members of the board of directors
and in case of a listed entity having outstanding SR equity shares, at least two thirds of the Risk Management
Committee shall comprise of independent directors.
(3) The Chairperson of the Risk management committee shall be a member of the board of directors and senior
executives of the listed entity may be members of the committee.
(3A) The risk management committee shall meet at least once in a year.
(4) The board of directors shall define the role and responsibility of the Risk Management Committee and may
delegate monitoring and reviewing of the risk management plan to the committee and such other functions as
it may deem fit such function shall specifically cover cyber security.
(5) The provisions of this regulation shall be applicable to top 500 listed entities, determined on the basis of
market capitalisation, as at the end of the immediate previous financial year.

VIGIL MECHANISM
Although the establishment of Vigil Mechanism is mandatory under the Companies Act, 2013 as well as in SEBI
(LODR) Regulations, 2015, but the word used is ‘mechanism’ and not the ‘committee’.
Lesson 5 • Board Committees 157

However, it shall be worthwhile to narrate the relevant provisions of the vigil mechanism here;

Provisions of VIGIL MECHANISM

Under the Companies Act, 2013 Under SEBI (LODR) Regulations, 2015
Section 177 read with Rule 7 of the Companies (Meetings Regulation 22 deals with the Vigil Mechanism.
of Board and Its Powers) Rules, 2014.
Constitution The listed entity shall formulate a vigil mechanism for
As per Section 177(9)Every listed company or such directors and employees to report genuine concerns.
class or classes of companies as prescribed under Rule [Regulation 22(1)]
7 of the Companies (Meetings of Board and its Powers)
Rules, 2014, shall establish a vigil mechanism for
directors and employees to report genuine concerns in
such manner as may prescribed in Rule 7.
Establishment of Vigil Mechanism
(1) Every listed company and the companies belonging
to the following class or classes shall establish a
vigil mechanism for their directors and employees
to report their genuine concerns or grievances-
(a) the Companies which accept deposits from
the public;
(b) the Companies which have borrowed money
from banks and public financial institutions
in excess of fifty crore rupees.
(2) The companies which are required to constitute an
audit committee shall oversee the vigil mechanism
through the committee and if any of the members
of the committee have a conflict of interest in a
given case, they should recuse themselves and
the others on the committee would deal with the
matter on hand.
(3) In case of other companies, the Board of directors
shall nominate a director to play the role of audit
committee for the purpose of vigil mechanism to
whom other directors and employees may report
their concerns.
(4) The vigil mechanism shall provide for adequate
safeguards against victimisation of employees and
directors who avail of the vigil mechanism and
also provide for direct access to the Chairperson of
the Audit Committee or the director nominated to
play the role of Audit Committee, as the case may
be, in exceptional cases.
(5) In case of repeated frivolous complaints being filed
by a director or an employee, the audit committee
or the director nominated to play the role of
audit committee may take suitable action against
the concerned director or employee including
reprimand.
 158 Lesson 5 • PP-GRMCE

The vigil mechanism under section 177(9) shall provide The vigil mechanism shall provide for adequate
for adequate safeguards against victimisation of persons safeguards against victimization of director(s) or
who use such mechanism and make provision for direct employee(s) or any other person who avail the
access to the chairperson of the Audit Committee in mechanism and also provide for direct access to the
appropriate or exceptional cases: chairperson of the audit committee in appropriate or
Provided that the details of establishment of such exceptional cases. [Regulation 22(2)]
mechanism shall be disclosed by the company on its
website, if any, and in the Board’s report.

OTHER COMMITTEES / NON- MANDATORY COMMITTEES OF THE BOARD

In addition to the Committees of the Board mandated by the Companies Act, 2013 or SEBI (LODR) Regulations,
2015, Companies may also constitute other Committees to oversee a specific objective or project. The nomenclature,
composition and role of such Committees will vary, depending upon the specific objectives and nature of business
of the company. A few examples of such Committees prevalent in the corporate sector in India and abroad are given
below:
(a) Corporate Governance Committee
The Corporate Governance Committee is responsible for considering and making recommendations to the
Board concerning the appropriate size, functions and needs of the Board. The Corporate Governance Committee
may, at its sole discretion, engage director search firms and has the sole authority to approve the fees and other
retention terms with respect to any such firms. The Corporate Governance Committee also has the authority, as
necessary and appropriate, to consult with other outside advisors to assist in its duties to the Company.
A company may constitute this Committee to develop and recommend the board a set of corporate governance
guidelines applicable to the company, implement policies and processes relating to corporate governance, to
review, periodically, the corporate governance guidelines of the company. Many companies give the mandate
of corporate governance to nomination committee and is given the nomenclature Nomination and Corporate
Governance Committee.
Typically, the committee may be responsible for considering matters relating to corporate governance including
the composition of board, appointment of new directors, review of strategic human resource decisions,
succession planning for the chairman and other key board and executive positions, performance evaluation of
the board and its committees and individual directors.
(b) Regulatory, Compliance & Government Affairs Committee
The primary objective of the Compliance Committee is to review, oversee, and monitor:
• the Company’s compliance with applicable legal and regulatory requirements,
• the Company’s policies, programmes, and procedures to ensure compliance with relevant laws, the
Company’s Code of Conduct, and other relevant standards;
• the Company’s efforts to implement legal obligations arising from settlement agreements and other
similar documents; and
• perform any other duties as are directed by the Board of Directors of the company.
The committee oversees the Company’s non-financial compliance programmes and systems with respect to
legal and regulatory requirements. Besides, it also oversees compliance with any ongoing Corporate Integrity
Agreements or any similar undertakings by the Company with a government agency. Section 134 (5) of the Act
dealing with Directors Responsibility Statement states that the directors need to ensure that they have devised
proper systems to ensure compliance with the provisions of all applicable laws and that such systems were
adequate and operating effectively. Essentially, this responsibility ought to be the bulwark of the charter of this
committee.
 Lesson 5 • Board Committees 159

(c) Science, Technology & Sustainability Committee

Science, Technology & Sustainability Committee may be constituted to
• Monitor and review the overall strategy, direction and effectiveness of the Company’s research and
development.
• Serve as a resource and provide input, as needed, regarding the scientific and technological aspects of
product safety matters.
• Review the Company’s policies, programmes and practices on environment, health, safety and sustainability.
• Assist the Board in identifying and comprehending significant emerging science and technology policy
and public health issues and trends that may impact the Company’s overall business strategy.
• Assist the Board in its oversight of the Company’s major acquisitions and business development activities
as they relate to the acquisition or development of new science or technology.
(d) Customer Service Committee / Customer Grievance Committee
Some service oriented companies may have separate Board Committee on customer service matters.
Grievance committee may look after the complaints (if any) received from the customer and the steps taken
to resolve it.
(e) Fraud Monitoring Committee
Although the fraud related aspects may be taken care of by the Audit Committee, but in some companies which
are in field of financial services, there may be need of the separate fraud monitoring committee, which may
take care of the checks and balances and preventive measures in order to discourage the employees in their
modus operandi.
(f) Information Technology Committee
Information Technology is need of hour. This committee may look after the present and future need of the
induction of Information Technology and also takes care of need of providing the training to the existing as well
new incumbents.
(g) Performance Appraisal Review Committee
This committee periodically (say annually) reviews the performance to Top Executives/ Key Managerial Person
of the company as well as the Directors of the company. It is just like the performance review of the each and
every employee, which happens in most of the organizations. By this annual exercise, the persons sitting at
helm of the affairs of the company comes under the scanner of this committee.
(h) Credit Committee
In financial institutions, the credit proposals beyond a threshold limits are being looked after by the Credit
Committee of the Board.
(i) Ethics Committee
The role of Ethics Committee may involve the review of the standards and procedures, facilitate compliance,
due diligence of prospective employees, oversight of communication and training of ethics programme, monitor
and audit compliance, enforcement of disciplinary mechanism, analysis and follow-up.

LESSON ROUND UP
• A Board Committee is a small working group identified by the Board, consisting of Board members for the
purpose of supporting the Board’s work.
• To enable better and more focused attention on the affairs of the Corporation, the board delegates particular
matters to committees of the board set up for the purpose.
160 Lesson 5 • PP-GRMCE

• Committees are usually formed as a means of improving board effectiveness and efficiency, in areas where
more focused, specialized and technical discussions are required.
• Committees prepare the ground work for decision-making and report at the subsequent Board meeting.
• Audit committee is one of the main pillars of the corporate governance mechanism in any company. The
committee is charged with the principal oversight of financial reporting and disclosures and enhance the
confidence in the integrity of the company’s financial reporting and disclosure and aims to the internal
control processes and procedures and the risk management systems.
• Greater specialization and intricacies of modern board work is one of the reasons for increased use of board
committees.
• Mandatory committees under Companies Act 2013 are Audit Committee, Nomination and Remuneration
Committee, stakeholders Relationship committee, CSR Committee.
• Other committees - Corporate Governance Committee, Compliance Committee, Risk Management Committee,
Ethics Committee, Strategies Committee, Capital Expenditure (Capex) Committee, etc.
• Nomination and Remuneration Committee: Nomination and Remuneration Committee as the name suggests
is constituted by a company is to determine the qualification and remuneration packages of executive
directors/ chief executive officers.
• Corporate Governance Committee: A company may constitute this committee to develop and recommend the
board a set of corporate governance guidelines applicable to the company, implement policies and processes
relating to corporate governance principles, to review, periodically, the corporate governance guidelines of
the company.
• Corporate Compliance Committee: The primary objective of the Compliance Committee is to review, oversee, and
monitor the Company’s compliance with applicable legal and regulatory requirements, its policies, programs, and
procedures to ensure compliance with relevant laws, its Code of Conduct, and other relevant standards.
• Risk Management Committee: A business is exposed to various kind of risk such as strategic risk, data-
security risk, fiduciary risk, credit risk, liquidity risk, reputational risk, environmental risk, competition risk,
fraud risk, technological risk etc. A risk management Committee’s role is to assist the Board in establishing
risk management policy, overseeing and monitoring its implementation.

GLOSSARY
Audit An audit committee is a group of selected members of a company’s board of directors whose
Committee responsibilities include helping auditors remain independent of management. Most audit
committees are made up of three to five or sometimes as many as seven directors who are not a
part of company management.
Corporate The Corporate Social Responsibility Committee is appointed by the Board of Directors to
Social promote a culture that emphasizes and sets high standards for corporate social responsibility
Responsibility and reviews corporate performance against those standards.
Committee
Independent An independent director (also sometimes known as an outside director) is a director (member)
Director of a board of directors who does not have a material or pecuniary relationship with company or
related persons, except sitting fees.
Fraud Pursuant to the directions of the RBI, the Bank has constituted a Fraud Monitoring Committee,
monitoring exclusively dedicated to the monitoring and following up of cases of fraud involving amounts
Committee of Rs. 1,00,00,000/- (Rupees One Crore Only) and above. The objectives of this Committee
are the effective detection of frauds and immediate reporting of the frauds and actions taken
against the perpetrators of frauds to the concerned regulatory and enforcement agencies.
Lesson 5 • Board Committees 161

TEST YOURSELF
(These are meant for recapitulation only. Answers to these questions are not to be submitted for evaluation)
1. As a company secretary can you advise if there any need and advantages of Committee Management?
2. Can you explain in detail is constitution of nomination and remuneration committee mandatory?
3. Is the constitution of Risk Management Committee mandatory? Explain the importance of constitution of
Risk Management Committee?
4. Discuss in detail about Audit Committee.
162 Lesson 5 • PP-GRMCE
 Corporate Policies and
Lesson 6
Disclosures

Key Concepts One Learning Objectives Regulatory Framework

Should Know
To understand the: The Companies Act, 2013
• Corporate Social
• Various policies that are • Section 135(3), (4)& (5)
Responsibility Policy
formulated by the companies
• Vigil Mechanism • Section 177(10)
under different securities laws and
Policy the Companies Act, 2013. • Section 178(3) & (4)
• Nomination and • Disclosures to be made by The Companies (Accounts) Rules, 2014
Remuneration Policy companies including the entities The Companies (Appointment
• Disclosure and that are listed on recognized stock and Remuneration of Managerial
Transparency exchanges. Personnel) Rules, 2014
• Disclosures which are mandatory The Companies (CSR) Rules, 2014
under the securities laws in India.
SEBI (LODR) Regulations, 2015
SEBI (ICDR) Regulations, 2018
SEBI (Substantial Acquisition of Shares
and Takeovers) Regulations, 2011
SEBI (Prohibition of Insider
Trading) Regulations, 2015

Lesson Outline
• Corporate Policies - Meaning and Importance
• Regulatory Framework
• Policies under the Companies Act, 2013
• Policies under the SEBI (LODR), Regulations, 2015
• Policies under other laws and voluntary policies
• Introduction to Disclosures and Transparency Requirements
• Mandatory Disclosures
• In terms of Companies Act, 2013 and various Rules made thereunder
• Under SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018
• Under SEBI (Substantial Acquisition of Shares and Takeovers) Regulations,
2011
• Under SEBI (Listing Obligations and Disclosure Requirements)
Regulations, 2015
• Under SEBI (Prohibition of Insider Trading) Regulations, 2015
• LESSON ROUNDUP
• GLOSSARY
• TEST YOURSELF
164 Lesson 6 • PP-GRMCE

CORPORATE POLICIES - MEANING AND IMPORTANCE

Corporate Policy is a formal declaration of the guiding principles by which an organization will function. It is usually
developed by its board of directors or a senior management policy committee. The management of a company
typically involves three tiers of documentation addressing operational issues. Memorandum of association creates
the entity in the first place. Articles of association provide structural definition to the enterprise. Policies and
procedures delineate more specific processes for day-to- day operations.
Policies are an essential component of every organisation and address important issues. Utilizing policies during
decision-making ensures that the management is consistent in its decisions. These policies must be effectively
communicated amongst stakeholders. The company should provide easy access to policies and also publicly disclose
them. These policies serve as an important form of internal control, it minimizes cost and helps in building a learning
culture in the Organisation.
In present scenario, corporate policies are essential even for businesses seeking to do things in a different way.
Without proper policies, it is extremely tough for the business to continue and policies work as guide and help the
manager to direct all the actions towards the same goal.

Some points highlighting the importance of corporate policies are given below-
• Policies are necessary to perform the business activities in a smooth way.
• Corporate polices offer clear cut courses for achievement of organizational goals.
• If an appropriate explicit policy has been developed, most of the details can be easily taken care of by the
employees and management would not needlessly spend its time as well as energy in performing such
tasks.
• Corporate Policies present you with instructions and a platform for making decisions.
• Policies promote delegation of the power of making decisions.
• Properly formulated corporate policies give a direction in which all management pursuits are targeted.
• Policies provide steadiness to the action of the members of the organization.
• Policies and guidelines prevent the subordinates to rethink on the day to day challenges and therefore
prevent repeated analysis of problems.
• Policies help in analysis of performance by serving as a standard.
• Corporate policies boost employees’ commitment and loyalty for the business.
• It helps in dealing with the issues for optimal utilization of limited resources.
• Sound policies aid in developing good public image of an organization.
• Corporate Polices give the organization clear targets so that the managers can decide regarding the future
plan of action.
• They act as tool for co-ordination and control.

Thus we can say that corporate policies are significant for a corporation. They help in the all-round development
and growth of the organization. A sound corporate policy gives indication to the workers with regards to working
conditions, organizational culture, authority, and responsibility.

Policies under the Companies Act, 2013

A Company has to formulate specific policies in different areas of operations that help to bring uniformity in processes
by clearly defining the business approach. Some of the policies are legally required, some are organisational needs
and some are voluntarily made as part of good governance.
 Lesson 6 • Corporate Policies and Disclosures 165

(1) Corporate Social Responsibility Policy

Section 135(4) of the Companies Act 2013, provides that the Board of every company which is required to
constitute a CSR Committee (as specified in sub-section (1) of section 135) shall:
(a) after taking into account the recommendations made by the Corporate Social Responsibility Committee,
approve the Corporate Social Responsibility Policy for the company and disclose contents of such Policy
in its report and also place it on the company’s website, and
(b) ensure that the activities as are included in Corporate Social Responsibility Policy of the company are
undertaken by the company.

Clarification with regard to provisions of CSR under section 135 of the Companies Act, 2013
[MCA’s General Circular No. 05/ 2016, No. 05/01/2014-CSR dated 16th May, 2016.]
The Companies, while undertaking CSR activities under provision of the Companies Act, 2013,
shall not contravene any other prevailing laws of the land including Cigarettes and Other Tobacco
Products Act (COTPA), 2003.

Section 135(3) (a) provides that the CSR Committee shall formulate and recommend to the Board, a CSR Policy
which shall include the activities to be undertaken by the company in areas or subject, specified in Schedule
VII.
The CSR Policy of the company shall, inter-alia, include the following namely:-
• A list of CSR projects or programs which a company plans to undertake within the areas or subjects
specified in schedule VII of the Act, specifying modalities of execution of such project or programs and
implementation schedules for the same.
 166 Lesson 6 • PP-GRMCE

• Monitoring process of such projects or programs.

• A clause specifying that the surplus arising out of the CSR projects or programs or activities shall not form
part of the business profit of the company.
Activities which may be included by companies in their Corporate Social Responsibility Policies are discussed
in the later lesson of the book.
(2) Risk Management Policy
Section 134(3)(n) of the Companies Act 2013, provides that a statement indicating development and
implementation of a risk management policy for the company including identification therein of elements of
risk, if any, which in the opinion of the Board may threaten the existence of the company should be included
in the report by its Board of Directors. This indicates that framing a risk management policy is also envisaged
under the provisions of the Companies Act, 2013.
(3) Vigil Mechanism Policy
Section 177(10) of the Companies, Act 2013 provides that the vigil mechanism under sub-section (9) of the
said section shall provide for adequate safeguards against victimisation of persons who use such mechanism
and make provision for direct access to the chairperson of the Audit Committee in appropriate or exceptional
cases and the details of establishment of such mechanism shall be disclosed by the company on its website, if
any, and in the Board’s report.
(4) Nomination and Remuneration policy
Section 178 (3) of the Companies Act 2013 provides that the Nomination and Remuneration Committee shall
formulate the criteria for determining qualifications, positive attributes and independence of a director and
recommend to the Board a policy, relating to the remuneration for the directors, key managerial personnel and
other employees.
Section 178(4) provides that the Nomination and Remuneration Committee shall, while formulating the
policy shall ensure that-
(a) the level and composition of remuneration is reasonable and sufficient to attract, retain and motivate
directors of the quality required to run the company successfully;
(b) relationship of remuneration to performance is clear and meets appropriate performance benchmarks;
and
(c) remuneration to directors, key managerial personnel and senior management involves a balance
between fixed and incentive pay reflecting short and long-term performance objectives appropriate to
the working of the company and its goals:
The policy shall be placed on the website of the company, if any, and the salient features of the policy and
changes therein, if any, along with the web address of the policy, if any, shall be disclosed in the Board’s report.

Policies/Codes under the SEBI (LODR), Regulations, 2015

 Lesson 6 • Corporate Policies and Disclosures 167

1. Risk policy: A listed entity is required to have a risk policy which shall be reviewed and guided by the board of
directors. [Regulation 4(2)(f)(ii)(1)]
2. Policy for preservation of documents: A listed entity is required to have a policy for preservation of
documents, approved by its board of directors, classifying them in at least two categories as follows-
(a) documents whose preservation shall be permanent in nature ;
(b) documents with preservation period of not less than eight years after completion of the relevant
transactions.
The documents may be preserved in electronic mode. [Regulation 9]
3. Archival Policy: A listed entity is required to identify all the documents which need to be preserved under
various regulations relating to securities laws and then develop a suitable archival policy. According to
Regulation 2 (zf) of SEBI (LODR) Regulations, 2015 “securities laws” means the Act -
• The Securities Contracts (Regulation) Act, 1956,
• The Depositories Act, 1996, the provisions of the Companies Act, 1956 and Companies Act, 2013, and
• the rules, regulations, circulars or guidelines made thereunder.
4. Policy for Determining ‘Material’ Subsidiary: A listed entity is required to formulate a policy for determining
‘material’ subsidiary. “Material subsidiary” means a subsidiary, whose income or net worth exceeds 10% of
the consolidated income or net worth respectively, of the listed entity and its subsidiaries in the immediately
preceding accounting year. [Regulation 16(1)(c)]
5. Policy on Materiality of Related Party: A listed entity is required to formulate a policy on materiality of
related party transactions and on dealing with related party transactions including clear threshold limits duly
approved by the board of directors and such policy needs to be reviewed by the board of directors at least once
every three years and updated accordingly.
Explanation: A transaction with a related party is considered material if the transaction(s) to be entered into
individually or taken together with previous transactions during a financial year, exceeds 10% of the annual
consolidated turnover of the listed entity as per the last audited financial statements of the listed entity.
[Regulation 23(1)]
Notwithstanding the above, with effect from July 01, 2019 a transaction involving payments made to a related
party with respect to brand usage or royalty shall be considered material if the transaction(s) to be entered
into individually or taken together with previous transactions during a financial year, exceed 5% of the annual
consolidated turnover of the listed entity as per the last audited financial statements of the listed entity.
[Regulation 23(1A)]
6. Policy for determination of materiality of events: A listed entity is required to frame a policy for determination
of materiality, duly approved by its board of directors, which shall be displayed on its website. The policy shall
be based on the following criteria for determination of materiality of events/ information: The omission of
an event or information, which is likely to result in discontinuity or alteration of event or information already
available publicly; or The omission of an event or information is likely to result in significant market reaction if
the said omission came to light at a later date; In case where the criteria specified in sub-clauses (a) and (b) are
not applicable, an event/information may be treated as being material if in the opinion of the board of directors
of listed entity, the event / information is considered material.
7. Whistle Blower Policy: Regulation 22 provides that -
(1) A listed entity shall formulate a vigil mechanism for directors and employees to report genuine concerns.
(2) The vigil mechanism shall provide for adequate safeguards against victimization of director(s) or
employee(s) or any other person who avail the mechanism and also provide for direct access to the
chairperson of the audit committee in appropriate or exceptional cases.
 168 Lesson 6 • PP-GRMCE

Further in terms of Regulation 46(2)(e) requires that the listed entity shall disseminate the information under a
separate section on its website relating to the details of establishment of Vigil mechanism / Whisle Blower Policy
8. Policy relating to the remuneration of the directors, key managerial personnel and other employees: A
listed entity is required to formulate a policy on the remuneration of the directors, key managerial personnel
and other employees. [Part- D, Schedule II (1)]
9. Policy on board diversity: A listed entity is required to formulate a policy on diversity of board of directors as
mentioned in Part- D, Schedule II (3) - role of nomination and remuneration committee.
10. Dividend Distribution Policy: Regulation 43A provides that-
(1) The top five hundred listed entities based on market capitalization (calculated as on March 31 of every
financial year) shall formulate a dividend distribution policy which shall be disclosed in their annual
reports and on their websites.
(2) The dividend distribution policy shall include the following parameters:
(a) the circumstances under which the shareholders of the listed entities may or may not expect
dividend;
(b) the financial parameters that shall be considered while declaring dividend;
(c) internal and external factors that shall be considered for declaration of dividend;
(d) policy as to how the retained earnings shall be utilized; and
(e) parameters that shall be adopted with regard to various classes of shares:
Provided that if the listed entity proposes to declare dividend on the basis of parameters in addition to
clauses (a) to (e) or proposes to change such additional parameters or the dividend distribution policy
contained in any of the parameters, it shall disclose such changes along with the rationale for the same in
its annual report and on its website.
(3) The listed entities other than top five hundred listed entities based on market capitalization may disclose
their dividend distribution policies on a voluntary basis in their annual reports and on their websites.
11. Code of Conduct for Board of Directors and Senior Management:
• Regulation 17(5) provides that - (a) the board of directors shall lay down a code of conduct for all members
of board of directors and senior management of the listed entity. (b) The code of conduct shall suitably
incorporate the duties of independent directors as laid down in the Companies Act, 2013.
• As per Regulation 26(3), all members of the board of directors and senior management Personnel shall
affirm compliance with the code of conduct of board of directors and senior management on an annual
basis.
• As per Regulation 46(2)(d), this Code of Conduct needs to be disclosed on the website of the Company.
• The Compliance Certificate under Corporate Governance, Part B of Schedule II requires that there are, to
the best of their knowledge and belief, no transactions entered into by the listed entity during the year
which are fraudulent, illegal or violative of the listed entity’s code of conduct.
• As per Para D of Schedule V, the Annual Report of the Company shall contain Declaration signed by the
chief executive officer stating that the members of board of directors and senior management personnel
have affirmed compliance with the code of conduct of board of directors and senior management.

POLICIES UNDER OTHER LAWS AND VOLUNTARY POLICIES

1. Insider Trading Policy: A listed company has to also formulate certain Policies as per the requirements of
SEBI (Prohibition of Insider Trading) Regulations, 2015. These are discussed in detail in the later part of the
Chapter.
 Lesson 6 • Corporate Policies and Disclosures 169

2. Policy for prevention of sexual harassment at workplace: All companies are required to formulate policy
for prevention of sexual harassment at workplace under the Sexual Harassment of Women at Workplace
(Prevention, Prohibition and Redressal) Act, 2013. The policy should contain the procedures and guidelines to
govern cases against sexual harassment in the company.
3. Voluntary Policies: In addition to above, the companies may also formulate following policies:
• Code of business conduct & Ethics
• Ethics policy
• Information security policy
• Health and safety policy
• Gender diversity policy
• Environmental policy
• Policy on investor relations
• Quality policy
• Social accountability policy
• Communication policy
• Investment and cash policy
• Policy for ascertaining the ‘Fit and Proper’ status of directors
• Affirmative action policy
• Code of corporate disclosures.

DISCLOSURE AND TRANSPARENCY REQUIREMENTS

Good corporate governance should ensure that timely and accurate disclosure is made regarding all material matters
concerning the corporation, including its financial situation and results. It is in the interest of each organisation to
provide clear, timely and reliable information that is adequately prepared, and to make relevant information equally
accessible to all stakeholders.
Shareholders and potential investors require access to regular, reliable and comparable information in sufficient
detail for them to assess the stewardship of management and make informed decisions about their share value.
Insufficient or unclear information can negatively affect the organisation in many ways.
The appropriate dissemination of information should provide for:
• Timely and cost-efficient access to relevant information
• Disclosure of all material developments that arise between regular reports
• Simultaneous reporting of information to all shareholders in order to ensure their equitable treatment
• Non-disclose of information that may endanger the organisation’s competitive position
Information should be prepared and disclosed in accordance with high quality standards of accounting and financial
and non-financial disclosure.
The various disclosures requirements under Companies Act, 2013 and other related legislations in our country are
given hereunder:

1. In Terms of Companies Act, 2013

Given below are the provisions relating to disclosure in the Board’s Report of a Company. However these are not
exhaustive and students are encouraged to read the various provisions to apprise themselves about disclosures
in Board’s Report prescribed at various places in the Act. Besides the Board’s Report, the Students may also make
note of disclosures required on the website of a Company, disclosures required in explanatory statement to be
 170 Lesson 6 • PP-GRMCE

annexed to notice of a general meeting in various circumstances, disclosures to be made in financial statements,
offer documents, etc. to understand the scope of the Act with respect to disclosure and transparency.
A. Disclosures under Section 134 of Companies Act 2013
Section 134(3) provides that there shall be attached to statements laid before a company in general meeting, a
report by its Board of Directors, which shall include -
(a) the web address, if any, where annual return referred to in sub-section (3) of section 92 has been placed.
(b) number of meetings of the Board.
(c) Directors’ Responsibility Statement.
(ca) details in respect of frauds reported by auditors under sub-section (12) of section 143 other than those
which are reportable to the Central Government.
(d) a statement on declaration given by independent directors under section 149(6).
(e) in case of a company covered under sub-section (1) of section 178, company’s policy on directors’
appointment and remuneration including criteria for determining qualifications, positive attributes,
independence of a director and other matters as given under sub-section (3) of section 178.
(f) explanations or comments by the Board on every qualification, reservation or adverse remark or
disclaimer made - (i) by the auditor in his report; and (ii) by the company secretary in practice in his
secretarial audit report.
(g) particulars of loans, guarantees or investments under section 186.
(h) particulars of contracts or arrangements with related parties referred to in sub-section (1) of section 188
in the prescribed form.
(i) the state of the company’s affairs.
(j) the amounts, if any, which it proposes to carry to any reserves.
(k) the amount, if any, which it recommends should be paid by way of dividend.
(l) material changes and commitments, if any, affecting the financial position of the company which have
occurred between the end of the financial year of the company to which the financial statements relate
and the date of the report.
(m) the conservation of energy, technology absorption, foreign exchange earnings and outgo, in such manner
as may be prescribed.
(n) a statement indicating development and implementation of a risk management policy for the company
including identification therein of elements of risk, if any, which in the opinion of the Board may threaten
the existence of the company.
(o) the details about the policy developed and implemented by the company on corporate social responsibility
initiatives taken during the year.
(p) in case of a listed company and every other public company having such paid-up share capital as may be
prescribed, a statement indicating the manner in which formal annual evaluation of the performance of
the Board, its Committees and of individual directors has been made.
(q) such other matters as may be prescribed.
Provided that where disclosures referred to in this sub-section have been included in the financial
statements, such disclosures shall be referred to instead of being repeated in the Board’s report.
Provided further that where the policy referred to in clause (e) or clause (o) is made available on
company’s website, if any, it shall be sufficient compliance of the requirements under such clauses if the
salient features of the policy and any change therein are specified in brief in the Board’s report and the
web-address is indicated therein at which the complete policy is available.
 Lesson 6 • Corporate Policies and Disclosures 171

As per Section 134(5), the Directors’ Responsibility Statement referred to in clause (c) of sub-section (3) shall
state that -
(a) in the preparation of the annual accounts, the applicable accounting standards had been followed along
with proper explanation relating to material departures;
(b) the directors had selected such accounting policies and applied them consistently and made judgments
and estimates that are reasonable and prudent so as to give a true and fair view of the state of affairs of
the company at the end of the financial year and of the profit and loss of the company for that period;
(c) the directors had taken proper and sufficient care for the maintenance of adequate accounting records in
accordance with the provisions of this Act for safeguarding the assets of the company and for preventing
and detecting fraud and other irregularities;
(d) the directors had prepared the annual accounts on a going concern basis;
(e) the directors, in the case of a listed company, had laid down internal financial controls to be followed by
the company and that such internal financial controls are adequate and were operating effectively.
Explanation to clause(e) defines the term “internal financial controls as the policies and procedures
adopted by the company for ensuring the orderly and efficient conduct of its business, including adherence
to company’s policies, the safeguarding of its assets, the prevention and detection of frauds and errors,
the accuracy and completeness of the accounting records, and the timely preparation of reliable financial
information; and
(f) the directors had devised proper systems to ensure compliance with the provisions of all applicable laws
and that such systems were adequate and operating effectively.
B. Disclosures under other Sections of Companies Act, 2013
Proviso to Section 178(4) provides that the Policy relating to the remuneration for the directors, key managerial
personnel and other employees, shall be placed on the website of the company, if any, and the salient features
of the policy and changes therein, if any, along with the web address of the policy, if any, shall be disclosed in
the Board’s report.
Section 149(10) provides that subject to the provisions of section 152, an independent director shall hold office
for a term up to five consecutive years on the Board of a company, but shall be eligible for reappointment on
passing of a special resolution by the company and disclosure of such appointment in the Board’s Report.
Under section 177(8), Board’s Report shall disclose the composition of Audit Committee and where the Board
had not accepted any recommendation of the Audit Committee, the same shall be disclosed in such report
along with the reasons therefor.
Proviso to section 177(10) prescribes that the details of establishment of vigil mechanism [under section 177
(9)]shall be disclosed by the company on its Website, if any, and in the Board’s Report.
As per section 204(1) every listed company and other companies as prescribed in Rule 9 of the Companies
(Appointment & Remuneration of Managerial Personnel) Rules, 2014 shall annex with its Board’s report, a
secretarial audit report given by a Company Secretary in practice.Sub-section (3) of section 204 provides that
Board of Directors, in their report shall explain in full any qualification or observation or other remarks made
by the Company Secretary in Practice in his Secretarial Audit Report.
Section 135(2) provides that the Board’s report under section 134(3) shall disclose the composition of the
Corporate Social Responsibility Committee.Section 135(5) provides that the Board of every company referred
to in sub-section (1) shall ensure that the company spends, in every financial year, at least two per cent.
of the average net profits of the company made during the three immediately preceding financial years or
where the company has not completed the period of three financial years since its incorporation, during such
immediately preceding financial years, in pursuance of its Corporate Social Responsibility Policy. The second
proviso to section 135(5) provides that if the company fails to spend such amount, the Board shall, in its report
made under clause (o) of sub-section (3) of section 134, specify the reasons for not spending the amount and,
172 Lesson 6 • PP-GRMCE

unless the unspent amount relates to any ongoing project referred to in sub-section (6), transfer such unspent
amount to a Fund specified in Schedule VII, within a period of six months of the expiry of the financial year.
The Second proviso to section 143(12) provides that the companies, whose auditors have reported frauds
under sub-section (12) to the audit committee or the Board but not reported to the Central Government, shall
disclose the details about such frauds in the Board’s report in the manner as prescribed in Rules.
As per Section 168(1) provides that , a company is required to place the fact of resignation of a Director in the
report of directors laid in the immediately following general meeting by the company.
The proviso to r Section 67(3) provides, disclosures in respect of voting rights not exercised directly by the
employees in respect of shares to which the scheme relates shall be made in the Board’s report in such manner
as prescribed in the Rules.
As per Section 92(3), every company shall place a copy of the annual return on the website of the company, if
any, and the web-link of such annual return shall be disclosed in the Baord’s report.
As per Section 188(2), every contract or arrangement entered into with related party as provided under sub-
section (1) shall be referred to in the Board’s report to the shareholders along with the justification for entering
into such contract or arrangement.
As per Section 197(12) provides that every listed company shall disclose in the Board’s report, the ratio of the
remuneration of each director to the median employee’s remuneration and other details as prescribed.

2. In Terms of Various Rules made under Companies Act, 2013

A. Companies (Accounts) Rules 2014
Matters to be Included in Board’s Report
As per Rule 8 of Companies (Accounts) Rules 2014 following matters need to be disclosed in the Board’s
Report:-
(1) The Board’s Report shall be prepared based on the stand alone financial statements of the company and
shall report on the highlights of performance of subsidiaries, associates and joint venture companies and
their contribution to the overall performance of the company during the period under report.
(2) The Report of the Board shall contain the particulars of contracts or arrangements with related parties
referred to in sub-section (1) of section 188 in the Form AOC-2.
(3) The report of the Board shall contain the following information and details, namely:-
(A) Conservation of energy-
(i) the steps taken or impact on conservation of energy;
(ii) the steps taken by the company for utilising alternate sources of energy;
(iii) thecapital investment on energy conservation equipments.
(B) Technology absorption-
(i) the efforts made towards technology absorption;
(ii) the benefits derived like product improvement, cost reduction, product development or import
substitution;
(iii) in case of imported technology (imported during the last three years reckoned from the
beginning of the financial year)-
(a) the details of technology imported;
(b) the year of import;
(c) if not fully absorbed, areas where absorption has not taken place, and the reasons thereof;
and
(iv) the expenditure incurred on Research and Development.
 Lesson 6 • Corporate Policies and Disclosures 173

(C) Foreign exchange earnings and outgo- The Foreign Exchange earned in terms of actual inflows
during the year and the Foreign Exchange outgo during the year in terms of actual outflows.
Provided that the requirement of furnishing information and details under this sub-rule shall not
apply to a government company engaged in producing defence equipment.
(4) Every listed company and every other public company having a paid up share capital of twenty five crore
rupees or more calculated at the end of the preceding financial year shall include, in the report by its
Board of directors, a statement indicating the manner in which formal annual evaluation has been made
by the Board of its own performance and that of its committees and individual directors.
(5) In addition to the information and details specified in sub-rule (4), the report of the Board shall also
contain -
(i) the financial summary or highlights;
(ii) the change in the nature of business, if any;
(iii) the details of directors or key managerial personnel who were appointed or have resigned during
the year;
(iiia) a statement regarding opinion of the Board with regard to integrity, expertise and experience
(including the proficiency) of the independent directors appointed during the year”.
Explanation.-For the purposes of this clause, the expression “proficiency” means the proficiency of
the independent director as ascertained from the online proficiency self-assessment test conducted
by the institute notified under sub-section (1) of section 150.
(iv) the names of companies which have become or ceased to be its Subsidiaries, joint ventures or
associate companies during the year;
(v) the details relating to deposits, covered under Chapter V of the Act-
(a) accepted during the year;
(b) remained unpaid or unclaimed as at the end of the year;
(c) whether there has been any default in repayment of deposits or payment of interest thereon
during the year and if so, number of such cases and the total amount involved-
(i) at the beginning of the year;
(ii)
maximum during the year;
(iii) at the end of the year.
(vi) the details relating to deposits, not in compliance with Chapter V of the Act.
(vii) the details of significant and material orders passed by the regulators or courts or tribunals
impacting the going concern status and company’s operations in future.
(viii) the details in respect of adequacy of internal financial controls with reference to the Financial
Statements.
(ix) a disclosure, as to whether maintenance of cost records as specified by the Central Government
under sub-section (1) of section 148 of the Companies Act, 2013, is required by the Company and
accordingly such accounts and records are made and maintained.
(x) a statement that the company has complied with provisions relating to the constitution of Internal
Complaints Committee under the Sexual Harassment of Women at Workplace (Prevention,
Prohibition and Redressal) Act, 2013 [14 of 2013].
(xi) the details of application made or any proceeding pending under the Insolvency and Bankruptcy
Code, 2016 (31 of 2016) during the year alongwith their status as at the end of the financial year.
 174 Lesson 6 • PP-GRMCE

(xii) the details of difference between amount of the valuation done at the time of one time settlement
and the valuation done while taking loan from the Banks or Financial Institutions along with the
reasons thereof.
(6) This rule shall not apply to One Person Company or Small Company]
Matters to be included in Board’s Report for One Person Company and Small Company
As per Rule 8A of Companies (Accounts) Rules 2014 following matters are to be disclosed in the Board’s Report
for One Person Company and Small Company :-
(1) The Board’s Report of One Person Company and Small Company shall be prepared based on the stand
alone financial statement of the company, which shall be in abridged form and contain the following:-
(a) the web address, if any, where annual return referred to in sub-section (3) of section 92 has been
placed;
(b) number of meetings of the Board;
(c) Directors’ Responsibility Statement as referred to in sub-section (5) of section 134;
(d) details in respect of frauds reported by auditors under sub-section (12) of section 143 other than
those which are reportable to the Central Government;
(e) explanations or comments by the Board on every qualification, reservation or adverse remark or
disclaimer made by the auditor in his report;
(f) the state of the company’s affairs;
(g) the financial summary or highlights;
(h) material changes from the date of closure of the financial year in the nature of business and their
effect on the financial position of the company;
(i) the details of directors who were appointed or have resigned during the year;
(j) the details or significant and material orders passed by the regulators or courts or tribunals
impacting the going concern status and company’s operations in future.
(2) The Report of the Board shall contain the particulars of contracts or arrangements with related parties
referred to in sub-section (1) of section 188 in the Form AOC-2.
B. Companies (Share Capital and Debenture) Rules, 2014
Equity Shares With Differential Rights
Rule 4(4) provides that theBoard of Directors shall, inter alia, disclose in the Board’s Report for the financial
year in which the issue of equity shares with differential rights was completed, the following details, namely:-
(a) the total number of shares allotted with differential rights;
(b) the details of the differential rights relating to voting rights and dividends;
(c) the percentage of the shares with differential rights to the total post issue equity share capital with
differential rights issued at any point of time and percentage of voting rights which the equity share
capital with differential voting right shall carry to the total voting right of the aggregate equity share
capital;
(d) the price at which such shares have been issued;
(e) the particulars of promoters, directors or key managerial personnel to whom such shares are issued;
(f) the change in control, if any, in the company consequent to the issue of equity shares with differential
voting rights;
(g) the diluted Earning Per Share pursuant to the issue of each class of shares, calculated in accordance with
the applicable accounting standards;
(h) the pre and post issue shareholding pattern along with voting rights in the format specified under sub-
rule (2) of rule 4.
 Lesson 6 • Corporate Policies and Disclosures 175

Issue of Sweat Equity Shares

Rule 8(13) provides that the Board of Directors shall, inter alia, disclose in the Directors’ Report for the year in
which such shares are issued, the following details of issue of sweat equity shares namely:-
(a) the class of director or employee to whom sweat equity shares were issued;
(b) the class of shares issued as Sweat Equity Shares;
(c) the number of sweat equity shares issued to the directors, key managerial personnel or other employees
showing separately the number of such shares issued to them , if any, for consideration other than cash
and the individual names of allottees holding one percent or more of the issued share capital;
(d) the reasons or justification for the issue;
(e) the principal terms and conditions for issue of sweat equity shares, including pricing formula;
(f) the total number of shares arising as a result of issue of sweat equity shares;
(g) the percentage of the sweat equity shares of the total post issued and paid up share capital;
(h) the consideration (including consideration other than cash) received or benefit accrued to the company
from the issue of sweat equity shares;
(i) the diluted Earnings Per Share (EPS) pursuant to issuance of sweat equity shares.
Issue of Employee Stock Options
Rule 12(9) provides that the Board of directors, shall, inter alia, disclose in the Directors’ Report for the year,
the following details of the Employees Stock Option Scheme:
(a) options granted;
(b) options vested;
(c) options exercised;
(d) the total number of shares arising as a result of exercise of option;
(e) options lapsed;
(f) the exercise price;
(g) variation of terms of options;
(h) money realized by exercise of options;
(i) total number of options in force;
(j) employee wise details of options granted to:
(i) key managerial personnel;
(ii) any other employee who receives a grant of options in any one year of option amounting to five
percent or more of options granted during that year.
(iii) identified employees who were granted option, during any one year, equal to or exceeding one
percent of the issued capital (excluding outstanding warrants and conversions) of the company at
the time of grant.
C. Companies (Appointment & Remuneration of Managerial Personnel) Rules, 2014
Disclosure in Board’s Report-Rule 5
(1) Every listed company shall disclose in the Board’s Report:-
(i) the ratio of the remuneration of each director to the median remuneration of the employees of the
company for the financial year;
(ii) the percentage increase in remuneration of each director, Chief Financial Officer, Chief Executive
Officer, Company Secretary or Manager, if any, in the financial year;
176 Lesson 6 • PP-GRMCE

(iii) the percentage increase in the median remuneration of employees in the financial year;
(iv) the number of permanent employees on the rolls of company;
(v)
[omiited]
(vi)
[omitted]
(vii)
[omiited]
(viii) average percentile increase already made in the salaries of employees other than the managerial
personnel in the last financial year and its comparison with the percentile increase in the managerial
remuneration and justification thereof and point out if there are any exceptional circumstances for
increase in the managerial remuneration;
(ix)
[omitted
(x)
[omiited
(xi)
[omiited
(xii) affirmation that the remuneration is as per the remuneration policy of the company.
Explantion: For the purposes of this rule.-(i) the expression “median” means the numerical value
separating the higher half of a population from the lower half and the median of a finite list of numbers
may be found by arranging all the observations from lowest value to highest value and picking the middle
one. (ii) if there is an even number of observations, the median shall be the average of the two middle
values
(2) The board’s report shall include a statement showing the names of the top ten employees in terms of
remuneration drawn and the name of every employee, who-
(i) if employed throughout the financial year, was in receipt of remuneration for that year which, in the
aggregate, was not less than one crore and two lakh rupees;
(ii) if employed for a part of the financial year, was in receipt of remuneration for any part of that year,
at a rate which, in the aggregate, was not less than eight lakh and fifty thousand rupees per month;
(iii) if employed throughout the financial year or part thereof, was in receipt of remuneration in that
year which, in the aggregate, or as the case may be, at a rate which, in the aggregate, is in excess of
that drawn by the managing director or whole-time director or manager and holds by himself or
along with his spouse and dependent children, not less than two percent of the equity shares of the
company.
(3) The statement referred to in sub-rule (2) shall also indicate -
(i) designation of the employee;
(ii)
remuneration received;
(iii) nature of employment, whether contractual or otherwise;
(iv) qualifications and experience of the employee;
(v) date of commencement of employment;
(vi) the age of such employee;
(vii) the last employment held by such employee before joining the company;
(viii) the percentage of equity shares held by the employee in the company within the meaning of clause
(iii) of sub-rule (2) above; and
(ix) whether any such employee is a relative of any director or manager of the company and if so, name
of such director or manager.
 Lesson 6 • Corporate Policies and Disclosures 177

Provided that the particulars of employees posted and working in a country outside India, not being
directors or their relatives, drawing more than sixty lakh rupees per financial year or five lakh rupees
per month, as the case may be, as may be decided by the Board, shall not be circulated to the members
in the Board’s report, but such particulars shall be filed with the Registrar of Companies while filing the
financial statement and Board Reports.
Provided further that such particulars shall be made available to any shareholder on a specific request
made by him in writing before the date of such Annual General Meeting wherein financial statements for
the relevant financial year are proposed to be adopted by shareholders and such particulars shall be made
available by the company within three days from the date of receipt of such request from shareholders.
Provided also that in case of request received even after the date of completion of Annual General Meeting,
such particulars shall be made available to the shareholders within seven days from the date of receipt of
such request.
D. Companies (Corporate Social Responsibility) Rules, 2014
CSR Reporting - Rule 8
(1) The Board’s Report of a company under these rules pertaining to a financial year shall include an Annual
Report on CSR containing particulars specified in Annexure.
(2) In case of a foreign company, the balance sheet filed under section 381(1)(b) shall contain an Annexure
regarding report on CSR.
(3) (a) Every company having average CSR obligation of ten crore rupees or more in pursuance of subsection
(5) of section 135 of the Act, in the three immediately preceding financial years, shall undertake
impact assessment, through an independent agency, of their CSR projects having outlays of one
crore rupees or more, and which have been completed not less than one year before undertaking
the impact study.
(b) The impact assessment reports shall be placed before the Board and shall be annexed to the annual
report on CSR.
(c) A Company undertaking impact assessment may book the expenditure towards Corporate Social
Responsibility for that financial year, which shall not exceed five percent of the total CSR expenditure
for that financial year or fifty lakh rupees, whichever is less.

3. Under SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018

Disclosures in the draft offer document and offer document (Regulation 24)
(1) The draft offer document and offer document shall contain all material disclosures which are true and adequate
to enable the applicants to take an informed investment decision.
(2) Without prejudice to the generality of sub-regulation (1), the red-herring prospectus, and prospectus shall
contain:
(a) disclosures specified in the Companies Act, 2013; and;
(b) disclosures specified in Part A of Schedule VI.
(3) The lead manager(s) shall exercise due diligence and satisfy themselves about all aspects of the issue including
the veracity and adequacy of disclosure in the draft offer document and the offer document.
(4) The lead manager(s) shall call upon the issuer, its promoters and its directors or in case of an offer for sale,
also the selling shareholders, to fulfil their obligations as disclosed by them in the draft offer document and the
offer document and as required in terms of these regulations.
(5) The lead manager(s) shall ensure that the information contained in the draft offer document and offer
document and the particulars as per restated audited financial statements in the offer document are not more
than six months old from the issue opening date.
178 Lesson 6 • PP-GRMCE

Filing of the draft offer document and offer document (Regulation 25)
(1) Prior to making an initial public offer, the issuer shall file three copies of the draft offer document with
the concerned regional office of the SEBI under the jurisdiction of which the registered office of the issuer
company is located, in accordance with Schedule IV, along with fees as specified in Schedule III, through the
lead manager(s).
(2) The lead manager(s) shall submit the following to the SEBI along with the draft offer document:
(a) a certificate, confirming that an agreement has been entered into between the issuer and the lead
manager(s);
(b) a due diligence certificate as per Form A of Schedule V;
(c) in case of an issue of convertible debt instruments, a due diligence certificate from the debenture trustee
as per Form B of Schedule V.
(3) The issuer shall also file the draft offer document with the stock exchange(s) where the specified securities
are proposed to be listed, and submit to the stock exchange(s), the Permanent Account Number, bank account
number and passport number of its promoters where they are individuals, and Permanent Account Number,
bank account number, company registration number or equivalent and the address of the Registrar of
Companies with which the promoter is registered, where the promoter is a body corporate.
Draft offer document and offer document to be available to the public (Regulation 26)
(1) The draft offer document filed with the SEBI shall be made public for comments, if any, for a period of at
least twenty one days from the date of filing, by hosting it on the websites of the SEBI, stock exchanges where
specified securities are proposed to be listed and lead manager(s) associated with the issue.
(2) The issuer shall, within two days of filing the draft offer document with the SEBI, make a public announcement
in one English national daily newspaper with wide circulation, one Hindi national daily newspaper with wide
circulation and one regional language newspaper with wide circulation at the place where the registered office
of the issuer is situated, disclosing the fact of filing of the draft offer document with the SEBI and inviting the
public to provide their comments to the SEBI, the issuer or the lead manager(s) in respect of the disclosures
made in the draft offer document.
(3) The lead manager(s) shall, after expiry of the period stipulated in sub-regulation (1), file with the SEBI, details
of the comments received by them or the issuer from the public, on the draft offer document, during that period
and the consequential changes, if any, that are required to be made in the draft offer document.
(4) The issuer and the lead manager(s) shall ensure that the offer documents are hosted on the websites as
required under these regulations and its contents are the same as the versions as filed with the Registrar of
Companies, SEBI and the stock exchanges, as applicable.
(5) The lead manager(s) and the stock exchanges shall provide copies of the offer document to the public as and
when requested and may charge a reasonable sum for providing a copy of the same.
Issue-related advertisements (Regulation 43)
(1) Subject to the provisions of the Companies Act, 2013, the issuer shall, after filing the red herring prospectus (in
case of a book built issue) or prospectus (in case of fixed price issue) with the Registrar of Companies, make
a pre-issue advertisement in one English national daily newspaper with wide circulation, Hindi national daily
newspaper with wide circulation and one regional language newspaper with wide circulation at the place
where the registered office of the issuer is situated.
(2) The pre-issue advertisement shall be in the format and shall contain the disclosures specified in Part A of
Schedule X.
Provided that the disclosures in relation to price band or floor price and financial ratios contained therein shall
only be applicable where the issuer opts to announce the price band or floor price along with the pre-issue
advertisement pursuant to sub-regulation (4) of regulation 29.
 Lesson 6 • Corporate Policies and Disclosures 179

(3) The issuer may release advertisements for issue opening and issue closing, which shall be in the formats
specified in Parts B and C of Schedule X.
(4) During the period the issue is open for subscription, no advertisement shall be released giving an impression
that the issue has been fully subscribed or oversubscribed or indicating investors’ response to the issue.
Post-issue advertisements (Regulation 51)
(1) The lead manager(s) shall ensure that an advertisement giving details relating to subscription, basis of
allotment, number, value and percentage of all applications including ASBA, number, value and percentage
of successful allottees for all applications including ASBA, date of completion of despatch of refund orders, as
applicable, or instructions to self-certified syndicate banks by the registrar, date of credit of specified securities
and date of filing of listing application, etc. is released within ten days from the date of completion of the
various activities in at least one English national daily newspaper with wide circulation, one Hindi national
daily newspaper with wide circulation and one regional language daily newspaper with wide circulation at the
place where registered office of the issuer is situated.
(2) Details specified in sub regulation (1) shall also be placed on the websites of the stock exchange(s).
Post-issue reports (Regulation 55)
The lead manager(s) shall submit a final post-issue report as specified in Part A of Schedule XVII, along with a due
diligence certificate as per the format specified in Form F of Schedule V, within seven days of the date of finalization
of basis of allotment or within seven days of refund of money in case of failure of issue.

4. Under SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011

Disclosure of acquisition and disposal (Regulation 29)
(1) Any acquirer who acquires shares or voting rights in a target company which taken together with shares or
voting rights, if any, held by him and by persons acting in concert with him in such target company, aggregating
to five per cent or more of the shares of such target company, shall disclose their aggregate shareholding and
voting rights in such target company in such form as may be specified.
(2) Any person, who together with persons acting in concert with him, holds shares or voting rights entitling them
to five per cent or more of the shares or voting rights in a target company, shall disclose the number of shares
or voting rights held and change in shareholding or voting rights, even if such change results in shareholding
falling below five per cent, if there has been change in such holdings from the last disclosure made under
sub-regulation (1) or under this subregulation; and such change exceeds two per cent of total shareholding or
voting rights in the target company, in such form as may be specified.
(3) The disclosures required under sub-regulation (1) and sub-regulation (2) shall be made within two working
days of the receipt of intimation of allotment of shares, or the acquisition 77 [or the disposal] of shares or
voting rights in the target company to,-
(a) every stock exchange where the shares of the target company are listed; and
(b) the target company at its registered office.
(4) For the purposes of this regulation, shares taken by way of encumbrance shall be treated as an acquisition,
shares given upon release of encumbrance shall be treated as a disposal, and disclosures shall be made by such
person accordingly in such form as may be specified.
(5) Provided that such requirement shall not apply to a scheduled commercial bank or public financial institution
78[or a housing finance company or a systemically important non-banking financial company] as pledgee in
connection with a pledge of shares for securing indebtedness in the ordinary course of business.
180 Lesson 6 • PP-GRMCE

Explanation. - For the purpose of this sub-regulation, -

A. a “housing finance company” means a housing finance company registered with the National Housing
Bank for carrying on the business of housing finance and is either deposit taking or having asset size
worth rupees five hundred crores or more; and
B. a “systemically important non-banking financial company” shall have the same meaning as assigned to it
in the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations,
2018.
Continual disclosures (Regulation 30)
1. Every person, who together with persons acting in concert with him, holds shares or voting rights entitling him
to exercise twenty-five per cent or more of the voting rights in a target company, shall disclose their aggregate
shareholding and voting rights as of the thirty-first day of March, in such target company in such form as may
be prescribed.
2. The promoter of every target company shall together with persons acting in concert with him, disclose their
aggregate shareholding and voting rights as of the thirty-first day of March, in such target company in such
form as may be specified.
3. The disclosures required under sub-regulation (1) and (2) shall be made within seven working days from the
end of each financial year to, -
(a) every stock exchange where the shares of the target company are listed; and
(b) the target company at its registered office.
Disclosure of encumbered shares (Regulation 31)
1. The promoter of every target company shall disclose details of shares in such target company encumbered by
him or by persons acting in concert with him in such form as may be specified.
2. The promoter of every target company shall disclose details of any invocation of such encumbrance or release
of such encumbrance of shares in such form as may be specified.
3. The disclosures required under sub-regulation (1) and sub-regulation (2) shall be made within seven working
days from the creation or invocation or release of encumbrance, as the case may be to,-
(a) every stock exchange where the shares of the target company are listed; and
(b) the target company at its registered office.
4. The promoter of every target company shall declare on a yearly basis that he, along with persons acting in
concert, has not made any encumbrance, directly or indirectly, other than those already disclosed during the
financial year.
5. The declaration required under sub-regulation (4) shall be made within seven working days from the end of
each financial year to -
(a) every stock exchange where the shares of the target company are listed; and
(b) the audit committee of the target company.

5. Under SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015

Under SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, there are certain intimations and
disclosures which are required to be made to the stock exchanges for the timely and accurate dissemination of the
information to all the stakeholders. The listed entities which have listed its specified securities on any recognised
stock exchange(s) either on the main board or on SME Exchange or on institutional trading platform are required to
make following intimations and disclosures.
 Lesson 6 • Corporate Policies and Disclosures 181

Disclosures

Prior Intimations (Regulation 29)

(1) The listed entity shall give prior intimation to stock exchange about the meeting of the board of directors in
which any of the following proposals is due be considered:
a. financial results viz. quarterly, half yearly, or annual, as the case may be;
b. proposal for buyback of securities;
c. proposal for voluntary delisting by the listed entity from the stock exchange(s);
d. fund raising by way of further public offer, rights issue, American Depository Receipts/Global Depository
Receipts/Foreign Currency Convertible Bonds, qualified institutions placement, debt issue, preferential
issue or any other method and for determination of issue price:
Provided that intimation shall also be given in case of any annual general meeting or extraordinary
general meeting or postal ballot that is proposed to be held for obtaining shareholder approval for further
fund raising indicating type of issuance.
e. Declaration/ recommendation of dividend, issue of convertible securities including convertible
debentures or of debentures carrying a right to subscribe to equity shares or the passing over of dividend.
f. the proposal for declaration of bonus securities where such proposal is communicated to the board of
directors of the listed entity as part of the agenda papers.
(2) The intimation required under sub-regulation (1), shall be given at least two working days in advance, excluding
the date of the intimation and date of the meeting:
Provided that intimation regarding item specified in clause (a) of sub-regulation (1), to be discussed at the
meeting of board of directors shall be given at least five days in advance (excluding the date of the intimation
and date of the meeting), and such intimation shall include the date of such meeting of board of directors.
(3) The listed entity shall give intimation to the stock exchange(s) at least eleven working days before any of the
following proposal is placed before the board of directors -
(a) any alteration in the form or nature of any of its securities that are listed on the stock exchange or in the
rights or privileges of the holders thereof.
(b) any alteration in the date on which, the interest on debentures or bonds, or the redemption amount of
redeemable shares or of debentures or bonds, shall be payable.
182 Lesson 6 • PP-GRMCE

Disclosure of Events or Information (Regulation 30)

Disclosure of Material Events-
(1) Every listed entity shall make disclosures of any events or information which, in the opinion of the board of
directors of the listed company, is material.
(2) Events specified in Para A of Part A of Schedule III are deemed to be material events and listed entity shall
make disclosure of such events.
(3) The listed entity shall make disclosure of events specified in Para B of Part A of Schedule III, based on
application of the guidelines for materiality, as specified in sub-regulation (4).
(4) (i) The listed entity shall consider the following criteria for determination of materiality of events/
information:
(a) the omission of an event or information, which is likely to result in discontinuity or alteration of
event or information already available publicly; or
(b) the omission of an event or information is likely to result in significant market reaction if the said
omission came to light at a later date;
(c) In case where the criteria specified in sub-clauses (a) and (b) are not applicable, an event/information
may be treated as being material if in the opinion of the board of directors of listed entity, the event /
information is considered material.
(ii) The listed entity shall frame a policy for determination of materiality, based on criteria specified in this
sub-regulation, duly approved by its board of directors, which shall be disclosed on its website.
(5) The board of directors of the listed entity shall authorize one or more Key Managerial Personnel for the
purpose of determining materiality of an event or information and for the purpose of making disclosures to
stock exchange(s) under this regulation and the contact details of such personnel shall be also disclosed to the
stock exchange(s) and as well as on the listed entity’s website.
(6) The listed entity shall first disclose to stock exchange(s) of all events, as specified in Part A of Schedule III, or
information as soon as reasonably possible and not later than twenty four hours from the occurrence of event
or information, Provided that in case the disclosure is made after twenty four hours of occurrence of the event
or information, the listed entity shall, along with such disclosures provide explanation for delay, Provided
further that disclosure with respect to events specified in sub-para 4 of Para A of Part A of Schedule III shall be
made within thirty minutes of the conclusion of the board meeting.
(7) The listed entity shall, with respect to disclosures referred to in this regulation, make disclosures updating
material developments on a regular basis, till such time the event is resolved/closed, with relevant explanations.
(8) The listed entity shall disclose on its website all such events or information which has been disclosed to stock
exchange(s) under this regulation, and such disclosures shall be hosted on the website of the listed entity for
a minimum period of five years and thereafter as per the archival policy of the listed entity, as disclosed on its
website.
(9) The listed entity shall disclose all events or information with respect to subsidiaries which are material for the
listed entity.
(10) The listed entity shall provide specific and adequate reply to all queries raised by stock exchange(s) with
respect to any events or information: Provided that the stock exchange(s) shall disseminate information and
clarification as soon as reasonably practicable.
(11) The listed entity may on its own initiative also, confirm or deny any reported event or information to stock
exchange(s).
(12) In case where an event occurs or an information is available with the listed entity, which has not been indicated
in Para A or B of Part A of Schedule III, but which may have material effect on it, the listed entity is required to
make adequate disclosures in regard thereof.
Lesson 6 • Corporate Policies and Disclosures 183

SCHEDULE III
PART A: DISCLOSURES OF EVENTS OR INFORMATION: SPECIFIED SECURITIES
The following shall be events/information, upon occurrence of which listed entity shall make disclosure to stock
exchange(s):
Para A. Events which shall be disclosed without any application of the guidelines for materiality as
specified in sub-regulation (4) of regulation (30): -
(1) Acquisition(s) (including agreement to acquire), Scheme of Arrangement (amalgamation/ merger/
demerger/restructuring), or sale or disposal of any unit(s), division(s) or subsidiary of the listed entity or
any other restructuring.
Explanation.- For the purpose of this sub-para, the word ‘acquisition’ shall mean,-
(i) acquiring control, whether directly or indirectly; or
(ii) acquiring or agreeing to acquire shares or voting rights in, a company, whether directly or indirectly,
such that -
(a) the listed entity holds shares or voting rights aggregating to five per cent or more of the shares or
voting rights in the said company; or;
(b) there has been a change in holding from the last disclosure made under sub-clause (a) of clause (ii)
of the Explanation to this sub-para and such change exceeds two per cent of the total shareholding
or voting rights in the said company.
(2) Issuance or forfeiture of securities, split or consolidation of shares, buyback of securities, any restriction
on transferability of securities or alteration in terms or structure of existing securities including forfeiture,
reissue of forfeited securities, alteration of calls, redemption of securities etc.
(3) Revision in Rating(s).
(4) Outcome of Meetings of the board of directors: The listed entity shall disclose to the Exchange(s), within 30
minutes of the closure of the meeting, held to consider the following:
(a) dividends and/or cash bonuses recommended or declared or the decision to pass any dividend and the
date on which dividend shall be paid/dispatched;
(b) any cancellation of dividend with reasons thereof;
(c) the decision on buyback of securities;
(d) the decision with respect to fund raising proposed to be undertaken;
(e) increase in capital by issue of bonus shares through capitalization including the date on which such
bonus shares shall be credited/dispatched;
(f) reissue of forfeited shares or securities, or the issue of shares or securities held in reserve for future
issue or the creation in any form or manner of new shares or securities or any other rights, privileges
or benefits to subscribe to;
(g) short particulars of any other alterations of capital, including calls;
(h) financial results;
(i) decision on voluntary delisting by the listed entity from stock exchange(s).
(5) Agreements (viz. shareholder agreement(s), joint venture agreement(s), family settlement agreement(s)
(to the extent that it impacts management and control of the listed entity), agreement(s)/treaty(ies)/
contract(s) with media companies) which are binding and not in normal course of business, revision(s) or
amendment(s) and termination(s) thereof.
(6) Fraud/defaults by promoter or key managerial personnel or by listed entity or arrest of key managerial
personnel or promoter.
184 Lesson 6 • PP-GRMCE

(7) Change in directors, key managerial personnel (Managing Director, Chief Executive Officer, Chief Financial
Officer , Company Secretary etc.), Auditor and Compliance Officer.
(7A) In case of resignation of the auditor of the listed entity, detailed reasons for resignation of auditor, as given
by the said auditor, shall be disclosed by the listed entities to the stock exchanges as soon as possible but not
later than twenty four hours of receipt of such reasons from the auditor.
(7B) Resignation of auditor including reasons for resignation: In case of resignation of an independent director of
the listed entity, within seven days from the date of resignation, the following disclosures shall be made to
the stock exchanges by the listed entities:
(i) Detailed reasons for the resignation of independent directors as given by the said director shall be
disclosed by the listed entities to the stock exchanges.
(ii) The independent director shall, along with the detailed reasons, also provide a confirmation that there
is no other material reasons other than those provided.
(iii) The confirmation as provided by the independent director above shall also be disclosed by the listed
entities to the stock exchanges along with the detailed reasons as specified in sub-clause (i) above.
(8) Appointment or discontinuation of share transfer agent.
(9) Corporate debt restructuring.
(10) One time settlement with a bank.
(11) Reference to BIFR and winding-up petition filed by any party / creditors.
(12) Issuance of Notices, call letters, resolutions and circulars sent to shareholders, debenture holders or
creditors or any class of them or advertised in the media by the listed entity.
(13) Proceedings of Annual and extraordinary general meetings of the listed entity.
(14) Amendments to memorandum and articles of association of listed entity, in brief.
(15) Schedule of Analyst or institutional investor meet and presentations on financial results made by the listed
entity to analysts or institutional investors.
(16) The following events in relation to the corporate insolvency resolution process (CIRP) of a listed corporate
debtor under the Insolvency Code:
(a) Filing of application by the corporate applicant for initiation of CIRP, also specifying the amount of
default;
(b) Filing of application by financial creditors for initiation of CIRP against the corporate debtor, also
specifying the amount of default;
(c) Admission of application by the Tribunal, along with amount of default or rejection or withdrawal, as
applicable ;
(d) Public announcement made pursuant to order passed by the Tribunal under section 13 of Insolvency Code;
(e) List of creditors as required to be displayed by the corporate debtor under regulation 13(2)(c) of the
IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016;
(f) Appointment/ Replacement of the Resolution Professional;
(g) Prior or post-facto intimation of the meetings of Committee of Creditors;
(h) Brief particulars of invitation of resolution plans under section 25(2)(h) of Insolvency Code in the Form
specified under regulation 36A(5) of the IBBI (Insolvency Resolution Process for Corporate Persons)
Regulations, 2016;
(i) Number of resolution plans received by Resolution Professional;
(j) Filing of resolution plan with the Tribunal;
Lesson 6 • Corporate Policies and Disclosures 185

(k) Approval of resolution plan by the Tribunal or rejection, if applicable;

(l) Specific features and details of the resolution plan as approved by the Adjudicating Authority under the
Insolvency Code, not involving commercial secrets, including details such as:
(i) Pre and Post net-worth of the company;
(ii) Details of assets of the company post CIRP;
(iii) Details of securities continuing to be imposed on the companies’ assets;
(iv) Other material liabilities imposed on the company;
(v) Detailed pre and post shareholding pattern assuming 100% conversion of convertible securities;
(vi) Details of funds infused in the company, creditors paid-off;
(vii) Additional liability on the incoming investors due to the transaction, source of such funding etc.;
(viii) Impact on the investor - revised P/E, RONW ratios etc.;
(ix) Names of the new promoters, key managerial persons(s), if any and their past experience in the
business or employment. In case where promoters are companies, history of such company and
names of natural persons in control;
(x) Brief description of business strategy.
(m) Any other material information not involving commercial secrets.
(n) Proposed steps to be taken by the incoming investor/acquirer for achieving the MPS;
(o) Quarterly disclosure of the status of achieving the MPS;
(p) The details as to the delisting plans, if any approved in the resolution plan.
(17) Initiation of Forensic audit: In case of initiation of forensic audit, (by whatever name called), the following
disclosures shall be made to the stock exchanges by listed entities:
(a) The fact of initiation of forensic audit along-with name of entity initiating the audit and reasons for the
same, if available;
(b) Final forensic audit report (other than for forensic audit initiated by regulatory / enforcement agencies)
on receipt by the listed entity along with comments of the management, if any.
Para B. Events which shall be disclosed upon application of the guidelines for materiality referred sub-
regulation (4) of regulation (30):
1. Commencement or any postponement in the date of commencement of commercial production or
commercial operations of any unit/division.
2. Change in the general character or nature of business brought about by arrangements for strategic, technical,
manufacturing, or marketing tie-up, adoption of new lines of business or closure of operations of any unit/
division (entirety or piecemeal).
3. Capacity addition or product launch.
4. Awarding, bagging/ receiving, amendment or termination of awarded/bagged orders/contracts not in the
normal course of business.
5. Agreements (viz. loan agreement(s) (as a borrower) or any other agreement(s) which are binding and not
in normal course of business) and revision(s) or amendment(s) or termination(s) thereof.
6. Disruption of operations of any one or more units or division of the listed entity due to natural calamity
(earthquake, flood, fire etc.), force majeure or events such as strikes, lockouts etc.
7. Effect(s) arising out of change in the regulatory framework applicable to the listed entity .
8. Litigation(s) / dispute(s) / regulatory action(s) with impact.
186 Lesson 6 • PP-GRMCE

9. Fraud/defaults etc. by directors (other than key managerial personnel) or employees of listed entity.
10. Options to purchase securities including any ESOP/ESPS Scheme.
11. Giving of guarantees or indemnity or becoming a surety for any third party.
12. Granting, withdrawal, surrender, cancellation or suspension of key licenses or regulatory approvals.
Para C. Disclosure of Other Events
Any other information/event viz. major development that is likely to affect business, e.g. emergence of new
technologies, expiry of patents, any change of accounting policy that may have a significant impact on the accounts,
etc. and brief details thereof and any other information which is exclusively known to the listed entity which
may be necessary to enable the holders of securities of the listed entity to appraise its position and to avoid the
establishment of a false market in such securities.
Para D: Without prejudice to the generality of para (A), (B) and (C) above, the listed entity may make disclosures
of event/information as specified by the Board from time to time.

Disclosures of Financial Results [Regulation (33)(1)(e)]

Regulation 33(1)(e) provides that the listed entity shall make the disclosures specified in Part A of Schedule IV.

SCHEDULE IV
PART A: DISCLOSURES IN FINANCIAL RESULTS
The listed entity shall make the following disclosures while preparing the financial results as specified in Part A
of Schedule IV.
A. Changes in accounting policies, if any, shall be disclosed in accordance with Accounting Standard 5 or Indian
Accounting Standard 8, as applicable, specified in Section 133 of the Companies Act, 2013 read with relevant
rules framed thereunder or by the Institute of Chartered Accountants of India, whichever is applicable.
B. If the auditor has expressed any modified opinion(s) in respect of audited financial results submitted or
published under this para, the listed entity shall disclose such modified opinion(s) and cumulative impact
of the same on profit or loss, net worth, total assets, turnover/total income, earning per share, total
expenditure, total liabilities, any other financial item(s) which may be impacted due to modified opinion(s),
while publishing or submitting such results.
BA. If the auditor has expressed any modified opinion(s), the management of the listed entity has the option to
explain its views on the audit qualifications and the same shall be included in the Statement on Impact of
Audit Qualifications (for audit report with modified opinion).
BB. With respect to audit qualifications where the impact of the qualification is not quantifiable:
(i) The management shall make an estimate and the auditor shall review the same and report accordingly;
(ii) Notwithstanding the above, the management may be permitted to not provide estimate on matters like
going concerns or sub-judice matters; in which case, the management shall provide the reasons and
the auditor shall review the same and report accordingly.
C. If the auditor has expressed any modified opinion(s) or other reservation(s) in his audit report or limited
review report in respect of the financial results of any previous financial year or quarter which has an impact
on the profit or loss of the reportable period, the listed entity shall include as a note to the financial results -
(i) how the modified opinion(s) or other reservation(s) has been resolved; or
(ii) if the same has not been resolved, the reason thereof and the steps which the listed entity intends to
take in the matter.
D. If the listed entity has changed its name suggesting any new line of business, it shall disclose the net sales
or income, expenditure and net profit or loss after tax figures pertaining to the said new line of business
 Lesson 6 • Corporate Policies and Disclosures 187

separately in the financial results and shall continue to make such disclosures for the three years succeeding
the date of change in name:
Provided that the tax expense shall be allocated between the said new line of business and other business
of the listed entity in the ratio of the respective figures of net profit before tax, subject to any exemption,
deduction or concession available under the tax laws.
E. If the listed entity had not commenced commercial production or commercial operations during the reportable
period, the listed entity shall, instead of submitting financial results, disclose the following details:
(i) details of amount raised i.e. proceeds of any issue of shares or debentures made by the listed entity;
(ii) the portions thereof which is utilized and that remaining unutilized;
(iii) the details of investment made pending utilisation;
(iv) brief description of the project which is pending completion;
(v) status of the project; and
(vi) expected date of commencement of commercial production or commercial operations.
Provided that the details mentioned above shall be approved by the board of directors based on certification
by the chief executive officer and chief financial officer.
F. All items of income and expenditure arising out of transactions of exceptional nature shall be disclosed.
G. Extraordinary items, if applicable, shall be disclosed in accordance with Accounting Standard 5 (AS 5 -
Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies) or Companies
(Accounting Standards) Rules, 2006, whichever is applicable.
H. The listed entity, whose revenues are subject to material seasonal variations, shall disclose the seasonal nature
of their activities and the listed entity may supplement their financial results with information for the twelve
month period ending on the last day of the quarter for the current and preceding years on a rolling basis.
I. The listed entity shall disclose any event or transaction which occurred during or before the quarter that
is material to an understanding of the results for the quarter including but not limited to completion of
expansion and diversification programmes, strikes and lock-outs, change in management, change in capital
structure and the listed entity shall also disclose similar material events or transactions that take place
subsequent to the end of the quarter.
J. The listed entity shall disclose the following in respect of dividends paid or recommended for the year,
including interim dividends : -
(i) amount of dividend distributed or proposed for distribution per share; the amounts in respect of
different classes of shares shall be distinguished and the nominal values of shares shall also be indicated.
(ii) where dividend is paid or proposed to be paid pro-rata for shares allotted during the year, the date
of allotment and number of shares allotted, pro-rata amount of dividend per share and the aggregate
amount of dividend paid or proposed to be paid on pro-rata basis.
K. The listed entity shall disclose the effect on the financial results of material changes in the composition
of the listed entity, if any, including but not limited to business combinations, acquisitions or disposal of
subsidiaries and long term investments, any other form of restructuring and discontinuance of operations.
L. The listed entity shall ensure that segment reporting is done in accordance with AS-17 or Indian Accounting
Standard 108 as applicable, specified in Section 133 of the Companies Act, 2013 read with relevant rules
framed thereunder or by the Institute of Chartered Accountants of India, whichever is applicable.

Annual Report Disclosures [Regulation (34)]

(1) The listed entity shall submit to the stock exchange and publish on its website-
(a) a copy of the annual report sent to the shareholders along with the notice of the annual general meeting
not later than the day of commencement of dispatch to its shareholders;
 188 Lesson 6 • PP-GRMCE

(b) in the event of any changes to the annual report, the revised copy along with the details of and explanation
for the changes shall be sent not later than 48 hours after the annual general meeting.
(2) The annual report shall contain the following:
(a) audited financial statements i.e. balance sheets, profit and loss accounts etc, and Statement on Impact of
Audit Qualifications as stipulated in regulation 33(3)(d), if applicable;
(b) consolidated financial statements audited by its statutory auditors;
(c) cash flow statement presented only under the indirect method as prescribed in Accounting Standard-3
or Indian Accounting Standard 7, as applicable, specified in Section 133 of the Companies Act, 2013 read
with relevant rules framed thereunder or as specified by the Institute of Chartered Accountants of India,
whichever is applicable;
(d) directors report;
(e) management discussion and analysis report - either as a part of directors report or addition thereto;
(f) for the top one thousand listed entities based on market capitalization (calculated as on March 31 of
every financial year), business responsibility report describing the initiatives taken by them from an
environmental, social and governance perspective, in the format as specified by the Board from time to time:
Provided that listed entities other than top 86[one thousand] listed companies based on market capitalization
and listed entities which have listed their specified securities on SME Exchange, may include these business
responsibility reports on a voluntary basis in the format as specified.
(3) The annual report shall contain any other disclosures specified in Companies Act, 2013 along with other
requirements as specified in Schedule V of these regulations.

SCHEDULE V
ANNUAL REPORT
The annual report shall contain the following additional disclosures:
A. Related Party Disclosure:
1. The listed entity shall make disclosures in compliance with the Accounting Standard on “Related Party
Disclosures”.
2. The disclosure requirements shall be as follows:
S. No. In the accounts of Disclosures of amounts at the year end and the maximum
amount of loans/ advances/ Investments outstanding during
the year.
1. Holding Company Loans and advances in the nature of loans to subsidiaries by name
and amount.
Loans and advances in the nature of loans to associates by name
and amount.
Loans and advances in the nature of loans to firms/companies in
which directors are interested by name and amount.
2. Subsidiary Same disclosures as applicable to the parent company in the
accounts of subsidiary company.
3. Holding Company Investments by the loanee in the shares of parent company and
subsidiary company, when the company has made a loan or
advance in the nature of loan.
For the purpose of above disclosures directors’ interest shall have the same meaning as given in
Section184 of Companies Act, 2013.
Lesson 6 • Corporate Policies and Disclosures 189

(2A) Disclosures of transactions of the listed entity with any person or entity belonging to the promoter/
promoter group which hold(s) 10% or more shareholding in the listed entity, in the format prescribed
in the relevant accounting standards for annual results.
3. The above disclosures shall be applicable to all listed entities except for listed banks.
B. Management Discussion and Analysis:
1. This section shall include discussion on the following matters within the limits set by the listed entity’s
competitive position:
(a) Industry structure and developments.
(b) Opportunities and Threats.
(c) Segment-wise or product-wise performance.
(d)
Outlook.
(e) Risks and concerns.
(f) Internal control systems and their adequacy.
(g) Discussion on financial performance with respect to operational performance.
(h) Material developments in Human Resources / Industrial Relations front, including number of
people employed.
(i) details of significant changes (i.e. change of 25% or more as compared to the immediately previous
financial year) in key financial ratios, along with detailed explanations therefor, including:
(i) Debtors Turnover
(ii)
Inventory Turnover
(iii)
Interest Coverage Ratio
(iv)
Current Ratio
(v)
Debt Equity Ratio
(vi) Operating Profit Margin (%)
(vii) Net Profit Margin (%) or sector-specific equivalent ratios, as applicable.
(j) details of any change in Return on Net Worth as compared to the immediately previous financial
year along with a detailed explanation thereof.
2. Disclosure of Accounting Treatment: Where in the preparation of financial statements, a treatment
different from that prescribed in an Accounting Standard has been followed, the fact shall be disclosed in
the financial statements, together with the management’s explanation as to why it believes such alternative
treatment is more representative of the true and fair view of the underlying business transaction.
C. Corporate Governance Report:
The following disclosures shall be made in the section on the corporate governance of the annual report.
(1) A brief statement on listed entity’s philosophy on code of governance.
(2) Board of directors:
(a) composition and category of directors (e.g. promoter, executive, non-executive, independent non-
executive, nominee director - institution represented and whether as lender or as equity investor);
(b) attendance of each director at the meeting of the board of directors and the last annual general
meeting;
(c) number of other board of directors or committees in which a directors is a member or chairperson
and with effect from the Annual Report for the year ended 31st March 2019, including separately
the names of the listed entities where the person is a director and the category of directorship;
190 Lesson 6 • PP-GRMCE

(d) number of meetings of the board of directors held and dates on which held;
(e) disclosure of relationships between directors inter-se;
(f) number of shares and convertible instruments held by non-executive directors;
(g) web link where details of familiarisation programmes imparted to independent directors is
disclosed;
(h) A chart or a matrix setting out the skills/expertise/competence of the board of directors specifying
the following:
(i) With effect from the financial year ending March 31, 2019, the list of core skills/expertise/
competencies identified by the board of directors as required in the context of its business(es)
and sector(s) for it to function effectively and those actually available with the board; and
(ii) With effect from the financial year ended March 31, 2020, the names of directors who have
such skills / expertise / competence.
(i) confirmation that in the opinion of the board, the independent directors fulfill the conditions
specified in these regulations and are independent of the management;
(j) detailed reasons for the resignation of an independent director who resigns before the expiry of
his tenure along with a confirmation by such director that there are no other material reasons
other than those provided.
(3) Audit committee:
(a) brief description of terms of reference;
(b) composition, name of members and chairperson;
(c) meetings and attendance during the year.
(4) Nomination and Remuneration Committee:
(a) brief description of terms of reference;
(b) composition, name of members and chairperson;
(c) meeting and attendance during the year;
(d) performance evaluation criteria for independent directors.
(5) Remuneration of Directors:
(a) all pecuniary relationship or transactions of the non-executive directors vis-à-vis the listed entity
shall be disclosed in the annual report;
(b) criteria of making payments to non-executive directors. alternatively, this may be disseminated
on the listed entity’s website and reference drawn thereto in the annual report;
(c) disclosures with respect to remuneration: in addition to disclosures required under the Companies
Act, 2013, the following disclosures shall be made:
(i) all elements of remuneration package of individual directors summarized under major
groups, such as salary, benefits, bonuses, stock options, pension etc;
(ii) details of fixed component and performance linked incentives, along with the performance
criteria;
(iii) service contracts, notice period, severance fees;
(iv) stock option details, if any and whether issued at a discount as well as the period over which
accrued and over which exercisable.
(6) Stakeholders’ grievance committee:
(a) name of non-executive director heading the committee;
Lesson 6 • Corporate Policies and Disclosures 191

(b) name and designation of compliance officer;

(c) number of shareholders’ complaints received so far;
(d) number not solved to the satisfaction of shareholders;
(e) number of pending complaints.
(7) General body meetings:
(a) location and time, where last three annual general meetings held;
(b) whether any special resolutions passed in the previous three annual general meetings; whether
any special resolution passed last year through postal ballot - details of voting pattern;
(c) person who conducted the postal ballot exercise;
(d) whether any special resolution is proposed to be conducted through postal ballot; procedure for
postal ballot.
(8) Means of communication:
(a)
quarterly results;
(b) newspapers wherein results normally published;
(c) any website, where displayed;
(d) whether it also displays official news releases; and presentations made to institutional investors
or to the analysts.
(9) General shareholder information:
(a) annual general meeting - date, time and venue;
(b) financial year;
(c) dividend payment date;
(d) the name and address of each stock exchange(s) at which the listed entity’s securities are listed
and a confirmation about payment of annual listing fee to each of such stock exchange(s);
(e)
stock code;
(f) market price data- high, low during each month in last financial year;
(g) performance in comparison to broad-based indices such as BSE sensex, CRISIL Index etc; in case
the securities are suspended from trading, the directors report shall explain the reason thereof;
(h) registrar to an issue and share transfer agents;
(i) share transfer system;
(j) distribution of shareholding;
(k) dematerialization of shares and liquidity;
(l) outstanding global depository receipts or American depository receipts or warrants or any
convertible instruments, conversion date and likely impact on equity;
(m) commodity price risk or foreign exchange risk and hedging activities;
(n)
plant locations;
(o) address for correspondence.
(p) list of all credit ratings obtained by the entity along with any revisions thereto during the relevant
financial year, for all debt instruments of such entity or any fixed deposit programme or any
scheme or proposal of the listed entity involving mobilization of funds, whether in India or abroad.
192 Lesson 6 • PP-GRMCE

(10) Other Disclosures:

(a) disclosures on materially significant related party transactions that may have potential conflict
with the interests of listed entity at large;
(b) details of non-compliance by the listed entity, penalties, strictures imposed on the listed entity
by stock exchange(s) or the board or any statutory authority, on any matter related to capital
markets, during the last three years;
(c) details of establishment of vigil mechanism, whistle blower policy, and affirmation that no
personnel has been denied access to the audit committee;
(d) details of compliance with mandatory requirements and adoption of the non-mandatory requirements;
(e) web link where policy for determining ‘material’ subsidiaries is disclosed;
(f) web link where policy on dealing with related party transactions;
(g) disclosure of commodity price risks and commodity hedging activities;
(h) Details of utilization of funds raised through preferential allotment or qualified institutions
placement as specified under Regulation 32 (7A);
(i) a certificate from a company secretary in practice that none of the directors on the board of the
company have been debarred or disqualified from being appointed or continuing as directors of
companies by the Board/Ministry of Corporate Affairs or any such statutory authority;
(j) where the board had not accepted any recommendation of any committee of the board which is
mandatorily required, in the relevant financial year, the same to be disclosed along with reasons
thereof:
Provided that the clause shall only apply where recommendation of / submission by the committee
is required for the approval of the Board of Directors and shall not apply where prior approval of
the relevant committee is required for undertaking any transaction under these Regulations.
(k) total fees for all services paid by the listed entity and its subsidiaries, on a consolidated basis, to
the statutory auditor and all entities in the network firm/network entity of which the statutory
auditor is a part;
(l) disclosures in relation to the Sexual Harassment of Women at Workplace (Prevention, Prohibition
and Redressal) Act, 2013:
a. number of complaints filed during the financial year
b. number of complaints disposed of during the financial year
c. number of complaints pending as on end of the financial year.
(11) Non-compliance of any requirement of corporate governance report of sub-paras (2) to (10) above,
with reasons thereof shall be disclosed.
(12) The corporate governance report shall also disclose the extent to which the discretionary requirements
as specified in Part E of Schedule II have been adopted.
(13) The disclosures of the compliance with corporate governance requirements specified in regulation
17 to 27 and clauses (b) to (i) of sub-regulation (2) of regulation 46 shall be made in the section on
corporate governance of the annual report.
D. Declaration signed by the chief executive officer stating that the members of board of directors
and senior management personnel have affirmed compliance with the code of conduct of board of
directors and senior management.
E. Compliance certificate from either the auditors or practicing company secretaries regarding
compliance of conditions of corporate governance shall be annexed with the directors’ report.
 Lesson 6 • Corporate Policies and Disclosures 193

F. Disclosures with respect to demat suspense account/ unclaimed suspense account

The listed entity shall disclose the following details in its annual report, as long as there are shares in the
demat suspense account or unclaimed suspense account, as applicable:
(a) aggregate number of shareholders and the outstanding shares in the suspense account lying at the
beginning of the year;
(b) number of shareholders who approached listed entity for transfer of shares from suspense account
during the year;
(c) number of shareholders to whom shares were transferred from suspense account during the year;
(d) aggregate number of shareholders and the outstanding shares in the suspense account lying at the end
of the year;
(e) that the voting rights on these shares shall remain frozen till the rightful owner of such shares claims
the shares.

Website Disclosures [Regulation (46)]

(1) The listed entity shall maintain a functional website containing the basic information about the listed
entity.
(2) The listed entity shall disseminate the following information under a separate section on its website.
(a) details of its business;
(b) terms and conditions of appointment of independent directors;
(c) composition of various committees of board of directors;
(d) code of conduct of board of directors and senior management personnel;
(e) details of establishment of vigil mechanism/ Whistle Blower policy;
(f) criteria of making payments to non-executive directors , if the same has not been disclosed in annual
report;
(g) policy on dealing with related party transactions;
(h) policy for determining ‘material’ subsidiaries;
(i) details of familiarization programmes imparted to independent directors including the following
details:-
(i) number of programmes attended by independent directors (during the year and on a
cumulative basis till date),
(ii) number of hours spent by independent directors in such programmes (during the year and on
cumulative basis till date), and
(iii)
other relevant details.
(j) the email address for grievance redressal and other relevant details;
(k) contact information of the designated officials of the listed entity who are responsible for assisting
and handling investor grievances;
(l) financial information including:
(i) notice of meeting of the board of directors where financial results shall be discussed;
(ii) financial results, on conclusion of the meeting of the board of directors where the financial
results were approved;
(iii) complete copy of the annual report including balance sheet, profit and loss account, directors
report, corporate governance report etc.
194 Lesson 6 • PP-GRMCE

(m) shareholding pattern;

(n) details of agreements entered into with the media companies and/or their associates, etc;
(o) schedule of analyst or institutional investor meet and presentations madeby the listed entity to
analysts or institutional investors simultaneously with submission to stock exchange;
(p) new name and the old name of the listed entity for a continuous period of one year, from the date of
the last name change;
(q) items in sub-regulation (1) of regulation 47, namely -
• notice of meeting of the board of directors where financial results shall be discussed.
• financial results, as specified in regulation 33, along-with the modified opinion(s) or
reservation(s), if any, expressed by the auditor:
Provided that if the listed entity has submitted both standalone and consolidated financial
results, the listed entity shall publish consolidated financial results along-with (1) Turnover,
(2) Profit before tax and (3) Profit after tax, on a stand- alone basis, as a foot note; and a
reference to the places, such as the website of listed entity and stock exchange(s), where the
standalone results of the listed entity are available.
• statements of deviation(s) or variation(s) as specified in sub-regulation (1) of regulation 32
on quarterly basis, after review by audit committee and its explanation in directors report in
annual report.
• notices given to shareholders by advertisement.
(r) With effect from October 1, 2018, all credit ratings obtained by the entity for all its outstanding
instruments, updated immediately as and when there is any revision in any of the ratings.
(s) separate audited financial statements of each subsidiary of the listed entity in respect of a relevant
financial year, uploaded at least 21 days prior to the date of the annual general meeting which has
been called to inter alia consider accounts of that financial year.
(3) (a) The listed entity shall ensure that the contents of the website are correct. (b)The listed entity shall
update any change in the content of its website within two working days from the date of such
change in content.

6. Under SEBI (Prohibition of Insider Trading) Regulations, 2015

Disclosures of Trading by Insiders
Regulation 6(2): The disclosures to be made by any person shall include those relating to trading by such person’s
immediate relatives, and by any other person for whom such person takes trading decisions.
NOTE: It is intended that disclosure of trades would need to be of not only those executed by the person concerned
but also by the immediate relatives and of other persons for whom the person concerned takes trading decisions.
These regulations are primarily aimed at preventing abuse by trading when in possession of unpublished price
sensitive information and therefore, what matters is whether the person who takes trading decisions is in possession
of such information rather than whether the person who has title to the trades is in such possession.
The disclosures of trading in securities shall also include trading in derivatives of securities and the traded value of
the derivatives shall be taken into account for purposes of this Chapter:
Provided that trading in derivatives of securities is permitted by any law for the time being in force.
The disclosures made shall be maintained by the company, for a minimum period of five years, in such form as may
be specified.
 Lesson 6 • Corporate Policies and Disclosures 195

Disclosures by Certain Persons - Initial Disclosure (Regulation 7 (1))

(a) Every promoter or member of the promoter group, key managerial personnel and director of every company
whose securities are listed on any recognised stock exchange shall disclose his holding of securities of the
company as on the date of these regulations taking effect, to the company within thirty days of these regulations
taking effect;
(b) Every person on appointment as a key managerial personnel or a director of the company or upon becoming
a promoter or member of the promoter group shall disclose his holding of securities of the company as on
the date of appointment or becoming a promoter, to the company within seven days of such appointment or
becoming a promoter.
Continual Disclosures: Regulation 7(2)
(a) Every promoter or member of the promoter group, designated person and director of every company shall
disclose to the company the number of such securities acquired or disposed of within two trading days of such
transaction if the value of the securities traded, whether in one transaction or a series of transactions over
any calendar quarter, aggregates to a traded value in excess of ten lakh rupees or such other value as may be
specified;
(b) Every company shall notify the particulars of such trading to the stock exchange on which the securities are
listed within two trading days of receipt of the disclosure or from becoming aware of such information.
Explanation. - It is clarified for the avoidance of doubts that the disclosure of the incremental transactions
after any disclosure under this sub-regulation, shall be made when the transactions effected after the prior
disclosure cross the threshold specified in clause (a) of sub-regulation (2).
The above disclosures shall be made in such form and such manner as may be specified by the Board from time
to time.
Disclosures by other connected persons
Any company whose securities are listed on a stock exchange may, at its discretion require any other connected
person or class of connected persons to make disclosures of holdings and trading in securities of the company in
such form and at such frequency as may be determined by the company in order to monitor compliance with these
regulations.
NOTE: This is an enabling provision for listed companies to seek information from those to whom it has to provide
unpublished price sensitive information. This provision confers discretion on any company to seek such information.
For example, a listed company may ask that a management consultant who would advise it on corporate strategy
and would need to review unpublished price sensitive information, should make disclosures of his trades to the
company.
Code of Fair Disclosure (Regulation 8)
(1) The board of directors of every company, whose securities are listed on a stock exchange, shall formulate
and publish on its official website, a code of practices and procedures for fair disclosure of unpublished price
sensitive information that it would follow in order to adhere to each of the principles set out in Schedule A to
these regulations, without diluting the provisions of these regulations in any manner.
NOTE: This provision intends to require every company whose securities are listed on stock exchanges to
formulate a stated framework and policy for fair disclosure of events and occurrences that could impact price
discovery in the market for its securities. Principles such as, equality of access to information, publication of
policies such as those on dividend, inorganic growth pursuits, calls and meetings with analysts, publication of
transcripts of such calls and meetings, and the like are set out in the schedule.
(2) Every such code of practices and procedures for fair disclosure of unpublished price sensitive information and
every amendment thereto shall be promptly intimated to the stock exchanges where the securities are listed.
NOTE: This provision is aimed at requiring transparent disclosure of the policy formulated in sub-regulation
(1).
196 Lesson 6 • PP-GRMCE

SCHEDULE A [Sub-regulation (1) of regulation 8]:

Principles of Fair Disclosure for purposes of Code of Practices and Procedures for Fair Disclosure of
Unpublished Price Sensitive Information
1. Prompt public disclosure of unpublished price sensitive information that would impact price discovery no
sooner than credible and concrete information comes into being in order to make such information generally
available.
2. Uniform and universal dissemination of unpublished price sensitive unpublished price sensitive information
to avoid selective disclosure.
3. Designation of a senior officer as a chief investor relations officer to deal with dissemination of information
and disclosure of unpublished price sensitive information.
4. Prompt dissemination of unpublished price sensitive information that gets disclosed selectively, inadvertently
or otherwise to make such information generally available.
5. Appropriate and fair response to queries on news reports and requests for verification of market rumours by
regulatory authorities.
6. Ensuring that information shared with analysts and research personnel is not unpublished price sensitive
information.
7. Developing best practices to make transcripts or records of proceedings of meetings with analysts and other
investor relations conferences on the official website to ensure official confirmation and documentation of
disclosures made.
8. Handling of all unpublished price sensitive information on a need-to-know basis.
Code of Conduct (Regulation 9)
(1) The board of directors of every listed company and the board of directors or head(s) of the organisation of
every intermediary shall ensure that the chief executive officer or managing director shall formulate a code of
conduct with their approval to regulate, monitor and report trading by its designated persons and immediate
relatives of designated persons towards achieving compliance with these regulations, adopting the minimum
standards set out in Schedule B (in case of a listed company) and Schedule C (in case of an intermediary)] to
these regulations, without diluting the provisions of these regulations in any manner.
NOTE: It is intended that every company whose securities are listed on stock exchanges and every
34[intermediary] registered with SEBI is mandatorily required to formulate a code of conduct governing
trading by 35[designated persons and their immediate relatives]. The standards set out in the 36[schedules]
are required to be addressed by such code of conduct.
(2) The board of directors or head(s) of the organisation, of every other person who is required to handle
unpublished price sensitive information in the course of business operations shall formulate a code of conduct
to regulate, monitor and report trading by their designated persons and immediate relative of designated
persons towards achieving compliance with these regulations, adopting the minimum standards set out in
Schedule C to these regulations, without diluting the provisions of these regulations in any manner.
Explanation - Professional firms such as auditors, accountancy firms, law firms, analysts, insolvency professional
entities, consultants, banks etc., assisting or advising listed companies shall be collectively referred to as
fiduciaries for the purpose of these regulations.
NOTE: This provision is intended to mandate persons other than listed companies and intermediaries that are
required to handle unpublished price sensitive information to formulate a code of conduct governing trading in
securities by their designated persons. These entities include professional firms such as auditors, accountancy
firms, law firms, analysts, insolvency professional entities, consultants, banks etc., assisting or advising listed
companies. Even entities that normally operate outside the capital market may handle unpublished price
sensitive information. This provision would mandate all of them to formulate a code of conduct.
 Lesson 6 • Corporate Policies and Disclosures 197

(3) Every listed company, intermediary and other persons formulating a code of conduct shall identify and designate
a compliance officer to administer the code of conduct and other requirements under these regulations.
NOTE: This provision is intended to designate a senior officer as the compliance officer with the responsibility
to administer the code of conduct and monitor compliance with these regulations.
(4) For the purpose of sub regulation (1) and (2), the board of directors or such other analogous authority code of
conduct on the basis of their role and function in the organisation and the access that such role and function
would provide to unpublished price sensitive information in addition to seniority and professional designation
and shall include:-
(i) Employees of such listed company, intermediary or fiduciary designated on the basis of their functional
role or access to unpublished price sensitive information in the organization by their board of directors
or analogous body;
(ii) Employees of material subsidiaries of such listed companies designated on the basis of their functional
role or access to unpublished price sensitive information in the organization by their board of directors;
(iii) All promoters of listed companies and promoters who are individuals or investment companies for
intermediaries or fiduciaries;
(iv) Chief Executive Officer and employees upto two levels below Chief Executive Officer of such listed
company, intermediary, fiduciary and its material subsidiaries irrespective of their functional role in the
company or ability to have access to unpublished price sensitive information;
(v) Any support staff of listed company, intermediary or fiduciary such as IT staff or secretarial staff who
have access to unpublished price sensitive information.
Institutional Mechanism for Prevention of Insider trading (Regulation 9A)
(1) The Chief Executive Officer, Managing Director or such other analogous person of a listed company, intermediary
or fiduciary shall put in place adequate and effective system of internal controls to ensure compliance with the
requirements given in these regulations to prevent insider trading.
(2) The internal controls shall include the following:
(a) all employees who have access to unpublished price sensitive information are identified as designated
person;
(b) all the unpublished price sensitive information shall be identified and its confidentiality shall be
maintained as per the requirements of these regulations;
(c) adequate restrictions shall be placed on communication or procurement of unpublished price sensitive
information as required by these regulations;
(d) lists of all employees and other persons with whom unpublished price sensitive information is shared
shall be maintained and confidentiality agreements shall be signed or notice shall be served to all such
employees and persons;
(e) all other relevant requirements specified under these regulations shall be complied with;
(f) periodic process review to evaluate effectiveness of such internal controls.
(3) The board of directors of every listed company and the board of directors or head(s) of the organisation
of intermediaries and fiduciaries shall ensure that the Chief Executive Officer or the Managing Director or
such other analogous person ensures compliance with regulation 9 and sub-regulations (1) and (2) of this
regulation.
(4) The Audit Committee of a listed company or other analogous body for intermediary or fiduciary shall review
compliance with the provisions of these regulations at least once in a financial year and shall verify that the
systems for internal control are adequate and are operating effectively.
198 Lesson 6 • PP-GRMCE

(5) Every listed company shall formulate written policies and procedures for inquiry in case of leak of unpublished
price sensitive information or suspected leak of unpublished price sensitive information, which shall be
approved by board of directors of the company and accordingly initiate appropriate inquiries on becoming
aware of leak of unpublished price sensitive information or suspected leak of unpublished price sensitive
information and inform the Board promptly of such leaks, inquiries and results of such inquiries.
(6) The listed company shall have a whistle-blower policy and make employees aware of such policy to enable
employees to report instances of leak of unpublished price sensitive information.
(7) If an inquiry has been initiated by a listed company in case of leak of unpublished price sensitive information
or suspected leak of unpublished price sensitive information, the relevant intermediaries and fiduciaries shall
co-operate with the listed company in connection with such inquiry conducted by listed company.

LESSON ROUND UP
• Policies are an essential component of every organization and address important issues.
• The companies should provide easy access to policies and also publicly disclose.
• Corporate policies serve as important forms of internal control, it minimize cost and help in building a
learning culture.
• Good corporate governance should ensure that timely and accurate disclosure is made regarding all material
matters concerning the corporation, including its financial situation and results.
• The following are the major legislations/regulations/guidelines on transparency and disclosure
requirements
• Companies Act, 2013
• SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009
• SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011
• SEBI (Prohibition of Insider Trading) Regulations, 2015
• SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015.

GLOSSARY
Transparency In a business or governance context, is honesty and openness. Transparency and
accountability are generally considered the two main pillars of good corporate
governance.
Policy A set of ideas or a plan of what to do in particular situations that has been agreed to
officially by a group of people, a business organization, a government, or a political party.
CSR Corporate social responsibility (CSR) is a self-regulating business model that helps a
company be socially accountable - to itself, its stakeholders, and the public.

TEST YOURSELF
(These are meant for recapitulation only. Answers to these questions are not to be submitted for evaluation)
1. Do you Know what are the mandatory policies to be formulated under Companies Act 2013? Describe in
brief.
2. Can you briefly explain the disclosure pertaining to financial requirements under SEBI LODR Regulations,
2015?
3. As a company secretary draft a sample corporate governance report of a listed company.
4. Write short note on CSR Policy.
5. As a company secretary guide the management of a company about various policies under SEBI LODR
Regulations, 2015.
 Accounting and Audit
Related Issues, Related Party
Lesson 7
Transactions (RPTs) and Vigil
Mechanism

Key Concepts One Learning Objectives Regulatory Framework

Should Know
To understand the: Companies Act, 2013
• Financial Reporting
Standards • Financial Reporting framework • Section 2(76)
• Auditing Standards • Concept of Related party • Section 2(77)
• Internal Audit transaction • Section 129(5)
• Secretarial Audit • Vigil mechanism, • Section 132 (2)
• NFRA • Background of whistle blower • Section 132 (4)
concept • Section 138
• Related Party
Transactions • Various laws pertaining to • Section 139(2)
Whistle blower
• Vigil Mechanism • Section 141(3)
• Whistle-blower
Lesson Outline • Section 143(12)
• Section 144
• Introduction
• Section 177(9)
• Regulatory Framework
• Section 177(10)
• Strengthening Financial
• Section 188(1)
Reporting Standards
• Section 204(1)
• Improving Auditors
effectiveness • Section 302
• Rotation of Auditors The Companies (Indian
Accounting Standard) Rules, 2015
• Compliance with Auditing
Standards The Companies (Audit and
• Internal Audit Auditors) Rules, 2014

• Secretarial Audit The Companies (Appointment

and Remuneration of Managerial
• Constitution of NFRA Personnel) Rules, 2014
• Related Party Transactions The National Financial
• Vigil Mechanism/Whistle Reporting Authority Rules, 2018
Blower The Companies (Meetings of
• LESSON ROUND-UP Board and its Powers) Rules, 2014
• GLOSSARY The Companies (Meetings of
• TEST YOURSELF Board and its Powers) Rules, 2014
200 Lesson 7 • PP-GRMCE

Ind-As 24 – Related Party Transactions

SEBI (LODR) Regulations, 2015
• Regulation 2(1)(zb) & (ZC)
• Regulation 22
• Regulation 23
• Regulation 24(A)
• Regulation 34(3)

INTRODUCTION
Many of the recent corporate failures like Maxwell in UK, Enron in US and Satyam in India could be attributed
to a lack of integrity on the part of management where individuals were involved in aggressive accounting,
earnings management or fraudulent financial reporting to manipulate share prices, borrowings and bonus
plans. In each of these cases executives were able to con investors by manipulating and falsifying financial
accounts of the company. The auditors of the companies were either negligent or an accomplice in allowing
incorrect and misleading financial statements to be issued. There is a clear need to restore confidence in
capital markets and elsewhere by enhancing corporate governance in order to provide financial information
of the highest quality. Confidence in financial reporting, and in audit, is a key factor in ensuring confidence in
capital markets.

The Cadbury Committee, long back had recommended increasing auditors’ effectiveness, setting up an audit
committee to provide financial oversight and strengthen financial reporting standards for improved disclosures.
The Companies Act, 2013 and SEBI (LODR) Regulations provide various provisions for the strengthening
of financial standards, auditing standards, mandatory internal audit and secretarial audit for certain class of
companies, rotation of auditors constitution of NFRA etc.

STRENGTHENING FINANCIAL REPORTING STANDARDS

Better financial standards are required to reduce scope for management and auditor’s discretion in preparing
financial statements. To improve financial reporting standards India has revised its accounting standards in line with
the International Financial Reporting Standards.
In tune with the global trend of adopting International Financial Reporting Standards (IFRS) as reporting language,
India has facilitated the convergence of the Accounting Standards of India with IFRS. All the existing Indian Accounting
Standards were revised and converged with corresponding International Accounting Standards/International
Financial Reporting Standards. These converged Accounting Standards are called “Indian Accounting Standards
(Ind AS)”.
Under Companies Act, 2013, Section 2(2) defines accounting standards as below:

“Accounting Standards” means the standards of accounting or any addendum thereto for companies or
class of companies referred to in section 133.

Section 133 provides that the Central Government may prescribe the standards of accounting or any addendum
thereto, as recommended by the Institute of Chartered Accountants of India, constituted under section 3 of the
Chartered Accountants Act, 1949 in consultation with and after examination of the recommendations made by
the National Financial Reporting Authority.
Provided that until the National Financial Reporting Authority is constituted under section 132 of the Companies Act,
2013, the Central Government may prescribe the standards of accounting or any addendum thereto, as recommended
by the Institute of Chartered Accountants of India, constituted under section 3 of the Chartered Accountants Act,
1949, in consultation with and after examination of the recommendations made by National Advisory Committee
on Accounting Standards constituted under section 210 A of the Companies Act, 1956.
 Lesson 7 • Accounting and Audit Related Issues, Related Party Transactions and Vigil Mechanism 201

The Indian Accounting Standards (Ind AS), as notified under section 133 of the Companies Act 2013, have been
formulated keeping the Indian economic & legal environment in view and with a view to converge with IFRS
Standards, as issued by and copyright of which is held by the IFRS Foundation.
The Companies Act, 2013, in several sections, has given cognizance to the Indian Accounting Standards, which are
standards converged with International Financial Reporting Standards. More disclosures are required under Ind-AS
as compared to Accounting Standards. The new standards emphasize fair value and transparency and will go a long
way in better financial reporting.
The Central Government, in consultation with the National Advisory Committee on Accounting Standards (NACAS),
had notified the Companies (Indian Accounting Standards) Rules, 2015 in exercise of the powers conferred by section
133 and section 469 of the Companies Act, 2013 and sub-section (1) of section 210A of the Companies Act, 1956. These
rules came into force on 1st April 2015. There are now two separate sets of Accounting Standards in India –

1. Indian Accounting Standards (Ind AS) as specified in the Annexure to

Companies (Indian Accounting Standards) Rules, 2015
Indian Accounting Standards (Ind AS) are the accounting standards prescribed
under Section 133 of the Companies Act, 2013 which are specified in the Annexure
to Companies (Indian Accounting Standards) Rules, 2015. These accounting standards
are converged with corresponding International Financial Reporting Standards. The
list of Ind AS (as on 01.04.2020) is given in Annexure A, at the end of this chapter.
2. Accounting Standards as specified in Annexure to the Companies (Accounting
Standards) Rules, 2006
The Central Government in consultation with NACAS, has notified Companies
(Accounting Standards) Rules, 2006 in exercise of the powers conferred by clause (a) of
sub-section (1) of section 642 and sub-section (3C) of section 211 and sub-section (1) of
section 210A of the Companies Act, 1956. Under these rules, 28 Accounting Standards
as recommended by the Institute of Chartered Accountants of India are prescribed.
These Accounting Standards are as per the Generally Accepted Accounting Principles
(GAAP) of India and not converged with International Financial Reporting Standards.

Regulation 48 of SEBI (LODR) Regulations, 2015 also provides that the listed entity shall comply with all the
applicable and notified Accounting Standards from time to time.
Obligation to comply with Indian Accounting Standards (Ind AS): Rule 4 of the Companies (Indian Accounting
Standards) Rules, 2015, deals with the obligation to comply with Indian Accounting Standards, which is as under:
1. The Companies and their auditors shall comply with the Indian Accounting Standards (Ind AS) specified in
Annexure to these rules in preparation of their Financial statements and audit respectively, in the following
manner, namely:-
i) any company and its holding, subsidiary, joint venture or associate company may comply with the
Indian Accounting Standards (Ind AS) for financial statements for accounting periods beginning on or
after 1st April, 2015, with the comparatives for the periods ending on 31st March, 2015, or thereafter;
ii) the following companies shall comply with the Indian Accounting Standards (Ind AS) for the accounting
periods beginning on or after 1st April, 2016, with the comparatives for the periods ending on 31st
March, 2016, or thereafter, namely:-
(a) companies whose equity or debt securities are listed or are in the process of being listed on any stock
exchange in India or outside India and having Net worth of rupees five hundred crore or more;
(b) companies other than those covered by sub-clause (a) of clause (ii) of sub- rule (1) and having net
worth of rupees five hundred crore or more;
(c) holding, subsidiary, joint venture or associate companies of companies covered by sub-clause (a) of
clause (ii) of sub- rule (1) and sub-clause (b) Of clause (ii) of sub- rule (1) as the case may be; and
202 Lesson 7 • PP-GRMCE

iii) the following companies shall comply with the Indian Accounting Standards (Ind AS) for the accounting
periods beginning on or after 1st April, 2017, with the comparatives for the periods pending on 31st
March, 2017, or thereafter, namely:-
(a) companies whose equity or debt securities are listed or are in the process of being listed on any
stock exchange in India or outside India and having net worth of less than rupees five hundred
crore;
(b) companies other than those covered in clause (ii) of sub- rule (1) and sub-clause (a) of clause (iii)
of sub-rule (1), that is, unlisted companies having net worth of rupees two hundred and fifty crore
or more but less than rupees five hundred crore;
(c) holding, subsidiary, joint venture or associate companies of companies covered under sub-clause
(a) of clause (iii) of sub- rule (1) and sub-clause(b) of clause (iii) of sub- rule (1), as the case may be:
Provided that nothing in this sub-rule, except clause (i), shall apply to companies whose securities
are listed or are in the process of being listed on SME exchange as referred to in Chapter XB or on
the Institutional Trading Platform without initial public offering in accordance with the provisions of
Chapter XC of the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements)
Regulations, 2009.
iv) Notwithstanding the requirement of clauses (i) to (iii), Non-Banking Financial Companies (NBFCs) shall
comply with the Indian Accounting Standards (Ind ASs) in preparation of their financial statements and
audit respectively, in the following manner, namely:-
(a) The following NBFCs shall comply with the Indian Accounting Standards (Ind AS) for accounting
periods beginning on or after the 1st April, 2018, with comparatives for the periods ending on 31st
March, 2018, or thereafter –
(A) NBFCs having net worth of rupees five hundred crore or more;
(B) holding, subsidiary, joint venture or associate companies of companies covered under item
(A), other than those already covered under clauses (i), (ii) and (iii) of sub-rule (1) of rule 4.
(b) The following NBFCs shall comply with the Indian Accounting Standards (Ind AS) for accounting
periods beginning on or after the 1st April, 2019, with comparatives for the periods ending on 31st
March, 2019, or thereafter –
(A) NBFCs whose equity or debt securities are listed or in the process of listing on any stock
exchange in India or outside India and having net worth less than rupees five hundred crore;
(B) NBFCs, that are unlisted companies, having net worth of rupees two-hundred and fifty crore
or more but less than rupees five hundred crore; and
(C) holding, subsidiary, joint venture or associate companies of companies covered under item
(A) or item (B) of sub-clause (b), other than those already covered in clauses (i), (ii) and (iii)
of sub-rule (1) or item (B) of sub-clause (a) of clause (iv).
Explanation.- For the purposes of clause (iv), if in a group of Companies, some entities apply Accounting
Standards specified in the Annexure to the Companies (Accounting Standards) Rules, 2006 and others
apply accounting standards as specified in the Annexure to these rules, in such cases, for the purpose of
individual financial statements, the entities should apply respective standards applicable to them. For
preparation of consolidated financial statements, the following conditions are to be followed, namely:-
(i) where an NBFC is a parent (at ultimate level or at intermediate level), and prepares consolidated
financial statements as per Accounting Standards specified in the Annexure to the Companies
(Accounting Standards) Rules, 2006, and its subsidiaries, associates and joint ventures, if covered
by clause (i), (ii) and (iii) of sub-rule (1) has to provide the relevant financial statement data in
accordance with the accounting policies followed by the parent company for consolidation purposes
(until the NBFC is covered under clause (iv) of sub-rule (1);
(ii) where a parent is a company covered under clause (i), (ii) and (iii) of sub-rule (1) and has an NBFC
subsidiary, associate or a joint venture, the parent has to prepare Ind AS-compliant consolidated
 Lesson 7 • Accounting and Audit Related Issues, Related Party Transactions and Vigil Mechanism 203

financial statements and the NBFC subsidiary, associate and a joint venture has to provide the
relevant financial statement data in accordance with the accounting policies followed by the parent
company for consolidation purposes (until the NBFC is covered under clause (iv) of sub-rule (1).
v) Notwithstanding clauses (i) to (iv), the holding, subsidiary, joint venture or associate companies of
Scheduled commercial banks (excluding RRBs) would be required to prepare Ind AS based financial
statements for accounting periods beginning from 1st April, 2018 onwards, with comparatives for the
periods ending 31st March, 2018 or thereafter:
Explanation 1. – SME Exchange shall have the same meaning as assigned to it in Chapter XB of the Securities
and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2009.
Explanation 2. – “Comparatives” shall mean comparative figures for the preceding accounting period.
2. For the purposes of calculation of net worth of companies under clause (i), (ii) and (iii) of sub-rule (1), the
following principles shall apply, namely:
(a) the net worth shall be calculated in accordance with the stand-alone financial statements of the company as
on 31st March, 2014 or the first audited financial statements for accounting period which ends after that date;
(b) for companies which are not in existence on 31st March, 2014 or an existing company falling under any
of thresholds specified in [clause (i), (ii) and (iii) of sub-rule (1)] for the first time after 31st March, 2014,
the net worth shall be calculated on the basis of the first audited financial statements ending after that
date in respect of which it meets the thresholds specified in [clause (i), (ii) and (iii) of sub-rule (1)].
Explanation. - For the purposes of sub-clause (b), the companies meeting the specified thresholds given in clause (i),
(ii) and (iii) of sub-rule (1) for the first time at the end of an accounting year shall apply Indian Accounting Standards
(Ind AS) from the immediate next accounting year in the manner specified in [clause (i), (ii) and (iii) of sub-rule (1)].

Illustration.-
i) The companies meeting threshold for the first time as on 31st March, 2017 shall apply Ind AS for the
financial year 2017-18 onwards.
ii) The companies meeting threshold for the first time as on 31st March, 2018 shall apply Ind AS for the
financial year 2018-19 onwards and so on.

2A. For the purposes of calculation of net worth of Non-Banking Financial Companies covered under clause (iv) of
sub-rule (1), the following principles shall apply, namely:-
(a) the net worth shall be calculated in accordance with the stand-alone financial statements of the NBFCs
as on 31st March, 2016 or the first audited financial statements for accounting period which ends after
that date;
(b) for NBFCs which are not in existence on 31st March, 2016 or an existing NBFC falling first time, after
31st March, 2016, the net worth shall be calculated on the basis of the first audited stand-alone financial
statement ending after that date, in respect of which it meets the thresholds.
Explanation.- For the purposes of sub-clause (b), the NBFCs meeting the specified thresholds given in subclause
(b) of clause (iv) of sub-rule (1) for the first time at the end of an accounting year shall apply Indian Accounting
Standards (Ind ASs) from the immediate next accounting year in the manner specified in subclause (b) of clause
(iv) of sub-rule (1).

Illustration.-
i) The NBFCs meeting threshold for the first time as on 31st March, 2019 shall apply Ind AS for the
financial year 2019-20 onwards.
ii) The NBFCs meeting threshold for the first time as on 31st March, 2020 shall apply Ind AS for the
financial year 2020-21 onwards and so on.
204 Lesson 7 • PP-GRMCE

3. Standards in Annexure to these rules once required to be complied with in accordance with these rules, shall
apply to both stand-alone financial statements and consolidated financial statements.
4. Companies to which Indian Accounting Standards (Ind AS) are applicable as specified in these rules shall
prepare their first set of financial statements in accordance with the Indian Accounting Standards (Ind AS)
effective at the end of its first Indian Accounting Standards (Ind AS) reporting period.
Explanation.- For the removal of doubts, it is hereby clarified that the companies preparing financial statements
applying the Indian Accounting Standards (Ind AS) for the accounting period beginning on 1st April, 2016 [or
1st April, 2018, as the case may be] shall apply the Indian Accounting Standards (Ind AS) effective for the
financial year ending on 31st March, 2017 or 31st March, 2019, as the case may be.
5. Overseas subsidiary, associate, joint venture and other similar entities of an Indian company may prepare its
standalone financial statements in accordance with the requirements of the specific jurisdiction:
Provided that such Indian company shall prepare its consolidated financial statements in accordance with the
Indian Accounting Standards (Ind AS) if it meets the criteria as specified in sub-rule (1).
6. Indian company which is a subsidiary, associate, joint venture and other similar entities of a foreign company
shall prepare its financial statements in accordance with the Indian Accounting Standards (Ind AS) if it meets
the criteria as specified in sub-rule (1).
7. Any company opting to apply the Indian Accounting Standards (Ind AS) voluntarily as specified in sub-rule(1)
for its financial statements shall prepare its financial statements as per the Indian Accounting Standards(Ind
AS) consistently.
8. Once the Indian Accounting Standards (Ind AS) are applied voluntarily, it shall be irrevocable and such
companies shall not be required to prepare another set of financial statements in accordance with Accounting
Standards specified in Annexure to Companies (Accounting Standards) Rules, 2006.
9. Once a company starts following the Indian Accounting Standards (Ind AS) on the basis of criteria
specified in sub-rule (1), it shall be required to follow the Indian Accounting Standards (Ind AS) for all
the subsequent financial statements even if any of the criteria specified in this rule does not subsequently
apply to it.
Exemptions - Rule 5: The Banking Companies and Insurance Companies shall apply the Ind ASs as notified by the
Reserve Bank of India (RBI) and Insurance Regulatory Development Authority (IRDA) respectively. An insurer or
insurance company shall however, provide Ind AS compliant financial statement data for the purposes of preparation
of consolidated financial statements by its parent or investor or venturer, as required by the parent or investor or
venturer to comply with the requirements of these rules.

Disclosure requirements pertaining to Accounting Standards

Section 129(5) of the Companies Act 2013 Regulation 34(3) read with Schedule V of SEBI (LODR)
provides- Regulations, 2015 provides –
Where the financial statements of a company do Regulation 34(3)
not comply with the accounting standards, the
The annual report shall contain any other disclosures
company shall disclose in its financial statements,
specified in Companies Act, 2013 along with other
the deviation from the accounting standards, the
requirements as specified in Schedule V of these regulations.
reasons for such deviation and the financial effects,
if any, arising out of such deviation. Disclosure of Accounting Treatment – Para 2 -Schedule V
Where in the preparation of financial statements, a treatment
different from th at prescribed in an Accounting Standard
has been followed, the fact shall be disclosed in the financial
statements, together with the management’s explanation
as to why it believes such alternative treatment is more
representative of the true and fair view of the underlying
business transaction.
 Lesson 7 • Accounting and Audit Related Issues, Related Party Transactions and Vigil Mechanism 205

IMPROVING AUDITORS’ EFFECTIVENESS

Auditors are responsible for evaluating the validity What are the requisites for an Auditor?
and reliability of the company’s financial statements.
Statutory auditors are independent accounting The auditor must be a chartered accountant or a chartered
professionals who audit the financial statements on accountant firm and they must carry out their work with
behalf of the shareholders to make sure they provide professional objectivity and due care. They should maintain
a true and fair presentation of the financial status of a professional and independent relationship with the
the company. Thus it is the shareholders who appoint management. Companies Act, 2013 has introduced several
auditors in the Annual General Meeting. new provisions with reference to auditors.

Auditor’s Independence
In order to maintain auditor’s independence, section 141(3) provides the list of persons not eligible to be appointed
as an auditor.
This section 141(3) provides that the following persons shall not be eligible for appointment as an auditor of
company, namely:-
a) a body corporate other than a limited liability partnership registered under the Limited Liability Partnership
Act, 2008;
b) an officer or employee of the company;
c) a person who is a partner, or who is in the employment, of an officer or employee of the company;
d) a person who, or his relative or partner–
i) is holding any security of or interest in the company or its subsidiary, or of its holding or associate company
or a subsidiary of such holding company: Provided that the relative may hold security or interest in the
company of face value not exceeding one thousand rupees or such sum as may be prescribed;
ii) is indebted to the company, or its subsidiary, or its holding or associate company or a subsidiary of such
holding company, in excess of such amount as may be prescribed; or
iii) has given a guarantee or provided any security in connection with the indebtedness of any third person
to the company, or its subsidiary, or its holding or associate company or a subsidiary of such holding
company, for such amount as may be prescribed;
e) a person or a firm who, whether directly or indirectly, has business relationship with the company, or its
subsidiary, or its holding or associate company or subsidiary of such holding company or associate company
of such nature as may be prescribed;
f) a person whose relative is a director or is in the employment of the company as a director or key managerial
personnel;
g) a person who is in full time employment elsewhere or a person or a partner of a firm holding appointment as its
auditor, if such persons or partner is at the date of such appointment or reappointment holding appointment
as auditor of more than twenty companies;
h) a person who has been convicted by a court of an offence involving fraud and a period of ten years has not
elapsed from the date of such conviction;
i) a person who, directly or indirectly, renders any service referred to in section 144 to the company or its holding
company or its subsidiary company.
Explanation.—For the purposes of this clause, the term “directly or indirectly” shall have the meaning assigned to it
in the Explanation to section 144, which is as under:
i) in case of auditor being an individual, either himself or through his relative or any other person connected
or associated with such individual or through any other entity, whatsoever, in which such individual has
significant influence or control, or whose name or trade mark or brand is used by such individual;
ii) in case of auditor being a firm, either itself or through any of its partners or through its parent, subsidiary
or associate entity or through any other entity, whatsoever, in which the firm or any partner of the firm has
significant influence or control, or whose name or trade mark or brand is used by the firm or any of its partners.
206 Lesson 7 • PP-GRMCE

Auditor’s Remuneration and Non-Audit Services: Though Companies Act,

2013 does not specify any restrictions on auditor’s remuneration it should Can non-audit services
be reasonable, adequate but not excess, keeping the scope of the audit and rendered by audit affect the
auditors capabilities in mind. Excess Remuneration is an incentive to retain independence of auditor?
the client and reduces their objectivity.
Non–audit services may affect
Section 144 which deals with the matter relating to the “Auditor not to the independence of the auditor
render certain services” provides that an auditor appointed under this Act hence the provision of following
shall provide to the company only such other services as are approved services by Statutory Auditors are
by the Board of Directors or the audit committee, as the case may be, prohibited under Section 144.
but which shall not include any of the following services (whether such
services are rendered directly or indirectly to the company or its holding
company or subsidiary company, namely:–
a) accounting and book keeping services;
b) internal audit;
c) design and implementation of any financial information system;
d) actuarial services;
e) investment advisory services;
f) investment banking services;
g) rendering of outsourced financial services;
h) management services; and
i) any other kind of services as may be prescribed.
Provided that an auditor or audit firm who or which has been performing any non-audit services on or before the
commencement of this Act shall comply with the provisions of this section before the closure of the first financial
year after the date of such commencement.
Oversight of Auditors: To ensure independence and effectiveness of statutory auditors, the Companies Act, 2013
have provisions under section 177 (4)(ii), which provides that every Audit Committee shall review and monitor the
auditor’s independence and performance and effectiveness of audit process.
Reporting of Fraud by Auditors : Section 143 (12) of the Companies Act, 2013 read with Rule 13(1) of the Companies
(Audit and Auditors) Rules, 2015 provides that if an auditor of a company, in the course of the performance of his
duties as auditor, has reason to believe that an offence of fraud, which involves or is expected to involve individually
an amount of rupees one crore or above, is being or has been committed against the company by its officers or
employees, the auditor shall report the matter to the Central Government.
In case of a fraud involving lesser than the amount specified in Rule 13(1), the auditor shall report the matter to
Audit Committee constituted under section 177 or to the Board immediately but not later than two days of his
knowledge of the fraud and he shall report the matter specifying the following:-
a) Nature of Fraud with description;
b) Approximate amount involved; and
c) Parties involved. [Rule 13(3)]
The following details of each of the fraud reported to the Audit Committee or the Board under sub-rule (3) during
the year shall be disclosed in the Board’s Report:-
a) Nature of Fraud with description;
b) Approximate Amount involved;
c) Parties involved, if remedial action not taken; and
d) Remedial actions taken. [Rule 13(4)]
 Lesson 7 • Accounting and Audit Related Issues, Related Party Transactions and Vigil Mechanism 207

MANDATORY ROTATION OF AUDITORS

The concept of mandatory audit rotation is not new. There has been considerable
interest in mandatory auditor rotation as a means of strengthening auditor Mandatory audit firm
independence, reducing the incidence of audit failure, improving the quality of rotation is defined in the
audit and protecting investors and other users of financial statements. Mandatory Sarbanes-Oxley (SOX) Act as
audit firm rotation sets a limit on the number of years a public accounting firm the imposition of a limit on
may audit a company’s financial statements. After a predetermined period, an the period of years during
accounting firm is no longer eligible to serve as the company’s auditor for a set which an accounting firm may
time interval and a rotation of firms is required. A mandatory audit rotation rule be the auditor of record.
which sets a limit on the maximum number of years an audit firm can audit a
given company’s financial statements has been proposed as a means to preserve auditor independence and possibly
to increase investors’ confidence in financial reports.
Mandatory audit firm rotation is often discussed as a potential way to improve audit quality – typically gaining
attention when public confidence in the audit function has been eroded by events such as corporate scandals or
audit failures.

Section 139(2) read with Rule 5 of the Companies (Audit and Auditors) Rules, 2014
No listed company or a company belonging to the following classes of
Why is rotation of auditors
companies excluding one person companies and small companies:-
necessary?
a) all unlisted public companies having paid up share capital of rupees
10 crore or more; When the same auditors continue
in the same company for years and
b) all private limited companies having paid up share capital of rupees years, it results in a close relationship
50 crore or more; between management and auditors
c) all companies having paid up share capital of below threshold limit which increases the chances of fraud.
mentioned in (a) and (b) above, but having public borrowings from Both Enron and Satyam saw this
financial institutions, banks or public deposits of rupees 50 crore or happen. Hence, section 139 of the
more. Companies Act was introduced for
mandatory rotation of auditors.
shall appoint or re-appoint –
a) an individual as auditor for more than one term of five consecutive years; and
b) an audit firm as auditor for more than two terms of five consecutive years.
Also, an individual auditor who has completed his term of five consecutive years shall not be eligible for re-
appointment as auditor in the same company for five years from the completion of his term.
An audit firm which has completed two terms of five consecutive years, shall not be eligible for re-appointment as
auditor in the same company for five years from the completion of such term.
Provided further that as on the date of appointment no audit firm having a common partner or partners to the other
audit firm, whose tenure has expired in a company immediately preceding the financial year, shall be appointed as
auditor of the same company for a period of five years.
The provisions for rotation of auditors can be summarised as under –
In case of an individual as auditor:
a) No individual shall be appointed or re-appointed as auditor for more than 1 term of 5 consecutive years.
b) An individual auditor, who has completed his term of 5 consecutive years, shall not be eligible for re-
appointment as auditor in the same company for 5 years from the date of completion.
In case of a firm as an auditor:
a) No audit firm shall be appointed or re-appointed as auditor for more than 2 terms of 5 consecutive years.
208 Lesson 7 • PP-GRMCE

b) An audit firm which has completed its 2 terms of 5 consecutive years, shall not be eligible for re-appointment
as auditor in the same company for 5 years from the completion of such terms.
c) If any firm/LLP which has one or more partners who are also partners in the outgoing audit firm/LLP cannot
be appointed as auditors during the 5 year period. In other words, if two or more audit firms have common
partner(s), and one of these firms has completed its 2 terms of 5 consecutive years, none of such audit firms
shall be eligible for re-appointment as auditor in the same company for 5 years.

The aforementioned provisions can be explained by the following illustration in a better manner.
If ABC & Co. is auditor of M/S XYZ Ltd. and the balance sheet of M/S XYZ Ltd. is being signed by Mr. A who is also
a partner in other firm PQR & Co. If the original tenure of appointment of ABC & Co. is expiring on 20th August,
2020. The firm PQR & Co. can’t take the appointment of auditor of M/S XYZ Ltd. for the period of five years
starting from 21st August, 2020 and up to 20th August, 2025.
In the above example, PQR & Co. can take the advantage of being appointed as auditor on a date starting after
the expiry of financial year 2020-2021. In simple words, PQR & Co. is being eligible for appointment of auditor of
M/S XYZ Ltd. after the start of new financial year from the expiry of original tenure of ABC & Co., as the proviso
mentions only of one preceding financial year.

AUDITING STANDARDS
The Standards on Auditing have been accorded legal sanctity under the Companies Act, 2013. Auditors are now
mandatorily bound to ensure compliance with Standards on Auditing.
As per Section 143(2) of the Companies Act 2013, the auditor shall make a report to the members of the company on the
accounts examined by him and on every financial statements which are required by or under this Act to be laid before
the company in general meeting and the report shall after taking into account the provisions of this Act, the accounting
and auditing standards and matters which are required to be included in the audit report under the provisions of this
Act or any rules made thereunder or under any order made under sub-section (11) and to the best of his information
and knowledge, the said accounts, financial statements give a true and fair view of the state of the company’s affairs as
at the end of its financial year and profit or loss and cash flow for the year and such other matters as prescribed in Rule
11 (Other matters to be included in Auditor’s Report) of the Companies (Audit and Auditors) Rules, 2014.
As per Section 143(9) of the Companies Act 2013, it is the duty of every auditor to comply with the auditing standards.
Section 143(10) confers power to the Central Government to prescribe the standards of auditing as recommended
by the Institute of Chartered Accountants of India in consultation with the National Financial Reporting Authority:
However, until any auditing standards are notified, any standard or standards of auditing specified by the Institute
of Chartered Accountants of India shall be deemed to be the auditing standards.

INTERNAL AUDIT

“Internal auditing is an independent, objective assurance and consulting activity designed to add value and improve
an organization’s operations. It helps an organisation accomplish its objectives by bringing a systematic, disciplined
approach to evaluate and improve the effectiveness of risk management, control, and governance processes.
The Institute of Internal Auditors”
The demand for auditing both external and internal
is sourced in the need to have some means of Internal Audit is an independent management
independent verification to reduce record-keeping function, which involves a continuous and critical
errors, asset misappropriation, and fraud within appraisal of the functioning of an entity with a view to
business and non-business organizations. The concept suggest improvements thereto and add value to and
of internal auditing evolved as an extension to external strengthen the overall governance mechanism of the
audit in testing the reliability of accounting records entity including entity’s strategic risk management and
that contribute to published financial statements. internal control system.
International financial scandals and recent events
including global financial crises have emphasised need for internal auditing within corporate governance
structures of organisations. As organisations and the world they operate in are becoming more and more complex,
 Lesson 7 • Accounting and Audit Related Issues, Related Party Transactions and Vigil Mechanism 209

internal audit is considered good practice & advisable as part of underlying internal control & risk management
framework of an organisation.
An effective internal audit function can play a significant role within the corporate governance framework of
a company. Over the last decade internal audit has developed and grown in importance. Efficient internal audit
functions provide objective assurance/assessments to the board (and to the audit committee) about the adequacy
and effectiveness of the processes by which risks are identified and prioritised, managed, controlled, and mitigated.
In most countries and business sectors internal auditor or reports professionally to an audit committee and
managerially to the chief executive or chief financial officer. Internal audit is an independent and objective appraisal
function; it supports senior management and the (management) board. Internal audit activities are performed in
diverse legal and cultural environments; within organisations that vary in size and structure. Internal audit functions
should comply with the relevant professional standards.
Internal Audit is an independent appraisal activity within an organization for the review of systems, procedures,
practices, compliance with policies for accounting, financial and other operations as a basis for service to
management. It is a tool of control -
• To measure and evaluate the effectiveness of the working of an organization;
• To ensure that all the laws, rules and regulations governing the operations of the organization are adhered to;
• To identify risks and also suggests remedial measures, thereby acting as a catalyst for change and action.
Section 138 of the Companies Act, 2013 read with Rule 13(1) of the Companies (Accounts) Rules, 2014, provides for
the mandatory appointment of an internal auditor who shall either be a chartered accountant or a cost accountant,
or such other professional as may be decided by the Board to conduct internal audit of the functions and activities
for classes of company as specified in the below chart.

Every listed Every listed company is required to appoint internal auditor.

company
Every unlisted • paid up share capital of 50 crore rupees or more during the preceding financial year; or
public company • turnover of 200 crore rupees or more during the preceding financial year; or
having
• outstanding loans or borrowings from banks or public financial institutions exceeding
100 crore rupees or more at any point of time during the preceding financial year; or
• outstanding deposits of 25 crore rupees or more at any point of time during the preceding
financial year; and
Every private • turnover of 200 crore rupees or more during the preceding financial year; or
company having • outstanding loans or borrowings from banks or public financial institutions exceeding
100 crore rupees or more at any point of time during the preceding financial year.
The Explanation to the Rule 13 elaborates that:
i) The internal auditor may or may not be an employee of the company.
ii) The term “Chartered Accountant” or “Cost Accountant” shall mean a “Chartered Accountant” or a “Cost
Accountant”, as the case may be, whether engaged in practice or not.
The Audit Committee of the company or the Board shall, in consultation with the Internal Auditor, formulate the
scope, functioning, periodicity and methodology for conducting the internal audit. [Rule 13(2)]

SECRETARIAL AUDIT
Secretarial Audit is an audit to check compliance of various
legislations including the Companies Act and other corporate and Who can perform Secretarial audit?
economic laws applicable to the company. The Secretarial Auditor Only a member of the Institute of Company
expresses an opinion as to whether there exist adequate systems Secretaries of India holding certificate of
and processes in the company commensurate with the size and practice (Company secretary in practice)
operations of the company to monitor and ensure compliance can conduct Secretarial Audit and furnish
with applicable laws, rules, regulations and guidelines. Secretarial the Secretarial Audit Report to the company.
Audit helps to detect the instances of non-compliance and [Section 204(1) of Companies Act, 2013]
facilitates taking corrective measures. It audits the adherence of
210 Lesson 7 • PP-GRMCE

good corporate practices by the company. It is therefore an independent and objective assurance intended to add value
and improve operations of the Company. It helps to accomplish the organisation’s objectives by bringing a systematic,
disciplined approach to evaluate and improve effectiveness of risk management, control, and governance processes.
Secretarial Audit thus provides necessary comfort to the management, regulators and the stakeholders, as to the statutory
compliance, good governance and the existence of proper and adequate systems and processes.
Secretarial Audit facilitates monitoring compliances with the requirements of law through a formal compliance
management programme which can produce positive results to the stakeholders of a company. The Secretarial Audit
provides an in-built mechanism for enhancing corporate compliance generally and helps to restore the confidence
of investors in the capital market through greater transparency in corporate functioning.
As per section 204(1) of Companies Act, 2013 read with rule 9 of the Companies (Appointment and Remuneration
of Managerial Personnel) Rules, 2014, the following companies are required to obtain Secretarial Audit Report:
• Every listed company;
• Every public company having a paid-up share capital of 50 crore rupees or more; or
• Every public company having a turnover of two hundred 50 crore rupees or more;
• Every company having outstanding loans or borrowings from banks or public financial institutions of 100
crore rupees or more.
Rule 9(2) provides that the format for the Secretarial Audit Report shall be in Form No. 3. The explanation to this
sub-rule provides that the paid-up share capital, turnover, or outstanding loans or borrowings as the case may be,
existing on the last date of latest audited financial statement shall be taken into account.
“Turnover” means the aggregate value of the realisation of amount made from the sale, supply or distribution of
goods or on account of services rendered, or both, by the company during a financial year. [Section 2(91)]
Regulation 24A of SEBI (LODR) regulations, 2015 provides that, every listed entity and its material unlisted
subsidiaries incorporated in India shall undertake secretarial audit and shall annex with its annual report, a
secretarial audit report, given by a company secretary in practice, in such form as may be specified with effect from
the year ended March 31, 2019.
Further, Circular No. CIR/CFD/CMD1/27/2019 dated February 08, 2019 contains that while the annual secretarial
audit shall cover a broad check on compliance with all laws applicable to the entity, listed entities shall additionally,
on an annual basis, require a check by the PCS on compliance of all applicable SEBI Regulations and circulars /
guidelines issued thereunder, consequent to which, the PCS shall submit a report to the listed entity in the manner
specified in this circular.
The format for the annual secretarial compliance report is placed at Annex – A to the circular. The annual secretarial
compliance report in the aforesaid format shall be submitted by the listed entity to the stock exchanges within 60
days of the end of the financial year.
The listed entities and their material subsidiaries shall provide all such documents/information as may be sought by
the PCS for the purpose of providing a certification under the Regulations and this circular.
ICSI may consider issuing a guidance note to Practising Company Secretaries to enable them to undertake
certifications in accordance with the Regulations and this circular in letter and in spirit. [Para 4 of the Circular] The
ICSI has already issued a Guidance Note on Secretarial Audit (4th Edition) in May 2018.

CONSTITUTION OF NATIONAL FINANCIAL REPORTING AUTHORITY (NFRA)

The National Financial Reporting Authority (NFRA) was constituted on 1st October, 2018 by the Government of India
under Sub Section (1) of section 132 of the Companies Act, 2013. NFRA is an independent regulator established to
oversee the auditing profession. It is similar to the Public Company Accounting Oversight Body set by in the USA by
the Sarbanes Oxley Act 2002.
The need for establishing NFRA has arisen on account of the need felt across various jurisdictions in the world, in the
wake of accounting scams, to establish independent regulators, independent from those it regulates, for enforcement
of auditing standards and ensuring the quality of audits to strengthen the independence of audit firms, quality of
audits and, therefore enhance investor and public confidence in financial disclosures of companies.
 Lesson 7 • Accounting and Audit Related Issues, Related Party Transactions and Vigil Mechanism 211

Classes of companies and bodies corporate governed by the Authority: Rule 3 of the National Financial
Reporting Authority Rules, 2018 (NFRA Rules) provides that:
1. Authority shall have power to monitor and enforce compliance with accounting standards and auditing standards,
oversee the quality of service under sub-section (2) of section 132 or undertake investigation under sub-section
(4) of such section of the auditors of the following class of companies and bodies corporate, namely:-
(a) companies whose securities are listed on any stock exchange in India or outside lndia;
(b) unlisted public companies having paid-up capital of not less than rupees five hundred crores or having
annual turnover of not less than rupees one thousand crores or having, in aggregate, outstanding loans,
debentures and deposits of not less than rupees five hundred crores as on the 31st March of immediately
preceding financial year;
(c) insurance companies, banking companies, companies engaged in the generation or supply of
electricity, companies governed by any special Act for the time being in force or bodies corporate
incorporated by an Act in accordance with clauses (b), (c), (d), (e) and (f) of sub-section (4) of section
1 of the Act;
Explanation. – For the purpose of this clause, “banking company” includes ‘corresponding new bank’ as
defined in clause (d) of section 2 of the Banking Companies (Acquisition and Transfer of Undertakings)
Act, 1970 (5 of 1970) and clause (b) of section 2 of the Banking Companies (Acquisition and Transfer of
Undertakings) Act, 1980 (40 of 1980) and ‘subsidiary bank’ as defined in clause (k) of section 2 of the
Stat Bank of India (Subsidiary Bank) Act, 1959 (38 of 1959).
(d) any body corporate or company or person, or any class of bodies corporate or companies or persons, on
a reference made to the Authority by the Central Government in public interest; and
(e) a body corporate incorporated or registered outside India, which is a subsidiary or associate company
of any company or body corporate incorporated or registered in India as referred to in clauses (a) to
(d), if the income or net worth of such subsidiary or associate company exceeds twenty percent. of the
consolidated income or consolidated net worth of such company or the body corporate, as the case may
be, referred to in clauses (a) to (d).
2. Every existing body corporate other than a company governed by these rules, shall inform the Authority within
thirty days of the commencement of these rules, in *Form NFRA-1, the particulars of the auditor as on the date
of commencement of these rules.
3. Every body corporate, other than a company as defined in clause (20) of section 2, formed in India and
governed under this rule shall, within fifteen days of appointment of an auditor under sub-section (1)
of section 139, inform the Authority in *Form NFRA-1, the particulars of the auditor appointed by such
body corporate:
Provided that a body corporate governed under clause (e) of sub-rule (1) shall provide details of appointment
of its auditor in Form NFRA-1.
4. A company or a body corporate other than a company governed under this rule shall continue to be governed
by the Authority for a period of three years after it ceases to be listed or its paid-up capital or turnover or
aggregate of loans, debentures and deposits falls below the limit stated therein.

Functions and duties of the Authority:

As per Sub Section (2) of Section 132 of the Companies Act, 2013, the duties of the NFRA are to:
a) Recommend accounting and auditing policies and standards to be adopted by companies for approval by the
Central Government;
b) Monitor and enforce compliance with accounting standards and auditing standards;
c) Oversee the quality of service of the professions associated with ensuring compliance with such standards and
suggest measures for improvement in the quality of service;
d) Perform such other functions and duties as may be necessary or incidental to the aforesaid functions and duties.
212 Lesson 7 • PP-GRMCE

Further Rule 4 of the (NFRA Rules) provides that :

1. The Authority shall protect the public interest and the interests of investors, creditors and others associated
with the companies or bodies corporate governed under rule 3 by establishing high quality standards of
accounting and auditing and exercising effective oversight of accounting functions performed by the companies
and bodies corporate and auditing functions performed by auditors.
2. In particular, and without prejudice to the generality of the foregoing, the Authority shall :–
(a) maintain details of particulars of auditors appointed in the companies and bodies corporate specified in
rule 3;
(b) recommend accounting standards and auditing standards for approval by the Central Government;
(c) monitor and enforce compliance with accounting standards and auditing standards;
(d) oversee the quality of service of the professions associated with ensuring compliance with such
standards and suggest measures for improvement in the quality of service;
(e) promote awareness in relation to the compliance of accounting standards and auditing standards;
(f) co-operate with national and international organisations of independent audit regulators in establishing
and overseeing adherence to accounting standards and auditing standards; and
(g) perform such other functions and duties as may be necessary or incidental to the aforesaid functions
and duties.
3. The Central Government may, by notification, and subject to such conditions, limitations and restrictions as
may be specified therein delegate any of its powers or functions under the Act, other than the power to make
rules, to the Authority.

Monitoring and enforcing compliance with accounting standards – Rule 7 of the NFRA Rules provides
that:
1. For the purpose of monitoring and enforcing compliance with accounting standards, the Authority may review
the financial statements of such company or body corporate, as the case may be, and if so required, direct such
company or body corporate or its auditor by a written notice, to provide further information or explanation or
any relevant documents relating to such company or body corporate, within such reasonable time as may be
specified in the notice.
2. The Authority may require the personal presence of the officers of the company or body corporate and its
auditor for seeking additional information or explanation in connection with the review of the financial
statements of such company or body corporate.
3. The Authority shall publish its findings relating to non-compliances on its website and in such other
manner as it considers fit, unless it has reasons not to do so in the public interest and it records the
reasons in writing.
4. Where the Authority finds or has reason to believe that any accounting standard has or may have been violated,
it may decide on the further course of investigation or enforcement action through its concerned Division.

Monitoring and enforcing compliance with auditing standards – Rule 8 of the NFRA Rules provides that:
1. For the purpose of monitoring and enforcing compliance with auditing standards under the Act by a company
or a body corporate governed under rule 3, the Authority may: (a) review working papers (including audit
plan and other audit documents) and communications related to the audit; (b) evaluate the sufficiency of the
quality control system of the auditor and the manner of documentation of the system by the auditor; and (c)
perform such other testing of the audit, supervisory, and quality control procedures of the auditor as may be
considered necessary or appropriate.
2. The Authority may require an auditor to report on its governance practices and internal processes designed to
promote audit quality, protect its reputation and reduce risks including risk of failure of the auditor and may
take such action on the report as may be necessary.
 Lesson 7 • Accounting and Audit Related Issues, Related Party Transactions and Vigil Mechanism 213

3. The Authority may seek additional information or may require the personal presence of the auditor for seeking
additional information or explanation in connection with the conduct of an audit.
4. The Authority shall perform its monitoring and enforcement activities through its officers or experts with
sufficient experience in audit of the relevant industry.
5. The Authority shall publish its findings relating to non-compliances on its website and in such other manner
as it considers fit, unless it has reasons not to do so in the public interest and it records the reasons in writing.
6. The Authority shall not publish proprietary or confidential information, unless it has reasons to do so in the
public interest and it records the reasons in writing.
7. The Authority may send a separate report containing proprietary or confidential information to the Central
Government for its information.
8. Where the Authority finds or has reason to believe that any law or professional or other standard has or may
have been violated by an auditor, it may decide on the further course of investigation or enforcement action
through its concerned Division.

Overseeing the quality of service and suggesting measures for improvement – Rule 9 of the NFRA
Rules provides that:
1. On the basis of its review, the Authority may direct an auditor to take measures for improvement of audit
quality including changes in their audit processes, quality control, and audit reports and specify a detailed
plan with time-limits.
2. It shall be the duty of the auditor to make the required improvements and send a report to the Authority
explaining how it has complied with the directions made by the Authority.
3. The Authority shall monitor the improvements made by the auditor and take such action as it deems fit
depending on the progress made by the auditor.
4. The Authority may refer cases with regard to overseeing the quality of service of auditors of companies or
bodies corporate referred to in rule 3 to the Quality Review Board constituted under the Chartered Accountants
Act, 1949 (38 of 1949) or call for any report or information in respect of such auditors or companies or bodies
corporate from such Board as it may deem appropriate.
5. The Authority may take the assistance of experts for its oversight and monitoring activities.

Power to investigate – Rule 10 of the NFRA Rules states that:

1. Where the Authority has –
(a) received any reference from the Central Government for investigation into any matter of professional or
other misconduct under sub-section (4) of section 132 of the Act;
(b) decided to undertake investigation into any matter on the basis of its compliance or oversight activities;
or
(c) decided to undertake suo motu investigation into any matter of professional or other misconduct, after
recording reasons in writing for this purpose, it shall forward the matter to its Division dealing with
enforcement for carrying out investigation and other action.
2. If, during the investigation, the Authority has evidence to believe that any company or body corporate has
not complied with the requirements under the Act or rules which involves or may involve fraud amounting to
rupees one crore or more, it shall report its findings to the Central Government.
3. On the commencement of these rules -
(a) the action in respect of cases of professional or other misconduct against auditors of companies
referred to in rule 3 shall be initiated by Authority and no other institute or body shall initiate
any such proceedings against such auditors: Provided that no other institute or body shall initiate
or continue any proceedings in such matters of misconduct where the Authority has initiated an
investigation under this rule;
214 Lesson 7 • PP-GRMCE

(b) the action in respect of cases of professional or other misconduct against auditors of companies or bodies
corporate other than those referred to in rule 3 shall continue to be proceeded with by the Institute
of Chartered Accountants of India as per provisions of the Chartered Accountants Act, 1949 and the
regulations made thereunder.
Manner of enforcement of orders passed in disciplinary proceedings - Rule 12 of NFRA Rules
1. Where the order passed under rule 11 relates to imposition of a monetary penalty on any auditor, the auditor
shall deposit the amount of penalty with the Authority within thirty days of the order:
Provided that where the auditor prefers an appeal against the order of the Authority, it shall deposit ten percent
of the amount of the monetary penalty with the Appellate Tribunal.
2. If, within thirty days of the order passed under rule 11, the auditor neither pays the penalty nor appeals against
the order, the Authority shall, without prejudice to any other action, inform about such non-compliance to
every company or body corporate (including those not covered by rule 3) in which the auditor is functioning
as auditor and every such company or body corporate shall appoint a new auditor in accordance with the
provisions of the Act.
3. Where the order passed under rule 11 imposes a penalty on the auditor or debars the auditor from practice,
the order shall be sent to every company or body corporate in which the auditor is functioning as auditor.
4. Where the order passed under rule 11 debars the auditor from practice or the order under sub-rule (2) is
passed, the order shall be sent to every company or body corporate (including those not covered by rule 3)
in which the auditor is functioning as auditor and every such company or body corporate shall appoint a new
auditor in accordance with the provisions of the Act.

Punishment in case of non-compliance – Rule 13 of NFRA

If a company or any officer of a company or an auditor or any other person contravenes any of the provisions of these
rules, the company and every officer of the company who is in default or the auditor or such other person shall be
punishable as per the provisions of section 450 of the Act.
Powers of NFRA – Section 132(4) of Companies Act, 2013 states that notwithstanding anything contained in any
other law for the time being in force, the National Financial Reporting Authority shall –
a) have the power to investigate, either suo moto or on a reference made to it by the Central Government, for such
class of bodies corporate or persons, in such manner as may be prescribed into the matters of professional or
other misconduct committed by any member or firm of chartered accountants, registered under the Chartered
Accountants Act, 1949:
Provided that no other institute or body shall initiate or continue any proceedings in such matters of
misconduct where the National Financial Reporting Authority has initiated an investigation under this
section.
b) have the same powers as are vested in a civil court under the Code of Civil Procedure, 1908, while trying a suit,
in respect of the following matters, namely: –
i) discovery and production of books of account and other documents, at such place and at such time as
may be specified by the National Financial Reporting Authority;
ii) summoning and enforcing the attendance of persons and examining them on oath;
iii) inspection of any books, registers and other documents of any person referred to in clause (b) at any
place;
iv) issuing commissions for examination of witnesses or documents.
c) where professional or other misconduct is proved, have the power to make order for –
(a) imposing penalty of –
(i) not less than one lakh rupees, but which may extend to five times of the fees received, in case of
individuals; and
 Lesson 7 • Accounting and Audit Related Issues, Related Party Transactions and Vigil Mechanism 215

(ii) not less than five lakh rupees, but which may extend to ten times of the fees received, in case of firms.
(b) debarring the member or the firm from –
(i) being appointed as an auditor or internal auditor or undertaking any audit in respect of financial
statements or internal audit of the functions and activities of any company or body corporate; or
(ii) performing any valuation as provided under section 247,
for a minimum period of six months or such higher period not exceeding ten years as may be determined
by the National Financial Reporting Authority.
Explanation. – For the purposes of his sub-section, the expression “professional or other misconduct” shall have the
same meaning assigned to it under section 22 of the Chartered Accountants Act, 1949.

RELATED PARTY TRANSACTIONS

A related party transaction can present a potential or actual conflict of interest and might not be aligned with the
best interests of the company and its shareholders, especially minority shareholders. It can result in situations
where such transactions are used as a conduit to channel funds out of the company into another entity which is a
“related party.” These transactions can also be considered as a business opportunity that is lost to a related party to
the detriment of the interests of the company and its shareholders. Thus, these conflicts of interest are inherently
linked to the governance structure of a company, which can either enhance or limit the board’s effectiveness. The
board carries the main responsibility for reviewing and guiding corporate strategy and for effectively monitoring
management, and is accountable to the company and its shareholders.
Not all RPTs are detrimental to the interest of the company or its shareholders. Some transactions can be legitimate
and serve practical, commercial purposes. If companies are prohibited from entering into such transactions, their
ability to maximise shareholder value can suffer. Some related party transactions are conducted for the purpose of
exchanging products or services, which should occur at an arm’s length basis. Some products or services do not have
comparable benchmarks in the marketplace, however, as they are available only within a closed group. For example,
a pharmaceutical conglomerate holds all of its patents with one company. If other companies have to manufacture
those products, they might have no choice but to transact with the related party for using such rights. In that case,
there might not be any transaction available in the marketplace that can serve as a useful benchmark to assess
whether the transactions was conducted at arm’s length.

The various types of RPTs that are commonly observed are:

• Financial assistance through provisions of loans, guarantees and collateral
• Asset sales and purchases between related parties
• The sale, purchase or supply of any goods, materials or services in the ordinary course of business
• Bailouts

The law in India does not prohibit RPTs. Instead, the law puts into place a system of checks and balances, such
as requirements for approval from the board of directors/shareholders, timely disclosures and prior statutory
approvals, to ensure that the transactions are conducted within appropriate boundaries. RPTs are required to be
managed transparently, so as not to impose a heavy burden on a company’s resources, affect the optimum allocation
of resources, distort competition or siphon off public resources.
The requirements concerning related party transactions under Companies Act 2013 and SEBI (LODR) Regulations,
2015 may be divided into four key parts, viz.,
• Identification of Related Parties
• Identification of Related Party Transactions
• Approval Process
• Disclosure requirements
216 Lesson 7 • PP-GRMCE

Identification of Related Parties

According to Section 2(76) of Companies Act 2013, “related party”, with reference to a company, means –
i) a director or his relative;
ii) a key managerial personnel or his relative;
iii) a firm, in which a director, manager or his relative is a partner;
iv) a private company in which a director or manager is a member or director;
v) a public company in which a director or manager is a director or holds along with his relatives, more than two
percent (2%) of its paid-up share capital;
vi) any body corporate whose Board of Directors, managing director or manager is accustomed to act in accordance
with the advice, directions or instructions of a director or manager;
vii) any person on whose advice, directions or instructions a director or manager is accustomed to act: Provided
that nothing in sub-clauses (vi) and (vii) shall apply to the advice, directions or instructions given in a
professional capacity;
viii) any body corporate which is –
(a) a holding, subsidiary or an associate company of such company;
(b) a subsidiary of a holding company to which it is also a subsidiary; or
(c) an investing company or the venturer of the company.
Explanation. – For the purpose of this clause, “the investing company or the venturer of a company” means
a body corporate whose investment in the company would result in the company becoming an associate
company of the body corporate.
ix) such other person as may be prescribed;
Rule 3 of the Companies (Specification of Definitions Details) Rules 2014 provides that for the purpose of sub-
section (ix) of section 2(76), a director other than an independent director or key managerial personnel of the
holding company or his relative with reference to a company shall be deemed to be related party.
Section 2(77) of the Companies Act, 2013 read with Rule 4 of the Companies (Specification of Definitions
Details) Rules 2014 provides that ‘‘relative’’, with reference to any person, means anyone who is related to
another, if –
x) they are members of a Hindu Undivided Family;
xi) they are husband and wife; or
xii) one person is related to the other in the following manner, namely -
• Father : Provided that the term “Father” includes step-father
• Mother : Provided that the term “Mother” includes the step-mother
• Son : Provided that the term “Son” includes the step-son
• Son’s wife
• Daughter
• Daughter’s husband
• Brother : Provided that the term “Brother” includes the step-brother
• Sister : Provided that the term “Sister” includes the step-sister.

Provisions under the SEBI (LODR) Regulations, 2015,

Relative: The definition of relative is harmonised under Regulation 2(1)(zd) of Listing Regulations. It provides
that Relative means relative as defined under sub-section (77) of section 2 of the Companies Act, 2013 and rules
prescribed there under. Provided that this definition shall not be applicable for the units issued by mutual fund
which are listed on a recognised stock exchange(s).
 Lesson 7 • Accounting and Audit Related Issues, Related Party Transactions and Vigil Mechanism 217

Related Party : Regulation 2(1) (zb) of Listing Regulations defines that “related party” means a related party as
defined under sub-section (76) of section 2 of the Companies Act, 2013 or under the applicable accounting standards.
Provided that any person or entity belonging to the promoter or promoter group of the listed entity and holding
20% or more of shareholding in the listed entity shall be deemed to be a related party.
Provided further that this definition shall not be applicable for the units issued by mutual funds which are listed on
a recognised stock exchange(s).
Related Party Disclosure under Ind AS: As per Ind AS 24: A related party is a person or entity that is related to the
entity that is preparing its financial statements (i.e. the ‘reporting entity’)
a) A person or a close member of that person’s family is related to a reporting entity if that person:
i) has control or joint control over the reporting entity;
ii) has significant influence over the reporting entity; or
iii) is a member of the key management personnel of the reporting entity or of a parent of the reporting
entity.
b) An entity is related to a reporting entity if any of the following conditions applies:
i) The entity and the reporting entity are members of the same group (which means that each parent,
subsidiary and fellow subsidiary is related to the others).
ii) One entity is an associate or joint venture of the other entity (or an associate or joint venture of a member
of a group of which the other entity is a member).
iii) Both entities are joint ventures of the same third party.
iv) One entity is a joint venture of a third entity and the other entity is an associate of the third entity.
v) The entity is a post-employment benefit plan for the benefit of employees of either the reporting entity
or an entity related to the reporting entity. If the reporting entity is itself such a plan, the sponsoring
employers are also related to the reporting entity.
vi) The entity is controlled or jointly controlled by a person identified in (a).
vii) A person identified in (a)(i) has significant influence over the entity or is a member of the key management
personnel of the entity (or of a parent of the entity).
viii) The entity, or any member of a group of which it is a part, provides key management personnel services
to the reporting entity or to the parent of the reporting entity.
A related party transaction is a transfer of resources, services or obligations between a reporting entity and a related
party, regardless of whether a price is charged.
Thus, the term ‘related party’ is broader under listing regulations. The definition includes all related parties
under the Act and under Ind AS 24. The definition of ‘related party’ under listing regulations is likely to result in
identification of significantly higher number of related parties vis-à-vis those under the Act. LODR is likely to result
in identification of much higher number of related parties and identification on a more consistent basis.

Identification of Related Party Transaction

Section 188 (1) of the Companies Act 2013 deals with the related party transactions 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 agent for purchase or sale of goods, materials, services or property
218 Lesson 7 • PP-GRMCE

f) Related party’s appointment to any office or place of profit in the company, its subsidiary company or associate
company, and
g) Underwriting the subscription of any securities or derivatives thereof, of the company.
Provided that no contract or arrangement, in the case of a company having a paid-up share capital of not less than
such amount, or transactions not exceeding such sums, as may be prescribed, shall be entered into except with the
prior approval of the company by a resolution:
Provided further that no member of the company shall vote on such resolution, to approve any contract or
arrangement which may be entered into by the company, if such member is a related party:
Provided also that nothing contained in the second proviso shall apply to a company in which ninety percent or
more members, in number, are relatives of promoters or are related parties:
Provided also that nothing in this sub-section shall apply to any transactions entered into by the company in its
ordinary course of business other than transactions which are not on an arm’s length basis.
Provided also that the requirement of passing the resolution under first proviso shall not be applicable for transactions
entered into between a holding company and its wholly owned subsidiary whose accounts are consolidated with
such holding company and placed before the shareholders at the general meeting for approval:
Explanation. – In this sub-section,–
a) the expression “office or place of profit” means any office or place–
i) where such office or place is held by a director, if the director holding it receives from the company
anything by way of remuneration over and above the remuneration to which he is entitled as director, by
way of salary, fee, commission, perquisites, any rent-free accommodation, or otherwise;
ii) where such office or place is held by an individual other than a director or by any firm, private company
or other body corporate, if the individual, firm,private company or body corporate holding it receives
from the company anything by way of remuneration, salary, fee, commission, perquisites, any rent-free
accommodation, or otherwise.
b) the expression “arm’s length transaction” means a transaction between two related parties that is conducted
as if they were unrelated, so that there is no conflict of interest.

RPT under SEBI (LODR) Regulations, 2015:

Under Regulation 2(1)(zc) of SEBI (LODR) Regulations, 2015 “related party transaction” means a transfer of
resources, services or obligations between a listed entity and a related party, regardless of whether a price is charged
and a “transaction” with a related party shall be construed to include a single transaction or a group of transactions
in a contract.
This regulation defines related party transactions in a much general sense (relying on the accounting standards)
whereas the Act is much more specific in which transactions it wants to regulate. In the definition under regulations,
specific attention is drawn to the use of the word ‘resource’ which may include even items that do not meet criteria
for recognition as an asset. To illustrate, a listed company is transferring to its fellow subsidiary ‘research work’
carried out in the past which does not meet criteria for recognition as an intangible asset. Under regulations, the
proposed transaction will be covered as transfer of resource. Hence, regulations contain a broader definition which
is expected to cover all types of related party transactions.

Approval process
Section 188(1) of the Companies Act 2013 provides that a company shall enter into any contract or arrangement
with a related party with respect to Related party transactions only with the consent of the Board of Directors
given by a resolution at a meeting of the Board and subject to certain conditions as prescribed under Rule 15 of the
Companies (Meetings of board and its Powers) Rules, 2014, which is as under :
1. The agenda of the Board meeting at which the resolution is proposed to be moved shall disclose -
(a) the name of the related party and nature of relationship;
 Lesson 7 • Accounting and Audit Related Issues, Related Party Transactions and Vigil Mechanism 219

(b) the nature, duration of the contract and particulars of the contract or arrangement;
(c) the material terms of the contract or arrangement including the value, if any;
(d) any advance paid or received for the contract or arrangement, if any;
(e) the manner of determining the pricing and other commercial terms, both included as part of contract and
not considered as part of the contract;
(f) whether all factors relevant to the contract have been considered, if not, the details of factors not
considered with the rationale for not considering those factors; and
(g) any other information relevant or important for the Board to take a decision on the proposed transaction.
2. Where any director is interested in any contract or arrangement with a related party, such director shall not
be present at the meeting during discussions on the subject matter of the resolution relating to such contract
or arrangement.
3. For the purposes of first proviso to sub-section (1) of section 188, except with the prior approval of the
company by a resolution, a company shall not enter into a transaction or transactions, where the transaction
or transactions to be entered into,-
(a) as contracts or arrangements with respect to clauses (a) to (e) of sub-section (1) of section 188, with
criteria as mention below –
(i) sale, purchase or supply of any goods or material, directly or through appointment of agent,
amounting to ten percent or more of the turnover of the company, as mentioned in clause (a) and
clause (e) respectively of sub-section (1) of section 188;
(ii) selling or otherwise disposing of or buying property of any kind, directly or through appointment
of agent, amounting to ten percent or more] of net worth of the company , as mentioned in clause
(b) and clause (e) respectively of sub-section (1) of section 188;
(iii) leasing of property any kind amounting to ten percent or more of the turnover of the company, as
mentioned in clause (c) of sub-section (1) of section 188;
(iv) availing or rendering of any services, directly or through appointment of agent, amounting to
ten percent or more] of the turnover of the company as mentioned in clause (d) and clause (e)
respectively of sub-section (1) of section 188:
Explanation.- It is hereby clarified that the limits specified in sub-clause (i) to (iv) shall apply for
transaction or transactions to be entered into either individually or taken together with the previous
transactions during a financial year.
(b) is for appointment to any office or place of profit in the company, its subsidiary company or associate
company at a monthly remuneration exceeding two and a half lakh rupees as mentioned in clause (f) of
sub-section (1) of section 188.
(c) is for remuneration for underwriting the subscription of any securities or derivatives thereof, of the
company exceeding one percent of the net worth as mentioned in clause (g) of sub-section (1) of
section 188.
Explanation.- (1) The turnover or net worth referred in the above sub-rules shall be computed on the basis of
the audited financial statement of the preceding financial year.
2. In case of wholly owned subsidiary, the resolution is passed by the holding company shall be sufficient for the
purpose of entering into the transaction between the wholly owned subsidiary and the holding company.
3. The explanatory statement to be annexed to the notice of a general meeting convened pursuant to section 101
shall contain the following particulars, namely:-
(a) name of the related party;
(b) name of the director or key managerial personnel who is related, if any;
(c) nature of relationship;
220 Lesson 7 • PP-GRMCE

(d) nature, material terms, monetary value and particulars of the contract or arrangements;
(e) any other information relevant or important for the members to take a decision on the proposed
resolution.
• In case of wholly owned subsidiary, the resolution passed by the holding company shall be sufficient
for the purpose of entering into the transaction between the wholly owned subsidiary and the
holding company.
• 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 in the general meeting and if it is
not ratified by the Board or, as the case may be, by the shareholders at a meeting within three
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 or, as the case may be, of the shareholders
and if the contract or arrangement is with a related party to any director, or is authorised by any
other director, the directors concerned shall indemnify the company against any loss incurred by it.

Provisions under SEBI (LODR) Regulations, 2015

Policy on materiality of related party transactions:
Regulation 23(1)- The listed entity shall formulate a When will a transaction with a related party be
policy on materiality of related party transactions and material?
on dealing with related party transactions including Explanation to Regulation 23(1): A transaction with
clear threshold limits duly approved by the Board of a related party shall be considered material if the
Directors and such policy shall be reviewed by the transaction(s) to be entered into individually or taken
Board of Directors at least once every three years and together with previous transactions during a financial
updated accordingly. year, exceeds 10% of the annual consolidated turnover
of the listed entity as per the last audited financial
Approval of Audit Committee statements of the listed entity.
Regulation 23(2)- All related party transactions shall Regulation 23(1A): With effect from July 01, 2019, a
require prior approval of the audit committee. transaction involving payments made to a related party
with respect to brand usage or royalty shall be considered
Omnibus Approval: material if the transaction(s) to be entered into
individually or taken together with previous transactions
Regulation 23(3) - Audit committee may grant during a financial year, exceed five percent of the annual
omnibus approval for related party transactions consolidated turnover of the listed entity as per the last
proposed to be entered into by the listed entity audited financial statements of the listed entity.
subject to the following conditions, namely -
a) the audit committee shall lay down the criteria for granting the omnibus approval in line with the policy on
related party transactions of the listed entity and such approval shall be applicable in respect of transactions
which are repetitive in nature;
b) the audit committee shall satisfy itself regarding the need for such omnibus approval and that such approval
is in the interest of the listed entity;
c) the omnibus approval shall specify:
i) the name(s) of the related party, nature of transaction, period of transaction, maximum amount of
transactions that shall be entered into;
ii) the indicative base price / current contracted price and the formula for variation in the price if any; and
iii) such other conditions as the audit committee may deem fit:
Provided that where the need for related party transaction cannot be foreseen and aforesaid details are
not available, audit committee may grant omnibus approval for such transactions subject to their value
not exceeding rupees one crore per transaction.
d) the audit committee shall review, at least on a quarterly basis, the details of related party transactions entered
into by the listed entity pursuant to each of the omnibus approvals given.
 Lesson 7 • Accounting and Audit Related Issues, Related Party Transactions and Vigil Mechanism 221

e) Such omnibus approvals shall be valid for a period not exceeding one year and shall require fresh approvals
after the expiry of one year:
Approval of the shareholders
Regulation 23(4) - All material related party transactions shall require approval of the shareholders through
resolution and no related party shall vote to approve such resolutions whether the entity is a related party to the
particular transaction or not:
Provided that the requirements specified under this sub-regulation shall not apply in respect of a resolution plan
approved under section 31 of the Insolvency Code, subject to the event being disclosed to the recognized stock
exchanges within one day of the resolution plan being approved.
Exemptions
Regulation 23 (5) - The provisions of Regulation 23 (2), (3) and (4) shall not be applicable in the following cases:
a) transactions entered into between two government companies;
b) transactions entered into between a holding company and its wholly owned subsidiary whose accounts
are consolidated with such holding company and placed before the shareholders at the general meeting for
approval.
Explanation. - For the purpose of clause (a), “government company(ies)” means Government company as defined in
sub-section (45) of section 2 of the Companies Act, 2013.
Other provisions
Regulation 23 (6) The provisions of this regulation shall be applicable to all prospective transactions.
Regulation 23 (7) For the purpose of this regulation, all entities falling under the definition of related parties shall
not vote to approve the relevant transaction irrespective of whether the entity is a party to the particular transaction
or not.
Regulation 23 (8) All existing material related party contracts or arrangements entered into prior to the date of
notification of these regulations and which may continue beyond such date shall be placed for approval of the
shareholders in the first General Meeting subsequent to notification of these regulations.
Regulation 23 (9) The listed entity shall submit within 30 days from the date of publication of its standalone and
consolidated financial results for the half year, disclosures of related party transactions on a consolidated basis, in
the format specified in the relevant accounting standards for annual results to the stock exchanges and publish the
same on its website.
The relevant disclosures to be made under Related Party transactions have already been covered in the previous
chapter.

VIGIL MECHANISM / WHISTLE BLOWER

Meaning and Definition

The term “whistle-blowing” originates from the practice of British policemen
Whistle blowing means
who blew their whistles whenever they observed commission of a crime. The
calling the attention of the
term ‘whistle-blowing’ is a relatively recent entry into the vocabulary of public
top management to some
and corporate affairs although the phenomenon itself is not new.
wrongdoing occurring within
The concept of a Whistleblower was in existence even in Ancient India, Kautilya an organization. A whistle-
had proposed- “Any informant (súchaka) who supplies information about blower may be an employee,
embezzlement just under perpetration shall, if he succeeds in proving it, get as former employee or member of
reward one-sixth of the amount in question; if he happens to be a government an organisation, a government
servant (bhritaka), he shall get for the same act one-twelth of the amount.” agency, who have willingness
The term whistle blowing probably arises by analogy with the referee or umpire to take corrective action on the
who draws public attention to a foul in a game by blowing of the whistle which misconduct.
would alert both the law enforcement officers and the general public of danger.
222 Lesson 7 • PP-GRMCE

Whistle blowers are individuals who expose corruption and fraud in organizations by filing a law suit or a complaint
with Government authorities that prompts a criminal investigation in to the organizations alleged behavior. A
whistle-blower is a person who publicly complains concealed misconduct on the part of an organization or a body of
people, usually from within that same organisation. This misconduct may be classified in many ways: for example, a
violation of a law, rule, regulation and/or a direct threat to the public interest, such as fraud, health/safety violations,
and corruption. Whistle-blowers frequently the face retaliation - sometimes at the hands of the organisation or the
group which they have accused, unless a system is in place that would ensure confidentiality. In addition, people
are more likely to take action with respect to unacceptable behavior within an organization, if there are complaint
systems that ensure confidentiality and indemnity.
US civic activist Ralph Nader coined the phrase in the early 1970s to avoid the negative connotations found in other
words such as “informers” and “snitches”.

Some important Definitions of whistle blowing are:

• R.M Green (1994) defines a whistle-blower as an Employee who, perceiving an organizational practice that
he believes to be illegal or unethical, seeks to stop this practice by alerting top management or failing that
by notifying authorities outside the organization.
• Sekhar (2002) defines whistleblowing as an attempt by an employee or a former employee of an organization
to disclose what he proclaims to be wrong doing in or by that organization.
• Koehn (2003) whistle blowing occurs when an employee informs the public of inappropriate activities
going on inside the organization.
• Boatright (2003) whistle blowing is the release of information by a member or former member of an organization
this is evidence of illegal and/or immoral conduct in the organization that is not in the public interest.

Types of Whistle-blowers

1. Internal: When the whistle-blower reports the wrong doings to the officials at higher position in the
organization. The usual subjects of internal whistle blowing are disloyalty, improper conduct, indiscipline,
insubordination, disobedience etc.
2. External: Where the wrongdoings are reported to the people outside the organization like media, public
interest groups or enforcement agencies it is called external whistle blowing.
3. Alumini: When the whistle blowing is done by the former employee of the organization it is called alumini
whistle blowing.
4. Open: When the identity of the whistle-blower is revealed, it is called Open Whistle Blowing.
5. Personal: Where the organizational wrongdoings are to harm one person only, disclosing such wrong doings
it is called personal whistle blowing.
6. Impersonal: When the wrong doing is to harm others, it is called impersonal whistle blowing.
7. Government: When a disclosure is made about wrong doings or unethical practices adopted by the officials
of the Government.
8. Corporate: When a disclosure is made about the wrongdoings in a business corporation, it is called corporate
whistle blowing.

Whistle Blowing under Sarbanes-Oxley Act, 2002 (SOX)

Section 302 of Sarbanes Oxley Act of 2002, an Act enacted by U.S. congress to protect investors by improving the
accuracy and reliability of corporate disclosures made pursuant to the securities laws, and for other purposes
contains following provisions for whistle-blowers:
• Make it illegal to “discharge, demote, suspend, threaten, harass or in any manner discriminate against” whistle-
blowers
• Establish criminal penalties of up to 10 years for executives who retaliate against whistle-blowers
 Lesson 7 • Accounting and Audit Related Issues, Related Party Transactions and Vigil Mechanism 223

• Require board audit committees to establish procedures for hearing whistleblower complaints
• Allow the secretary of labour to order a company to rehire a terminated employee with no court hearing
• Give a whistle-blower the right to a jury trial, bypassing months or years of administrative hearings.

Vigil Mechanism under Companies Act, 2013

Section 177(9) of the Companies Act, 2013 provides every listed company or such class or classes of companies, as
prescribed in Rule 7 of the Companies (Meetings of Board and its Powers) Rules, 2014, shall establish a vigil
mechanism for directors and employees to report genuine concerns in such manner as may be prescribed.

Rule 7 of the Companies (Meetings of Board and its Powers) Rules, 2014, provides that -
1. Every listed company and the companies belonging to the following class or classes shall establish a vigil
mechanism for their directors and employees to report their genuine concerns or grievances -
(a) the Companies which accept deposits from the public;
(b) the Companies which have borrowed money from banks and public financial institutions in excess of fifty
crore rupees.
2. The companies which are required to constitute an audit committee shall oversee the vigil mechanism through
the committee and if any of the members of the committee have a conflict of interest in a given case, they
should recuse themselves and the others on the committee would deal with the matter on hand.
3. In case of other companies, the Board of Directors shall nominate a director to play the role of audit committee
for the purpose of vigil mechanism to whom other directors and employees may report their concerns.
4. The vigil mechanism shall provide for adequate safeguards against victimisation of employees and directors
who avail of the vigil mechanism and also provide for direct access to the Chairperson of the Audit Committee
or the director nominated to play the role of Audit Committee, as the case may be, in exceptional cases.
5. In case of repeated frivolous complaints being filed by a director or an employee, the audit committee or the
director nominated to play the role of audit committee may take suitable action against the concerned director
or employee including reprimand.
Section 177(10) of the Companies Act, 2013 provides that the vigil mechanism under sub-section (9) shall
provide for adequate safeguards against victimisation of persons who use such mechanism and make provision for
direct access to the chairperson of the Audit Committee in appropriate or exceptional cases:
Provided that the details of establishment of such mechanism shall be disclosed by the company on its website, if
any, and in the Board’s report.

Vigil mechanism under SEBI Listing Obligations and Disclosure Requirements, 2015

1. The listed entity shall formulate a vigil mechanism for directors and employees to report genuine concerns.
[Regulation 22(1)]
2. The vigil mechanism shall provide for adequate safeguards against victimization of director(s) or employee(s)
or any other person who avail the mechanism and also provide for direct access to the chairperson of the audit
committee in appropriate or exceptional cases. [Regulation 22(2)]
3. Regulation 46(2)(e) provides that the listed entity shall disseminate the details of establishment of vigil
mechanism/ Whistle Blower policy.
4. The disclosure regarding the details of establishment of vigil mechanism, whistle blower policy, and affirmation
that no personnel has been denied access to the audit committee shall be made in the section on the corporate
governance of the annual report. [Schedule V-Section C: Corporate Governance Report-Para 10(c)]
224 Lesson 7 • PP-GRMCE

Case Example: Enron, a Houston-based energy company founded by a brilliant entrepreneur,

Kenneth Lay.
The company was created in 1985 by a merger of two American gas pipeline companies in Nabraska
and Texas. Lay assumed the role of chairperson and CEO, a position he held through most of the next 16
years, until the company’s downfall in 2001. In a period of 16 years the company was transformed from
a relatively small concern, involved in gas pipelines, oil and gas exploration, to the world’s largest energy
trading company. In 2001 Enron became a household name-and probably in most households in most
countries around the world. On 2 December, 2001 Enron, one of the 10 largest companies in the US, filed
for bankruptcy.
During the boom years of the late 1990s the company positioned itself as a trader of virtually any type of
asset: pulp and paper, weather derivatives, commodities, credits, and so on. It also expanded into areas that
it thought would benefit from rapid growth, including water (following deregulation measures), fiber optic
capacity/ Internet bandwidth, and so on. At the end of 1999, Enron launched its Internet based trading
platform—Enron online. In February 2001, the company’s stock market value was USD 4.60 billion.
In early 2001, as Lay handed the CEO role to Skilling, Enron reached an apex: the company reported
revenues of US $ 100 billion and ranked seventh on the Fortune500 list of largest global companies.
In early 2001, however, the company’s problems started mounting: the expensive expansion into the
broadband sector became questionable. Enron’s stock prices started falling. In August 2001 the chief
executive Jeffery Skilling, left the company following concerns about the company’s management. Former
CEO Lay returned to his old role (retaining the board chair as well).
Whistle-blowers within the firm – aware of widespread financial improprieties—were attempting to convey
information to the board of directors; one employee, Sherron Watkins, Enron’s vice president of corporate
development, was finally successful in alerting certain board members that all was not well. In November
2001, it became clear that Enron was facing serious financial problems.

ANNEXURE A

The list of Ind AS are as under:

Ind AS Number Title

Ind AS 1 Presentation of Financial Statements

Ind AS 2 Inventories

Ind AS 7 Statement of Cash Flows

Ind AS 8 Accounting Policies, Changes in Accounting Estimates and Errors

Ind AS 10 Events after Reporting Period

Ind AS 11 Construction Contracts

Ind AS 12 Income Taxes

Ind AS 16 Property, Plant and Equipment

Ind AS 17 Leases

Ind AS 18 Revenue

Ind AS 19 Employee Benefits

Lesson 7 • Accounting and Audit Related Issues, Related Party Transactions and Vigil Mechanism 225

Ind AS 20 Accounting for Government Grants and Disclosure of Government Assistance

Ind AS 21 The Effects of Changes in Foreign Exchange Rates

Ind AS 23 Borrowing Costs

Ind AS 24 Related Party Disclosures

Ind AS 27 Separate Financial Statements

Ind AS 28 Investments in Associates and Joint Ventures

Ind AS 29 Financial Reporting in Hyperinflationary Economies

Ind AS 32 Financial Instruments: Presentation

Ind AS 33 Earnings per Share

Ind AS 34 Interim Financial Reporting

Ind AS 36 Impairment of Assets

Ind AS 37 Provisions, Contingent Liabilities and Contingent Assets

Ind AS 38 Intangible Assets

Ind AS 40 Investment Property

Ind AS 41 Agriculture

Ind AS 101 First-time adoption of Ind AS

Ind AS 102 Share Based payments

Ind AS 103 Business Combination

Ind AS 104 Insurance Contracts

Ind AS 105 Non-Current Assets Held for Sale and Discontinued Operations

Ind AS 106 Exploration for and Evaluation of Mineral Resources

Ind AS 107 Financial Instruments: Disclosures

Ind AS 108 Operating Segments

Ind AS 109 Financial Instruments

Ind AS 110 Consolidated Financial Statements

Ind AS 111 Joint Arrangements

Ind AS 112 Disclosure of Interests in Other Entities

Ind AS 113 Fair Value Measurement

Ind AS 114 Regulatory Deferral Accounts

Ind AS 115 Revenue from Contracts with Customers

Ind AS 116 Leases

226 Lesson 7 • PP-GRMCE

LESSON ROUND UP
• Corporate Scams created the need to increasing auditors’ effectiveness, setting up an audit committee and
strengthen financial reporting standards.
• Auditors are professional accountants who assure shareholders reliability of financial statements.
• Auditors’ effectiveness is enhance through –
• Encouraging Professional Objectivity
• Maintaining Independence
• Rotation of Auditors
• Appropriate Remuneration
• Restriction on Non-Audit Services.
• To improve financial reporting standards India has revised its accounting standards. The new Ind-AS is in
line with the International Financial Reporting standard.
• Section 139 requires mandatory rotation of auditors. An individual cannot act as an auditor for more than
five consecutive years and an audit firm can be appointed as auditor for not more than two terms of five
consecutive years each. Once the term is ended they cannot be reappointed a period of five years.
• The National Financial Reporting Authority is an independent regulator established under Section 132 of
the Act to oversee the auditing profession, improve the quality of audit and ensure independence of audit
firms.
• Whistle blowers are individuals who expose corruption and fraud in organizations by filing a law suit or a
complaint with Government authorities that prompts a criminal investigation in to the organizations alleged
behavior.

GLOSSARY
Audit An official inspection of an organization’s accounts, typically by an independent body.
Vigil Mechanism It is a mechanism called ‘Vigil Mechanism’ for all the Directors and employees to report to
the management instances of unethical behavior, actual or suspected fraud or violation of
the Company’s code of conduct or ethics policy.
A whistle-blower A whistle-blower is a person who publicly complains concealed misconduct on the part of
an organization or a body of people, usually from within the same organisation.

TEST YOURSELF
(These are meant for recapitulation only. Answers to these questions are not to be submitted for evaluation)
1. Can you suggest some measures to increase auditors’ effectiveness?
2. As a Company Secretary briefly explain the powers and functions of NFRA?
3. Are there is any provision in the legislature for mandatory rotation of auditors in India? Explain
4. Does having an independent audit prevent scams? Justify your answer.
5. Write a short note on Internal Audit.
6. Explain in brief the provisions and importance of secretarial audit.
 Corporate Governance and
Lesson 8
Shareholder’s Rights

Key Concepts One Learning Objectives Regulatory Framework

Should Know
Companies Act, 2013
• Minority To understand the: • Section 2(69)
shareholders • Rights of the shareholders • Section 125(2)&(3)
• Class action suit from corporate governance • Section 151
perspective • Section 241(1)&(2)
• IEPF
• Protection of interest of • Section 242
• E-Voting Minority shareholders in light • Section 245
• Exit Rights of related party transactions • Section 408
• CG Rating system • Role that institutional Rights of Shareholders under
• CalPERS shareholders can play in Companies Act, 2013
prompting good corporate • Section 44
• Proxy Advisorsy
governance • Section 46
firm
• Global trends in Corporate • Section 47
Governance • Section 48
• International codes like • Section 56
UK Stewardship Code, UN • Section 62
Principles on Responsible • Section 71, 71(13)
Investment • Section 72
• Section 87
• The Code for Responsible • Section 94(2)
Investing in South Africa • Section 96
(CRISA), CalPERS corporate • Section 100
engagement process • Section 101(1)&(2)
• The role of proxy advisors • Section 105
• corporate governance in • Section 107
subsidiaries and family owned • Section 119
enterprises • Section 136(1)
• Section 140
• Section 170
• Section 189
• Section 190
• Section 190(2)
• Section 210
• Section 241
• Section 242
SEBI (LODR) Regulation, 2015
• Regulation 2(1)(oo)
• Regulation 2(1)(pp)
228 Lesson 8 • PP-GRMCE

Lesson Outline
• Introduction
• Regulatory Framework
• Rights of Shareholders
• Promoter / Controlling Shareholder
• Role and Liabilities of Promoters
• Majority and Minority Shareholders
• Protection of rights of shareholders/investors in India
• IEPF
• Investor Associations
• Protection of Rights of Minority Shareholders
• Oppression and Mismanagement
• Class Action Suits
• Others
• Institutional Investors
• UK Stewardship Code
• Principles for Responsible Investment (PRI)
• Code for Responsible Investing in South Africa (CRISA)
• California Public Employees’ Retirement System
• Role of Proxy Advisors
• Governance of Group Entities/ Subsidiaries
• Corporate Governance in Family owned enterprises
• LESSON ROUND-UP
• GLOSSARY
• TEST YOURSELF

INTRODUCITON
Protection of shareholder rights is sacrosanct for good corporate governance. It is one of the pillars of
corporate governance. For the efficient functioning of the capital market, the fundamental requirement is
that the investor rights are well protected. The Preamble to Securities and Exchange Board of India Act, 1992
reads as under:
“An Act to provide for the establishment of a Board to protect the interests of investors in securities and to promote
the development of, and to regulate the securities market and for matters connected there with or incidental thereto.”

The central element in corporate governance is the challenges arising out of separation of ownership and control.
The shareholders are the true owners of a corporate and the governance function controls the operations of the
corporate. There is a strong likelihood that there is a mismatch between the expectations of the shareholders and
the actions of the management. Therefore there is a need to lay down clearly the rights of the shareholders and that
of the management.
In the Indian context, the SEBI Act, 1992, the various SEBI Regulations and Guidelines and the Companies Act, 2013
enables the empowerment of shareholder rights.
Lesson 8 • Corporate Governance and Shareholder’s Rights 229

RIGHTS OF SHAREHOLDERS

Under the Companies Act, 2013

S. No. Section Rights of Shareholder

1. Rights to receive copies of the following documents:
(a) Right of Member to A copy of the financial statements, including consolidated financial
Copies of Audited statements, if any, auditor’s report and every other document required by law
Financial Statement: to be annexed or attached to the financial statements, which are to be laid
Section 136(1) before a company in its general meeting, shall be sent to every member of the
company, to every trustee for the debenture-holder of any debentures issued
by the company, and to all persons other than such member or trustee, being
the person so entitled, not less than 21 days before the date of the meeting.
Provided that if the copies of the documents are sent less than 21 days before
the date of the meeting, they shall, notwithstanding that fact, be deemed to
have been duly sent if it is so agreed by members -
a) Holding, if the company has a share capital, majority in number entitled
to vote and who represent not less than 95% of such part of paid-up
share capital of the company as gives a right to vote at the meeting; or
b) Having, if the company has no share capital, not less than 95% of the
total voting power exercisable at the meeting.
Provided further that in the case of a listed company, the provisions of this sub-
section shall be deemed to be complied with, if the copies of the documents
are made available for inspection at its registered office during working
hours for a period of twenty-one days before the date of the meeting and a
statement containing the salient features of such documents in the prescribed
form or copies of the documents, as the company may deem fit, is sent to
every member of the company and to every trustee for the holders of any
debentures issued by the company not less than twenty-one days before the
date of the meeting unless the shareholders ask for full financial statements.
(b) Contract of Employment 1. Every company shall keep at its registered office,–
with Managing or (a) where a contract of service with a managing or whole-time
Whole- Time Directors: director is in writing, a copy of the contract; or
Section 190
(b) where such a contract is not in writing, a written memorandum
setting out its terms.
2. The copies of the contract or the memorandum kept under sub-section
(1) shall be open to inspection by any member of the company without
payment of fee.
3. If any default is made in complying with the provisions of sub-section
(1) or sub-section (2), the company shall be liable to a penalty of twenty-
five thousand rupees and every officer of the company who is in default
shall be liable to a penalty of 5000 rupees for each default.
4. The provisions of this section shall not apply to a private company.
(c) Notice of Meeting: 1. A general meeting of a company may be called by giving not less than
Section 101(1) & 3(a) clear 21 days’ notice either in writing or through electronic mode.
2. The notice through electronic mode has been dealt with in Rule 18 of
the Companies (Management and Administration) Rules, 2014.
3. (a) The notice of every meeting of the company shall be given to every
member of the company, legal representative of any deceased member
or the assignee of an insolvent member.
230 Lesson 8 • PP-GRMCE

2. Right to inspect statutory registers/returns and get copies thereof on payment of prescribed fees.
(a) Debentures: 71(6): A debenture trustee shall take steps to protect the interests of the
Section 71(6), 71(13) debenture-holders and redress their grievances in accordance with Rule 18
of the Companies (Share Capital and Debentures) Rules, 2014.
71(13): The Central Government has prescribed the procedure under Rule 18
of the Companies (Share Capital and Debentures), Rules, 2014, for securing
the issue of debentures, the form of debenture trust deed, the procedure for
the debenture-holders to inspect the trust deed and to obtain copies thereof,
quantum of debenture redemption reserve required to be created and such
other matters.
(b) Rectification by Central The Central Government on being satisfied that –
Government in Register
a) the omission to give intimation to the Registrar of the payment or
of Charges
satisfaction of a charge, within the time required under this Chapter; or
Section 87
b) the omission or misstatement of any particulars, in any filing previously
made to the Registrar with respect to any such charge or modification
thereof or with respect to any memorandum of satisfaction or other entry
made in pursuance of section 82 or section 83, was accidental or due
to inadvertence or some other sufficient cause or it is not of a nature to
prejudice the position of creditors or shareholders of the company, it may,
on the application of the company or any person interested and on such
terms and conditions as it deems just and expedient, direct that the time for
the giving of intimation of payment or satisfaction shall be extended or, as
the case may require, that the omission or misstatement shall be rectified.
(c) Place of keeping and The registers and their indices, except when they are closed under the
Inspection of Registers, provisions of this Act, and the copies of all the returns shall be open for
Returns, etc. inspection by any member, debenture-holder, other security holder or
Section 94(2) beneficial owner, during business hours without payment of any fees and by
any other person on payment of such fees as prescribed under Rule 14 of the
Companies (Management and Administration) Rules, 2014.
(d) Inspection of Minute- 1. The books containing the minutes of the proceedings of any general
Books of General meeting of a company or of a resolution passed by postal ballot, shall –
Meeting
(a) be kept at the registered office of the company; and
Section 119
(b) be open, during business hours, to the inspection by any member
without charge, subject to such reasonable restrictions as the
company may, by its articles or in general meeting, impose, so,
however, that not less than two hours in each business day are
allowed for inspection.
2. Any member shall be entitled to be furnished, within seven working
days after he has made a request in that behalf to the company, and on
payment of such fees as may be prescribed, with a copy of any minutes
referred to in sub-section (1).
(e) Register of Contracts or 3. The register of contracts or arrangements shall be kept at the registered
Arrangements in Which office of the company and it shall be open for inspection at such office
Directors are Interested during business hours and extracts may be taken therefrom, and
Section 189 copies thereof as may be required by any member of the company shall
be furnished by the company to such extent, in such manner, and on
payment of such fees as may be prescribed.
Lesson 8 • Corporate Governance and Shareholder’s Rights 231

(f) Register of Directors 1. Every company shall keep at its registered office a register containing
and key Managerial such particulars of its directors and key managerial personnel as may be
Personnel and their prescribed, which shall include the details of securities held by each of
Shareholding them in the company or its holding, subsidiary, subsidiary of company’s
Section 170 holding company or associate companies.
(g) Contract of Employment 1. Every company shall keep at its registered office, –
with Managing or
(b) where a contract of service with a managing or whole-time
Whole-Time Directors
director is in writing, a copy of the contract; or
Section 190
(c) where such a contract is not in writing, a written memorandum
setting out its terms.
2. The copies of the contract or the memorandum kept under sub-section
(1) shall be open to inspection by any member of the company without
payment of fee.
3. If any default is made in complying with the provisions of sub-section
(1) or sub-section (2), the company shall be liable to a penalty of
25000 rupees and every offier of the company who is in default shall
be liable to a penalty of 5000 rupees for each default.
4. The provisions of this section shall not apply to a private company.
3. Right to attend Meetings of the Shareholders and exercise voting rights at these meetings either
personally or through proxy.
(a) Annual General Meeting: Section 96(1): (1) Every company other than a One Person Company shall
Section 96 in each year hold in addition to any other meetings, a general meeting
as its annual general meeting and shall specify the meeting as such in
the notices calling it, and not more than fifteen months shall elapse
between the date of one annual general meeting of a company and that
of the next.
(b) Calling of Extraordinary Section 100(2): The Board shall, at the requisition made by, –
General Meeting a) in the case of a company having a share capital, such number of members
Section 100 who hold, on the date of the receipt of the requisition, not less than one-
tenth of such of the paid-up share capital of the company as on that date
carries the right of voting;
b) in the case of a company not having a share capital, such number of
members who have, on the date of receipt of the requisition, not less
than one-tenth of the total voting power of all the members having on
the said date a right to vote;
call an extraordinary general meeting of the company within the period
specified in sub-section (4).
(c) Proxies Section 105: (1) Any member of a company entitled to attend and vote at a
Section 105 meeting of the company shall be entitled to appoint another person as a proxy
to attend and vote at the meeting on his behalf. However, a proxy shall not
have the right to speak at such meeting and shall not be entitled to vote except
on a poll.
(d) Voting by Show of Hands Section 107(1): At any general meeting, a resolution put to the vote of the
Section 107 meeting shall, unless a poll is demanded under section 109 or the voting is
carried out electronically, be decided on a show of hands.

4. Other Rights
232 Lesson 8 • PP-GRMCE

(a) Certificate of Shares Section 46(1): A certificate, issued under the common seal, if any, of the
Section 46 company or signed by two directors or by a director and the Company
Secretary, wherever the company has appointed a Company Secretary,
specifying the shares held by any person, shall be prima facie evidence of the
title of the person to such shares.
(2) A duplicate certificate of shares may be issued, if such certificate- (a) is
proved to have been lost or destroyed; (b) has been defaced, mutilated or torn
and is surrendered to the company.
(4) Where a share is held in depository form, the record of the depository is
the prima facie evidence of the interest of the beneficial owner.
(b) Nature of Shares or Section 44: The shares or debentures or other interest of any member in a
Debentures: company shall be movable property transferable in the manner provided by
Section 44 the articles of the company.
Transfer and Section 56(1): A company shall not register a transfer of securities of the
Transmission of company, or the interest of a member in the company in the case of a company
Securities: having no share capital, other than the transfer between persons both of
Section 56 whose names are entered as holders of beneficial interest in the records
of a depository, unless a proper instrument of transfer, in Form No. SH4 as
prescribed in Rule 11 of the Companies (Share Capital and Debentures) Rules,
2014, duly stamped, dated and executed by or on behalf of the transferor and
the transferee and specifying the name, address and occupation, if any, of
the transferee has been delivered to the company by the transferor or the
transferee within a period of sixty days from the date of execution, along with
the certificate relating to the securities, or if no such certificate is in existence,
along with the letter of allotment of securities.
(c) Further issue of share Section 62: (1) Where at any time, a company having a share capital proposes
capital: to increase its subscribed capital by the issue of further shares, such shares
Section 62 shall be offered–
a) to persons who, at the date of the offer, are holders of equity shares of
the company in proportion, as nearly as circumstances admit, to the
paid-up share capital on those shares by sending a letter of offer.
(d) Removal, Resignation Section 140(1):The auditor appointed under section 139 may be removed
of Auditor and Giving of from his office before the expiry of his term only by a special resolution of the
Special Notice: company, after obtaining the previous approval of the Central Government in
Section 140 that behalf in the prescribed manner.
(e) Variation of Section 48:(1) Where a share capital of the company is divided into different
Shareholders’ Rights: classes of shares, the rights attached to the shares of any class may be varied
Section 48 with the consent in writing of the holders of not less than three-fourths of
the issued shares of that class or by means of a special resolution passed at a
separate meeting of the holders of the issued shares of that class,–
a) if provision with respect to such variation is contained in the
memorandum or articles of the company; or
b) in the absence of any such provision in the memorandum or articles, if
such variation is not prohibited by the terms of issue of the shares of
that class.
If the variation of one class of shareholders affects the rights of any other
class of shareholders, the consent of three-fourths of such other class of
shareholders shall also be obtained and the provisions of this section shall
apply to such variation.
Lesson 8 • Corporate Governance and Shareholder’s Rights 233

(f) Investigation into Section 210: (1) Where the Central Government is of the opinion, that it is
Affairs of Company: necessary to investigate into the affairs of a company, –
Section 210
a) on the receipt of a report of the Registrar or inspector under section
208;
b) on intimation of a special resolution passed by a company that the
affairs of the company ought to be investigated; or(c) in public interest,
it may order an investigation into the affairs of the company.
c) in public interest, it may order an investigation into the affairs of the
company.
(g) Application to Tribunal Section 241(1): Any member of a company who complains that –
for Relief in Cases of
a) the affairs of the company have been or are being conducted in a manner
Oppression, etc:
prejudicial to public interest or in a manner prejudicial or oppressive to
Section 241
him or any other member or members or in a manner prejudicial to the
interests of the company; or
b) the material change, not being a change brought about by, or in the
interests of, any creditors, including debenture holders or any class
of shareholders of the company, has taken place in the management
or control of the company, whether by an alteration in the Board of
Directors, or manager, or in the ownership of the company’s shares,
or if it has no share capital, in its membership, or in any other manner
whatsoever, and that by reason of such change, it is likely that the affairs
of the company will be conducted in a manner prejudicial to its interests
or its members or any class of members
may apply to the Tribunal, provided such member has a right to apply under
section 244, for an order under this Chapter.
Power of the Tribunal: Section 242: (1) If, on any application made under section 241, the Tribunal
Section- 242 is of the opinion–
a) that the company’s affairs have been or are being conducted in a manner
prejudicial or oppressive to any member or members or prejudicial to public
interest or in a manner prejudicial to the interests of the company; and
b) that to wind up the company would unfairly prejudice such member
or members, but that otherwise the facts would justify the making of a
winding-up order on the ground that it was just and equitable that the
company should be wound up,
the Tribunal may, with a view to bringing to an end the matters complained of,
make such order as it thinks fit.
(h) Power to Nominate: (1) Every holder of securities of a company may, at any time, nominate, in the
Section 72 prescribed manner, any person to whom his securities shall vest in the event
of his death.
(i) Voting Rights: Section 47(1): Subject to the provisions of section 43, sub-section (2) of
Section 47 section 50 and sub-section (1) of section 188, –
a) every member of a company limited by shares and holding equity share
capital therein, shall have a right to vote on every resolution placed
before the company; and
b) his voting right on a poll shall be in proportion to his share in the paid-
up equity share capital of the company.
234 Lesson 8 • PP-GRMCE

Rights of shareholder under SEBI (LODR) Regulations, 2015

Regulation 4(2) states that the listed entity which has listed its specified securities shall comply with the corporate
governance provisions as specified in chapter IV which shall be implemented in a manner so as to achieve the
objectives of the principles which are already discussed in Lesson 2 of this Study material.

PROMOTER / CONTROLLING SHAREHOLDER

A promoter is a person, firm or company who does the preliminary work for the formation of a company, including
framing its memorandum and articles of association, its incorporation process and initial raising of capital for business.

US Securities Exchange Commission defines the word ‘Promoter’ under Rule 405 of the Securities Act, 1933.
As per Rule 405 Promoter includes:
Any person who, acting alone or in conjunction with one or more other persons, directly or indirectly takes
initiative in founding and organizing the business or enterprise of an issuer; or
Any person who, in connection with the founding and organizing of the business or enterprise of an issuer,
directly or indirectly receives in consideration of services or property, or both services and property, 10 percent
or more of any class of securities of the issuer or 10 percent or more of the proceeds from the sale of any class
of such securities. However, a person who receives such securities or proceeds either solely as underwriting
commissions or solely in consideration of property shall not be deemed a promoter within the meaning of this
paragraph if such person does not otherwise take part in founding and organizing the enterprise.

A promoter is neither a trustee nor an agent of the company but he has a fiduciary relationship with the company.
Fiduciary relation means a relation of trust and confidence.

“The promoters of a company stand undoubtedly in a fiduciary position. They have in their hands the creation
and moulding of the company. They have the power of defining how and when and in what shape and under what
supervision, it shall start into existence and begin to act as a trading corporation.”
– Lord Cairns, Erlanger V. New Sembrero Phosphate Co

Companies Act, 2013: According to Sec 2 (69) of Companies Act, 2013 a “promoter” means a person –
a) who has been named as such in a prospectus or is identified by the company in the annual return referred to
in section 92; or
b) who has control over the affairs of the company, directly or indirectly whether as a shareholder, director or
otherwise; or
c) in accordance with whose advice, directions or instructions the Board of Directors of the company is
accustomed to act:
Provided that nothing in sub-clause (c) shall apply to a person who is acting merely in a professional capacity.
From the above definition, ‘promoter’ is not only a person who have been named in the prospectus, but all those
persons who have control over the affairs of the company or on whose advise the Board of Directors are accustomed
to act. However, by way of proviso to the definition, it has been made clear that the persons who are rendering
services to the company in their professional capacity shall not be considered promoters e.g. Company Secretary,
Chartered Accountant, Cost Accountant, Lawyers, Merchant Banker, Lead Manager etc.
Further in sub-clause (b) above, the word ‘control’ has been used. The “control” has been defined by section 2(27)
in the Companies Act, 2013 which reads as under:
“control” shall include the right to appoint majority of the directors or to control the management or policy decisions
exercisable by a person or persons acting individually or in concert, directly or indirectly, including by virtue of their
shareholding or management rights or shareholders agreements or voting agreements or in any other manner.
In India, a large number of companies are family owned where the promoters are the majority or controlling
shareholder group. They either directly manage the day-to-day affairs of the company or indirectly influence its
activities. With their significant holding they can make all the decisions in the company including appointment of
directors. This power they have has been recognised by the Companies Act, 2013 in the definition of promoter and
hence they can be held liable for their actions as promoters.
 Lesson 8 • Corporate Governance and Shareholder’s Rights 235

SEBI (ICDR) 2018

The Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2018, has
defined the word(s) ‘promoter’ and ‘promoter groups’ as under;
In terms of Regulation 2(1)(oo), “promoter” shall include a person:
i) who has been named as such in a draft offer document or offer document or is identified by the issuer in the
annual return referred to in section 92 of the Companies Act, 2013; or
ii) who has control over the affairs of the issuer, directly or indirectly whether as a shareholder, director or
otherwise; or
iii) in accordance with whose advice, directions or instructions the board of directors of the issuer is accustomed
to act:
Provided that nothing in sub-clause (iii) shall apply to a person who is acting merely in a professional capacity;
Provided further that a financial institution, scheduled commercial bank, [foreign portfolio investor other than
individuals, corporate bodies and family offices], mutual fund, venture capital fund, alternative investment fund,
foreign venture capital investor, insurance company registered with the Insurance Regulatory and Development
Authority of India or any other category as specified by the Board from time to time, shall not be deemed to be a
promoter merely by virtue of the fact that twenty percent or more of the equity share capital of the issuer is held by
such person unless such person satisfy other requirements prescribed under these regulations.
Further in terms of Regulation 2(1)(pp), ‘promoter group’ includes:
i) the promoter;
ii) an immediate relative of the promoter (i.e. any spouse of that person, or any parent, brother, sister or child of
the person or of the spouse); and
iii) in case promoter is a body corporate:
(a) a subsidiary or holding company of such body corporate;
(b) anybody corporate in which the promoter holds twenty percent or more of the equity share capital;
and/or anybody corporate which holds twenty percent or more of the equity share capital of the
promoter;
(c) anybody corporate in which a group of individuals or companies or combinations thereof acting in
concert, which hold twenty percent or more of the equity share capital in that body corporate and such
group of individuals or companies or combinations thereof also holds twenty percent or more of the
equity share capital of the issuer and are also acting in concert; and
iv) in case the promoter is an individual:
(a) any body corporate in which twenty percent or more of the equity share capital is held by the promoter
or an immediate relative of the promoter or a firm or Hindu Undivided Family in which the promoter or
any one or more of their relative is a member;
(b) any body corporate in which a body corporate as provided in (A) above holds twenty percent or more, of
the equity share capital; and
(c) any Hindu Undivided Family or firm in which the aggregate share of the promoter and their relatives is
equal to or more than twenty percent of the total capital;
v) all persons whose shareholding is aggregated under the heading “shareholding of the promoter group”:
Provided that a financial institution, scheduled bank, foreign portfolio investor other than individuals, corporate
bodies and family offices, mutual fund, venture capital fund, alternative investment fund, foreign venture capital
investor, insurance company registered with the Insurance Regulatory and Development Authority of India or any
other category as specified by the Board from time to time, shall not be deemed to be promoter group merely by
virtue of the fact that twenty percent or more of the equity share capital of the promoter is held by such person
or entity:
236 Lesson 8 • PP-GRMCE

Provided further that such financial institution, scheduled bank, foreign portfolio investor other than individuals,
corporate bodies and family offices, mutual fund, venture capital fund, alternative investment fund and foreign
venture capital investor insurance company registered with the Insurance Regulatory and Development Authority
of India or any other category as specified by the Board from time to time shall be treated as promoter group for the
subsidiaries or companies promoted by them or for the mutual fund sponsored by them.

Role and Liabilities of Promoters

The general role of promoters as discussed is applicable anywhere including in India. Companies Act, 2013 (Act)
does not lay down specific duties of the promoter. However, various sections impose liabilities on promoters under
certain conditions even when they are not directors or employees of the company.
• Officer who is in Default : Section 2(60) of the Act provides that an officer of the company who is in default
shall be liable to any penalty or punishment by way of imprisonment, fine or otherwise, means any of the
following officers of a company namely:
i) whole-time director;
ii) key managerial personnel;
iii) where there is no key managerial personnel, such director or directors as specified by the Board in this
behalf and who has or have given his or their consent in writing to the Board to such specification, or all
the all the director, if no direction is so specified;
iv) any person who, under the immediate authority of the Board or any key managerial personnel, is
charged with any responsibility including maintenance, filing or distribution of accounts or records,
authorises, actively participates in, knowingly permits, or knowingly fails to take active steps to
prevent, any default;
v) any person in accordance with whose advice, directions or instructions the Board of Directors of the
company is accustomed to act, other than a person who gives advice to the Board in a professional
capacity;
vi) every director, in respect of a contravention of any of the provisions of this Act, who is aware of such
contravention by virtue of the receipt by him of any proceedings of the Board or participation in such
proceedings without objecting to the same, or where such contravention had taken place with his consent
or connivance;
vii) in respect of the issue or transfer of any shares of a company, the share transfer agents, registrars and
merchant bankers to the issue or transfer.
The word ‘Officer’ has been explained in section 2(59) which includes any director, manager or key managerial
personnel or any person in accordance with whose directions or instructions the Board of Directors or any one
or more of the directors is or are accustomed to act. Thus, promoter if found in default of provisions of the Act
may be penalised with fine or punished by imprisonment.
• Incorrect information during incorporation : Section 7(6) provides that without prejudice to the provisions of
sub-section (5) where, at any time after the incorporation of a company, it is proved that the company has been
got incorporated by furnishing any false or incorrect information or representation or by suppressing any material
fact or information in any of the documents or declaration filed or made for incorporating such company, or by any
fraudulent action, the promoters, the persons named as the first directors of the company and the persons making
declaration under clause (b) of sub-section (1) shall each be liable for action under section 447.
• False or misleading Prospectus: Promoters who authorise a prospectus which is untrue or misleading are
subject to criminal liability (Sec 34) and civil liability and are required to pay compensation to every person
who has sustained loss or damage because of such prospectus. (Sec 35)
• Criminal Liability for Mis-statements in Prospectus: Section 34 provides that where a prospectus, issued,
circulated or distributed under this Chapter, includes any statement which is untrue or misleading in form
or context in which it is included or where any inclusion or omission of any matter is likely to mislead, every
person who authorizes the issue of such prospectus shall be liable under section 447:
 Lesson 8 • Corporate Governance and Shareholder’s Rights 237

Provided that nothing in this section shall apply to a person if he proves that such statement or omission was
immaterial or that he had reasonable grounds to believe, and did up to the time of issue of the prospectus
believe, that the statement was true or the inclusion or omission was necessary.
• Civil Liability for Mis-statements in Prospectus: Section 35(1) provides that where a person has subscribed
for securities of a company acting on any statement included, or the inclusion or omission of any matter, in the
prospectus which is misleading and has sustained any loss or damage as a consequence thereof, the company
and every person who –
(a) is a director of the company at the time of the issue of the prospectus;
(b) (has authorised himself to be named and is named in the prospectus as a director of the company,
(c) or has agreed to become such director, either immediately or after an interval of time; (c) is a promoter
of the company;
(d) has authorised the issue of the prospectus; and
(e) is an expert referred to in sub-section (5) of section 26.
shall, without prejudice to any punishment to which any person may be liable under section 36, be liable to pay
compensation to every person who has sustained such loss or damage.
• Contravention of Provisions of Raising Equity Capital: Similarly if the promoters contravene any provisions
of the act while issuing prospectus or during private placement they may be penalised or imprisoned. (Sec 26
and Sec 42).
Section 26(9) which deals with the ‘Matters to be stated in the prospectus’ states that if a prospectus is issued
in contravention of the provisions of this section, the company shall be punishable with fine which shall not be
less than 50,000 rupees but which may extend to 3,00,000 rupees and every person who is knowingly a party
to the issue of such prospectus shall be punishable with fine which shall not be less than 50,000 rupees but
which may extend to 3,00,000 rupees.
Section 42(10) which deals with the ‘Issue of shares on private placement basis’, provides that if a company
makes an offer or accepts monies in contravention of this section, the company, its promoters and directors
shall be liable for a penalty which may extend to the amount raised through the private placement or two crore
rupees, whichever is lower, and the company shall also refund all monies with interest as specified in sub-
section (6) to subscribers within a period of thirty days of the order imposing the penalty.
• Improper Notice of General Meeting: Section 102 deals with the matters relating to “Statement to be annexed
to notice”. Its sub-section (5) states that if any default is made in complying with the provisions of this section,
every promoter, director, manager or other key managerial personnel who is in default shall be punishable
with fine which may extend to 50,000 rupees or five times the amount of benefit accruing to the promoter,
director, manager or other key managerial personnel or any of his relatives, whichever is higher.
• Co-operate with Official Liquidator: Section 284 deals in the matters relating to “Promoters, directors,
etc., to cooperate with Company Liquidator”. Its sub-section (2) provides that where any person, required to
assist or cooperate with the company liquidator does not assist or cooperate, the company liquidator may
make an application to the Tribunal for necessary directions. Sub-section (3) provides that on receiving the
said application, the Tribunal shall, by an order, direct the person required to assist or cooperate with the
Company Liquidator to comply with the instructions of the Company Liquidator and to cooperate with him in
discharging his functions and duties.
• Fraudulent conduct of business: Section 339 deals with the matters relating to ‘Liability for fraudulent
conduct of business’. Sub-section (1) provides that if in the course of the winding up of a company, it appears
that any business of the company has been carried on with intent to defraud creditors of the company or any
other persons or for any fraudulent purpose, the Tribunal, on the application of the Official Liquidator, or the
Company Liquidator or any creditor or contributory of the company, may, if it thinks it proper so to do, declare
that any person, who is or has been a director, manager, or officer of the company or any persons who were
knowingly parties to the carrying on of the business in the manner aforesaid shall be personally responsible,
without any limitation of liability, for all or any of the debts or other liabilities of the company as the Tribunal
may direct: Its sub-section (3) provides that where any business of a company is carried on with such intent or
238 Lesson 8 • PP-GRMCE

for such purpose as is mentioned in sub-section (1), every person who was knowingly a party to the carrying
on of the business in the manner aforesaid, shall be liable for action under section 447.
• Vacation of the office of director [Section 167(3)] and Resignation of director [Section 168(3)]: Where
all the directors of a company vacate their offices under any of the disqualifications specified in sub-section
(1), the promoter or, in his absence, the Central Government shall appoint the required number of directors
who shall hold office till the directors are appointed by the company in the general meeting.[ Section 167(3)]
Where all the directors of a company resign from their offices, or vacate their offices under section 167, the promoter
or, in his absence, the Central Government shall appoint the required number of directors who shall hold office till
the directors are appointed by the company in general meeting. [Section 168(3)]

MAJORITY AND MINITORY SHAREHODERS

When an individual, organization or group of shareholders together hold or control more than 50% shares of the
company they are known as majority shareholders. This gives them absolute control over the operations of the
company particularly selection of board by deciding who will be appointed as directors.
If a company has a majority shareholder then all other shareholders become minority shareholders as they hold less
than 50% shares.

Let’s understand with the help of an example

Company Y has two shareholders A with 51% and B with 49%, than A is the majority shareholder and B the
minority shareholder. On the other hand company X has shareholder C with 51% and 49 more shareholders with
1% shareholding each. Then C is the majority shareholder and all other are minority shareholders.

Typically in Indian family firms promoters along with their family members control majority shares with other
shareholders holding small percentage of shares. India has a large number of family-owned listed companies with
promoter group holding 51% or more in most cases. They thus dominate and run the company in a way that best
protects their own interest.
Also, more often small shareholders don’t exercise their rights either due to unaware of their rights or inability to
participate in meetings. Small shareholders are dispersed across the country and travelling to the meeting venue is
time consuming and costly. Those with short term investment horizons are only looking at an opportunity of making
quick profits on their investment and thus have no desire to get involved in the affairs of the company. Sometimes
small shareholders do not bother to participate as they are of view that the cost of voting is more than the benefit or
their vote won’t matter as majority shareholder’s decision prevails.
As a result promoter group can have effective control or ‘controlling interest’ of the company with a small block
holding of only 15% to 30% and need not hold on to the entire 50% shares of the company.
The interests, goals, and investment horizons
of majority shareholders may vary from What is Controlling interest?
minority shareholders. Majority shareholder
may decide on investing company surplus A controlling interest is when a shareholder, or a group acting
in a new risky venture whereas minority in kind, holds a majority of a company’s voting stock, giving it
shareholders may prefer return in the form significant influence over any corporate actions. Shareholders
of dividends. A proper balance of the rights of that have a controlling interest often are able to direct the course
majority and minority shareholders enables of a company and make most strategic and operational decisions.
efficient functioning of the company.

PROTECTION OF RIGHTS OF SHAREHOLDER / INVESTORS IN INDIA

Securities and Exchange Board of India (SEBI) is the capital market regulator and nodal agency in India who
regulates the security market. One of the objectives of the SEBI is to provide a degree of protection to the investors
and to safeguard their rights, steady flow of savings into market and to promote the development of and regulate
the securities market.
Investors should be safeguarded not only against frauds and cheating but also against the losses arising out of unfair
practices. Such practices may include:
• Deliberate misstatement in offer statements to investors
 Lesson 8 • Corporate Governance and Shareholder’s Rights 239

• Price manipulations
• Insider trading
SEBI has issued many guidelines and regulations to regulate the capital market and to protect the investors. Some
of the guidelines are:

SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018

SEBI (Ombudsman) Regulation, 2003 –designed to redress the investor’s grievance

against listed companies or intermediaries or both for amicable settlement;

SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities

Market) Regulations 2003 – to prohibit any fraudulent and unfair Trade Practices
relating to securities market;

SEBI (Prohibition of Insider Trading) Regulations, 2015 – The basic objective is to

prohibit persons who have more access to company’s information which can be
used to benefit the individual or group of individual or agency.

In addition to the above, SEBI has set up a separate cell to address the grievances of
investors-SEBI Complaints Redressal System (SCORES).

SEBI (Investor Protection and Education Fund) Regulations, 2009 to establisha Fund to be
called the Investor Protection and Education Fund.

INVESTOR EDUCATION & PROTECTION FUND

Investor Education and Protection Fund
IEPF Authority
(IEPF) is established for promotion of
investors’ awareness and protection of the For administration of Investor Education and Protection Fund
interests of investors under the provisions of Government of India has on 7th September, 2016 established
section 125 of the Companies Act, 2013. Investor Education and Protection Fund Authority under the
provisions of section 125 of the Companies Act, 2013.
The IEPF Authority is entrusted with
the responsibility of administration of The Authority is entrusted with the responsibility of
the Investor Education Protection Fund administration of the Investor Education Protection Fund (IEPF),
(IEPF), make refunds of shares, unclaimed make refunds of shares, unclaimed dividends, matured deposits/
dividends, matured deposits/debentures debentures etc. to investors and to promote awareness among
etc. to investors and to promote awareness investors.
among investors.
As per Section 125(2) of the Companies Act 2013, following shall be credited to the Fund :
a) the amount given by the Central Government by way of grants after due appropriation made by Parliament by
law in this behalf for being utilised for the purposes of the Fund;
240 Lesson 8 • PP-GRMCE

b) donations given to the Fund by the Central Government, State Governments, companies or any other institution
for the purposes of the Fund;
c) the amount in the Unpaid Dividend Account of companies transferred to the Fund under sub-section (5) of
section 124;
d) the amount in the general revenue account of the Central Government which had been transferred to that
account under sub-section (5) of section 205A of the Companies Act, 1956, as it stood immediately before
the commencement of the Companies (Amendment) Act, 1999, and remaining unpaid or unclaimed on the
commencement of this Act;
e) the amount lying in the Investor Education and Protection Fund under section 205C of the Companies Act,
1956;
f) the interest or other income received out of investments made from the Fund;
g) the amount received under sub-section (4) of section 38;
h) the application money received by companies for allotment of any securities and due for refund;
i) matured deposits with companies other than banking companies;
j) matured debentures with companies;
k) interest accrued on the amounts referred to in clauses (h) to (j);
l) sale proceeds of fractional shares arising out of issuance of bonus shares, merger and amalgamation for seven
or more years;
m) redemption amount of preference shares remaining unpaid or unclaimed for seven or more years; and
n) such other amount as may be prescribed:
Provided that no such amount referred to in clauses (h) to (j) shall form part of the Fund unless such amount
has remained unclaimed and unpaid for a period of seven years from the date it became due for payment.
According to Section 125(3) - the Fund shall be utilised for –
a) The refund in respect of unclaimed dividends, matured deposits, matured debentures, the application money
due for refund and interest thereon;
b) Promotion of investors’ education, awareness and protection;
c) Distribution of any disgorged amount among eligible and identifiable applicants for shares or debentures,
shareholders, debenture-holders or depositors who have suffered losses due to wrong actions by any person,
in accordance with the orders made by the Court which had ordered disgorgement;
d) Reimbursement of legal expenses incurred in pursuing class action suits under sections 37 and 245 by
members, debenture-holders or depositors as may be sanctioned by the Tribunal; and
e) Any other purpose incidental there to, in accordance with Rule 3 of the the Investor Education and Protection
Fund Authority (accounting, Audit, Transfer and Refund) Rules, 2016.

INVESTOR ASSOCIATIONS
SEBI as a part of undertaking various investor awareness and education activities, has recognised organisations
working in the area of investor education / awareness, conducting awareness workshops and rendering assistance
to individuals/investors in the area of grievance redressal as “Investors’ Associations”.
The recognized Investors’ Associations supplements SEBI’s initiatives in the area of Investor Education and
Protection. SEBI has issued “Operational Guidelines (Investors’ Associations), 2019” to facilitate and regulate the
functioning of SEBI recognised Investors’ Associations which came into force from February 1, 2019.
“Recognised Investors’ Association” means an entity rendering services in the area of investor education and
awareness, conducting awareness workshops and assisting individuals/investors in redressal of their grievances
and recognized by SEBI as an Investors’ Association. The Investors’ Association shall conduct workshops under SEBI
IEPF in the state in which their registered office is located subject to prior approval from the respective SEBI office at
 Lesson 8 • Corporate Governance and Shareholder’s Rights 241

least 5 working days prior to date of the workshop. The Investors’ Associations are eligible to claim reimbursement
of the expenses incurred from SEBI subject to the conditions specified.

PROTECTION OF RIGHTS OF MAJORITY SHAREHODERS

The OECD Principles are presented in six different chapters:

Ensuring the basis for an effective corporate governance framework;

The rights and equitable treatment of shareholders and key ownership functions

Institutional investors, stock markets, and other intermediaries;

The role of stakeholders;

Disclosure and transparency; and

The responsibilities of the board.

According to OECD principles (OECD, 2015) ‘the corporate governance framework should protect and facilitate
the exercise of shareholders’ rights and ensure the equitable treatment of all shareholders, including minority and
foreign shareholders. All shareholders should have the opportunity to obtain effective redress for violation of their
rights. As an equity shareholder, minority have the right to:
• participate in the profits of the company,
• information about the company,
• participation in general shareholder meetings and influence corporate actions through voting on proposals.
Companies Act, 2013 provides for some measures to protect the interest of minority shareholders which are
discussed below -
1. Oppression and Mismanagement: Part XVI consisting of Sections from 241 to 246 of Companies Act, 2013
deals with prevention of Oppression and Mismanagement. When a shareholder’s rights are violated it can
be termed as oppression. Oppression occurs when the majority shareholders misuse their rights and take
company’s business as their personal property resulting in loss to the minority shareholders.
Conditions for Oppression and Mismanagement: Section 241(1) provides that any member of a company
who complains that:
(a) the affairs of the company have been or are being conducted in a manner
• prejudicial to public interest, or
• prejudicial or oppressive to any member or members, or
• prejudicial to the interests of the company.
OR
(b) material change, not being a change brought about by, or in the interests of, any creditors, including
debenture holders or any class of shareholders of the company, has taken place in the management or
control of the company whether by
• an alteration in the Board of Directors, or manager, or
• in the ownership of the company’s shares, or if it has no share capital, in its membership, or
• in any other manner whatsoever, and that by reason of such change, it is likely that the affairs of the
company will be conducted in a manner prejudicial to its interests or its members or any class of
242 Lesson 8 • PP-GRMCE

members, may apply to the Tribunal, provided such member has a right to apply under section 244,
for an order under this Chapter.
2. The Central Government, if it is of the opinion that the affairs of the company are being conducted in a manner
prejudicial to public interest, it may itself apply to the Tribunal for an order under this Chapter.
3. Where in the opinion of the Central Government there exist circumstances suggesting that –
(a) any person concerned in the conduct and management of the affairs of a company is or has been in
connection therewith guilty of fraud, misfeasance, persistent negligence or default in carrying out his
obligations and functions under the law or of breach of trust;
(b) the business of a company is not or has not been conducted and managed by such person in accordance
with sound business principles or prudent commercial practices;
(c) a company is or has been conducted and managed by such person in a manner which is likely to cause,
or has caused, serious injury or damage to the interest of the trade, industry or business to which such
company pertains; or
(d) the business of a company is or has been conducted and managed by such person with intent to defraud
its creditors, members or any other person or otherwise for a fraudulent or unlawful purpose or in a
manner prejudicial to public interest, the Central Government may initiate a case against such person
and refer the same to the Tribunal with a request that the Tribunal may inquire into the case and record
a decision as to whether or not such person is a fit and proper person to hold the office of director or any
other office connected with the conduct and management of any company.
4. The person against whom a case is referred to the Tribunal under sub-section (3), shall be joined as a
respondent to the application.
5. Every application under sub-section (3) –
(a) shall contain a concise statement of such circumstances and materials as the Central Government may
consider necessary for the purposes of the inquiry; and
(b) shall be signed and verified in the manner laid down in the Code of Civil Procedure, 1908, for the signature
and verification of a plaint in a suit by the Central Government.
Relief Measures : Section 242 provides that if, on any application made under section 241, the Tribunal is of
the opinion –
(a) that the company’s affairs have been or are being conducted in a manner prejudicial or oppressive to any
member or members or prejudicial to public interest or in a manner prejudicial to the interests of the
company; and
(b) that to wind up the company would unfairly prejudice such member or members, but that otherwise
the facts would justify the making of a winding up order on the ground that it was just and equitable
that the company should be wound up, the Tribunal may, with a view to bringing to an end the matters
complained of, make such order as it thinks fit.
Without prejudice to the generality of the powers under sub-section (1), an order under that sub-section may
provide for –
(a) the regulation of conduct of affairs of the company in future;
(b) the purchase of shares or interests of any members of the company by other members thereof or by the
company;
(c) in the case of a purchase of its shares by the company as aforesaid, the consequent reduction of its share
capital;
(d) restrictions on the transfer or allotment of the shares of the company;
(e) the termination, setting aside or modification, of any agreement, howsoever arrived at, between the
company and the managing director, any other director or manager, upon such terms and conditions as
may, in the opinion of the Tribunal, be just and equitable in the circumstances of the case;
 Lesson 8 • Corporate Governance and Shareholder’s Rights 243

(f) the termination, setting aside or modification of any agreement between the company and any person
other than those referred to in clause (e):
Provided that no such agreement shall be terminated, set aside or modified except after due notice and
after obtaining the consent of the party concerned.
(g) the setting aside of any transfer, delivery of goods, payment, execution or other act relating to property
made or done by or against the company within three months before the date of the application under
this section, which would, if made or done by or against an individual, be deemed in his insolvency to be
a fraudulent preference;
(h) removal of the managing director, manager or any of the directors of the company;
(i) recovery of undue gains made by any managing director, manager or director during the period of
his appointment as such and the manner of utilisation of the recovery including transfer to Investor
Education and Protection Fund or repayment to identifiable victims;
(j) the manner in which the managing director or manager of the company may be appointed subsequent to
an order removing the existing managing director or manager of the company made under clause (h);
(k) appointment of such number of persons as directors, who may be required by the Tribunal to report to
the Tribunal on such matters as the Tribunal may direct;
(l) imposition of costs as may be deemed fit by the Tribunal;
(m) any other matter for which, in the opinion of the Tribunal, it is just and equitable that provision should
be made.
2. Class Action Suit: American depositors of Satyam were able to receive $125 million in settlement because of
strong framework of class action in USA while Indian investors lost all their money. Hence Companies Act,
2013 vide Section 245 has introduced the new concept of class action suit. This section gives additional rights
to minorities in case of oppression and mismanagement.
Section 245. (1) Such number of member or
members, depositor or depositors or any class What is a class action suit?
of them, as the case may be, as are indicated in A class action is a legal proceeding in which
sub-section (2) may, if they are of the opinion shareholders bring suit as a group against the
that the management or conduct of the affairs of company or its directors or officers and the judgment
the company are being conducted in a manner or settlement received from the suit covers all the
prejudicial to the interests of the company or its shareholders equally.
members or depositors, file an application before
the Tribunal on behalf of the members or depositors for seeking all or any of the following orders, namely: –
(a) to restrain the company from committing an act which is ultra vires the articles or memorandum of the
company;
(b) to restrain the company from committing breach of any provision of the company’s memorandum or
articles;
(c) to declare a resolution altering the memorandum or articles of the company as void if the resolution was
passed by suppression of material facts or obtained by mis-statement to the members or depositors;
(d) to restrain the company and its directors from acting on such resolution;
(e) to restrain the company from doing an act which is contrary to the provisions of this Act or any other law
for the time being in force;
(f) to restrain the company from taking action contrary to any resolution passed by the members;
(g) to claim damages or compensation or demand any other suitable action from or against;
(i) the company or its directors for any fraudulent, unlawful or wrongful act or omission or conduct or
any likely act or omission or conduct on its or their part;
244 Lesson 8 • PP-GRMCE

(ii) the auditor including audit firm of the company for any improper or misleading statement of
particulars made in his audit report or for any fraudulent, unlawful or wrongful act or conduct; or
(iii) any expert or advisor or consultant or any other person for any incorrect or misleading statement
made to the company or for any fraudulent, unlawful or wrongful act or conduct or any likely act or
conduct on his part.
(h) to seek any other remedy as the Tribunal may deem fit.
3. Where the members or depositors seek any damages or compensation or demand any other suitable action
from or against an audit firm, the liability shall be of the firm as well as of each partner who was involved in
making any improper or misleading statement of particulars in the audit report or who acted in a fraudulent,
unlawful or wrongful manner.
3(i) The requisite number of members provided in sub-section (1) shall be as under: –
(a) in the case of a company having a share capital, not less than one hundred members of the company or
not less than such percentage of the total number of its members as may be prescribed, whichever is
less, or any member or members holding not less than such percentage of the issued share capital of the
company as may be prescribed, subject to the condition that the applicant or applicants has or have paid
all calls and other sums due on his or their shares;
(b) in the case of a company not having a share capital, not less than one-fifth of the total number of its
members.
ii) The requisite number of depositors provided in sub-section (1) shall not be less than one hundred depositors
or not less than such percentage of the total number of depositors as may be prescribed, whichever is less, or
any depositor or depositors to whom the company owes such percentage of total deposits of the company as
may be prescribed.
With section 245, hopefully, in genuine cases of oppression minority shareholders will be empowered and will
be able to come together to institute suits to protect their rights and will be able to claim damages as well from
the company, directors, auditors, experts and advisors. An individual shareholder may find it difficult to file
a suit against the company and even if he does so, may not be able to enforce his rights but may have a much
better chance when filling a combined suit with similarly aggrieved shareholders.
3. Special Rights: As ‘the will of the majority prevails’ the decision of majority shareholders in a company binds
the minority. They exercise their rights without considering the interests of minority. They may misuse their
power to exploit the rights of minority. Hence Companies Act, 2013 provides some special powers to small
shareholders to prevent exploitation of their rights.
4. Representation on Board: Section 151 provides that a listed company may have one director elected by such
small shareholders as prescribed under Rule 7 of the Companies (Appointment and Qualification of Directors)
Rules, 2014.
Explanation to section 151 provides that “small shareholders” means a shareholder holding shares of nominal
value of not more than twenty thousand rupees or such other sum as may be prescribed, which means a
shareholder holding shares of nominal value of not more than twenty thousand rupees.
Rule 7(1) provides that a listed company, may upon notice of not less than 1000 small shareholders or 1/10th
of total number of shareholders, whichever is lower have a small shareholder’s directed elected by the small
shareholders.
5. E-Voting: Voting by electronic means is a facility given to the members of a company with more than 1000
shareholders to cast their votes on the resolutions through electronic mode. It provides an opportunity to
shareholders residing in far-flung area to take part in the decision making process of the company. Shareholders
can therefore exercise their voting rights even when they cannot be physically present for meetings and
without spending too much time or money.
6. Exit Rights: In the event of an acquirer, or a person acting in concert with such acquirer, becoming registered
holder of 90% or more of the issued equity share capital of a company, or in the event of any person or group
of persons becoming ninety percent majority or holding 90% of the issued equity share capital of a company,
by virtue of an amalgamation, share exchange, conversion of securities or for any other reason, such acquirer,
 Lesson 8 • Corporate Governance and Shareholder’s Rights 245

person or group of persons, as the case may be, shall notify the company of their intention to buy the remaining
equity shares [Section 236(1)].
7. Related Party Transactions: Section 188(1) provides that except with the consent of the Board of Director
given by a resolution at meeting of the Board, not company shall enter into any contract or arrangement with
a 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 agent 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 associate
company; and (g) underwriting the subscription of any securities or derivatives thereof, of the company:
8. Application to Tribunal for Relief:
Section 244(1) provides that Any member of a company who complains that –
(a) the affairs of the company have been or are being conducted in a manner prejudicial to public interest or
in a manner prejudicial or oppressive to him or any other member or members or in a manner prejudicial
to the interests of the company; or
(b) the material change, not being a change brought about by, or in the interests of, any creditors, including
debenture holders or any class of shareholders of the company, has taken place in the management or
control of the company, whether by an alteration in the Board of Directors, or manager, or in the ownership
of the company’s shares, or if it has no share capital, in its membership, or in any other manner whatsoever,
and that by reason of such change, it is likely that the affairs of the company will be conducted in a manner
prejudicial to its interests or its members or any class of members, may apply to the Tribunal, provided
such member has a right to apply under section 244, for an order under Chapter XVI.
Section 244(1) provides that the following members of a company shall have the right to apply under section
241, namely: –
(a) in the case of a company having a share capital, not less than one hundred members of the company or
not less than onetenth of the total number of its members, whichever is less, or any member or members
holding not less than one tenth of the issued share capital of the company, subject to the condition that
the applicant or applicants has or have paid all calls and other sums due on his or their shares;
(b) in the case of a company not having a share capital, not less than one-fifth of the total number of its
members:
Provided that the Tribunal may, on an application made to it in this behalf, waive all or any of the requirements
specified in clause (a) or clause (b)so as to enable the members to apply under section 241.
Explanation.—For the purposes of this sub-section, where any share or shares are held by two or more persons
jointly, they shall be counted only as one member.
Sub-section (2) provides that where any members of a company are entitled to make an application under
subsection (1), any one or more of them having obtained the consent in writing of the rest, may make the
application on behalf and for the benefit of all of them.

INSTITUTIONAL INVESTORS AND THEIR ROLE IN PROMOTING GOOD CORPORATE GOVERNANCE

Institutional investors are those financial institutions which accept funds from other parties for investment
by the institution in its own name but on their clients/beneficiaries behalf. The different kinds of institutional
investors are banks, development financial institutions, insurance companies, mutual funds, foreign institutional
investor, provident funds and proposed private fund managers. They are now significant players in the global
economy.
Institutional investors are entrusted with funds from the public and most of the household income is with these
institutional investors. They are safe keepers of public money and act in a fiduciary capacity. They are obligated to
take decisions which best serve the companies’ interests and steer the company to function in an ethical manner.
There is a mutual relationship between institutional investors and the corporate governance of a company. The
corporate governance practices followed by a company are very important to determine the number of institutional
investors who would like to invest in the firm and the extent to which they would like to invest.
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Most governance sensitive institutional investors would like to invest in firms which already have their governance
mechanisms in place. Institutions with corporate governance mechanisms in place are better to invest in as this
would mean decreased monitoring costs. The institutional investors would not have to play a proactive role in
monitoring the practices followed by the company.
The Institutional Investors use different tools to assess the health of Company before investing resources in it.
Some of the important tools are discussed as under:
• One-to-one meetings: The meetings between institutional investors and companies are extremely
important as a means of communication between the two parties. This is one clear example of the way that
individual investors are at a disadvantage to institutional investors as corporate management will usually
only arrange such meetings with large investors who are overwhelmingly institutional investors. A
company will usually arrange to meet with its largest institutional investors on a one-to-one basis during
the course of the year.
• Voting: The right to vote which is attached to voting shares (as opposed to non-voting shares) is a basic
prerogative of share ownership, and is particularly important given the division of ownership (shareholders)
and control (directors) in the modern corporation. The right to vote can be seen as fundamental tools for some
element of control by shareholders. The institutional investors can register their views by postal voting, or,
vote electronically where this facility is available. Most of the large institutional investors now have a policy
of trying to vote on all issues which may be raised at their investee company’s AGM. Some may vote directly
on all resolutions, others may appoint a proxy (which may be a board member). Generally, an institutional
investor will try to sort out any contentious issues with management ‘behind the scenes’, however if this fails,
then they may abstain from voting on a particular issue (rather than voting with incumbent management
as they generally would) or they may actually vote against a resolution. In this case, they would generally
inform the firm of their intention to vote against. Corporate governance issues tend to be the most contentious,
particularly directors’ remuneration and lengths of contract.
• Focus lists: A number of institutional investors have established ‘focus lists’ whereby they target
underperforming companies and include them on a list of companies which have underperformed a main
index, such as Standard and Poor’s. Underperforming index would be a first point of identification, other
factors would include not responding appropriately to the institutional investor’s inquiries regarding
underperformance, and not taking account of the institutional investor’s views. After being put on the focus
list, the companies often receive unwanted, attention of the institutional investors who may seek to change
various directors on the board.
• Corporate governance rating systems: With the What is Corporate Governance Rating and
increasing emphasis on corporate governance across how is it useful?
the globe, it is perhaps not surprising that a number Corporate Governance Rating (CGR) is
of corporate governance rating systems have been an opinion on the relative position of
developed. an organisation in respect of adoption
These corporate governance rating systems should be of benefit of corporate governance practices. It
to investors, both potential and those presently invested, and to indicates to the stakeholders about the level
the companies themselves. of corporate governance practices prevailing
in the organisation. Examples of such firms
In turn, the ratings will also be useful to governments in identifying which have developed corporate governance
perceived levels of corporate governance in their country rating systems are Deminor, Standard and
compared to other countries in their region, or outside it, whose Poor’s, and Governance Metrics International
companies may be competing for limited foreign investment. In (GMI). The rating system cover several
emerging market countries in particular, those companies with markets, for example, Deminor has tended
a corporate governance infrastructure will, ceteris paribus, be to concentrate on European companies
less subject to cronyism and its attendant effects on corporate whilst Standard and Poor’s have used their
wealth. These companies would tend to be more transparent and corporate governance rating system in quite
accountable, and hence more attractive to foreign investors. different markets, for example, Russia. GMI
A corporate governance rating could be a powerful indicator of ratings cover a range of countries including
the extent to which a company currently is adding, or has the the US, various countries in the Asia-Pacific
potential to add in the future, shareholder value. This is because region and Europe.
Lesson 8 • Corporate Governance and Shareholder’s Rights 247

a company with good corporate governance is generally perceived as more attractive to investors than one without.
Good corporate governance should, for example, indicate a board that is prepared to participate actively in dialogue
with its shareholders, ensuring the effective exercise of voice (Hirschman 1970) thus enabling investors to articulate
their interests.
The OECD principles have advocated increased awareness amongst institutional shareholding and increased
participation of investors in the affairs of the company. Institutional investors acting in a fiduciary capacity should
disclose their overall corporate governance and voting policies with respect to their investments, including the
procedures that they have in place for deciding on the use of their voting rights. It is increasingly common for shares
to be held by institutional investors. The effectiveness and credibility of the entire corporate governance system and
company oversight will, therefore, to a large extent depend on institutional investors that can make informed use of
their shareholder rights and effectively exercise their ownership functions in companies in which they invest. While
this principle does not require institutional investors to vote their shares, it calls for disclosure of how they exercise
their ownership functions with due consideration to cost effectiveness. For institutions acting in a fiduciary capacity,
such as pension funds, mutual investment schemes and some activities of insurance companies, the right to vote can
be considered part of the value of the investment being undertaken on behalf of their clients. Failure to exercise the
ownership rights could result in a loss to the investor who should therefore be made aware of the policy to be followed
by the institutional investors.
The incentives for intermediary owners to vote their shares and exercise key ownership functions may under certain
circumstances differ from those of direct owners. Such differences may sometimes be commercially sound but may
also arise from conflicts of interest which are particularly acute when the fiduciary institution is a subsidiary or an
affiliate of another financial institution, and especially an integrated financial group. When such conflicts arise from
material business relationships, for example, through an agreement to manage the portfolio company’s funds, market
integrity would be enhanced if they are identified and disclosed. At the same time, institutions should disclose what
actions they are taking to minimise the potentially negative impact on their ability to exercise key ownership rights.
Such actions may include the separation of bonuses for fund management from those related to the acquisition of
new business elsewhere in the organisation.
Institutional investors are subject to widely varying levels of regulation. Apart from the regulatory framework, in
recent years, a number of jurisdictions have introduced professional codes of behaviour for institutional investors.
Some of them are discussed below.

UK Stewardship Code
The Stewardship Code is a part of UK company law concerning principles that institutional investors are expected to
follow. Stewardship aims to promote the long term success of companies in such a way that the ultimate providers
of capital also prosper.
In publicly listed companies responsibility for stewardship is shared. The primary responsibility rests with the
board of the company, which oversees the actions of its management. Investors in the company also play an
important role in holding the board to account for the fulfilment of its responsibilities.
The UK Corporate Governance Code identifies the principles that underlie an effective board. The UK Stewardship
Code sets out the principles of effective stewardship by investors. In so doing, the Code assists institutional investors
better to exercise their stewardship responsibilities, which in turn gives force to the “comply or explain” system.
For investors, stewardship is more than just voting. Activities may include monitoring and engaging with
companies on matters such as strategy, performance, risk, capital structure, and corporate governance, including
culture and remuneration. Engagement is purposeful dialogue with companies on these matters as well as on
issues that are the immediate subject of votes at general meetings.
The UK Stewardship Code 2020 is a substantial and ambitious revision to the 2012 edition of the Code which takes
effect from 1 January 2020.
The new Code sets high expectations of those investing money on behalf of UK savers and pensioners. In particular,
the new Code establishes a clear benchmark for stewardship as the responsible allocation, management and
oversight of capital to create long-term value for clients and beneficiaries leading to sustainable benefits for the
economy, the environment and society.
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There is a strong focus on the activities and outcomes of stewardship, not just policy statements. There are new
expectations about how investment and stewardship is integrated, including environmental, social and governance
(ESG) issues. The Code asks investors to explain how they have exercised stewardship across asset classes. For example,
for listed equity, fixed income, private equity, infrastructure investments, and in investments outside the UK.
The Code consists of 12 Principles for asset managers and asset owners, and six Principles for service
providers. These are supported by reporting expectations which indicate the information that should be publicly
reported in order to become a signatory.
UK Stewardship Code 2020: Twelve Principles for asset managers and asset owners:
Asset owners and asset managers cannot delegate their responsibility and are accountable for effective stewardship.
Stewardship activities include investment decision-making, monitoring assets and service providers, engaging
with issuers and holding them to account on material issues, collaborating with others, and exercising rights
and responsibilities. Capital is invested in a range of asset classes over which investors have different terms and
investment periods, rights and levels of influence. Signatories should use the resources, rights and influence available
to them to exercise stewardship, no matter how capital is invested.

Principles for Asset Owners and Asset Managers

Purpose and Governance

Principle 1 Purpose, Strategy and Signatories’ purpose, investment beliefs, strategy, and culture enable
Culture stewardship that creates longterm value for clients and beneficiaries
leading to sustainable benefits for the economy, the environment and
society
Principle 2 Governance, resources and Signatories’ governance, resources and incentives support
incentives stewardship.
Principle 3 Conflicts of interest Signatories manage conflicts of interest to put the best interests of
clients and beneficiaries first.
Principle 4 Promoting well-functioning Signatories identify and respond to market-wide and systemic risks
markets to promote a well-functioning financial system.
Principle 5 Review and assurance Signatories review their policies, assure their processes and assess
the effectiveness of their activities.
Principle 6 Client and beneficiary Signatories take account of client and beneficiary needs and
needs communicate the activities and outcomes of their stewardship and
investment to them.
Principle 7 Stewardship, investment Signatories systematically integrate stewardship and investment,
and ESG including material environmental, social and governance issues, and
climate change, to fulfil their responsibilities.
Principle 8 Monitoring managers and Signatories monitor and hold to account managers and/or service
service providers.
Principle 9 Engagement Signatories engage with issuers to maintain or enhance the value of
assets.
Principle 10 Collaboration Signatories, where necessary, participate in collaborative engagement
to influence issuers.
Principle 11 Escalation Signatories, where necessary, escalate stewardship activities to
influence issuers.
Principle 12 Exercising rights and Signatories actively exercise their rights and responsibilities.
responsibilities

UK Stewardship Code 2020 : Six Principles for service providers

Service providers play a key role in the investment community as they provide services that support clients to
fulfil their stewardship responsibilities. Service providers applying these Principles include, but are not limited to,
 Lesson 8 • Corporate Governance and Shareholder’s Rights 249

investment consultants, proxy advisors, and data and research providers. Activities service providers undertake to
support their clients’ stewardship may include, but are not limited to, engagement, voting recommendations and
execution, data and research provision, advice, and provision of reporting frameworks and standards.

PRINCIPLES FOR SERVICE PROVIDERS

Principle 1 Purpose, strategy and culture Signatories’ purpose, strategy and culture enable them to promote
effective stewardship.
Principle 2 Governance, resources and Signatories’ governance, workforce, resources and incentives
incentives enable them to promote effective stewardship.
Principle 3 Conflicts of interest Signatories identify and manage conflicts of interest and put the
best interests of clients first.
Principle 4 Promoting well-functioning Signatories identify and respond to market-wide and systemic
markets risks to promote a well-functioning financial system.
Principle 5 Supporting client’s stewardship Signatories support clients’ integration of stewardship and
investment, taking into account, material environmental, social
and governance issues, and communicating what activities they
have undertaken.
Principle 6 Review and assurance Signatories review their policies and assure their processes.

Principles for Responsible Investment (PRI)

Responsible investment is an approach to investing that aims to incorporate environmental, social and governance
(ESG) factors into investment decisions, to better manage risk and generate sustainable, long-term returns. The PRI
is the world’s leading proponent of responsible investment.
It works to understand the investment implications of environmental, social and governance (ESG) factors and
to support its international network of investor signatories in incorporating these factors into their investment
and ownership decisions. The PRI acts in the long-term interests of its signatories, of the financial markets and
economies in which they operate and ultimately of the environment and society as a whole.
The PRI is truly independent. It encourages investors to use responsible investment to enhance returns and better
manage risks, but does not operate for its own profit; it engages with global policymakers but is not associated with
any government; it is supported by, but not part of, the United Nations.
In early 2005, the then United Nations Secretary-General Kofi Annan invited a group of the world’s largest
institutional investors to join a process to develop the Principles for Responsible Investment. A 20-person investor
group drawn from institutions in 12 countries was supported by a 70-person group of experts from the investment
industry, intergovernmental organisations and civil society.
The Principles were launched in April 2006 at the New York Stock Exchange. Since then the number of signatories
has grown from 100 to over 4,000.
The six Principles for Responsible Investment are a voluntary and aspirational set of investment principles that offer
a menu of possible actions for incorporating ESG issues into investment practice.
The Principles were developed by investors, for investors. In implementing them, signatories contribute to
developing a more sustainable global financial system.
Principle 1: We will incorporate ESG issues into investment analysis and decision-making processes.

Possible actions:
• Address ESG issues in investment policy statements.
• Support development of ESG-related tools, metrics, and analyses.
• Assess the capabilities of internal investment managers to incorporate ESG issues.
• Assess the capabilities of external investment managers to incorporate ESG issues.
250 Lesson 8 • PP-GRMCE

• Ask investment service providers (such as financial analysts, consultants, brokers, research firms, or rating
companies) to integrate ESG factors into evolving research and analysis. Encourage academic and other
research on this theme.
• Advocate ESG training for investment professionals.
Principle 2: We will be active owners and incorporate ESG issues into ownership policies and practices.

Possible actions:
• Develop and disclose an active ownership policy consistent with the Principles.
• Exercise voting rights or monitor compliance with voting policy (if outsourced).
• Develop an engagement capability (either directly or through outsourcing).
• Participate in the development of policy, regulation, and standard setting (such as promoting and protecting
shareholder rights).
• File shareholder resolutions consistent with long-term ESG considerations.
• Engage with companies on ESG issues.
• Participate in collaborative engagement initiatives.
• Ask investment managers to undertake and report on ESG-related engagement.
Principle 3: We will seek appropriate disclosure on ESG issues by the entities in which they invest.

Possible actions:
• Ask for standardised reporting on ESG issues (using tools such as the Global Reporting Initiative).
• Ask for ESG issues to be integrated within annual financial reports.
• Ask for information from companies regarding adoption of/adherence to relevant norms, standards, codes of
conduct or international initiatives (such as the UN Global Compact).
• Support shareholder initiatives and resolutions promoting ESG disclosure.
Principle 4: We will promote acceptance and implementation of the Principles within the investment industry.
Possible actions:
• Include Principles-related requirements in requests for proposals (RFPs).
• Align investment mandates, monitoring procedures, performance indicators and incentive structures
accordingly (for example, ensure investment management processes reflect long-term time horizons when
appropriate).
• Communicate ESG expectations to investment service providers.
• Revisit relationships with service providers that fail to meet ESG expectations.
• Support the development of tools for benchmarking ESG integration.
• Support regulatory or policy developments that enable implementation of the Principles.
Principle 5: We will work together to enhance effectiveness in implementing the Principles.
Possible actions:
• Support/participate in networks and information platforms to share tools, pool resources, and make use of
investor reporting as a source of learning.
• Collectively address relevant emerging issues.
• Develop or support appropriate collaborative initiatives.
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Principle 6: We will each report on their activities and progress towards implementing the Principles.
Possible actions:
• Disclose how ESG issues are integrated within investment practices.
• Disclose active ownership activities (voting, engagement, and/or policy dialogue).
• Disclose what is required from service providers in relation to the Principles.
• Communicate with beneficiaries about ESG issues and the Principles.
• Report on progress and/or achievements relating to the Principles using a comply-or-explain approach.
• Seek to determine the impact of the Principles.
• Make use of reporting to raise awareness among a broader group of stakeholders

Code for Responsible Investing in South Africa (CRISA)

The Code for Responsible Investing in South Africa (CRISA Code of 2011) became effective on 1st February, 2012. The
Code is endorsed by the Institute of Directors in Southern Africa, The Principal Officers Association, The Association
for Savings and Investment South Africa, The Financial Services Board and The Johannesburg Stock Exchange.
The Code is intended to give guidance on how the institutional investor should execute investment analysis and
investment activities and exercise rights so as to promote sound governance.
The purpose of CRISA is to form part of an effective governance framework in South Africa. CRISA applies to:
• Institutional investors as asset owners, for example, pension funds and insurance companies.
• Service providers of institutional investors, for example, asset and fund managers and consultants.
CRISA originally consisted of four principles. While the original four remain, a fifth principle addressing conflict of
interest was added as a result of feedback by stakeholders on the draft Code.

Principles of CRISA1 :
Principle 1: An institutional investor should incorporate sustainability considerations, including ESG, into its
investment analysis and investment activities as part of the delivery of superior risk-adjusted returns to the ultimate
beneficiaries.  The Code requires institutional investors to develop policies on how they incorporate sustainability
considerations, including ESG, into investment analysis and activities. Institutional investors should ensure that this
policy is implemented and establish processes to monitor compliance with the policy.
1. An institutional investor should develop a policy on how it incorporates sustainability considerations, including
ESG, into its investment analysis and activities. The matters to be dealt with in the policy should include, but
not necessarily be limited to, an assessment of :
(a) the sum of tangible and intangible assets of a company;
(b) the quality of the company’s integrated reporting dealing with the long-term sustainability of the
company’s strategy and operations. If integrated reporting has not been applied, due enquiry should be
made on the reasons for this;1
(c) the manner in which the business of the company is being conducted based on, for example, alignment
with targeted investment strategies of the institutional investor and the code of conduct and supply
chain code of conduct of the company.
2. An institutional investor should ensure implementation of the policy on sustainability considerations, including
ESG, and establish processes to monitor compliance with the policy.
Principle 2: An institutional investor should demonstrate its acceptance of ownership responsibilities in its
investment arrangements and investment activities. The second principle requires institutional investors to
demonstrate a responsible approach to shareholding by, among others, implementing a policy detailing mechanisms
of intervention and engagement with companies when concerns have been identified, as well as the means of

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escalation if concerns raised cannot be resolved. The Code requires such a policy to also detail the approach to
voting at shareholder meetings, including the criteria to be used in reaching voting decisions and public disclosure
of full voting records.
3. An institutional investor should develop a policy dealing with ownership responsibilities. The policy should
include, but not necessarily be limited to the following:
(a) guidelines to be applied (e.g. King III) for the identification of sustainability concerns, including ESG, at
a company.
(b) mechanisms of intervention and engagement with the company when concerns have been identified and
the means of escalation of activities as a shareholder if these concerns cannot be resolved.
(c) voting at shareholder meetings, including the criteria that are used to reach voting decisions and for
public disclosure of full voting records.
4. Even if passive investment strategies are followed, active voting policies incorporating sustainability
considerations, including ESG, should still be followed.
5. An institutional investor should ensure implementation of the policy on ownership responsibilities and
establish processes to monitor compliance with the policy.
6. Where the institutional investor outsources to third party service providers, the onus is on the institutional
investor as owner to ensure that the mandate deals with sustainability concerns, including ESG, and that there
are processes to oversee that the service providers apply the provisions of CRISA when executing their mandate.
7. The institutional investor should introduce controls that prevent it from receiving price sensitive information
regarding a company or acting on such information in a manner that makes it an ‘insider’ in terms of the Securities
Services Act No 36 of 2004. These controls should be applied when engaging with the company, and when seeking
any information it requires, whether this is to fulfil its duties or to act within the guidelines of CRISA.
Principle 3: Where appropriate, institutional investors should consider a collaborative approach to promote
acceptance and implementation of the principles of CRISA and other codes and standards applicable to institutional
investors.  Institutional investors are encouraged to work with other shareholders, service providers, regulators,
investee companies and ultimate beneficiaries to promote CRISA and sound governance.
8. An institutional investor should consider a collaborative approach to work jointly with other shareholders,
service providers, regulators, investee companies and ultimate beneficiaries to, where appropriate, promote
acceptance and implementation of CRISA and sound governance. Parties should be aware of the consequences
of acting in concert in terms of applicable legislation.
Principle 4: An institutional investor should recognise the circumstances and relationships that hold a potential for
conflicts of interest and should pro-actively manage these when they occur. Institutional investors are encouraged
develop a policy on prevention and management of conflicts of interests and establish processes to monitor
compliance with this policy.
9. All of the circumstances and relationships that could potentially lead to a conflict of interest should be identified
by the institutional investor and a policy for preventing and managing these conflicts should be developed.
10. An institutional investor should ensure implementation of the policy on prevention and management of
conflicts of interests and establish processes to monitor compliance with this policy.
Principle 5: Institutional investors should be transparent about the content of their policies, how the policies are
implemented and how CRISA is applied to enable stakeholders to make informed assessments. The Code requires
institutional investors to fully and publicly disclose to stakeholders at least once a year to what extent the Code has
been applied.
11. An institutional investor should regularly engage with its stakeholder groupings, including investee companies
and the ultimate beneficiaries, in order to, inter alia, identify and understand information requirements and, at
least once a year, fully and publicly disclose to what extent it applies to CRISA.
12. If an institutional investor does not apply some or any of the principles or recommendations in CRISA or
applies them differently from how they are set out, it should in a transparent manner explain the reasons for
this and the alternative measures employed.
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13. The disclosure by institutional investors should be made public in order that it is readily accessible by all
stakeholders, including investee companies and the ultimate beneficiaries.
14. The following policies should be disclosed publicly upon CRISA becoming effective and subsequently in the
event of changes to the policies:
(a) policy on incorporation of sustainability considerations, including ESG, into investment analysis and
investment activities with reference to the matters as set out under Principle 1.
(b) policy in regard to ownership responsibilities, including voting as set out under Principle 2.
(c) policy on identification, prevention and management of conflicts of interests as set out under
Principle 4.
15. Non-disclosure of voting records by an institutional investor and its service providers precludes the investee
company the opportunity to engage with the institutional investor or its service providers regarding the vote
exercised. Therefore an institutional investor and its service providers should, before agreeing to a proxy or
other instruction to keep voting records confidential, carefully consider the reasons put forward to justify
confidentiality.
16. Disclosure of policies should be reinforced by clear explanation of how the commitments made in the policies
were practically implemented and monitored during the reporting period
17. There should be disclosure by an institutional investor of processes to ensure that its service providers apply
CRISA as well as the requirements of the institutional investor’s policies.

Revision of the Code 2011

The CRISA Code of 2011 is under revision for which the comments were sought by 31st January, 2021. The main
objective of the revision is to position CRISA front and centre as a custodian of governance for the South African
investment community, thus re-affirming the Code and its principles as a key component of the governance
framework for South Africa.
The Proposed draft Code is as under:
PRINCIPLE 1: INTEGRATION OF SUSTAINABLE FINANCE
Investment arrangements and activities reflect a systematic approach to integration of sustainable finance
practices, including the identification and consideration of materially relevant ESG and broader sustainable
development considerations.
PRINCIPLE 2: DILIGENTLY DISCHARGING STEWARDSHIP DUTIES
Investment arrangements and activities demonstrate the acceptance of ownership responsibilities (where
applicable) and enable diligent discharge of stewardship duties through purposeful engagement and voting.
PRINCIPLE 3: CAPACITY BUILDING AND COLLABORATION
A collaborative approach is taken where appropriate to promote acceptance and implementation of the principles
of CRISA and other relevant codes and standards, to support the building of capacity throughout the investment
industry and enhance sound governance practices.
PRINCIPLE 4: GOVERNANCE
Sound governance structures and processes are in place to enable oversight of and accountability for investment
arrangements and activities towards diligent stewardship and responsible investment, including proactively
managing conflicts of interest.
PRINCIPLE 5: TRANSPARENCY
Meaningful disclosure is made at set time intervals in relation to the investment arrangements and activities
across asset classes that support the integration of sustainable finance practices, discharging of stewardship
duties and collaborative initiatives.
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California Public Employees’ Retirement System (CalPERS)

Established in 1932, The California Public Employees’ Retirement System (CalPERS) is the largest U.S. public pension
fund, with fund market value of $372.6 billion and has paid $24.2 billion in benefits during 2018-19.
Its mission is to deliver retirement and health care benefits to members and their beneficiaries. The pension fund
serves more than 1.9 million members in the CalPERS retirement system and administers benefits for 1.5 million
members and their families in their health program.
The CalPERS Board of Administration is guided by the CalPERS Board’s Investment Committee, Investment Beliefs
and Core Values: Quality, Respect, Accountability, Integrity, Openness, and Balance. CalPERS management and more
than 380 Investment Office staff carry out the daily activities of the investment program. Our goal is to efficiently
and effectively manage investments to achieve the highest possible return at an acceptable level of risk. In doing so,
CalPERS has generated strong long- term returns.
CalPERS Global Governance Program has evolved since the mid-80’s when it was solely reactionary: reacting to
the anti-takeover actions of corporate managers that struck a dissonant chord with owners of the corporate entity
concerned with accountability and fair play. The late 1980s and early 1990s represented a period in which CalPERS
learned a great deal about the “rules of the game” – how to influence corporate managers, what issues were likely to
elicit fellow shareowner support, and where the traditional modes of shareowner/ corporation communication were
at odds with current reality. Beginning in 1993, CalPERS turned its focus toward companies considered by virtually
every measure to be “poor” financial performers. By centering its attention and resources in this way, CalPERS could
demonstrate very specific and tangible results to those who questioned the value of corporate governance.
In 2011, CalPERS Global Governance Program transitioned into an Investment Office-wide role to support the Total
Fund; and, the CalPERS Board approved the adoption of a Total Fund process for integrating environmental, social,
and governance (ESG) issues across the investment portfolio as a strategic priority. This transition recognizes
CalPERS’ ongoing effort to integrate ESG factors into investment decision making across asset classes, grounded in
the three forms of economic capital – financial, human, and physical – that are needed for long-term value creation.
This work has also been integrated into CalPERS Investment Beliefs which address sustainable investment, risk
management, and CalPERS engagement with companies, regulators, managers, and stakeholders.
The CalPERS Board, through its Investment Committee, has adopted the Global Governance Principles (Global
Principles). The Global Principles are broken down into three areas – Core, Domestic, and International Principles.
Adopting the Global Principles in its entirety may not be appropriate for every company in the global capital
marketplace due to differing developmental stages, competitive environment, regulatory or legal constraints.
However, CalPERS does believe the criteria contained in the Core Principles should be adopted by companies across
all markets - from developed to emerging – in order to establish the foundation for achieving long-term sustainable
investment returns through accountable corporate governance structures.
For companies in the United States or listed on U.S. stock exchanges, CalPERS advocates the expansion of the
Core Principles into the Domestic Principles. For companies outside the United States or listed on non-U.S. stock
exchanges, CalPERS advocates the expansion of the Core Principles into the International Principles.
CalPERS expects all internal and external managers of CalPERS capital to integrate the Global Principles into
investment decision making including proxy voting, consistent with fiduciary duty. CalPERS recognizes that
countries and companies are in different developmental stages and that CalPERS investment managers will need to
exercise their best judgment after taking all relevant factors, principles, and trends into account. CalPERS requires
internal and external managers across the total fund to consider these Global Principles among the decision factors
employed in the investment process.

Principles:
There are many features that are important considerations in the continuing evolution of corporate governance best
practices. However, the underlying tenet for CalPERS Core Principles is that fully accountable governance structures
produce, over the long term, the best returns to shareowners. CalPERS believes the following Core Principles should
be adopted by companies and markets – from developed to emerging – in order to establish the foundation for
achieving long-term sustainable investment returns through accountable corporate governance structures.
1. Sustainability : Companies and external managers in which CalPERS invests are expected to optimize
operating performance, profitability and investment returns in a risk-aware manner while conducting
 Lesson 8 • Corporate Governance and Shareholder’s Rights 255

themselves with propriety and with a view toward responsible conduct. Anchored by CalPERS Investment
Beliefs, CalPERS believes long-term value creation requires the effective management of three forms of
capital described as follows:
(a) Financial Capital (Governance) : Governance is the primary tool to align interests between CalPERS and
the managers of our financial capital – including companies and external managers. Good governance
enhances a company’s long-term value and protects investor interests.
(b) Physical Capital (Environment) : Encouraging external managers, portfolio companies, and policy
makers to engage in responsible environmental practices is important to identifying opportunities and
risk management. This means making wise use of scarce resources, considering impact, and addressing
systemic risks, such as climate change.
(c) Human Capital (Social) : The success and long-term value of the companies we invest in will be impacted
by their management of human capital. This includes fair labor practices, responsible contracting,
workplace and board diversity, and protecting the safety of employees directly and through the supply
chain.
2. Director Accountability : Directors should be accountable to shareowners, and management accountable to
directors. To ensure this accountability, directors must be accessible to shareowner inquiry concerning their
key decisions affecting the company’s strategic direction.
3. Transparency : Operating, financial, and governance information about companies must be readily
transparent to permit accurate market comparisons; this includes disclosure and transparency of objective
globally accepted minimum accounting standards, such as the International Financial Reporting Standards
(“IFRS”).
4. One-share/One-vote : All investors must be treated equitably and upon the principle of one-share/one- vote.
5. Proxy Materials : Proxy materials should be written in a manner designed to provide shareowners with the
information necessary to make informed voting decisions. Similarly, proxy materials should be distributed in a
manner designed to encourage shareowner participation. All shareowner votes, whether cast in person or by
proxy, should be formally counted with vote outcomes formally announced.
6. Code of Best Practices: Each capital market in which shares are issued and traded should adopt its own
Code of Best Practices to promote transparency of information, prevention of harmful labor practices, investor
protection, and corporate social responsibility. Where such a code is adopted, companies should disclose to
their shareowners whether they are in compliance.
7. Long-term Vision: Corporate directors and management should have a long-term strategic vision that, at
its core, emphasizes sustained shareowner value and effective management of both risk and opportunities
in the oversight of financial, physical, and human capital. In turn, despite differing investment strategies and
tactics, shareowners should encourage corporate management to resist short-term behavior by supporting
and rewarding long-term superior returns.
8. Access to Director Nominations: Shareowners should have effective access to the director nomination process.
9. Political Stability: Progress toward the development of basic democratic institutions and principles,
including such things as: a strong and impartial legal system; and, respect and enforcement of property
and shareowner rights.
10. Transparency: Financial transparency, including elements of a free press, is necessary for investors to have
truthful, accurate and relevant information.
11. Productive Labor Practices: No harmful labor practices or use of child labor. In compliance, or moving toward
compliance, with the International Labor Organization (ILO) Declaration on the Fundamental Principles and
Rights at Work.
12. Corporate Social Responsibility : Eliminating Human Rights Violations: Corporations should adopt maximum
progressive practices toward the elimination of human rights violations in all countries or environments in which
the company operates. Additionally, these practices should emphasize and focus on preventing discrimination
and/or violence based on race, color, religion, national origin, age, disability, sexual orientation, gender identity,
marital status, or any other status protected by laws or regulations in areas of a company’s operation.
256 Lesson 8 • PP-GRMCE

13. Market Regulation and Liquidity : Little to no repatriation risk. Potential market and currency volatility are
adequately rewarded.
14. Capital Market Openness : Free market policies, openness to foreign investors, and legal protection for
foreign investors.
15. Settlement Proficiency/Transaction Costs: Reasonable trading and settlement proficiency and reasonable
transaction costs.
16. Disclosure: Companies should adopt corporate reporting guidelines in order to measure, disclose, and be
accountable to internal and external stakeholders for organizational performance. Disclosure reporting
guidelines should include:
(a) The effect of environmental, social and governance impacts, risks and opportunities related to the
company’s stakeholders.
(b) Activities the company is undertaking to protect shareowner rights and investment capital.
17. Financial Markets: Policy makers and standards setters which impact investment portfolio risk and return
should promote fair, orderly, and effectively regulated financial markets through the following:
a. Transparency: To promote full disclosure so that the financial markets provide incentives that price risk
and opportunity.
b. Governance: To foster alignment of interest, protect investor rights and independence of regulators.
c. Systemic Risk: For earlier identification by regulators of issues that give rise to overall market risk that
threaten global markets and foster action that mitigates those risks.

DEALING WITH INSTITUTIONAL INVESTORS

Companies should consider implementing the following practices, while dealing with institutional investors:
• Preparing (in advance) materials articulating positions vis-à-vis significant issues to be submitted to a
shareholder vote, addressing major rationales supporting a view contrary to the views the public company
intends to espouse;
• Consistent with disseminating or otherwise making materials addressing shareholder voting issues available
to proxy services firms, current investors, company social media outlets, various media outlet representatives
covering the companies;
• Formally seeking opportunities to meet with proxy services firms on issues subject to shareholder votes
in advance of proxy services firm issuance of recommendations (if possible), and immediately after
recommendations are made to ensure that predicates for recommendations are accurate and up to date;
• Contemporaneously documenting proxy services firm responses to meeting requests, as well as substantive
discussions at any meetings;
• Formally requesting that proxy services firms provide previews of recommendations they anticipate making
vis-à-vis issues to be submitted to public company shareholders for a vote;
• Contemporaneously documenting proxy services firm responses to preview requests (and any substantive
discussions about ensuing proxy services firm recommendations); and
• Monitoring proxy services firm recommendations for accuracy or reliance on outdated information.
The relationship between companies and their investors both individual and institutional is very crucial. The
companies should:
• encourage investors to communicate directly their preferences, expectations and policies to the company;
• provide meaningful communications about strategy, long-term objectives and governance, and encourage
investors to actively listen to companies and review these communications;
• establish and maintain meaningful, direct long-term relationships with significant investors and encourage
those investors to have the appropriate policies, personnel and procedures for meaningful reciprocity in the
relationship; and
• where companies are pursuing subpar strategies that are unlikely to bring long-term success, encourage
investors to use behind-the-scenes, direct engagement with the companies as a first line of action.
Lesson 8 • Corporate Governance and Shareholder’s Rights 257

Companies should continue to engage in year-round, regular communications with institutional investors, to
develop and maintain a relationship of trust and confidence, and also provide companies with an opportunity to
bring concerns about the actions (or inaction) of proxy services firms to the attention of investors.
Companies can serve their shareholders by maintaining a continuous dialogue with proxy services firms in order
to correct erroneous or stale information, or to address any troublesome recommendations that do not advance the
best interests of the shareholders.

ROLE OF PROXY ADVISORY FIRMS

Proxy advisory firms are independent research outfits that evaluate the pros and cons of corporate matters such
as mergers, acquisitions, top appointments and CEO pay,
which shareholders are expected to vote on in AGMs, EGMs Proxy advisory firms provide institutional
or court-convened meetings. These firms engage in heavy- investors with research, data, and recommendations
duty analysis of the major actions that are put to vote, on management and shareholder proposals that are
and produce detailed reports advising shareholders on voted on at a company’s annual meeting or extra
how they should swing to safeguard their interest. Proxy ordinary general meetings. They also comment on
advisory firms charge fees to institutional investors and governance practices in companies which helps
provide regular, independent voting recommendations on institutional investors take investment decisions.
the companies that the latter own.
Proxy advisers can be valuable because they fill an information gap: institutional investors contract with these firms
to carry out comprehensive reviews of voting proposals that the investors themselves have neither the time nor the
resources to undertake. In short, many institutional investors, including pension funds and mutual funds, review
and perhaps follow proxy advisers’ recommendations when voting their shares.
Over the years, proxy services firms have played an increasingly outsized role in imposing their views of appropriate
corporate governance on corporations and their shareholders. These firms purport to evaluate every issue for which
corporate proxies are solicited, and their recommendations are demonstrably influential in how proxy votes are
cast. Following are few reasons why institutional investors engage proxy advisors:
i) Proxy advisors generally offer variety of services consisting of both, analyzing the proposals at general
meetings and recommending voting decisions.
ii) The recommendations of proxy advisors help the investors to obtain a more considered understanding of
different agenda items and to arrive at an informed voting decision, allowing them to optimise their own
limited resources and cast their votes in a timely and informed manner.
iii) Considering that institutional investors invest in multiple companies in different industry range and across
the globe, it may not be feasible for those investors to have informed knowledge of the corporate governance
specifications of that country and hence there may be an inability to understand the need and impact of a
particular agenda item. Proxy advisors help to combat this issue as well through their informed consultancy.
Due to cross border voting investors may face issues in terms of language of a country. The proxy advisors can
assist in mitigating the language issues as well. Further, they may also enable the investors to have a voting
platform in cases where electronic voting is a pre-requisite at general meetings.
iv) Apart from the above, general meetings across the globe may be concentrated during a certain period of the
year and therefore the investors may not be in a position to gather information and knowledge about all the
companies and hence, may not be in a position to take informed decision while voting. Proxy services industry
emerged and expanded with the growth of institutional investors and shareholder activism. Proxy services
firms play an important role in the proxy voting system. Such firms offer valuable services which includes
analysing of the proposals for general meetings and providing voting recommendations, either based on the
their own voting policy or on the investor’s customised voting policy.
v) Proxy advisers also influence boards’ decision making. They do a good job of policing the boards and governance
records of the firms they track, and nudging institutional investors to take a stand on governance issues.

GOVERNANCE OF GROUP ENTITIES / SUBSIDIARIES

A corporate group or group of companies is a collection of holding and subsidiary corporations that function as a single
economic entity through a common source of control. In India most big family businesses operate through a group of
258 Lesson 8 • PP-GRMCE

companies such as Tata group and Aditya Birla Group. Controlling a company means having the power to appoint the
majority of its directors or significantly influence its decisions. The group may have a single holding company or be
a network of companies through cross holdings. The control of company S by company H may be direct i.e. company
H directly holds the majority of voting rights of company S or indirect i.e. H controls intermediate companies A, B,
C, etc, which it can ask to vote the same way as the board of H, thereby obtaining a majority of rights in S. According
to Sec 2(27) of the Companies Act 2013 (Act) “control shall include the right to appoint majority of the directors or
to control the management or policy decisions exercisable by a person or persons acting individually or in concert,
directly or indirectly, including by virtue of their shareholding or management rights or shareholders agreements or
voting agreements or in any other manner”. In the above case H is the holding company and S the subsidiary company.
Group companies create a complex organizational structure resulting in a complicated governance environment.
Boards have a fiduciary duty to work in the best interest of the company. For the board of a holding company the
question is to what extent should it be involved in the governance of its subsidiaries? To properly carry out its
fiduciary role, the board must act independently and objectively. The holding company often nominates its director
or officers as directors on the subsidiary company. It is difficult for the board of the subsidiary to act in its own
interest alone. If directors of subsidiaries act against wishes of the controlling authority the risk being removed from
the board. As a result the interest of the group or holding company gets priority over that of the subsidiary.
The board of the holding company needs to determine whether all companies will have a single governance structure
or each subsidiary can determine their own governance systems. And how the parent board will monitor governance
of the subsidiaries and what will be the extent of oversight. Subsidiaries may be categories in terms of level of
investment, strategic importance and risk to the group and appropriate governance mechanism established.
In multinational groups with companies incorporated in different countries there is an additional problem of
difference in laws and regulations. While local governance regulations are to be compiled by the subsidiary, its
governance system must be aligned with the holding company for smooth functioning.
To protect the interest of shareholders of holding company and minority shareholders of subsidiary certain
provisions have been put in place both by the Companies Act, 2013 and SEBI (LODR).
• Board: At least one independent director on the board of directors of the listed company shall be a director
on the board of directors of any unlisted material subsidiaries including foreign companies. The minutes of
the meetings of the board of directors of the unlisted subsidiary shall be placed at the meeting of the board of
directors of the listed company. The management of the unlisted subsidiary shall periodically bring to the notice
of the board of directors of the listed company, a statement of all significant transactions and arrangements
entered into by the unlisted subsidiary. Significant transaction or arrangement” shall mean any individual
transaction or arrangement that exceeds or is likely to exceed ten percent (10%) of the total revenues or
total expenses or total assets or total liabilities, as the case may be, of the unlisted material subsidiary for the
immediately preceding accounting year. (Regulation 24).
• Consolidated Financial Statements: If a company has one or more subsidiaries, associate companies or
Joint Ventures, it shall prepare a consolidated financial statement of the company and of all the subsidiaries,
associate companies and joint venture in the same form and manner as that of its own. In addition to the stand
alone financial statements of the holding company, a consolidated financial Statement of holding company is
to be published to disclose details about subsidiary, associate Companies and Joint ventures. (Sec 129) The
Balance sheet of holding company shall specifically disclose investments in the subsidiaries. The Profit and
Loss account of Holding company shall disclose (a) Dividends from subsidiary Companies and (b) Provisions
for losses of subsidiary Companies. (Schedule III) The holding Company is required to:
(a) Place separate audited accounts in respect of each of its subsidiary on its website and
(b) Provide a copy of separate audited financial statements in respect of each of its subsidiary, to any
shareholder of the Company who ask for it. (Section 136)
On the other hand the balance sheet of subsidiary company should disclose shares held by its holding company
or its ultimate holding Company, or subsidiaries and associates of the holding company and the ultimate
holding Company. (Schedule III)
• Audit and Audit Committee: The statutory auditor of a listed entity shall undertake a limited review of the
audit of all the entities/ companies whose accounts are to be consolidated with the listed entity. Besides
audited annual consolidated statements, at least eighty percent of the quarterly consolidated financial results,
of each of the consolidated revenue, assets and profits, respectively, shall have been audited or subjected to
limited review. (Regulation 33)
 Lesson 8 • Corporate Governance and Shareholder’s Rights 259

The audit committee of the listed company shall also review the financial statements, of subsidiaries in
particular, the investments made by the unlisted subsidiary. (Regulation 24) The board of a holding company
can authorize anyone to Inspection of books of account of any subsidiary company. (Section 128)
• Material Subsidiary: The listed company shall not dispose of shares in its material subsidiary which would
reduce its shareholding (either on its own or together with other subsidiaries) to less than 50% or cease the
exercise of control over the subsidiary without passing a special resolution in its General Meeting. Exception has
been granted for divestment under a scheme of arrangement duly approved by a court/ tribunal (Regulation 24).
Selling, disposing and leasing of assets amounting to more than twenty percent (20%) of the assets of the material
subsidiary on an aggregate basis during a financial year shall require prior approval of shareholders by way of
special resolution, unless the sale/ disposal/ lease is made under a scheme of arrangement duly approved by a
Court/ Tribunal (Regulation 24).
Every listed entity’s material unlisted subsidiaries incorporated in India shall undertake secretarial audit and shall
annex the report with its annual report. (Regulation 24A) This will help improve compliance of group as a whole.
The policy on material subsidiary shall be disclosed in the company’s web site and in the annual report of the company
or a web link provided in the annual report. These regulations ensure that shareholders of the holding company can
monitor subsidiaries whose performance affects the performance of their company even if they are unlisted.

CORPORATE GOVERNANCE IN FAMILY OWNED ENTERPRISES

India enjoys a rich and glorious history of family-owned business. A family business may be company, partnership
firm, HUF or any other form of business owned, controlled and operated by members of a family. In India the majority
of businesses are controlled by families.
Family businesses are the major form of enterprise in India and across the world, viz. Corporation houses
like Aditya Birla Group, Bajaj Auto, Eicher Motors, Emami, GMR Infrastructure, Godrej Group, GVK Power &
Infrastrcture,HCL Technologies, Hero Moto Corp., Marico, Reliance Industries, Tata Group, are some of the family
owned companies in India. Arcelor Mittal, Berskire Hathway, BMW, Cargill, Comcast, Continental,Ford Motor,
Hyundai, Koch Industries, LG, Maersk, News Corporations, Peugeot, Roche, Samsung, Volkswagen, Walmart,
are companies owned / controlled by family. Several studies indicate that family business carry the weight of
economic wealth creation in all economies.
Most family businesses do not survive beyond two or three generations. One of the main reasons for the short life
span of family businesses is due to the lack of governance mechanisms in the family. With better family governance,
business development reaches next level and ensures continuity of the business across generations. Strong
governance measures in a family owned business can effectively act as a prevention mechanism against a lot of
tensions that may arise between family members at a later stage. It is also imperative for family businesses to adopt
effective corporate governance measures in order to give tough competition to other players in the global market.
The most glaring characteristic of a family owned business is that all the key managerial positions in such
businesses are held by family members. Non-family members may of course be employees of the company,
but the decision-making power usually vests with the members of the family. Professionalisation of a family
business is of supreme importance for its long-term sustainability. In absence of professionalism, a family
business may get frequently weighed down with conflicts due to lack of clarity and systematic work processes,
role confusion and informal organisation structure. Poor accountability and improper operations control
severely interrupts efficiency of business. The business also fails to attract and retain good external talent.
Family businesses are generally operated with the ethos of “Family First”. Business decisions are taken while
keeping the family’s wellbeing in focus. With changing preferences of the next-generation successors, it is
possible to balance the family’s philosophy, culture and personal needs with business performance, profit and
transparency. However, a visible change can be observed in the family businesses in India. Old family business
houses are changing to “professionally managed” companies. The younger successors have a broad vision and
global aspirations. They prefer working with modern management techniques, build competent teams, and
create transparent systems and processes. Instead of getting stalled in family conflicts, disputes, and non-
productive practices, the younger generation prefers to create a professional work culture.
Certain provisions of Corporate Governance in a Family Owned Companies have been incorporated in the Companies
Act, 2013 such as:
260 Lesson 8 • PP-GRMCE

• Independent Directors and Women Directors : To build up the transparency and accountability of the Board
of Directors, the Act now requires at least 1/3rd of the total directors of a listed company to be Independent
Directors and have no material or pecuniary relationship with the company or related persons. Unlisted Public
companies with paid up share capital of Rs. 10 Crores or more; turnover of Rs. 100 crore or more; aggregate
outstanding loans, debentures, and deposits, of Rs. 50 crore or more are statutorily required to have at least 2
directors as Independent Directors.
To ensure diversity on the board, all listed companies and non-listed public companies having paid up share
capital more than Rs.100 Crores or more and turn over exceeding Rs.300 Crores or more are required to have
atleast one woman director on the board.
• Corporate Social Responsibility : Every company having net worth of Rs. 500 Crores or more, turnover
exceeding Rs. 1000 Crores or net profit of more than Rs. 5 Crore is required to constitute a Corporate Social
Responsibility Committee under Section 135 of the Companies Act, 2013 constituting 3 or more directors
with at least 1 Independent Director to formulate policies and recommend activities that the company may
undertake for promotion of education, gender equality, health, poverty eradication, environment, employment
etc. Again, this measure puts responsibility on the company for the social wellbeing not just of its workforce,
but also makes it publicly accountable.
• Audit Committee : The Act provides for the setting up of an Audit Committee comprising of at least 3 directors
by all listed companies, majority of which have to be independent directors. The members of such a committee
have to be persons who can read and understand financial statements and the task entrusted to such a
committee is recommending remuneration and appointments of auditors and reviewing their independence.
• Nomination and Remuneration Committee : The Nomination and Remuneration committee shall comprise
of 3 or more non-executive directors out of which at least half shall be Independent Directors. Such committee
shall identify persons qualified to become directors of the company and make recommendations to the board
of directors regarding their appointment and approval.
• Serious Fraud Investigation Office : Section 211 of the Act provides for the establishment of a Serious Fraud
Investigation Office to look into the affairs of the company and investigate incidences of fraud upon receipt
of report of the Registrar or inspector or generally in the public interest or request from any Department of
Central or State Government.
Some Unique challenges/ Governance issues of family businesses:
• Managing the diverse opinions of family members in the business, solving internal issues and disputes, etc., is
a challenge.
• Investors – both shareholders and creditors – may look with distrust on family-controlled companies, because
of the risk that the controlling family may abuse the rights of other shareholders. So investors shall scrutinize
such companies with care before taking the plunge and investing.
• There are also challenges of multiple stakeholders for the leadership position. Very often, there is lack of
communication between the incumbent and incoming generations. The incumbents do not know how to
handle the succession challenge, while the incoming generation does not know how to raise it. The families
should choose their most competent member(s) to manage the business, disregarding age, gender or bloodline.
However, post-succession role of the incumbent is not often planned leading to complications.
• Hiring external staff which may perceive that career advancement, freedom and decision-making are solely
the purview of family.
• Although ownership and management succession are the key concerns of a large number of business families,
they do not devote enough attention to the process involved. Succession dilemma is also closely related to the
family policy on entry of new generation, retirement of incumbents and mechanisms for resolving conflicts.
Entry of new members from the family depends also on the ‘space’ available in the organization, which in turn
depends on the success of the business. The younger generation may face difficulties in proving themselves to
the former generation.
• Change in mind-set: Differing views between the older generation and the newer generation
• Lack of Competitiveness: Another source of challenge is in the nature of competitiveness. For instance,
when the Indian economy was opened up in 1991, most Indian companies, of which a huge majority were
family owned, were put under competitive pressures for the first time. Many firms, particularly those that
Lesson 8 • Corporate Governance and Shareholder’s Rights 261

grew under government protection did not have a strategy to respond and took it as a threat rather than
opportunity for a variety of reasons. This created huge tensions in business families, sometimes leading to
division of assets.

CONCLUSION
Shareholders are one of the most important stakeholders of a corporate. Upholding the legitimate rights of the
shareholders, equitable treatment amongst all shareholders, meaningful engagement with them, etc. are all
paramount in ensuring good corporate governance. Protection of shareholder rights is the fundamental expectation
from any corporate.

LESSON ROUND UP
• Protection of shareholder rights is sacrosanct for good corporate governance. It is one of the pillars of
corporate governance.
• In India, the SEBI Act, 1992, the various SEBI Regulations/Guidelines and the Companies Act, 2013 enables
the empowerment of shareholder rights.
• Any member of a company who complain that the affairs of the company are being conducted in a manner
prejudicial to public interest or in a manner oppressive to any member or members may apply to the Tribunal
for an order.
• Shareholder has right to pass a special resolution, resolving that the company be wound up by the Tribunal.
• Principle III of the OECD Principles on Corporate Governance states that the corporate governance framework
should ensure the equitable treatment of all shareholders, including minority and foreign shareholders.
• Investor Education and Protection Fund (IEPF) has been established under Section 125 of the Companies
Act, 2013 for promotion of investors’ awareness and protection of the interests of investors.
• The Sarbanes-Oxley Act significantly increased the importance of investor relations in the financial markets.
• Institutional investors are organizations which pool large sums of money and invest those sums in companies.
Their role in the economy is to act as highly specialized investors on behalf of others.
• UK Stewardship Code (2012) aims to enhance the quality of engagement between institutional investors
and companies to help improve long-term returns to shareholders and the efficient exercise of governance
responsibilities.
• As a strategy CalPERS invest in sick and ailing companies where it employs good governance practices to
improvise company’s overall performance.
• The Institutional Investors use different tools like one-to-one meetings, focus lists, corporate governance
rating systems, etc. to assess the health of Company before investing resources in it.

GLOSSARY
IEPF Investor Education and Protection Fund (IEPF) is for promotion of investors’ awareness and
protection of the interests of investors. This website is an information providing platform to
promote awareness, and it does not offer any investment advice or evaluation.
Controlling A controlling interest is when a shareholder, or a group acting in kind, holds a majority
interest of a company’s voting stock, giving it significant influence over any corporate actions.
Shareholders that have a controlling interest often are able to direct the course of a company
and make most strategic and operational decisions.
Class action suit A class action is a legal proceeding in which shareholders bring suit as a group against the
company or its directors or officers and the judgment or settlement received from the suit
covers all the shareholders equally.
Principles of The UN Principles for Responsible Investment (PRI) is an international organization that
Responsible works to promote the incorporation of environmental, social, and corporate governance
Investment (PRI) factors (ESG) into investment decision-making.
262 Lesson 8 • PP-GRMCE

CalPERS: The California Public Employees’ Retirement System is an agency in the California executive
branch that “manages pension and health benefits for more than 1.6 million California public
employees, retirees, and their families
Proxy Advisory Proxy advisory firms are independent research outfits that evaluate the pros and cons of
firms corporate matters such as mergers, acquisitions, top appointments and CEO pay, which
shareholders are expected to vote on in AGMs, EGMs or court-convened meetings.
SFIO Serious Fraud Investigation Office (SFIO) is a multi-disciplinary organization under Ministry
of Corporate Affairs, consisting of experts in the field of accountancy, forensic auditing, law,
information technology, investigation, company law, capital market and taxation for detecting
and prosecuting or recommending for prosecution white-collar crimes/frauds.

TEST YOURSELF
(These are meant for recapitulation only. Answers to these questions are not to be submitted for evaluation)
1. Can you discuss about the provisions for protection of shareholder rights?
2. Do you know what are the tools that an institutional investor can use to assess the health of a company?
Explain.
3. Briefly write a short note on IEPF.
4. Throw some light on Oppression and mismanagement.
 Corporate Governance and
Lesson 9
Other Stakeholders

Key Concepts One Learning Objectives Regulatory Framework

Should Know
To understand the: Companies Act, 2013
• Stakeholder
• Changed concept from • Section 135 (c)
• Audit  • Section 166 (2)
shareholder to the stakeholder.
• Corporate Social SEBI (LODR) Regulation, 2015
• Link between good corporate
Responsibility
governance and importance • Regulation 4(2)(d)
• Remuneration of various stakeholders in the
• Shareholder- governance structure of an
Relationship organization.
• Capital Policy • Stakeholders Concept which
is well recognized by the law
• Whistleblower
and highlights the important
• Shareholder government/regulatory initiative
• Lenders to channelize the corporate
sector growth as well as ensuring
• Vendors
good governance for the benefits
of society at large.
• Role of employees, customer,
lenders, vendors, government
and society in ensuring good
corporate governance in the
corporate sector.

Lesson Outline
• Introduction
• Regulatory Framework
• Definition and Evolution of Stakeholder Theory
• Recognition of Stakeholder Concept in Law
• Stakeholder Engagement
• Stakeholder Analysis
• Better Stakeholder Engagement ensures
• Good Governance
• Types of Stakeholders
• The Caux Round Table
• The Clarkson Principles of Stakeholder Management
• Governance Paradigm and various Stakeholders
• Conclusion
• LESSON ROUND UP
• GLOSSARY
• TEST YOURSELF
264 Lesson 9 • PP-GRMCE

INTRODUCTION
We may not know in how many organisations, we are the stakeholders, but yes, we are associated with these, in either
way, direct or indirect. Today every one (apart from the shareholder / investors) whether it be as an employees of
the organisation, supplier, customer, competitor, community, regulator, government all have some sort of stake in the
organisation. All such persons/ entities are associated with progress of business These groups are influenced by
business and also have the ability to affect business.
“Stakeholder Theory is an idea about how business really works. It says that for any business to be successful it has
to create value for customers, suppliers, employees, communities and financiers, shareholders, banks and others
people with the money. It says that you can’t look at any one of their stakes or stakeholders if you like, in isolation.
Their interest has to go together, and the job of a manager or entrepreneur is to work out how the interest of
customers, suppliers, communities, employees and financiers go in the same direction.
• Now, think about how important each of these groups is for business to be successful, think about a business
that’s lost its edge with its customers that has products and services that its customers don’t want as much or
that they don’t want at all that’s a business in decline.
• Think about a business who manages suppliers in a way that the suppliers don’t make them better.
• The suppliers just take orders and sell stuff, but the suppliers aren’t trying to make a business more
innovative, more creative that’s a business that’s in a holding pattern and probably in decline.
• Think about a business whose employees don’t want to be there every day who aren’t using a hundred percent
of their efforts, energy and their creativity to make the business better; that’s a business in decline.
• Think about a business that’s not a good citizen in the community and routinely ignores or violates local custom.
That doesn’t pay attention to the quality of life in the community and, doesn’t pay attention to issues of
corporate responsibility or sustainability, that’s a business in decline.
• Think about a business that doesn’t create value doesn’t create profits for its financiers, its shareholders, banks
and others, that’s a business in decline
So stakeholder theory is the idea that each one of these groups is important to the success of a business, and figuring
out where their interests go in the same direction is what the managerial task and the entrepreneurial task is all
about. Stakeholder theory says if you’re just focused on financiers you miss what makes capitalism tick. What makes
capitalism tick is that shareholders financiers, customers, suppliers, employees, communities can together create
something that no one of them can create alone.

DEFINITION AND EVOLUTION OF STAKEHOLDER THEORY

In a business context, customers, investors, shareholders, employees, suppliers,
Stakeholder theory succeeds
government agencies, communities and many others who have a ‘stake’ or claim
in becoming famous not
in some aspect of a company’s products, operations, markets, industry and
only in the business ethics
outcomes are known as stakeholders.
fields; it is used as one of the
Stakeholder theory suggests that the purpose of a business is to create as much frameworks in corporate social
value as possible for stakeholders. In order to succeed and be sustainable over responsibility methods. For
time, executives must keep the interests of customers, suppliers, employees, example, ISO 26000 and GRI
communities and shareholders aligned and going in the same direction. (Global Reporting Initiative)
Innovation to keep these interests aligned is more important than the easy involve stakeholder analysis.
strategy of trading off the interests of stakeholders against each other.
Hence, by managing stakeholders, executives will also create as much value as possible for shareholders and
other financiers.
The stakeholder theory was first proposed in the book Strategic Management: A Stakeholder Approach by R.
Edward Freeman and outlines how management can satisfy the interests of stakeholders in a business.
R. Edward Freeman’s view on Stakeholder Theory1 : One very broad definition of a stakeholder is any
group or individual which can affect or is affected by an organization.” Such a broad conception would
include suppliers, customers, stockholders, employees, the media, political action groups, communities, and
 Lesson 9 • Corporate Governance and Other Stakeholders 265

governments. A more narrow view of stakeholder would include employees, suppliers, customers, financial
institutions, and local communities where the corporation does its business. But in either case, the claims
on corporate conscience are considerably greater than the imperatives of maximizing financial return to
stockholders.
Stakeholder theories have grown in number and type since the term stakeholder was first coined in 1963.
According to R. Edward Freeman1, whose work in stakeholder theory is well known, the stakeholder concept
was originally defined as including “those groups without whose support the organization would cease to
exist.” In some of the literature review, the same definition has been modified as “those groups who are vital
to the survival and success of the organization”. As a part of management theory and practice, stakeholder
theory takes a number of forms. Descriptively, some research on stakeholder theory assumes that managers
who wish to maximize their firm’s potential will take broader stakeholder interests into account. This gives
rise to a number of studies on how managers, firms, and stakeholders do in fact interact. Normatively, other
management studies and theories will discuss how corporations ought to interact with various stakeholders.
From an analytical perspective, a stakeholder approach can assist managers by promoting analysis of how the
company fits into its larger environment, how its standard operating procedures affect stakeholders within the
company (employees, managers, stockholders) and immediately beyond the company (customers, suppliers,
financiers). Friedman (2006) divides the stakeholders in two groups. One immediate group consisting of
customers, employees, local communities, suppliers and distributors, and shareholders and an additional group
which consists of the media, public in general, business partners, future generations, academics, competitors,
financiers, NGOs or activists, Government, regulators, policy makers, etc.
Freeman suggests, for example, that each firm should fill in a “generic stakeholder map” with specific
stakeholders. General categories such as owners, financial community, activist groups, suppliers, government,
political groups, customers, unions, employees, trade associations, and competitors would be filled in with
more specific stakeholders. In turn, the rational manager would not make major decisions for the organization
without considering the impact on each of these specific stakeholders. As the organization changes over time,
and as the issues for decision change, the specific stakeholder map will vary.
Freeman suggest a stakeholder mapping to be done by the
organization and their managers by asking few fundamental Interesting Fact
questions, such as: Who are our current and potential stakeholders? Stakeholder theory has seen growing
What are their interests/ rights? How does each stakeholder affect uptake in higher education in the late
us? How do we affect each stakeholder? What assumption does our 20th and early 21st centuries.
current strategy make about each important stakeholder?
Again, the contrast with Friedman’s view [Milton Friedman(1912) believed that the only social responsibility
of corporations is to provide a profit for its owners] should be evident: if the corporate manager looks only to
maximize stockholder wealth, other corporate constituencies (stakeholders) can easily be overlooked.
In a normative sense, stakeholder theory strongly suggests that overlooking these other stakeholders is (a)
unwise or imprudent and/or (b) ethically unjustified. To this extent, stakeholder theory participates in a
broader debate about business and ethics: will an ethical company be more profitable in the long run than
a company that looks only to the “bottom line” in any given quarter or year? Those who claim that corporate
managers are imprudent or unwise in ignoring various non-stockholder constituencies would answer “yes.”
Others would claim that overlooking these other constituencies is not ethically justified, regardless of either
the short-term or long-term results for the corporation.
The first elements of a stakeholder-based
Inevitably, fundamental questions are raised, such as “What
approach in port management can however be
is a corporation, and what is the purpose of a corporation?”
traced back to the articles by Frankel (1989)
Many stakeholder theorists visualize the corporation not as
and Goss (1990a, 1990b, 1990c). Both authors
a truly separate entity, but as part of a much larger social
concluded that the objectives of a port managing
enterprise. The corporation is not so much a “natural”
body clearly differ from those of conventional
individual, in this view, but is rather constructed legally
business firms.
and politically as an entity that creates social goods.

R. Edward Freeman is a professor at the Darden School of the University of Virginia. He is the author of several books on Stakehold-
1.

er Management including the influential Strategic Management: A Stakeholder Approach.

266 Lesson 9 • PP-GRMCE

A Stakeholder model of Company

Management

Owners Local
Community

Stakeholders
of Company

Suppliers Customers

Employees

RECOGNITION OF STAKEHOLDER CONCEPT IN LAW

Under the UK Companies Act, 2006

Chapter 2 of the said Act provides the general duties of directors.

Section 170: Scope and nature of general duties

1. The general duties specified in sections 171 to 177 are owed by a director of a company to the company.
2. A person who ceases to be a director continues to be subject— (a) to the duty in section 175 (duty to
avoid conflicts of interest) as regards the exploitation of any property, information or opportunity of
which he became aware at a time when he was a director, and (b) to the duty in section 176 (duty not
to accept benefits from third parties) as regards things done or omitted by him before he ceased to be a
director. To that extent those duties apply to a former director as to a director, subject to any necessary
adaptations.
3. The general duties are based on certain common law rules and equitable principles as they apply in relation to
directors and have effect in place of those rules and principles as regards the duties owed to a company by a director.
4. The general duties shall be interpreted and applied in the same way as common law rules or equitable principles,
and regard shall be had to the corresponding common law rules and equitable principles in interpreting and
applying the general duties.
5. The general duties apply to shadow directors where, and to the extent that, the corresponding common law
rules or equitable principles so apply.

Section 172: Duty to promote the success of the company

1. A director of a company must act in the way he considers, in good faith, would be most likely to promote the
success of the company for the benefit of its members as a whole, and in doing so have regard (amongst other
matters) to –
(a) the likely consequences of any decision in the long term, (b) the interests of the company’s employees,
 Lesson 9 • Corporate Governance and Other Stakeholders 267

(b) the need to foster the company’s business relationships with suppliers, customers and others, (d) the
impact of the company’s operations on the community and the environment,
(c) the desirability of the company maintaining a reputation for high standards of business conduct, and
(d) the need to act fairly as between members of the company.
2. Where or to the extent that the purposes of the company consist of or include purposes other than the benefit
of its members, subsection (1) has effect as if the reference to promoting the success of the company for the
benefit of its members were to achieving those purposes.
3. The duty imposed by this section has effect subject to any enactment or rule of law requiring directors, in
certain circumstances, to consider or act in the interests of creditors of the company.

Section 173: Duty to exercise independent judgment

1. A director of a company must exercise independent judgment.
2. This duty is not infringed by his acting –
(a) in accordance with an agreement duly entered into by the company that restricts the future exercise
of discretion by its directors, or
(b) in a way authorised by the company’s constitution.

Section 174: Duty to exercise reasonable care, skill and diligence

1. A director of a company must exercise reasonable care, skill and diligence.
2. This means the care, skill and diligence that would be exercised by a reasonably diligent person with—
(a) the general knowledge, skill and experience that may reasonably be expected of a person carrying out the
functions carried out by the director in relation to the company, and
(b) the general knowledge, skill and experience that the director has.

Section 175: Duty to avoid conflicts of interest

1. A director of a company must avoid a situation in which he has, or can have, a direct or indirect interest that
conflicts, or possibly may conflict, with the interests of the company.
2. This applies in particular to the exploitation of any property, information or opportunity (and it is
immaterial whether the company could take advantage of the property, information or opportunity).
3. This duty does not apply to a conflict of interest arising in relation to a transaction or arrangement with the
company.
4. This duty is not infringed –
(a) if the situation cannot reasonably be regarded as likely to give rise to a conflict of interest; or
(b) if the matter has been authorised by the directors.
5. Authorisation may be given by the directors –
(a) here the company is a private company and nothing in the company’s constitution invalidates such
authorized on, by the matter being proposed to and authorized by the directors; or
(b) where the company is a public company and its constitution includes provision enabling the directors to
authorise the matter, by the matter being proposed to and authorised by them in accordance with the
constitution.
6. The authorisation is effective only if –
(a) any requirement as to the quorum at the meeting at which the matter is considered is met without
counting the director in question or any other interested director, and
(b) the matter was agreed to without their voting or would have been agreed to if their votes had not been
counted.
7. Any reference in this section to a conflict of interest includes a conflict of interest and duty and a conflict of duties.
268 Lesson 9 • PP-GRMCE

Section 176: Duty not to accept benefits from third parties:

1. A director of a company must not accept a benefit from a third party conferred by reason of –
(a) his being a director, or
(b) his doing (or not doing) anything as director.
2. A “third party” means a person other than the company, an associated body corporate or a person acting
on behalf of the company or an associated body corporate.
3. Benefits received by a director from a person by whom his services (as a director or otherwise) are provided
to the company are not regarded as conferred by a third party.
4. This duty is not infringed if the acceptance of the benefit cannot reasonably be regarded as likely to give rise to
a conflict of interest.
5. Any reference in this section to a conflict of interest includes a conflict of interest and duty and a conflict of duties.

Section 177: Duty to declare interest in proposed transaction or arrangement:

1. If a director of a company is in any way, directly or indirectly, interested in a proposed transaction
or arrangement with the company, he must declare the nature and extent of that interest to the other
directors.
2. The declaration may (but need not) be made –
(a) at a meeting of the directors, or
(b) by notice to the directors in accordance with –
(i) section 184 (notice in writing), or
(ii) section 185 (general notice).
3. If a declaration of interest under this section proves to be, or becomes, inaccurate or incomplete, a further
declaration must be made.
4. Any declaration required by this section must be made before the company enters into the transaction or
arrangement.
5. This section does not require a declaration of an interest of which the director is not aware or where the director
is not aware of the transaction or arrangement in question. For this purpose a director is treated as being aware
of matters of which he ought reasonably to be aware.
6. A director need not declare an interest –
(a) if it cannot reasonably be regarded as likely to give rise to a conflict of interest;
(b) if, or to the extent that, the other directors are already aware of it (and for this purpose the other
directors are treated as aware of anything of which they ought reasonably to be aware); or
(c) if, or to the extent that, it concerns terms of his service contract that have been or are to be considered –
(i) by a meeting of the directors, or
(ii) by a committee of the directors appointed for the purpose under the company’s constitution.

Under the UK Corporate Governance Code, 2018

The first version of the UK Corporate Governance Code (the Code) was published
in 1992 by the Cadbury Committee. It defined corporate governance as ‘the Cadbury Report was a response
system by which companies are directed and controlled. Boards of directors to major corporate scandals
are responsible for the governance of their companies. The shareholders’ associated with governance failures
role in governance is to appoint the directors and the auditors and to satisfy in the UK. It was formed after
themselves that an appropriate governance structure is in place.’ This remains Polly Peck International, a major
true today, but the environment in which companies, their shareholders and UK company, went insolvent after
wider stakeholders operate continues to develop rapidly. years of falsifying financial reports.
 Lesson 9 • Corporate Governance and Other Stakeholders 269

Over the years the Code has been revised and expanded to take account of the increasing demands on the UK’s
corporate governance framework. The 2018 Code focuses on the application of the Principles. The Listing Rules
require companies to make a statement of how they have applied the Principles, in a manner that would enable
shareholders to evaluate how the Principles have been applied. The ability of investors to evaluate the approach to
governance is important. Reporting should cover the application of the Principles in the context of the particular
circumstances of the company and how the board has set the company’s purpose and strategy, met objectives and
achieved outcomes through the decisions it has taken.
Corporate governance reporting should also relate coherently to other parts of the annual report – particularly the
Strategic Report and other complementary information – so that shareholders can effectively assess the quality of
the company’s governance arrangements, and the board’s activities and contributions. This should include providing
information that enables shareholders to assess how the directors have performed their duty under section 172 of
the Companies Act 2006 (the Act) to promote the success of the company. Nothing in this Code overrides or is
intended as an interpretation of the statutory statement of directors’ duties in the Act.
The Code is applicable to all companies with a premium listing, whether incorporated in the UK or elsewhere. The
new Code applies to accounting periods beginning on or after 1 January 2019.

1. BOARD LEADERSHIP AND COMPANY PURPOSE

Principles
A. A successful company is led by an effective and entrepreneurial board, whose role is to promote the long-
term sustainable success of the company, generating value for shareholders and contributing to wider society.
B. The board should establish the company’s purpose, values and strategy, and satisfy itself that these and its
culture are aligned. All directors must act with integrity, lead by example and promote the desired culture.
C. The board should ensure that the necessary resources are in place for the company to meet its objectives
and measure performance against them. The board should also establish a framework of prudent and effective
controls, which enable risk to be assessed and managed.
D. In order for the company to meet its responsibilities to shareholders and stakeholders, the board should ensure
effective engagement with, and encourage participation from, these parties.
E. The board should ensure that workforce policies and practices are consistent with the company’s values and
support its long-term sustainable success. The workforce should be able to raise any matters of concern.

2. DIVISION OF RESPONSIBILITIES
Principles
F. The chair leads the board and is responsible for its overall effectiveness in directing the company. They should
demonstrate objective judgement throughout their tenure and promote a culture of openness and debate. In
addition, the chair facilitates constructive board relations and the effective contribution of all non-executive
directors, and ensures that directors receive accurate, timely and clear information.
G. The board should include an appropriate combination of executive and non-executive (and, in particular,
independent non-executive) directors, such that no one individual or small group of individuals dominates the
board’s decision-making. There should be a clear division of responsibilities between the leadership of the
board and the executive leadership of the company’s business.
H. Non-executive directors should have sufficient time to meet their board responsibilities. They should provide
constructive challenge, strategic guidance, offer specialist advice and hold management to account.
I. The board, supported by the company secretary, should ensure that it has the policies, processes, information,
time and resources it needs in order to function effectively and efficiently.

3. COMPOSITION, SUCCESSION AND EVALUATION

Principles
J. Appointments to the board should be subject to a formal, rigorous and transparent procedure, and an effective
succession plan should be maintained for board and senior management.4 Both appointments and succession
270 Lesson 9 • PP-GRMCE

plans should be based on merit and objective criteria5 and, within this context, should promote diversity of
gender, social and ethnic backgrounds, cognitive and personal strengths.
K. The board and its committees should have a combination of skills, experience and knowledge. Consideration
should be given to the length of service of the board as a whole and membership regularly refreshed.
L. L. Annual evaluation of the board should consider its composition, diversity and how effectively members work
together to achieve objectives. Individual evaluation should demonstrate whether each director continues to
contribute effectively.

4. AUDIT, RISK AND INTERNAL CONTROL

Principles
M. The board should establish formal and transparent policies and procedures to ensure the independence and
effectiveness of internal and external audit functions and satisfy itself on the integrity of financial and
narrative statements.
N. The board should present a fair, balanced and understandable assessment of the company’s position and
prospects.
O. The board should establish procedures to manage risk, oversee the internal control framework, and
determine the nature and extent of the principal risks the company is willing to take in order to achieve its
long-term strategic objectives.
P. The audit committee, a sub-committee of the board, should look after financial reporting matters and the
workings of both internal and external auditors. At least one member of the audit committee must have recent
and relevant financial experience and the committee as a whole should have relevant sector experience.

5. REMUNERATION Principles
Q. Remuneration policies and practices should be designed to support strategy and promote long-term
sustainable success. Executive remuneration should be aligned to company purpose and values, and be clearly
linked to the successful delivery of the company’s long-term strategy.
R. A formal and transparent procedure for developing policy on executive remuneration and determining director
and senior management remuneration should be established. No director should be involved in deciding their
own remuneration outcome.
S. Directors should exercise independent judgement and discretion when authorising remuneration outcomes,
taking account of company and individual performance, and wider circumstances.

Under the UAE Corporate Governance Rules, 2016

The Securities and Commodities Authority of the United Arab Emirates (UAE) is the UAE federal regulator responsible
for regulating companies listed on the Dubai Financial Market exchange and the Abu Dhabi Securities Exchange. On
28 April 2016, the UAE Securities and Commodities Authority issued Decree No. 7 R M of 2016 which set out UAE
corporate governance rules, and came into force on 1 May 2016, repealing the old governance rules issued under
Decree No. 518 of 2009. This new set of UAE corporate governance rules applies to public joint stock companies that
are listed on the Dubai Financial Market or Abu Dhabi Securities Exchange.
In February 2020, the Chairman of the Securities and Commodities Authority (SCA) has issued Board Resolution No.
(03/R.M) of 2020 which adopts the new Corporate Governance Guide for Public Joint-Stock Companies (the Resolution).
The Resolution will come into force on 28 April 2020 and will repeal the previous SCA Chairman Resolution No. (7 R.M)
of 2016 on the Standards of Institutional Discipline and Governance of Public Joint-Stock Companies.
Resolution No. (03/R.M) of 2020, issued by Securities and Commodities Authority (SCA) came into force on April 28,
2020. It is the new Corporate Governance Guide for Public Joint-Stock Companies. It applies only to local Public Joint-
Stock Companies listed on the UAE stock market and will lead to more transparency and higher accountability.
Important provisions:
1. Board Secretary to be appointed on the board of directors and their functions. (Article 8)
2. Control of nomination for Board Members. Majority of board members to the independent, non-executive
members. (Article 9)
 Lesson 9 • Corporate Governance and Other Stakeholders 271

3. Emphasis on female representation on the board and establish policies regarding gender diversity.
(Article 9)
4. Disclosures by the board members for change of interest and secretary’s obligation to review it to bring clarity
to the mechanism. (Article 11)
5. Training and evaluations for board members to strengthen effectiveness. (Article 12)
6. Effective method to handle conflict of interest to bring clarity. (Article 32-38)
7. Introduction of optional adoption of a dual structure of governance where two boards will be formed for-
executive and supervisory. (Article 53-56)
8. Optional formation of permanent committee for handling risks. (Article 63)
9. Clarity of governance related disclosures including annual report for corporate governance and approval of
the same. (Article 74-77)
10. Introduction of guidelines for governance of subsidiary company. Parent company to ensure that subsidiary
adopts appropriate governance framework. (Article 79)
11. Optional formation of a technology committee, to ensure overall role of technology for business strategies.
(Article 64)
12. Introduction of revised CSR provisions. (Article 81)
13. Penalties for breach include- warnings, fines, and referral of violations to public prosecutors subject to
provisions of Authority’s Board of Directors’ decision No. (42) of
14. 2015 regarding controls and procedures of Conciliation in Offenses Relating to
15. Public Joint Stock Companies. (Article 82)

Overview of UAE Corporate Governance Rule 2016

I. CORPORATE LEADERSHIP
i) Board membership
The articles of association of the listed company shall decide on the method of formation, number of members
and tenure of membership of the board of directors. Members of the board of directors are elected through
secret, cumulative voting by the members of the general assembly of the listed company. The chairperson
and a majority of the members of the board of directors must be UAE nationals. At least one-third of the
members of the board must be independent, and a majority must be non-executive board members (a board
member will lack independence if such board member or any of his or her relatives work or has worked
in the senior executive management of the listed company or any of its subsidiaries during the two years
preceding the date of becoming a board member candidate). A minimum of 20 per cent of the members of
the board of directors must be female. If a listed joint stock company is unable to meet this requirement, it
must disclose the reason why to the UAE Securities and Commodities Authority. The chairperson may not
hold the position of manager, executive manager or any other executive function in the listed company. If a
government owns 5 per cent or more of a listed company’s shares, the said government may then appoint a
representative in the listed company’s board of directors pro rata to its shareholding or at least one board
member if the shareholding percentage required to elect such member is less than the shareholding of the
said government.
ii) Board meetings and votes
Resolutions of the board of directors are passed by the majority of votes of those members and representatives
present at the meeting. In the case of a tie, the chairperson shall have a casting vote. Only a majority of directors
are required to hold board meetings in person. Board meetings may be held using electronic communication
methods, such as video conferencing, subject to the articles of association of the listed company.
iii) Board member candidacy and responsibilities
Candidates for board membership must not have been dismissed from their position on the board of directors of
another publicly listed joint stock company in the 12 months prior to the date of nomination. Candidates for board
272 Lesson 9 • PP-GRMCE

membership must not be board members in more than five companies or be chairperson or vice chairperson
in more than two companies or be the managing director of more than one company. Board members must:
1. not have been convicted of a crime of ‘honour’ or honesty unless pardoned;
2. have at least five years’ experience in the activity carried out by the listed company;
3. hold a clean record before the UAE Securities and Commodities Authority with no disciplinary action
having been taken against him or her, no court order issued to dismiss or remove him or her from his or
her position as a board member and no outstanding proceedings before the public prosecution office in
relation to honesty and integrity;
4. preserve the listed company’s rights and act as a prudent person;
5. act with honesty and integrity and in accordance with the applicable laws and regulations and the listed
company’s articles of association;
6. disclose being a chairman, board member or a member of the senior executive management of any
other company; and
7. dedicate sufficient time for his or her duties and obligations toward the listed company.
iv) Board remuneration
Under the UAE governance rules, if the listed company generates net profits for a given year, the board members’
remuneration is not subject to the distribution of a minimum percentage of dividends (i.e., even if no dividends
are distributed to shareholders, the general assembly of a listed company may resolve to pay board members’
remuneration for such financial year). If a board member contributes to the listed company beyond his or her
ordinary duties (e.g., through serving on special committees, performing special works, etc.), the listed company
may compensate such board member for relevant fees and expenses, or pay a monthly salary to such board
member, to the extent determined appropriate by the board of directors. If, owing to the negligence of the board
of directors, the listed company is fined for violating the listed company’s articles of association or applicable
laws, such fine amounts shall be deducted from the board of directors’ remuneration.

II. DISCLOSURE
A relevant topic relating to corporate disclosure in the UAE is the restriction on related-party transactions for public
joint stock companies. The UAE corporate governance rules contain a broad definition of ‘related party’. When deciding
if a counterparty to a transaction is a related party, consideration must be given to whether the counterparty is:
1. a director, chair, board member, employee or senior executive of the listed company (each a ‘related person’); or
2. any company in which any related person has a 30 per cent (or greater) interest, and any affiliate, subsidiary
or parent of any such company (each a ‘related company’, together with each related person, a ‘related party’).
Listed companies are required to maintain up-todate lists of related companies and details of any transactions
with related parties. The UAE corporate governance rules are silent as to whether the 30 per cent share ownership
threshold applies to indirect, or only direct, ownership.
In relation to any transactions, contracts or agreements entered into between a public joint stock company and a
related party that:
1. does not fall under the main activity of such listed company; or
2. includes preferential terms not typically granted by the listed company to its clients, must be approved by the
listed company’s:
(1) board of directors if the value of the transaction, contract or agreement is 5 per cent or less than the
listed company’s capital; and
(2) general assembly, if the value of the transaction, contract or agreement is more than 5 per cent of the
listed company’s capital.
Furthermore, if a transaction, contract or agreement exceeds 5 per cent of the listed company’s capital, such transaction
must be evaluated by a valuator accredited by the UAE Securities and Commodities Authority before obtaining the
approval of the listed company’s general assembly, in order for such transaction to be concluded.
Details of any transaction between the listed company and a related party must be disclosed to the listed company’s
board of directors and general assembly, irrespective of the size or value of the transaction. Additionally, any transaction
 Lesson 9 • Corporate Governance and Other Stakeholders 273

between the listed company and a related party must be disclosed to the UAE Securities and Commodities Authority by
the listed company’s chairman. Such disclosure must include details of the transaction, including details of the:
1. transaction value and nature;
2. related party; and
3. nature and benefit of the involvement of the related party.
Such disclosure must also contain a written confirmation that the terms of the transaction are fair, reasonable, and
in favour of the listed company’s shareholders.
The board of directors must set up a committee of non-executive board members responsible for reviewing issues
that may result in a conflict of interest for board members including verifying financials and the review of transactions
concluded with stakeholders. In addition, there are no squeeze-out or compulsory acquisition provisions on the two
main UAE exchanges.
A member of the board of directors must inform the board of directors of any conflict or joint interest and must
not participate in the voting in respect of such matter. In addition, if the director fails to inform the publicly listed
company of his or her conflict, the listed company can move before the competent court to invalidate the contract or
to order the director who acted in contravention of the corporate governance rules to account to the listed company
for any profit or benefit obtained as a result of entering into the conflicted transaction.
One additional disclosure consideration to take into account is that if a party reaches an ownership interest of 5 per
cent or more of the shares of a listed company or 10 per cent or more of the shares of a parent company or subsidiary
to the listed company, the relevant party must inform the market on which the relevant public company is listed.
In addition, the relevant party must commit to declare to the UAE Securities and Commodities Authority every
additional 1 per cent interest that he or she acquires in the listed target and in accordance with the above

III. CORPORATE RESPONSIBILITY

A member of the board of directors of a listed company is specifically charged with the responsibility to:
1. preserve the listed company’s rights and act as a prudent person;
2. dedicate sufficient time for his or her duties and obligations toward the listed company; and
3. act with honesty and integrity in accordance with the applicable laws and regulations and the listed company’s
articles of association.
Integrity and ethical behaviour in the corporate context would generally qualify as a public policy concern, and
companies, directors, executives, and others are expected to behave ethically when transacting in the UAE. Listed
companies are also required to maintain registers of insiders, conflicts of interest and related party matters (as
detailed above). Transparency and the duty of care to the shareholders of public companies require companies to
maintain such registers in order to ensure effective compliance.
Companies are required to appoint a compliance officer who shall oversee the listed company and its employees’
compliance with the listed company’s articles of association, applicable laws and regulations, and the resolutions
of the general assembly and board of directors of the listed company. The listed company’s compliance officer may
also be the director of the listed company’s internal control department simultaneously. The board must establish a
strict internal control system to implement the UAE corporate governance code, regulate risk management, ensure
compliance with local laws and regulations, ensure compliance with internal policies and procedures, and to review
financial information used in drafting financial statements.

IV. SHAREHOLDERS
i. General assembly
In the UAE, the corporate governance rules allow shareholders who own 10 per cent of the issued share
capital of a listed company to call for an urgent general assembly meeting to discuss urgent matters. The UAE
corporate governance rules also allow shareholders who own five per cent of the issued share capital to submit
a written request to the UAE Securities and Commodities Authority to include an additional item on the agenda
of a shareholders’ meeting, even if the invitation to the meeting has already been published. A board of directors
of a public company may also call a general assembly with less than 30 days’ notice only if approved by 95 per
274 Lesson 9 • PP-GRMCE

cent of the shareholders. The notice convening the general assembly meeting must: (1) contain full details of
the purpose and agenda of the general assembly meeting; (2) be published on the relevant public company’s
website; and (3) be disclosed to the market on the relevant market’s regulatory news service. The rationale
behind these requirements is to assist shareholders with access and participation rights in relation to the public
company. The UAE Securities and Commodities Authority is required to approve a listed company’s general
assembly meeting, but the shareholders, through these rules, may maximise their participation in the public
company’s decision-making process. Each shareholder has the right to attend the meetings of the general
assembly of a listed company and shall have the votes equal to the number of shares in his or her possession.

ii. Dividends
Following a general assembly meeting of a public joint stock company where a distribution of dividends has been
approved, the listed company is mandated to deposit the cash dividends to the shareholders within 10 days of the
general assembly meeting. If a delay is experienced for any reason, the delay may not extend past 30 days from
the listed company’s general assembly meeting. This rule is meant to enhance shareholder economic protections.

iii. Lock-up periods

In relation to joint stock companies listed on the Dubai Financial Market or Abu Dhabi Securities Exchange,
following the statutory two-year lock-up period, founding shareholders would be permitted to sell-down their
interest in the listed company through a secondary offering. With respect to Private Joint stock companies,
founders of the company will only be subject to a 6 month lock-up period from the date of conversion to a
private joint stock company by the virtue of the United Arab Emirates (UAE) Federal Decree Law No. 26/2020
which came into force on 2 January 2021. There are limitations to this approach as companies that are listed
on the Dubai Financial Market or Abu Dhabi Securities Exchange are only permitted to sell-down up to 30 per
cent of the total share capital through a secondary offering. A workaround to this limitation is to first list on an
overseas exchange, which permits a sell-down greater than 30 per cent and to, thereafter, list on the Dubai
Financial Market or Abu Dhabi Securities Exchange. Also worth exploring is the possibility of an indirect sell-
down of shares in the entity listed on the Dubai Financial Market or Abu Dhabi Securities Exchange.
iv. Share capital increase
In order to issue new shares in a listed company, the approval of the listed company’s shareholders is required,
in addition to the approval of the UAE Securities and Commodities Authority. In applicable cases, companies
subject to the supervision of the UAE Central Bank must also obtain its approval as well. The issuance of new
shares is also subject to the requirements of the UAE Commercial Companies Law. The new Law with regards
to the same provides for a new mechanism to allow shareholders to resort to courts to increase the issued
share capital of a company where the quorum to increase the capital (being 75% of the shares represented in
the meeting) is not met and the company in question suffers insolvency issues.

v. Additional shareholder rights

Shareholders generally have the right to review the listed company’s financial statements and reports, records, and
documents, and also have the right to obtain their specific share of the listed company’s assets upon liquidation. The
corporate governance report which must be submitted in order to apply for convening the annual general assembly
meeting of a listed company must be made available to the shareholders of the listed company prior to submission.

vi. Proxy battles and hostile takeovers

Proxy battles and hostile takeovers are rare in the UAE.

Under the South Africa, King IV Report On Corporate Governance, 2016

King IV Code on Corporate Governance

It consists of 5 Parts, which are as under:
Part 5.1.: Leadership, ethics and corporate citizenship
Part 5.2: Strategy, performance and reporting Part 5.3.: Governing structures and delegation
 Lesson 9 • Corporate Governance and Other Stakeholders 275

Part 5.4.: Governance functional areas

Part 5.5.: Stakeholder relationships
Part 5.5 in the King IV Code contains the principles and practices that deal with relationships in accordance with the
stakeholder inclusive approach.
Principle 16: In the execution of its governance role and responsibilities, the governing body should adopt a
stakeholder inclusive approach that balances the needs, interests and expectations of material stakeholders in the
best interest of the organization over time.
It recommends the following practices:

Stakeholder Relationships
The quality of stakeholder relationships indicate how effectively an organisation is able to strike this balance
between the needs, interests and expectations of the stakeholders in making such decisions.
1. The governing body should assume responsibility for the governance of stakeholder relationships by setting
the direction for how stakeholder relationships should be approached and conducted in the organization.
2. The governing body should approve policy that articulates and gives effects to its direction on stakeholder
relationships.
3. The governing body should delegate to management the responsibility for implementation and execution of
effective stakeholder relationship management.
4. The governing body should exercise ongoing oversight of stakeholder relationship management and, in
particular, oversee that it results in the following:
(a) Methodologies for identifying individual stakeholders and stakeholders groupings.
(b) Determination of material stakeholders based on the extent to which they affect, or are affected by, the
activities, outputs, and outcomes of the organization.
(c) Management of stakeholders risk as an integral part of organization-wise risk management.
(d) Formal mechanisms for engagement and communication with stakeholders, including the use of dispute
resolution mechanisms and associated processes.
(e) Measurement of the quality of material stakeholder relationships, and appropriate responses to the outcomes.
5. The following should be disclosed in relation to stakeholder relationships;
a An overview of the arrangements for governing and managing stakeholder relations.
b. Key areas of focus during the reporting period.
c. Action taken to monitor the effectiveness of stakeholder management and how the outcomes were
addressed.
d. Future areas of focus.
Shareholder relationships (Applicable to companies only)
6. The board should oversee that the company encourages proactive engagement with shareholder, including
engagement at the annual general meeting (AGM) of the company.
7. All directors should be available at the AGM to respond to shareholder’s queries on how the board executed
its governance duties.
8. The board should ensure that the designated partner of the external audit firm attends the AGM.
9. The board should ensure that the shareholders are equitably treated, and that the interests of minority
shareholders are adequately protected.
10. The minutes of the AGMS of listed companies should be made publicly available.
Relationships within a group of companies:
11. The board of the holding company should assume responsibility for governance across the group by
setting the direction for how the relationships and exercise of power within the group should be approached
and conducted.
276 Lesson 9 • PP-GRMCE

12. The board should approve a group governance framework that articulates and gives effect to its direction
on relationships and the exercise of authority across the group.
13. The adoption and implementation of the policies, structures and procedures of the holding company is a
matter for consideration and approval by the board of the subsidiary company as a separate legal entity. The
board of the holding company should therefore ensure that the boards of its subsidiaries are included in the
development of the group governance framework.
14. The board of the holding company should ensure that the group governance frame work does not
conflict with the memorandum of incorporation, delegations, shareholders agreements, board charters, board
committee terms of reference, and related policies and agreement within the group.
15. The board of the holding company should ensure that the group governance framework recognizes each subsidiary
within the group as a separate and independent juristic person to whom its directors own fiduciary duties.
16. The board of the holding company should ensure that the group governance e framework addresses
governance matters as is appropriate for the group, including the following:
a. Delineation of the right and role of the holding company
b. If applicable, delegation of certain responsibilities by the board of a subsidiary to a board committee of
the holding company, without abdicating accountability, and subject to agree reporting and information
sharing arrangements.
c. The extent to which governance and operational policies of the holding company have been adopted by
subsidiary companies in the group.
d. Engagement by the holding company with the board of a subsidiary company before the holding company
exercises its rights to elect directors to the board of the subsidiary.
e. Arrangements to address the risk of breaching legal duty in relation to the use of information obtained
while acting as director of one company in the group for the purposes of another company in the group.
17. The board of the holding company should ensure that the agree group governance framework is
implemented across the group.
18. The holding company should disclose an overview of the group governance that is implemented across the group.
19. The subsidiary company should disclose what responsibilities it has delegated to board committees of the
holding company and the extent to which it has adopted the policies and procedures of the holding company.

Under The Code Of Corporate Governance For Listed Companies in China

The Code of Corporate Governance for Listed Companies in China is divided into Eight Chapters, viz;
Chapter 1 : Shareholders and Shareholders’ Meetings
Chapter 2 : Listed Company and Its Controlling Shareholders Chapter 3 : Directors and Board of Directors
Chapter 4 : The Supervisors and the Supervisory Board
Chapter 5 : Performance Assessments and Incentive and Disciplinary Systems
Chapter 6 : Stakeholders
Chapter 7 : Information Disclosure and Transparency
Chapter 8 : Supplementary Article
Among the above Chapters, Chapter 6 which deals with the Stakeholders, prescribes the following points:
Chapter 6 of the code prescribes provisions pertaining to ‘Stakeholders’.
1. A listed company shall respect the legitimate rights of banks and other creditors, employees, consumers,
suppliers, the community and other stakeholders.
2. A listed company shall actively cooperate with its stakeholders and jointly advance the company’s
sustained and healthy development.
3. A company shall provide the necessary conditions to ensure the legitimate rights of stakeholders.
Stakeholders shall have opportunities and channels for redress for infringement of rights.
 Lesson 9 • Corporate Governance and Other Stakeholders 277

4. A company shall provide necessary information to banks and other creditors to enable them to make
judgments and decisions about the company’s operating and financial situation.
5. A company shall encourage employees’ feedback regarding the company’s operating and financial situations
and important decisions affecting employee’s benefits through direct communications with the board of
directors, the supervisory board and the management personnel.
6. While maintaining the listed company’s development and maximizing the benefits of shareholders,
the company shall be concerned with the welfare, environmental protection and public interests of the
community in which it resides, and shall pay attention to
the company’s social responsibilities. The government of China controlled every
aspect of China’s economy until very recent
It further prescribes that the board of directors shall earnestly times. The 1990s was the first step toward
perform its duties as stipulated by laws, regulations and the modern corporate governance by establishing
company’s articles of association, shall ensure that the company the Shanghai and Shenzhen Stock Exchanges
complies with laws, regulations and its articles of association, and by creating a new government body—
shall treat all the shareholders equally and shall be concerned the China Securities Regulatory Commission
with the interests of stakeholders. (CSRC)—to regulate its new stock market.

Under The German Corporate Governance Code, 2019

The objective of the Code is to make the dual German corporate governance
system transparent and understandable. The Code includes principles, The traditional German corporate
recommendations and suggestions governing the management and governance model developed
monitoring of German listed companies that are accepted nationally and against the background of a “pay-as-
internationally as standards of good and responsible governance. It aims to you go” pension system and within
promote confidence in the management and supervision of German listed a consensus-oriented political
companies by investors, customers, employees and the general public. culture that came under pressure
due to the burst of globalisation
The principles reflect material legal requirements for responsible around the world.
governance, and are used here to inform investors and other stakeholders.
Recommendations of the Code are indicated in the text by using the word “shall”. Companies may depart from
recommendations, but in this case they are obliged to disclose and explain any departures each year (“comply or
explain”). This enables companies to take into account sector- or company- specific special characteristics. Well
justified departures from recommendations of the Code may be in the best interests of good corporate governance.
Finally, the Code contains suggestions from which companies may depart without disclosure; suggestions are
indicated in the text by using the word “should”.
Code stipulations covering not only the listed company itself but also its group entities use the word “enterprise”
rather than “company”. Shareholders generally exercise their membership rights before or at the General Meeting.
Institutional investors are of particular importance to enterprises. They are expected to exercise their ownership
rights actively and responsibly, in accordance with transparent principles that also respect the concept of
sustainability.
The Code is addressed to listed companies and companies with access to capital markets pursuant to section 161(1)
sentence 2 of the German Stock Corporation Act. Companies which are not capital market oriented may use the Code’s
recommendations and suggestions as guidelines.
Listed credit institutions and insurance undertakings are subject to the applicable prudential requirements, which
are not reflected in the Code. Code recommendations apply to the extent that they do not contradict any legal
stipulations. The following principles have been laid down:
• Principle 1: The Management Board is responsible for managing the enterprise in its own best interests. Its
members are jointly accountable for managing the enterprise. The Chair or Spokesperson of the Management
Board coordinates the work of the Management Board members.
• Principle 2: The Management Board develops the enterprise strategy, coordinates it with the Supervisory
Board and ensures its implementation.
• Principle 3: The Management Board stipulates target values for the share of women in the two management
levels below the Board.
278 Lesson 9 • PP-GRMCE

• Principle 4: A responsible management of risks arising from business activities requires an appropriate and
effective internal control and risk management system.
• Principle 5: The Management Board ensures that all provisions of law and internal policies are complied with,
and endeavours to achieve their compliance by the enterprise.
• Principle 6: The Supervisory Board appoints and discharges the members of the Management Board; it
supervises and advises the Management Board in the management of the enterprise and has to be involved
in decisions of fundamental importance to the enterprise. The Articles of Association and/or the Supervisory
Board stipulate that transactions of fundamental importance are subject to approval. Furthermore, transactions
with related parties* may be subject to prior approval by the Supervisory Board according to the applicable
legal regulations.
• Principle 7: The Supervisory Board chair is elected by the Supervisory Board from among its members. The
Chair coordinates the activities of the Supervisory Board and represents the interests of the Supervisory Board
externally.
• Principle 8: Shareholders regularly exercise their membership rights at the General Meeting. The General
Meeting adopts resolutions in particular on the appropriation of net profit, approves the actions of the
Management Board and the Supervisory Board by way of discharge, and elects the shareholder representatives
to the Supervisory Board as well as the external auditors. The General Meeting also adopts resolutions on the
company’s legal principles, including, but not limited to, amendments to the Articles of Association, corporate
actions, inter-company agreements and transformations. The General Meeting generally adopts advisory
resolutions on the approval of the remuneration system for the Management Board members prepared by the
Supervisory Board, on the actual remuneration of the Supervisory Board, as well as proposing resolutions on
the approval of the remuneration report for the preceding financial year.
• Principle 9: The Supervisory Board determines, within legal and statutory provisions, the number of
Management Board members, the required qualifications as well as the appointment of suitable candidates to
individual positions. The Supervisory Board defines the target percentage representation of female Management
Board members.
• Principle 10: The Supervisory Board consists of shareholder representatives, and of employee representatives,
if applicable. Shareholder representatives are usually elected by the General Meeting. The applicable co-
determination acts stipulate – depending on the number of employees and the respective industry sector – if
and how many Supervisory Board members must be elected by employees. Shareholder representatives and
employee representatives are obliged in equal measure to act in the best interests of the enterprise.
• Principle 11: The composition of the Supervisory Board has to ensure that its members collectively possess
the knowledge, skills and professional expertise required to properly perform their duties; furthermore, the
legal gender quota must be considered.
• Principle 12: Each Supervisory Board member ensures that they have sufficient time available to discharge
their duties.
• Principle 13: The Management Board and the Supervisory Board cooperate on a trust basis to the benefit of
the enterprise. Good corporate governance requires an open dialogue between the Management Board and
Supervisory Board, as well as between the members of these individual Boards. Comprehensive observance of
confidentiality is of paramount importance in this regard.
• Principle 14: The establishment of committees generally supports the effectiveness of the Supervisory
Board’s work for larger companies.
• Principle 15: The Management Board is responsible for keeping the Supervisory Board informed.
Nevertheless, the Supervisory Board must itself ensure that it obtains sufficient information. The
Management Board informs the Supervisory Board regularly, without delay and comprehensively about all
issues that are relevant to the enterprise, in particular regarding strategy, planning, business development,
the risk situation, risk management and compliance. The Management Board addresses departures in the
current business development from its existing projections and agreed targets, indicating the reasons for
any such departures. The Supervisory Board may at any time require the Management Board to provide
additional information.
 Lesson 9 • Corporate Governance and Other Stakeholders 279

• Principle 16: The Management Board Chair or Spokesperson informs the Supervisory Board Chair without
undue delay of major events that are of material importance for the assessment of the enterprise’s status and
performance, and for the management of the enterprise. The Supervisory Board Chair subsequently has to
inform the Supervisory Board and, if required, convenes an extraordinary Supervisory Board meeting.
• Principle 17: The external auditors support the Supervisory Board and – where applicable – the Audit
Committee in monitoring the management, particularly in relation to the review of the accounting and the
monitoring of the accounting-related control and risk management systems. The external auditors’ audit
opinion informs the capital market about the compliance of financial reporting with generally accepted
accounting principles.
• Principle 18: The members of the Supervisory Board take responsibility for undertaking any training or
professional development measures necessary to fulfil their duties.
• Principle 19: The members of the Management Board and Supervisory Board are bound to observe the
enterprise’s best interests. In all their decisions, they must neither pursue personal interests nor exploit
for themselves business opportunities to which the enterprise is entitled. Management Board members are
subject to comprehensive non-compete clauses throughout the duration of their appointment.
• Principle 20: All other things being equal, the company will ensure equal treatment of all shareholders in
respect of information. Principle 21 Shareholders and third parties are kept informed by the consolidated
financial statements and the group management report (including CSR reporting), as well as by interim
financial information.
• Principle 22: Management Board and Supervisory Board provide information about the company’s corporate
governance in their Corporate Governance Statement, on an annual basis.
• Principle 23: The Supervisory Board decides upon a clear and understandable system for Management
Board remuneration, and on this basis determines the actual remuneration for each Management Board
member. The General Meeting generally adopts advisory resolutions concerning the approval of the
remuneration system for Management Board members, prepared by the Supervisory Board, as well as
proposing resolutions on the approval of the remuneration report for the preceding financial year. The
remuneration structure of listed companies is to be oriented towards the company’s sustainable and long-
term development. Management Board remuneration is to be set in a way that promotes the corporate
strategy and the company’s long-term development.
• Principle 24: Supervisory Board members receive remuneration appropriate to their tasks and the situation
of the company. Such remuneration is specified by resolution of the General Meeting, or in the Articles of
Association, if applicable.
• Principle 25: The Management Board and the Supervisory Board prepare an annual remuneration report, in
accordance with statutory provisions.

Under The Japan’s Corporate Governance Code, 2018

Tokyo Stock Exchange, Inc. (TSE) has partially revised the Securities Listing Regulations pertaining to the revision of
Japan’s Corporate Governance Code (the Code) with effect from June 1, 2018.
This revision is based on the proposals made by the Council of Experts Japan developed a unique
Concerning the Follow-up of Japan’s Stewardship Code and Japan’s Corporate corporate governance structure,
Governance Code (hereinafter the “Council”). Jointly operated by the Financial that was different from the
Services Agency and TSE, the Council made proposals to revise the Code in US and German models, after
order to advance governance reform not just in form but also in substance World War II in the process of
through dialogue between companies and investors. The Code adopts a “comply rebuilding its economy. This led
or explain ‘’ approach for implementation, i.e. in cases where a company finds a to its economy booming in the
certain principle inappropriate, it does not need to comply with the principle, 1980s to becoming the second
provided that the company fully explains the reason why it does not comply. largest economy in the world at
The Code also strives to enhance the quality and quantity of climate-related that time.
disclosure based on TCFD recommendations or equivalent international
frameworks at Prime Market listed companies.
280 Lesson 9 • PP-GRMCE

Under the Japanese Companies Act, there are three governance systems from which companies may choose, as follows:
1. Companies with Audit and Supervisory Board (Kansayaku Board)
2. Companies with Three designated committees (Nomination Committee, etc.)
3. Companies with an Audit and Supervisory Committee
Below given chart explains functioning of Shareholders elect directors and Kansayaku at the annual shareholders
meeting Directors oversee the CEO, who executes the company’s business activities, and each Kansayaku
independently audits and supervises directors from the point of view of their fiduciary duty.

General Principles:
1. Securing the Rights and Equal Treatment of Shareholders
Companies should take appropriate measures to fully secure shareholder rights and develop an environment
in which shareholders can exercise their rights appropriately and effectively. In addition, companies should
secure effective equal treatment of shareholders. Given their particular sensitivities, adequate consideration
should be given to the issues and concerns of minority shareholders and foreign shareholders for the effective
exercise of shareholder rights and effective equal treatment of shareholders.
2. Appropriate Cooperation with Stakeholders Other Than Shareholders
Companies should fully recognize that their sustainable growth and the creation of mid- to long-term corporate
value are brought as a result of the provision of resources and contributions made by a range of stakeholders,
including employees, customers, business partners, creditors and local communities. As such, companies
should endeavor to appropriately cooperate with these stakeholders. The board and the management should
exercise their leadership in establishing a corporate culture where the rights and positions of stakeholders are
respected and sound business ethics are ensured.
3. Ensuring Appropriate Information Disclosure and Transparency
Companies should appropriately make information disclosure in compliance with the relevant laws and
regulations, but should also strive to actively provide information beyond that required by law. This includes
both financial information, such as financial standing and operating results, and non-financial information,
such as business strategies and business issues, risk, and governance. The board should recognize that disclosed
information will serve as the basis for constructive dialogue with shareholders, and therefore ensure that such
information, particularly non-financial information, is accurate, clear and useful.
 Lesson 9 • Corporate Governance and Other Stakeholders 281

4. Responsibilities of the Board

Given its fiduciary responsibility and accountability to shareholders, in order to promote sustainable
corporate growth and the increase of corporate value over the mid- to long-term and enhance earnings power
and capital efficiency, the board should appropriately fulfill its roles and responsibilities, including: (1) Setting
the broad direction of corporate strategy; (2) Establishing an environment where appropriate risk-taking by
the senior management is supported; and (3) Carrying out effective oversight of directors and the management
(including shikkoyaku and so-called shikkoyakuin) from an independent and objective standpoint. Such
roles and responsibilities should be equally and appropriately fulfilled regardless of the form of corporate
organization – i.e., Company with Kansayaku Board (where a part of these roles and responsibilities are
performed by kansayaku and the kansayaku board), Company with Three Committees (Nomination, Audit and
Remuneration), or Company with Supervisory Committee.
5. Dialogue with Shareholders
In order to contribute to sustainable growth and the increase of corporate value over the mid- to long- term,
companies should engage in constructive dialogue with shareholders even outside the general shareholder
meeting. During such dialogue, senior management and directors, including outside directors, should listen
to the views of shareholders and pay due attention to their interests and concerns, clearly explain business
policies to shareholders in an understandable manner so as to gain their support, and work for developing a
balanced understanding of the positions of shareholders and other stakeholders and acting accordingly.

Section 1: Securing the Rights and Equal Treatment of Shareholders

General Principle 1:
Companies should take appropriate measures to fully secure shareholder rights and develop an environment in which
shareholders can exercise their rights appropriately and effectively. In addition, companies should secure effective
equal treatment of shareholders. Given their particular sensitivities, adequate consideration should be given to the
issues and concerns of minority shareholders and foreign shareholders for the effective exercise of shareholder
rights and effective equal treatment of shareholders.
• Principle 1.1. - Securing the Rights of Shareholders: Companies should take appropriate measures to fully
secure shareholder rights, including voting rights at the general shareholder meeting.
• Principle 1.2. - Exercise of Shareholder Rights at General Shareholder Meetings: Companies should
recognize that general shareholder meetings are an opportunity for constructive dialogue with shareholders,
and should therefore take appropriate measures to ensure the exercise of shareholder rights at such meetings.
• Principle 1.3. - Basic Strategy for Capital Policy: Because capital policy may have a significant effect on
shareholder returns, companies should explain their basic strategy with respect to their capital policy.
• Principle 1.4. - Cross-Shareholdings: When companies hold shares of other listed companies as cross-
shareholdings, they should disclose their policy with respect to doing so, including their policies regarding the
reduction of cross-shareholdings. In addition, the board should annually assess whether or not to hold each
individual cross-shareholding, specifically examining whether the purpose is appropriate and whether the
benefits and risks from each holding cover the company’s cost of capital. The results of this assessment should
be disclosed. Companies should establish and disclose specific standards with respect to the voting rights as to
their cross-shareholdings, and vote in accordance with the standards.
• Principle 1.5. - Anti-Takeover Measures: Anti-takeover measures must not have any objective associated
with entrenchment of the management or the board. With respect to the adoption or implementation of
anti-takeover measures, the board and kansayaku3 should carefully examine their necessity and rationale in
light of their fiduciary responsibility to shareholders, ensure appropriate procedures, and provide sufficient
explanation to shareholders.
• Principle 1.6. - Capital Policy that May Harm Shareholder Interests: With respect to a company’s capital
policy that results in the change of control or in significant dilution, including share offerings and management
buyouts, the board and kansayaku should, in order not to unfairly harm the existing shareholders’ interests,
carefully examine the necessity and rationale from the perspective of their fiduciary responsibility to
shareholders, should ensure appropriate procedures, and provide sufficient explanation to shareholders.
282 Lesson 9 • PP-GRMCE

• Principle 1.7. - Related Party Transactions: When a company engages in transactions with its directors or
major shareholders (i.e., related party transactions), in order to ensure that such transactions do not harm the
interests of the company or the common interests of its shareholders and prevent any concerns with respect
to such harm, the board should establish appropriate procedures beforehand in proportion to the importance
and characteristics of the transaction. In addition to their use by the board in approving and monitoring such
transactions, these procedures should be disclosed.

Section 2: Appropriate Cooperation with Stakeholders Other Than Shareholders

General Principle 2:
Companies should fully recognize that their sustainable growth and the creation of mid- to long-term corporate value
are brought about as a result of the provision of resources and contributions made by a range of stakeholders, including
employees, customers, business partners, creditors and local communities. As such, companies should endeavor to
appropriately cooperate with these stakeholders. The board and the management should exercise their leadership
in establishing a corporate culture where the rights and positions of stakeholders are respected and sound business
ethics are ensured.
• Principle 2.1. - Business Principles as the Foundation of Corporate Value Creation: Over the Mid- to Long-
Term Guided by their position concerning social responsibility, companies should undertake their businesses
in order to create value for all stakeholders while increasing corporate value over the mid- to long-term. To this
end, companies should draft and maintain business principles that will become the basis for such activities.
• Principle 2.2. - Code of Conduct: Companies should draft and implement a code of conduct for employees
in order to express their values with respect to appropriate cooperation with and serving the interests of
stakeholders and carrying out sound and ethical business activities. The board should be responsible for
drafting and revising the code of conduct, and should ensure its compliance broadly across the organization,
including the front line of domestic and global operations.
• Principle 2.3.- Sustainability Issues, Including Social and Environmental Matters: Companies should
take appropriate measures to address sustainability issues, including social and environmental matters.
• Principle 2.4. Ensuring Diversity, Including Active Participation of Women: Companies should recognize
that the existence of diverse perspectives and values reflecting a variety of experiences, skills and characteristics
is a strength that supports their sustainable growth. As such, companies should promote diversity of personnel,
including the active participation of women.
• Principle 2.5. - Whistleblowing: Companies should establish an appropriate framework for whistleblowing
such that employees can report illegal or inappropriate behavior, disclosures, or any other serious concerns
without fear of suffering from disadvantageous treatment. Also, the framework should allow for an objective
assessment and appropriate response to the reported issues, and the board should be responsible for both
establishing this framework, and ensuring and monitoring its enforcement.
• Principle 2.6.- Roles of Corporate Pension Funds as Asset Owners: Because the management of corporate
pension funds impacts stable asset formation for employees and companies’ own financial standing, companies
should take and disclose measures to improve human resources and operational practices, such as the recruitment
or assignment of qualified persons, in order to increase the investment management expertise of corporate pension
funds (including stewardship activities such as monitoring the asset managers of corporate pension funds), thus
making sure that corporate pension funds perform their roles as asset owners. Companies should ensure that conflicts
of interest which could arise between pension fund beneficiaries and companies are appropriately managed.

Section 3: Ensuring Appropriate Information Disclosure and Transparency

General Principle 3
Companies should appropriately make information disclosure in compliance with the relevant laws and regulations,
but should also strive to actively provide information beyond that required by law. This includes both financial
information, such as financial standing and operating results, and non-financial information, such as business
strategies and business issues, risk and governance. The board should recognize that disclosed information will serve
as the basis for constructive dialogue with shareholders, and therefore ensure that such information, particularly
non-financial information, is accurate, clear and useful.
 Lesson 9 • Corporate Governance and Other Stakeholders 283

• Principle 3.1- Full Disclosure: In addition to making information disclosure in compliance with relevant
laws and regulations, companies should disclose and proactively provide the information listed below (along
with the disclosures specified by the principles of the Code) in order to enhance transparency and fairness in
decision-making and ensure effective corporate governance: i) Company objectives (e.g., business principles),
business strategies and business plans; ii) Basic views and guidelines on corporate governance based on each
of the principles of the Code; iii) Board policies and procedures in determining the remuneration of the senior
management and directors; iv) Board policies and procedures in the appointment/dismissal of the senior
management and the nomination of directors and kansayaku candidates; and v) Explanations with respect to
the individual appointments/dismissals and nominations based on iv).
• Principle 3.2. - External Auditors: External auditors and companies should recognize the responsibility
that external auditors owe toward shareholders and investors, and take appropriate steps to secure the proper
execution of audits.
Section 4: Responsibilities of the Board
General Principle 4:
Given its fiduciary responsibility and accountability to shareholders, in order to promote sustainable corporate growth
and the increase of corporate value over the mid to long-term and enhance earnings power and capital efficiency,
the board should appropriately fulfill its roles and responsibilities, including: (1) Setting the broad direction of
corporate strategy; (2) Establishing an environment where appropriate risk-taking by the senior management is
supported; and (3) Carrying out effective oversight of directors and the management (including shikkoyaku and
so-called shikkoyakuin ) from an independent and objective standpoint. Such roles and responsibilities should be
equally and appropriately fulfilled regardless of the form of corporate organization – i.e., Company with Kansayaku
Board (where a part of these roles and responsibilities are performed by kansayaku and the kansayaku board),
Company with Three Committees (Nomination, Audit and Remuneration) or Company with Supervisory Committee.
• Principle 4.1. - Roles and Responsibilities of the Board: The board should view the establishment of
corporate goals (business principles, etc.) and the setting of strategic direction as one major aspect of its roles
and responsibilities. It should engage in constructive discussion with respect to specific business strategies and
business plans, and ensure that major operational decisions are based on the company’s strategic direction.
• Principle 4.2 Roles and Responsibilities of the Board: The board should view the establishment of an
environment that supports appropriate risk-taking by the senior management as a major aspect of its roles and
responsibilities. It should welcome proposals from the management based on healthy entrepreneurship, fully
examine such proposals from an independent and objective standpoint with the aim of securing accountability,
and support timely and decisive decision-making by the senior management when approved plans are
implemented. Also, the remuneration of the management should include incentives such that it reflects mid-
to long-term business results and potential risks, as well as promotes healthy entrepreneurship.
• Principle 4.3 Roles and Responsibilities of the Board: The board should view the effective oversight of
the management and directors from an independent and objective standpoint as a major aspect of its roles
and responsibilities. It should appropriately evaluate company performance and reflect the evaluation in its
assessment of the senior management. In addition, the board should engage in oversight activities in order to
ensure timely and accurate information disclosure, and should establish appropriate internal control and risk
management systems. Also, the board should appropriately deal with any conflict of interests that may arise
between the company and its related parties, including the management and controlling shareholders.
• Principle 4.4. - Roles and Responsibilities of Kansayaku and the Kansayaku Board: Kansayaku and the
kansayaku board should bear in mind their fiduciary responsibilities to shareholders and make decisions from
an independent and objective standpoint when executing their roles and responsibilities including the audit
of the performance of directors’ duties, appointment and dismissal of external auditors and the determination
of auditor remuneration. Although so-called “defensive functions,” such as business and accounting audits, are
part of the roles and responsibilities expected of kansayaku and the kansayaku board, in order to fully perform
their duties, it would not be appropriate for kansayaku and the kansayaku board to interpret the scope of their
function too narrowly, and they should positively and proactively exercise their rights and express their views
at board meetings and to the management.
• Principle 4.5.- Fiduciary Responsibilities of Directors and Kansayaku: With due attention to their
fiduciary responsibilities to shareholders, the directors, kansayaku and the management of companies should
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secure the appropriate cooperation with stakeholders and act in the interest of the company and the common
interests of its shareholders.
• Principle 4.6. - Business Execution and Oversight of the Management: In order to ensure effective,
independent and objective oversight of the management by the board, companies should consider utilizing
directors who are neither involved in business execution nor have close ties with the management.
• Principle 4.7. - Roles and Responsibilities of Independent Directors: Companies should make effective
use of independent directors , taking into consideration the expectations listed below with respect to their
roles and responsibilities: i) Provision of advice on business policies and business improvement based on
their knowledge and experience with the aim to promote sustainable corporate growth and increase corporate
value over the mid- to long-term; ii) Monitoring of the management through important decision-making at
the board including the appointment and dismissal of the senior management; iii) Monitoring of conflicts
of interest between the company and the management or controlling shareholders; and iv) Appropriately
representing the views of minority shareholders and other stakeholders in the boardroom from a standpoint
independent of the management and controlling shareholders.
• Principle 4.8. - Effective Use of Independent Directors: Independent directors should fulfill their roles
and responsibilities with the aim of contributing to sustainable growth of companies and increasing corporate
value over the mid- to long-term. Companies should therefore appoint at least two independent directors that
sufficiently have such qualities. Irrespective of the above, if a company believes it needs to appoint at least
one-third of directors as independent directors based on a broad consideration of factors such as the industry,
company size, business characteristics, organizational structure and circumstances surrounding the company,
it should appoint a sufficient number of independent directors.
• Principle 4.9- Independence Standards and Qualification for Independent Directors: Boards should
establish and disclose independence standards aimed at securing effective independence of independent
directors, taking into consideration the independence criteria set by securities exchanges. The board should
endeavor to select independent director candidates who are expected to contribute to frank, active and
constructive discussions at board meetings. Also, in order to enhance board independence, there should be
an increase in the number of independent directors from at least 2 to at least ⅓ of the Board for Prime Market
listed companies as provided by the Guidelines. This also involves appointment of independent directors enough
to have them for majority of the Board or establish an independent social committee at Prime Market Listed
subsidiaries so as to cope with conflicts of interest between their parent company and minority shareholders.
• Principle 4.10. - Use of Optional Approach: In adopting the most appropriate organizational structure (as
stipulated by the Companies Act) that is suitable for a company’s specific characteristics, companies should
employ optional approaches, as necessary, to further enhance governance functions.
• Principle 4.11. - Preconditions for Board and Kansayaku Board Effectiveness: The board should be well
balanced in knowledge, experience and skills in order to fulfill its roles and responsibilities, and it should
be constituted in a manner to achieve both diversity, including gender and international experience, and
appropriate size. In addition, persons with appropriate experience and skills as well as necessary knowledge
on finance, accounting, and the law should be appointed as kansayaku. In particular, at least one person who
has sufficient expertise on finance and accounting should be appointed as kansayaku. The board should
endeavor to improve its function by analyzing and evaluating effectiveness of the board as a whole.
• Principle 4.12. - Active Board Deliberations: The board should endeavor to foster a climate where free, open and
constructive discussions and exchanges of views take place, including the raising of concerns by outside directors.
• Principle 4.13. - Information Gathering and Support Structure: In order to fulfill their roles and
responsibilities, directors and kansayaku should proactively collect information, and as necessary, request the
company to provide them with additional information. Also, companies should establish a support structure
for directors and kansayaku, including providing sufficient staff. The board and the kansayaku board should
verify whether information requested by directors and kansayaku is provided smoothly.
• Principle 4.14. - Director and Kansayaku Training: New and incumbent directors and kansayaku should deepen
their understanding of their roles and responsibilities as a critical governance body at a company, and should
endeavor to acquire and update necessary knowledge and skills. Accordingly, companies should provide and
arrange training opportunities suitable to each director and kansayaku along with financial support for associated
expenses. The board should verify whether such opportunities and support are appropriately provided.
 Lesson 9 • Corporate Governance and Other Stakeholders 285

Section 5: Dialogue with Shareholders

General Principle 5:
In order to contribute to sustainable growth and the increase of corporate value over the mid- to long-term,
companies should engage in constructive dialogue with shareholders even outside the general shareholder meeting.
During such dialogue, senior management and directors, including outside directors, should listen to the views of
shareholders and pay due attention to their interests and concerns, clearly explain business policies to shareholders
in an understandable manner so as to gain their support, and work for developing a balanced understanding of the
positions of shareholders and other stakeholders and acting accordingly.
• Principle 5.1. - Policy for Constructive Dialogue with Shareholders: Companies should, positively and
to the extent reasonable, respond to the requests from shareholders to engage in dialogue (management
meetings) so as to support sustainable growth and increase corporate value over the mid- to long-term. The
board should establish, approve and disclose policies concerning the measures and organizational structures
aimed at promoting constructive dialogue with shareholders.
• Principle 5.2. - Establishing and Disclosing Business Strategies and Business Plans: When establishing and
disclosing business strategies and business plans, companies should articulate their earnings plans and capital
policies, and present targets for profitability and capital efficiency after accurately identifying the company’s cost
of capital. Also, companies should provide explanations that are clear and logical to shareholders with respect to
the allocation of management resources, such as reviewing their business portfolio and investments in fixed assets,
R&D, and human resources, and specific measures that will be taken in order to achieve their plans and targets.

Under the Indian Companies Act, 2013

a) Section 135 - Corporate Social Responsibilities:
Every company having net worth of rupees five hundred crore or more, or turnover of rupees one thousand
crore or more or a net profit of rupees five crore or more during the immediate preceding financial year shall
constitute a Corporate Social Responsibility Committee of the Board consisting of three or more directors, out
of which at least one director shall be an independent director.
Provided that where a company is not required to appoint an independent director under sub-section (4) of
section 149, it shall have in its Corporate Social Responsibility Committee two or more directors.
Section 166 - Duties of Directors:
(1) Subject to the provisions of this Act, a director of a company shall act in accordance with the articles of
the company.
(2) A director of a company shall act in good faith in order to promote the objects of the company for the benefit
of its members as a whole, and in the best interests of the company, its employees, the shareholders, the
community and for the protection of environment.
(3) A director of a company shall exercise his duties with due and reasonable care, skill and diligence and
shall exercise independent judgment.
(4) A director of a company shall not involve in a situation in which he may have a direct or indirect interest
that conflicts, or possibly may conflict, with the interest of the company.
(5) A director of a company shall not achieve or attempt to achieve any undue gain or advantage either to
himself or to his relatives, partners, or associates and if such director is found guilty of making any undue
gain, he shall be liable to pay an amount equal to that gain to the company.
(6) A director of a company shall not assign his office and any assignment so made shall be void.
(7) If a director of the company contravenes the provisions of this section such director shall be punishable
with fine which shall not be less than one lakh rupees but which may extend to five lakh rupees.
b) Role and Functions of Independent Directors - Part II of Schedule IV Code of Independent Directors
With reference to the stakeholders’ interest, the role and functions of Independent Directors as specified in
Part II of Schedule IV mentions that the independent directors shall safeguard the interests of all stakeholders,
particularly the minority shareholders and balance the conflicting interest of the stakeholders.
286 Lesson 9 • PP-GRMCE

Part II of Schedule IV: II. Role and functions:

The independent directors shall:
1. help in bringing an independent judgment to bear on the Board’s deliberations especially on issues of
strategy, performance, risk management, resources, key appointments and standards of conduct;
2. bring an objective view in the evaluation of the performance of board and management;
3. scrutinise the performance of management in meeting agreed goals and objectives and monitor the
reporting of performance;
4. satisfy themselves on the integrity of financial information and that financial controls and the systems of risk
management are robust and defensible;
5. safeguard the interests of all stakeholders, particularly the minority shareholders;
6. balance the conflicting interest of the stakeholders;
7. determine appropriate levels of remuneration of executive directors, key managerial personnel and senior
management and have a prime role in appointing and where necessary recommend removal of executive
directors, key managerial personnel and senior management;
8. moderate and arbitrate in the interest of the company as a whole, in situations of conflict between
management and shareholder’s interest.

Part III of Schedule IV: III. Duties:

The independent directors shall –
1. undertake appropriate induction and regularly update and refresh their skills, knowledge and familiarity
with the company;
2. seek appropriate clarification or amplification of information and, where necessary, take and follow
appropriate professional advice and opinion of outside experts at the expense of the company;
3. strive to attend all meetings of the Board of Directors and of the Board committees of which he is a member;
4. participate constructively and actively in the committees of the Board in which they are chairpersons
or members;
5. strive to attend the general meetings of the company;
6. where they have concerns about the running of the company or a proposed action, ensure that these are
addressed by the Board and, to the extent that they are not resolved, insist that their concerns are recorded
in the minutes of the Board meeting;
7. keep themselves well informed about the company and the external environment in which it operates;
8. not to unfairly obstruct the functioning of an otherwise proper Board or committee of the Board;
9. pay sufficient attention and ensure that adequate deliberations are held before approving related party
transactions and assure themselves that the same are in the interest of the company;
10. ascertain and ensure that the company has an adequate and functional vigil mechanism and to ensure that the
interests of a person who uses such mechanism are not prejudicially affected on account of such use;
11. report concerns about unethical behaviour, actual or suspected fraud or violation of the company’s code of
conduct or ethics policy;
12. “act within their authority”, assist in protecting the legitimate interests of the company, shareholders and
its employees;
13. not disclose confidential information, including commercial secrets, technologies, advertising and sales
promotion plans, unpublished price sensitive information, unless such disclosure is expressly approved by
the Board or required by law.
 Lesson 9 • Corporate Governance and Other Stakeholders 287

Under the Principles articulated under SEBI (LODR) Regulations, 2015

Role of stakeholders in corporate governance:
As per Regulation 4(2)(d) of SEBI (LODR) Regulations, 2015 the listed entity should recognise the rights of
stakeholders and encourage co-operation between listed entity and the stakeholders in the following manner:-
i) The listed entity should respect the rights of stakeholders that are established by law or through mutual
agreements.
ii) Stakeholders should have the opportunity to obtain effective redress for violation of their rights.
iii) Stakeholders should have access to relevant, sufficient and reliable information on a timely and regular basis to
enable them to participate in Corporate Governance process.
iv) The listed entity should devise an effective vigil mechanism/whistle blower policy enabling stakeholders,
including individual employees and their representative bodies, to freely communicate their concerns about
illegal or unethical practices.

STAKEHOLDER ENGAGEMENT
Stakeholder engagement is the process by which an organisation involves people who may be affected by the
decisions it makes or can influence the implementation of its decisions. It is an alliance-building tool. Corporations
practice stakeholder engagement in an effort to understand the needs of their stakeholders, create partnerships
and to promote dialogue. Stakeholder engagement identifies stakeholders, assesses stakeholder needs, develops
stakeholder relations plans and forms alliances with stakeholders.
Stakeholder engagement leads to increased transparency, responsiveness, compliance, organizational learning,
quality management, accountability and sustainability. Stakeholder engagement is a central feature of sustainability
performance. Stakeholder engagement is undertaken for numerous reasons which include:
• Improved corporate responsibility and financial performance across the globe.
• To avoid conflict through negotiation, mediation and collaborative learning.
• Development of a shared vision to direct future business decisions and operations.
• To innovate through collaboration.

Stakeholder engagement involves following steps:

1. Identify stakeholder
2. Establish the goals and objectives of the company for engagement.
3. Identify stakeholder needs and interests.
4. Determine the stakeholder engagement strategy.
5. Evaluate outcomes and internalize learnings.
Corporations are often confronted with the difficulty of balancing competing or opposing stakeholder needs or
demands. The success of stakeholder engagement is initially dependent upon the quality of stakeholder analysis.

Key principles of Stakeholder engagement

• Communicate: Interactions from the various stakeholders should be promoted.

Example: for customers there should be dedicated customer care center. The
communication may be made through the print media elaborating about the progress
of the company, which is also a part of the transparency and disclosure. Ensure
intended message is understood and the desired response achieved.
• Consult, early and often: Always ask the right questions to get the useful information
and ideas. To engage their support, ask them for advice and listen how they feel.
288 Lesson 9 • PP-GRMCE

• Remember, they are human: Operate with an awareness of human feelings.

• Plan it: Time investment and careful planning against it, has a significant payoff.
• Relationship: Try to engender trust with the stakeholders. Seek out networking
opportunity.
• Simple but not easy: Show your care. Be empathetic. Listen to the stakeholders.
• Managing risk: Stakeholders can be treated as risk and opportunities that have
probabilities and impact.
• Compromise: Compromise across a set of stakeholders’ diverging priorities.
• Understand what success is: Explore the value of the project to the stakeholder.
• Take responsibility: Project governance is the key to project success. It’s always the
responsibility of everyone to maintain an ongoing dialogue with stakeholders.

Benefits: Stakeholder engagement provides opportunities to further align business practices with societal needs and
expectations, helping to drive long-term sustainability and shareholder value. Stakeholder engagement is intended
to help the practitioners fully realise the benefits of stakeholder engagement in their organization, to compete in
an increasingly complex and ever-changing business environment, while at the same time bringing about systemic
change towards sustainable development.

STAKEHOLDER ANALYSIS
Stakeholder analysis is the identification of a project’s/activity’s key stakeholders, an assessment of their interests,
and the ways in which these interests affect project riskiness and viability. It is linked to both institutional appraisal
and social analysis: drawing on the information deriving from these approaches, but also contributing to the
combining of such data in a single framework. Stakeholder analysis contributes to project design/activity design
through the logical framework, and by helping to identify appropriate forms of stakeholder participation. It is the
process of identifying the individuals or groups that are likely to affect or be affected by a proposed action, and
sorting them according to their impact on the action and the impact the action will have on them. This information
is used to assess how the interests of those stakeholders should be addressed in a project plan, policy, program, or
other action.
Stakeholder analysis is a key part of stakeholder management. A stakeholder Indian companies like
analysis of an issue consists of weighing and balancing all of the competing Infosys, Tata, Wipro, TCS
demands on a firm by each of those who have a claim on it, in order to arrive at and Reliance are some
the firm’s obligation in a particular case. A stakeholder analysis does not preclude global giants that keep their
the interests of the stakeholders overriding the interests of the other stakeholders flags to successfully fly
affected, but it ensures that all affected will be considered. high in the sky due to good
corporate governance.
Doing a stakeholder analysis can:
• draw out the interests of stakeholders in relation to the problems which the project is seeking to address (at the
identification stage) or the purpose of the project (once it has started)
• identify conflicts of interests between stakeholders
• help to identify relations between stakeholders which can be built upon, and may enable establish synergies
• help to assess the appropriate type of participation by different stakeholders.
The underlining factor in the stakeholder concept is that every activity of an organization should be based taking
into account the interests of all the stakeholders. A holistic approach ensuring fairness to all the stakeholders is
completely necessary for the sustainability of an enterprise.
A major reason for increasing adoption of a Stakeholder Concept in setting business objectives is the recognition
that businesses are affected by the “environment” in which they operate. Businesses come into regular contact with
customers, suppliers, government agencies, families of employees, special interest groups. Decisions made by a
business are likely to affect one or more of these “stakeholder groups”.
Lesson 9 • Corporate Governance and Other Stakeholders 289

The stakeholder concept suggests that the managers of a business should take into account their responsibilities to other
groups – “not just the shareholder group” - when making decisions. The concept suggests that businesses can benefit
significantly from cooperating with stakeholder groups, incorporating their needs in the decision-making process.
Stakeholder analysis helps with the identification of Stakeholders’ interests, Mechanisms to influence other
stakeholders, Potential risks, Key people to be informed about the project during the execution phase and Negative
stakeholders as well as their adverse effects on the project.

BETTER STAKEHOLDER ENGAGEMENT ENSURES GOOD GOVERNANCE

Stakeholders are characterized by their relationship to the company and their needs, interests and concerns, which
will be foremost in their minds at the start of an engagement process. However, as the process unfolds they will soon
take a particular role with related tasks and responsibilities. The following are just some of the different roles that
stakeholders can play:
• Experts, such as academics, who have been invited to contribute knowledge and strategic advice to the
company’s board;
• Technical advisors with expertise on the social and environmental risks associated with particular technological
and scientific developments invited to sit on scientific and ethical panels in science-based industries;
• Representatives of special interests, such as employees, local communities or the environment, commonly
invited to participate in stakeholder panels to review company performance and/or reporting practices;
• Co-implementers, such as NGOs, who have partnered with the company to implement a joint solution or
program to address a shared challenge.
Stakeholders can only be well informed and knowledgeable if companies are transparent and report on issues that
impact stakeholders. Both parties have an obligation to communicate sincerely and attempt to understand, not just
be understood.

TYPES OF STAKEHOLDERS
The concept of stakeholders may be classified into Primary and Secondary Stakeholders:
• Primary stakeholders are those whose continued association is absolutely necessary for a firm’s survival; these
include employees, customers, investors, and shareholders, as well as the governments and communities that
provide necessary infrastructure.
• Secondary stakeholders do not typically engage in transactions with a company and thus are not essential for
its survival; these include the media, trade associations, and special interest groups.
Both primary and secondary stakeholders embrace specific values and standards that dictate what constitutes
acceptable or unacceptable corporate behaviors. While primary groups may present more day-to- day concerns,
secondary groups cannot be ignored or given less consideration in the ethical decision- making process.

THE CAUX ROUND TABLE

The Caux Round Table (CRT) is an international network of business leaders working to promote a morally and
sustainable way of doing business. The CRT believes that its Principles for Responsible Business provide necessary
foundations for a fair, free and transparent global society.
The Caux Round Table was founded in1986 by Frits Philips Sr, former President of Philips Electronics, and Olivier
Giscard d’Estaing, former Vice-Chairman of INSEAD, as a means of reducing escalating international trade tensions
between Europe, Japan and the USA.
At the urging of Ryuzaburo Kaku, then Chairman of Canon, Inc, the CRT began to focus attention on the importance
of global corporate responsibility in reducing social and economic threats to world peace and stability. This led to
the development of the 1994 Caux Round Table Principles for Business around three ethical foundations, namely:
responsible stewardship; the Japanese concept of Kyosei - living and working for mutual advantage; and respecting
and protecting human dignity. These principles recognize that while laws and market forces are necessary, they are
insufficient guides for responsible business conduct.
The principles also have a risk management foundation - because good ethics is good risk management. And they
balance the interests of business with the aspirations of society to ensure sustainable and mutual prosperity for all.
290 Lesson 9 • PP-GRMCE

PRINCIPLE 1 - RESPECT STAKEHOLDERS BEYOND SHAREHOLDERS

• A responsible business acknowledges its duty to contribute value to society through the wealth and employment
it creates and the products and services it provides to consumers.
• A responsible business maintains its economic health and viability not just for shareholders, but also for other
stakeholders.
• A responsible business respects the interests of, and acts with honesty and fairness towards, its customers,
employees, suppliers, competitors, and the broader community.
PRINCIPLE 2 – CONTRIBUTE TO ECONOMIC, SOCIAL AND ENVIRONMENTAL DEVELOPMENT
• A responsible business recognizes that business cannot sustainably prosper in societies that are failing or
lacking in economic development.
• A responsible business therefore contributes to the economic, social and environmental development of
the communities in which it operates, in order to sustain its essential ‘operating’ capital – financial, social,
environmental, and all forms of goodwill.
• A responsible business enhances society through effective and prudent use of resources, free and fair
competition, and innovation in technology and business practices.
PRINCIPLE 3 – BUILD TRUST BY GOING BEYOND THE LETTER OF THE LAW
• A responsible business recognizes that some business behaviors, although legal, can nevertheless have adverse
consequences for stakeholders.
• A responsible business therefore adheres to the spirit and intent behind the law, as well as the letter of the law,
which requires conduct that goes beyond minimum legal obligations.
• A responsible business always operates with candor, truthfulness, and transparency, and keeps its
promises.
PRINCIPLE 4 –RESPECT RULES AND CONVENTIONS
• A responsible business respects the local cultures and traditions in the communities in which it operates,
consistent with fundamental principles of fairness and equality.
• A responsible business, everywhere it operates, respects all applicable national and international laws,
regulations and conventions, while trading fairly and competitively.
PRINCIPLE 5 – SUPPORT RESPONSIBLE GLOBALISATION
• A responsible business, as a participant in the global marketplace, supports open and fair multilateral trade.
• A responsible business supports reform of domestic rules and regulations where they unreasonably hinder
global commerce.

PRINCIPLE 6 – RESPECT THE ENVIRONMENT

• A responsible business protects and, where possible, improves the environment, and avoids wasteful use of
resources.
• A responsible business ensures that its operations comply with best environmental management practices
consistent with meeting the needs of today without compromising the needs of future generations.

PRINCIPLE 7 – AVOID ILLICIT ACTIVITIES

• A responsible business does not participate in, or condone, corrupt practices, bribery, money laundering, or
other illicit activities.
• A responsible business does not participate in or facilitate transactions linked to or supporting terrorist
activities, drug trafficking or any other illicit activity.
• A responsible business actively supports the reduction and prevention of all such illegal and illicit
activities.
 Lesson 9 • Corporate Governance and Other Stakeholders 291

CRT Stakeholder Management Guidelines

The Caux Round Table’s (CRT) Stakeholder Management Guidelines supplement the CRT Principles for
Responsible Business with more specific standards for engaging with key stakeholder constituencies.
The key stakeholder constituencies are those who contribute to the success and sustainability of business enterprise.
Customers provide cash flow by purchasing goods and services; employees produce the goods and services sold,
owners and other investors provide funds for the business; suppliers provide vital resources; competitors provide
efficient markets; communities provide social capital and operational security for the business; and the environment
provides natural resources and other essential conditions.
In turn, key stakeholders are dependent on business for their well-being and prosperity. They are the beneficiaries of
ethical business practices.

1. Customers
A responsible business treats its customers with respect and dignity. Business therefore has a responsibility to:
a) Provide customers with the highest quality products and services consistent with their requirements.
b) Treat customers fairly in all aspects of business transactions, including providing a high level of service
and remedies for product or service problems or dissatisfaction.
c) Ensure that the health and safety of customers is protected.
d) Protect customers from harmful environmental impacts of products and services.
e) Respect the human rights, dignity and the culture of customers in the way products and services are
offered, marketed, and advertised.

2. Employees
A responsible business treats every employee with dignity and respects their interests. Business therefore has
a responsibility to:
a) Provide jobs and compensation that contribute to improved living standards
b) Provide working conditions that protect each employee’s health and safety.
c) Provide working conditions that enhance each employee’s well-being as citizens, family members, and
capable and caring individuals
d) Be open and honest with employees in sharing information, limited only by legal and competitive constraints.
e) Listen to employees and act in good faith on employee complaints and issues.
f) Avoid discriminatory practices and provide equal treatment, opportunity and pay in areas such as
gender, age, race, and religion.
g) Support the employment of differently-abled people in places of work where they can be productive.
h) Encourage and assist all employees in developing relevant skills and knowledge.
i) Be sensitive to the impacts of unemployment and work with governments, employee groups and other
agencies in addressing any employee dislocations.
j) Ensure that all executive compensation and incentives further the achievement of long- term wealth
creation, reward prudent risk management, and discourage excessive risk taking.
k) Avoid illicit or abusive child labor practices.

3. Shareholders
A responsible business acts with care and loyalty towards its shareholders and in good faith for the best
interests of the corporation. Business therefore has a responsibility to:
a) Apply professional and diligent management in order to secure fair, sustainable and competitive returns
on shareholder investments.
292 Lesson 9 • PP-GRMCE

b) Disclose relevant information to shareholders, subject only to legal requirements and competitive
constraints.
c) Conserve, protect, and increase shareholder wealth.
d) Respect shareholder views, complaints, and formal resolutions.

4. Suppliers
A responsible business treats its suppliers and subcontractors with fairness, truthfulness and mutual respect.
Business therefore has a responsibility to:
a) Pursue fairness and truthfulness in supplier and subcontractor relationships, including pricing, licensing,
and payment in accordance with agreed terms of trade.
b) Ensure that business supplier and subcontractor activities are free from coercion and threats.
c) Foster long-term stability in the supplier relationships in return for value, quality, competitiveness and
reliability.
d) Share information with suppliers and integrate them into business planning.
e) Seek, encourage and prefer suppliers and subcontractors whose employment practices respect human
rights and dignity.
f) Seek, encourage and prefer suppliers and subcontractors whose environmental practices meet best
practice standards.

5. Competitors
A responsible business engages in fair competition which is a basic requirement for increasing the wealth
of nations and ultimately for making possible the just distribution of goods and services. Business therefore
has a responsibility to:
a) Foster open markets for trade and investment.
b) Promote competitive behavior that is socially and environmentally responsible and demonstrates
mutual respect among competitors.
c) Not participate in anti-competitive or collusive arrangements or tolerate questionable payments or
favors to secure competitive advantage.
d) Respect both tangible and intellectual property rights.
e) Refuse to acquire commercial information through dishonest or unethical means, such as industrial
espionage.

6. Communities
As a global corporate citizen, a responsible business actively contributes to good public policy and to human
rights in the communities in which it operates. Business therefore has a responsibility to:
a) Respect human rights and democratic institutions, and promote them wherever practicable.
b) Recognize government’s legitimate obligation to society at large and support public policies and
practices that promote social capital.
c) Promote harmonious relations between business and other segments of society.
d) Collaborate with community initiatives seeking to raise standards of health, education, workplace safety
and economic well-being.
e) Promote sustainable development in order to preserve and enhance the physical environment while
conserving the earth’s resources.
f) Support peace, security and the rule of law.
g) Respect social diversity including local cultures and minority communities.
 Lesson 9 • Corporate Governance and Other Stakeholders 293

h) Be a good corporate citizen through ongoing community investment and support for employee
participation in community and civic affairs.

THE CLARKSON PRINCIPLES OF STAKEHOLDER MANAGEMENT

The year after his retirement from the faculty of the University of Toronto in 1988, Max Clarkson (1922-1998)
founded the Centre for Corporate Social Performance and Ethics in the Faculty of Management, now the Clarkson
Centre for Business Ethics & Board Effectiveness, or CC(BE) 2 . Four conferences hosted by the Centre between 1993
and 1998 brought together management scholars to share ideas on stakeholder theory, an emerging field of study
examining the relationships and responsibilities of a corporation to employees, customers, suppliers, society, and
the environment. The Alfred P. Sloan Foundation funded the project, from which the Clarkson Principles emerged.
After an introduction to the stakeholder concept with comments on shareowners and the legal and moral duty of
managers, seven (7) principles of Stakeholder Management are set forth, each with a paragraph or two expanding
on its meaning. These principles represent an early stage general awareness of corporate governance concerns that
have been widely discussed in connection with the business scandals of 2002.
• Principle 1 : Managers should acknowledge and actively monitor the concerns of all legitimate stakeholders,
and should take their interests appropriately into account in decision-making and operations.
• Principle 2: Managers should listen to and openly communicate with stakeholders about their respective
concerns and contributions, and about the risks that they assume because of their involvement with the
corporation.
• Principle 3: Managers should adopt processes and modes of behavior that are sensitive to the concerns and
capabilities of each stakeholder constituency.
• Principle 4: Managers should recognize the interdependence of efforts and rewards among stakeholders, and
should attempt to achieve a fair distribution of the benefits and burdens of corporate activity among them,
taking into account their respective risks and vulnerabilities.
• Principle 5: Manages should work cooperatively with other entities, both public and private, to insure that risks
and harms arising from corporate activities are minimized and, where they cannot be avoided, appropriately
compensated.
• Principle 6: Managers should altogether avoid activities that might jeopardize inalienable human rights (e.g.,
the right to life) or give rise to risks which, if clearly understood, would be patently unacceptable to relevant
stakeholders.
• Principle 7: Managers should acknowledge the potential conflicts between (a) their own role as corporate
stakeholders, and (b) their legal and moral responsibilities for the interests of stakeholders, and should
address such conflicts through open communication, appropriate reporting and incentive systems, and, where
necessary, third party review.
In many ways, the Clarkson Principles are “meta-principles” that encourage management to embrace specific
stakeholder principles and then to implement them in accordance with the norms listed above. Their current use
seems largely hortatory, unlike principles or codes that call for formal adoption by managers or corporations.

GOVERNANCE PARADIGM AND VARIOUS STAKEHOLDERS

(a) Employees:
Earlier it was believed that shareholder’s primacy is supreme since they have contributed towards the capital
and it leaves out the role of employees. However with the growth, that capital alone cannot do miracle and
labour is also an equally important factor of the production.
Employee participation in corporate governance systems can be found in many countries and corporations
throughout the world. Following are the some important example for ensuring good governance by employees:
• Right to consultation - where employees must be consulted on certain management decisions. This
right increases transparency of management decisions and allows employee opinion to ameliorate the
asymmetry of information between management and the market.
294 Lesson 9 • PP-GRMCE

• Right to nominate/vote for supervisory board members - In many cases employee participation on
the board is mandated. This right creates a check and balance system between management and the
supervisory board, which in turn creates the perception of greater fairness.
• Compensation/privatization programs that make employees holders of shares, thereby empowering
employees to elect the board members, which, in turn holds management responsible.
• Participation in the capital: Employees may be partner in the capital contribution. They may be
given the shares under the ESOP scheme. This will create the belongingness of the ownership
concept among the employees meaning there by owner as well as employee. This will lead to the
Improved employee commitment and buy-in to management’s goals side by side the alignment of
interest between employees and shareholders. It may support the emergence of more transparent
and effective corporate governance.
• Profit sharing: The profit-sharing plans should be broad-based (all or most employees) rather
than for executives only. This can be done in a variety of ways like: Cash-based sharing of annual
profits, Deferred profit-sharing. The advantages of it are Encourage employee involvement, improve
motivation, Improve distribution of wealth and Wage flexibility can improve firm performance.
• Whistle Blower Policy: A whistle blower is the one who exposes wrongdoing, fraud, corruption or
mismanagement in an organization. A whistle blower is a person who publicly complains/discloses
the concealed misconduct on the part of an organization or body of people, usually from within that
same organisation. Whistle blower may be an employee, former employee, vendor, customer or other
stakeholder. Whistle blowers are important stakeholders as they can work as a tool for authorities to
get information of deviant behaviour or practices in organizations.
• The big question is that in an organization where although lots of people work, who will take chance
against the possible risk involved? Who would blow the whistle about the wrongdoing/malpractices
going on inside an organization? It’s not only about just raising alarm, it is more about impartiality
and courage to start with.
• Whistle blower needs protection against retaliation/misbehavior by superiors. At the corporate
level, the companies can provide protection to whistle blowers by establishing a well documented
“Whistle Blower Policy” and ensuring its effectiveness practically. Just making a documented policy
is not sufficient to develop confidence among the employees; examples should be set by taking action
against the wrongdoing reported.

(b) Customers:
The business activity runs around the customer. There is a maxim ‘Caveat Emptor’ means let the buyer
beware. However, to run the business in long term, the concept has to re-think else the competitor will
take advantage of it. Today the customer satisfaction is one of the most important aspects of firm’s
performance.
In today’s global environment, customers have innumerable choices. Therefore, corporations need to
establish a differentiation. The differentiation is established in terms of quality and price of the product or
service. Customers are also driving corporate to consider environmental factors in designing the products
and services.
Over and above this, the customers consider the reputation which a corporate builds. The trust and loyalty that
an organization earns is based on its successful delivery over a long period of time.
Governance plays a big role in improving the relation between the organization and the customer
(building customer trust and commitment) which eventually leads to better performance for the
organization especially if you take into consideration that the cost of new customer is five to six times
more than maintaining the current customer.

(c) Lenders:
Lenders normally are the banks and financial institutions. They provide the term loan as well as the working
capital. While giving the credit facilities to any concerns, apart from the financial strength, project viability,
Lesson 9 • Corporate Governance and Other Stakeholders 295

income generation of the organization, lenders also like to ensure about the other aspects like market
reputation, compliance culture prevailing in the organization and adherence to the ethical standards and
adoption of corporate governance practices
When a company borrows money, a loan contract typically includes covenants or promises made by its
management that either guide or limit its actions. If a borrower violates a covenant, the creditor can opt to
demand immediate repayment even though the borrower has not defaulted. Lending institutions many times
places its nominee as a director on the Board of borrowing companies.
Lenders may include covenants relating to environment and sustainability. The Equator Principles is a
risk management framework, adopted by financial institutions, for determining, assessing and managing
environmental and social risk in projects and is primarily intended to provide a minimum standard for due
diligence to support responsible risk decision-making.

(d) Vendors:
Vendors play a key role in the success of an organisation. The organisation which builds a mutually strong
relationship with its vendors improves its overall performance in the marketplace. The time, money and
energy used to nurture a positive vendor relationship cannot be measured directly against the company’s
bottom line. However, a well managed vendor relationship will result in increased customer satisfaction,
reduced costs, better quality, and better service from the vendor. It ultimately contributes toward the good
governance of an organisation. A proper systematic approach of vendor management will benefits all the
employees, organisation, customer and vendors.

(e) Government:
Government is the largest stakeholder. Government policy and the legal environment set the tone for the desired
corporate governance practices by the corporate sector. Government in any country plays a key role in setting
the mandatory limit and recognition of voluntary efforts of corporate sector. Since, it is a well maintained
proposition that you can’t legislate good behavior, therefore, the Government role is to differentiate between
the voluntary and mandatory measures becomes more important so that in regulatory role, it should not
burden the corporate sector with the legal compliances.
The government role is to provide an ease environment for the corporate sector as well as to take care of the
interest of other stakeholders. The government acts as a major player between the Corporate and Stakeholders
by facilitating both of them.
Further beyond the law, government may directly influence the corporate governance practices of the corporate
sector by providing voluntary measure and recognition in the respect of Corporate Governance measures.

(f) Society:
What society wants from good governance in the aggregate is maximum production of economic well-
being. This requires innovation and experimentation as well as it also requires control, probity, and risk
management to seize the activities involving hazard to the local community. Now a day’s Companies are
spending voluntarily for the social and community development which is well recognized by the society and
government as well.
Business was perceived to maximize profit by exploiting environmental and social systems. These
perceptions and attitude forced society to revalue their expectations from business. It was realized that
increased economic development at all costs would not be desirable. Only industrial development which
does not reduce the quality of life should be encouraged. Thus if businesses do not behave in a socially
responsible manner, their activities will have a negative impact on the society and the society will have
a negative impact. As a result of change in society’s attitude towards business, relations between society
and business firms first became strained, and this change triggered a sense of frustration for corporate
management in the early stage of this awareness.
In today’s globalised world, the Corporate sector is growing day by day which combines the economic value
creation and development of wealth for its stakeholders including society. Society being an important element
for a company can’t be ignored to be part of this development. The society provides the desired climate for
296 Lesson 9 • PP-GRMCE

successful operation of a company business. If society turns against the company, then business lose its faith
in the eyes of other stakeholders be it government or customer.
The good governed companies always value the society in which they operate their business. The companies
need to understand the expectation of society from them and should strive to give the maximum for the society
according to the need.
Society can ensure good governance of companies as they are one of the major stakeholders representing the
environmental and social concern apart from the government mandate to the companies.

CONCLUSION
Whose interest and for whose benefit the corporations are running? The answer to this question is certainly for
the Stakeholder (and not for shareholders alone). Every activity in the organization should be in the interest
of all the stakeholders since stakeholders provide resources that are more or less critical to a firm’s long-term
success.
Gone are the days when the fundamental purpose was to maximise corporate profit with a view to increasing
shareholder wealth. It has been now realised that the ‘modern corporation by its nature creates interdependencies with
a variety of groups with whom the corporation has a legitimate concern, such as employees, customers, suppliers
and members of the communities in which the corporation operates.

LESSON ROUND UP
• “Stakeholder Theory is an idea about how business really works. It says that for any business to be successful
it has to create value for customers, suppliers, employees, communities and financiers, shareholders, banks
and other people with the money.
• R. Edward Freeman defined Stakeholder Theory in broad definition of a stakeholder is any group or
individual which can affect or is affected by an organization.” Such a broad conception would include
suppliers, customers, stockholders, employees, the media, political action groups, communities, and
governments.
• A more narrow view of stakeholder would include employees, suppliers, customers, financial
institutions, and local communities where the corporation does its business. But in either case, the claims
on corporate conscience are considerably greater than the imperatives of maximizing financial return to
stockholders.
• Stakeholder engagement is the process by which an organisation involves people who may be affected by
the decisions it makes or can influence the implementation of its decisions.
• The concept of stakeholders may be classified into Primary and Secondary Stakeholders.
• The 2009 CRT Principles for Responsible Business comprise seven principles and more detailed Stakeholder
Management Guidelines covering each of the key stakeholder dimensions of ethical business practices:
customers, employees, shareholders, suppliers, competitors, and communities.
• The CRT Principles for Responsible Business are supported by more detailed Stakeholder Management
Guidelines covering each key dimension of business success: customers, employees, shareholders, suppliers,
competitors, and communities.
• Clarkson introduced seven Principles of Stakeholder Management.

GLOSSARY
Analytical This is a way of doing something that involves the use of logical reasoning.
Capitalism An economic system characterized by private or corporate ownership of capital goods, by
investments that are determined by private decision, and by prices, production, and the distribution
of goods that are determined mainly by competition in a free market.
Normative Relating to, or determining norms or standards / conforming to or based on norms.
Coexist To exist together or at the same time / to live in peace with each other especially as a matter of policy.
Lesson 9 • Corporate Governance and Other Stakeholders 297

TEST YOURSELF
(These are meant for recapitulation only. Answers to these questions are not to be submitted for evaluation)
1. Can you explain why the concept form shareholder to stakeholder changed and what are the benefits of it?
2. Can you define the stakeholder theory and its principles.
3. Narrate the national and international provisions pertaining to ‘Stakeholders’ as prescribed under the Code
of Corporate Governance.
4. Explain the recommendations of the Caux Round Table (CRT)?
5. Can you write brief notes on (i) Stakeholder Engagement (ii) Stakeholder Analysis

REFERENCE FOR FURTHER READING

• http://www.stakeholdermap.com/stakeholder-theory.htm
• http://lexicon.ft.com/Term?term=stakeholder-theory
• http://www.businessdictionary.com/definition/stakeholder-theory.html
• http://www.referenceforbusiness.com/encyclopedia/Sel-Str/Stakeholder-Theory.htm
• https://www.thehindubusinessline.com/opinion/columns/slate/all-you-wanted-to-know-about-proxy-
advisory- services/article9395194.ece
298 Lesson 9 • PP-GRMCE
Lesson 10 Governance and Compliance Risk

Key Concepts One Learning Objectives Regulatory Framework

Should Know
• Section 88 of the Companies
• Compliance Risk To understand the: Act, 2013
• Transparency • path of creating a • Section 92 of the Companies
corporate environment of Act, 2013
• Non-compliance
trust, transparency, and • Section 13 of Foreign Exchange
• Governance accountability. Management Act, 1999
• Risk-awareness • promotion of, increased • Section 21 of the Maternity
• Residual Risk investment, sustainable growth Benefit Act, 1961
and financial stability. • Section 22A of the Minimum
• Memorandum
• concept of compliance risk Wages Act, 1948
• Securities
and consequences of non- • Section 43A of the Competition
• Risk Assessment compliance. Act, 2002
• compliance risk management,
steps thereto and mitigation of
compliance risks.
• new developments in
Governance and Risk
Compliances (GRC).

Lesson Outline
• Introduction
• Regulatory Framework
• Compliance Risk
• Elements of effective compliance program
• Consequences/ Risks of Non-Compliance
• Compliance Risk Management
• Steps in Compliance Risk Management
• Compliance Risk Mitigation
• Essentials of a Successful Compliance-Risk Management Program
• New Developments- Governance and Risk Compliance (GRC)
• Conclusion
• LESSON ROUND-UP
• GLOSSARY
• TEST YOURSELF
300 Lesson 10 • PP-GRMCE

INTRODUCTION
“Governance is the culture, values, mission, structure, layers of policies, processes and measures by which
organizations are directed and controlled”.
Governance defines how the organization should perform, describing
Do you know the origin of the word through policies what is acceptable and unacceptable and compliance is
Governance ? the area responsible for inspecting and proving that they are adequately,
Governance is believed to have been being implemented and followed.
used since 15th century and its roots Governance is also responsible for risk and compliance oversight, as well
can be traced back to the Latin verb as evaluating performance against enterprise objectives. The board acts
“gubernare,” or more originally from as an active monitor for shareholders’ and stakeholders’ benefit, with the
the Greek word “kubernaein,” which goal of Board oversight to make management accountable, and thus more
means “to steer.” Governance is also effective.
believed to be an art of steering either
a government or any organisation.. Properly implemented compliance oversight is proactive and regularly
monitors and evaluates the organization’s Content Management System
with the emerging regulatory landscape. Accordingly, governance should be able to understand and foresee the
organization’s vulnerabilities and, hence make decisions to reduce them. Also, governance should distribute power
to provide insight and intelligence, at the right time, so that the right people in the management can make risk-aware
decisions in accordance with key business objectives. Risk-awareness is possible through the close proximity that
governance should have with risk management, which may provide very useful information in strategy setting and
decision making.
Governance needs to touch every part of the organization. It needs to be at the heart of corporate culture when in
today’s complex global ecosystems, risks are becoming more interconnected.
In the current globalised world, economies and business networks are so deeply interconnected that a single risk event
can cause widespread disruption. Risks themselves are becoming more interconnected. The World Economic Forum’s
report on the global top risks of 2021 analyses the risks from societal fracture, indicated through the continuing risks to
the human health and rising unemployment leading to social instability.. In 2020, the risk of a pandemic became reality.
As governments, businesses and societies grapple with COVID-19, societal cohesion became more important than ever.
Businesses risk a disorderly shakeout which can exclude large cohorts of workers and companies from the markets of
the future . Even regulatory enforcement risks are crossing boundaries, as is evident through corporations being fined
by cross-jurisdictional regulators. Today, compliance risks are not just compliance risks; they are also reputational
risks, strategic risks, and financial risks. It is crucial to understand these interconnections to build risk maturity.
With the advent of a younger workforce and technologies such as the cloud and mobility, the emphasis is on the
consumerisation. People want simple and contextual information and accessibility available to them anywhere,
anytime. Efficiency is also becoming important. Today, companies need to know less about what happened, and more
about what is happening, what is likely to happen, and what needs to be done – the possible scenarios, decisions, and
constraints. They also need to be able to tie all this information back to their core business performance.
Today, corporations and government agencies are facing an unprecedented wave of regulatory obligations and
increased penalties for non-compliance. The financial services sector, as an example, needs to comply with a myriad of
prudential regulations, RBI laws, AML compliances, consumer credit and protection laws to name a few. If companies
want to move up the risk maturity curve, they need to find ways of tying various Governance and Compliance elements
together with risks.
Compliance with law and regulation must be managed as an integral part of any corporate strategy. The board of directors
and management must recognize the scope and implications of laws and regulations that apply to the company. They
must establish a compliance management system as a supporting system of risk management system as it reduces
compliance risk to a great extent. To ensure an effective approach to compliance, the participation of senior management
in the development and maintenance of a compliance program is necessary. They should review the effectiveness of its
compliance management system at periodic intervals, so as to ensure that it remains updated and relevant in terms of
modifications/ changes in regulatory regime including acts, rules, regulations etc. and business environment.
Every organisation has a responsibility to identify existing and emerging legislation relevant to its business and ensure
that risks that may arise from the compliance requirements are well understood by the board and management. The
 Lesson 10 • Governance and Compliance Risk 301

risks that may stem from non-compliance with key legislative requirements can be very costly and damaging to an
organisation and the custodians of governance within the organisation.
The consequences of non-compliance range from penalties and fines, to imprisonment, withdrawal of licenses, lawsuits
and reputational risk which may individually and or collectively have a fundamental impact on the organisation’s
sustainability as a going concern; as well as the impact that a lack of good corporate governance at board and business
levels can have on the commercials of a business concern. The impact and probability of the risks that the legislation
represents depend on the attention paid to the legislation and how well risk and compliance management is entrenched
within the organisation. It is therefore critical that an organisation implements relevant structures and processes to
effectively manage and monitor the compliance process to ensure that these are entrenched in a way that compliance
becomes “second nature”. The residual risk will also be high until the organisation is able to implement measures or
controls that effectively mitigate the new risks arising out of compliance requirements for the new legislation.

Compliance
Compliance, in general, is a term used to describe the process through which businesses showcase that they have
conformed to the requirements in contracts, regulations, policies and laws. Such adherence not only includes the
state laws, but also internal policies and procedures. By enforcing compliance, the company can prevent and detect
violations of the rules which subsequently protects the organization as a whole from the fines and the lawsuits.
Sometimes, it is very challenging to follow each law and act according to it but not obeying to these laws may also
result in missing various opportunities that come along. For examples- compliance include obtaining a business
license and paying taxes on time. Organisations are not only required to obey the external laws and rules but also
it should follow internally designed business policies for the betterment of the organisation. Requirement for
compliance increases with as the organisation grow. So, the businesses should also keep changing compliance
procedures along with the changes in the external and internal environments. This will help the organisation in
growing smoothly without any intervention from regulatory authorities. Requirement to obey legal laws and follow
company policies may vary from business to business. Following and acting responsibly in the legal and ethical
environment can add value to the organization and which in turn will save a lot of time, effort and cost.

Compliance Obligations

Compliance obligations include other interested party requirements related to the Management System which the
organization has to or chooses to adopt. These can include, if applicable:
• agreements with community groups or non-governmental organizations;
• agreements with public authorities or customers;
• organizational requirements;
• voluntary principles or codes of practice;
• obligations arising under contractual arrangements with the organization;
• relevant organizational or industry standards.
Compliance obligations may be mandatory (eg. Acts and Regulations), or voluntary (eg. contractual relationships,
codes of practice and agreements and even expectations of third parties). Voluntary undertakings become
compliance obligations once an organization decides to adopt them. The revised standards require the organization
to take a high-level look at their “compliance obligations”, which include both regulatory requirements and
voluntary commitments. The organization must determine the risks and opportunities associated with compliance
obligations.

Need for compliance

A timely compliance with all the relevant laws, regulations and policies can benefit the organizations by keeping
things running smoothly, reducing fines & penalties and also maintaining its position in the industry. Some of the
benefits are :
• Higher Employee retention : Employees have a tendency to switch the workplace if they find any complaints
or issues working in the present environment. With an effective internal compliance where there is safety,
302 Lesson 10 • PP-GRMCE

employee benefits and compensations, a positive work environment is developed. This positive work
environment attracts the employees to work and add to the value of the business.
• Reduced legal charges : No business wants to suffer the results of not complying with various laws and
legislations. Complying with those laws will decrease the risk of fines, penalties, lawsuits or also shutdown
of the business. There are so many regulations related to how employees should be managed, how products
should be manufactured, how buying and selling should be done, how the business should contribute to the
society, etc. Obeying them all is the great challenge but if achieved, reward is reduced fines or penalties and
greater market share.
• Competitive advantage to the businesses : The business which follows all the rules and regulations and also
has strict internal policies have a competitive advantage over those businesses which have not complied with
the requirements timely. Government authorities, stakeholders, employees and customers are attracted to such
businesses which strictly follow the compliance and prevent any kind of improper and unethical behaviour.
• Better public relations : The success of the business depends a lot on its public image. When an organisation
starts facing court cases or any government interventions, the market or customers start losing trust in it
and this will lead to a negative financial impact. Compliance will ensure that a company maintains its public
relations and holds a positive image.

Types of compliances
Compliance is of two types:
1. External Compliance External Compliance refers to following the rules, laws and standards set by the
governmental authorities to avoid any negative impact on the goodwill of the organization. These laws are made
to help an organisation build public relations, trust and bring transparency to the business it does. Complying
with all the laws ensures any unnecessary duplication of efforts of resources. Some of the broadheads can be
categorized as follows:

Company Law Labour Law

External
Complince
Tax Law Environment Law

2. Internal Compliance : Internal compliance refers to internally designed set of rules and regulations which the
owners, employees, traders, customers follow to maintain the quality of the services or products provided by
the organisation. An organisation will comply with external requirements only when it is working in line with
the internal rules and regulations. Some of the broad heads can be categorized as below:

Preventive
Polices

Example
An example to internal compliance is when the accounts
departments follows the company’s policy and reconcilies
Internal cash and bank accounts at the end of every month and
Complince reports to the internal auditor. An example to external
compliance is when statutory audit of the company is
Corrective Detective done by the due date provided by the Companies Act.
Procedures Controls
 Lesson 10 • Governance and Compliance Risk 303

COMPLIANCE RISK
It is exposure to legal penalties, financial forfeiture and material loss
an organization faces when it fails to act in accordance with industry The Basel Committee
laws and regulations, internal policies or prescribed best practices. It was initially named the Committee on
Compliance risk is also sometimes known as integrity risk. Many Banking Regulations and Supervisory
compliance regulations are enacted to ensure that organizations operate Practices - was established by the
fairly and ethically. For that reason, compliance risk is also known as central bank Governors of the Group
integrity risk. of Ten countries at the end of 1974 in
The Basel Committee on Banking Supervision is the primary global the aftermath of serious disturbances
standard setter for the prudential regulation of banks and provides in international currency and banking
a forum for regular cooperation on banking supervisory matters. Its markets (notably the failure of
paper on ‘Compliance and the compliance function in banks’ defined the Bankhaus Herstatt in West Germany)
“compliance risk” as the risk of legal or regulatory sanctions, material
financial loss, or loss to reputation a bank may suffer as a result of its failure to comply with laws, regulations, rules,
related self- regulatory organisation standards, and codes of conduct applicable to its banking activities
This risk is closely interconnected with the operational risk, legal and reputation, so that from one follows the other.

C
Operational Example: This product does not comply O
M
P
R
L
Legal I
Refunding request I
S
A
K
N
Reputation Loss of customers C
E

Compliance risk is the threat posed to a company’s earnings or capital as a result of violation or nonconformance
with laws, regulations, or prescribed practices. Companies that fail to comply with the necessary standards may be
subjected to fines, payment of damages, and voided contracts. This, in turn, can lead to diminished reputation and
limited business opportunities as the company finds its franchises reduced in value and its potential for expansion
curtailed and thus it also poses an Integrity Risk. In extreme cases, the company may find it is no longer capable of
enforcing its contracts. Compliance should be part of the culture of the organisation, it is not just the responsibility
of specialist compliance staff.
Compliance risk management, is a subset of compliance management, and it involves identifying, assessing, and
monitoring the risks to your enterprise’s compliance with regulations and industry standards, putting internal
controls in place to ensure that you are compliant, and monitoring those controls to be sure that they’re effective on
an ongoing basis.

ELEMENTS OF EFFECTIVE COMPLIANCE PROGRAM

According to the U.S. Federal Sentencing Guidelines §8B2.1(a)(2), in order to have an effective compliance program,
an organization must establish and maintain an organizational culture that “encourages ethical conduct and a
commitment to compliance with the law.”

The elements of an Effective Compliance Program may be listed as under:

1. High level company personnel who exercise effective oversight : The organization’s governing body should
be knowledgeable about the effective compliance program and should have oversight of it. The governing body
304 Lesson 10 • PP-GRMCE

should have the overall responsibility for the compliance program and shall ensure the effectiveness of it.
Specific individuals shall have overall responsibility for the day to day operations of the compliance program.
A Compliance Officer shall be designated by the organization’s governing body, who shall periodically report
to the higher level management/ governing body. The Compliance Officer should be given adequate resources
with appropriate authority and direct access to the governing body.

2. Written policies and procedures : The employees of the organization should be made known the legal
requirements so that employees understand their obligations. The employees should be encouraged to report
suspected fraud and other irregularities without fear.

3. Training and education : The employees of the organization should be provided reasonable training to
understand the organization’s compliance program and its policies and process.

4. Lines of communication : Information about the compliance program must be widely communicated at all
levels of an organization. To enhance the effectiveness of the compliance program, the program must establish
lines of communication, whereby employees and agents may seek guidance and report their concerns,
including the opportunity to report anonymously (such as a compliance hotline); there are assurances that
there will be no retaliation for good faith reporting.

5. Standards enforced through well-publicized disciplinary guidelines : The organization’s compliance and ethics
program should be promoted and enforced consistently through well-publicized guidelines that provide incentives
to support the compliance and ethics program and at the same time provides disciplinary measures for disobeying
the law, the organization’s policies, or the requirements of the compliance and ethics program.

6. Internal compliance monitoring : The organization shall take reasonable steps, including monitoring and auditing,
to, ensure that the organization’s compliance and ethics program is followed diligently and its effective compliance
must be evaluated periodically..

7. Response to detected offenses and corrective action plans : After monitoring and auditing of the compliance
program, the organization shall take reasonable steps to, respond appropriately to any violations of the law or
policies, to prevent future misconduct; and modify or improve its program if required at any stage.

Regulatory Technology (RegTech)

The Financial Service sector has long been brimming with regulations. In an attempt to reduce the vast and
ever-increasing burden of these regulatory terms, financial institutions are starting to turn to new technology
solutions. Around the world, regulatory changes in the financial sector is increasing at a staggering rate.
Coping with the sheer volume of new regulatory changes imposes high complexity and stringent timelines
upon financial institutions. Over the past decade, regulators have asked financial institutions to undertake
several modernisations on their businesses and many of the organisations have struggled with regulatory-
driven transformations. Regulatory Technology (RegTech) established a solid foundation within the FinTech
(Financial Technology) ecosystem to overcome this and come up with solutions that are targeted to new and
complex regulations, litigation and regulatory remediation areas faced by financial institutions (FI), combined
with overall reduction in cost compliance. RegTech is a platform that combines regulations with technology.
These are technologies created to facilitate compliance with increasingly complex regulations and serve users
in-process monitoring.

Areas of intervention and potential benefits

A successful RegTech strategy extends to engagement with other institutions and
regulators to test and scale solutions faster with reduced cost and risk. For example, the
development of shared testing facilities for solutions using machine learning to automate
the management of regulation impact and change. RegTech will help financial institutions
to co-create and scale solutions rapidly in partnership with financial institutions and
FinTechs.
 Lesson 10 • Governance and Compliance Risk 305

Technologies supporting RegTech solutions

It is important to develop robust FinTech solutions with RegTech innovation for a sustainable financial products
with security Automation of Regulatory Process. Major technologies supporting RegTech companies are:

Artificial
Intelligence

Cloud
Block Chain
computing

Application
Big Data
Programming RegTech
Interface (API)

Data mining and Machine

analytics learning

Virtualisation

Financial Institutions are complex legal entity structures, with various business models, metrics and risks. RegTech
enables Financial Institutions to internal control and accountability for risk data, compliance assessment, analysis
and effective policy and procedure management. The various advantages of RegTech Companies are:
• Remain complaint with regulations
• Simplifies data management
• Real time reporting
• Data analytics and decision making
• Regulation reframing and implementing new governances
• Fraud and risk management
• Reducing time needed for client onboarding
• Identifying the frauds
• Adapting to new regulations faster
• Improve data collection and data analytics
306 Lesson 10 • PP-GRMCE

CONSEQUENCES/ RISKS OF NON-COMPLIANCE

Failing to comply with rules, regulations, and specifications could have costly consequences. In the famous Sahara
case, the Group was accused of failing to refund over 200 billion rupees to its more than 30 million small investors
that it had collected through two unlisted companies of Sahara. In 2011, SEBI ordered Sahara to refund this amount
with interest to the investors, as the issue was not in compliance with the requirements applicable to the public
offerings of securities. Later in 2014, Mr. Subrata Roy, the chairman of Sahara was arrested for the said fraud. His
proposal to settle the matter was rejected by the court and the SEBI.

Consequences:
• Supreme Court directed SHICL to refund over Rs. 40,000 crore to its investors.
• Subrata Roy arrested by Uttar Pradesh police for failure to appear before the Supreme Court
• SEBI cancelled the licence of Sahara’s mutual fund business

Penalties
and Fines

Roadblock Criminal
in Charges
Funding

Risks of
Non
compliance

Access to
Markets and Reputational
Product Delays Damage

Thus, non-compliance with the laws of the land can have multi-faceted consequences, ranging from penalties,
additional fines to prosecution. Following are some of the risk of non-compliance:
1) Penalties and Fines: Penalties include financial fines, limitations on activities, additional barriers to approval
and even imprisonment. Even if the organization, sometimes, is not given an actual penalty, an investigation by
a government body costs many hours of work and costs in form of potential legal and contractor fees. Penalties
for non-compliance can lead to the organization’s loss of reputation and business opportunities, as well as the
devaluation of its franchises. Below are a few examples of penalties imposed under the laws and regulations
in India-

� Under the Companies Act, 2013:

• Memorandum- Section 4(5)(ii)(a): Where after reservation of name under clause (i), it is found that
name was applied by furnishing wrong or incorrect information, then,— (a) if the company has not
been incorporated, the reserved name shall be cancelled and the person making applicationunder
sub-section (4) shall be liable to a penalty which may extend to one lakh rupees, to ensure that
companies furnish true information and frauds can be avoided.
• Registered Office of the Company - Section 12(8): If any default is made in complying with the
requirements of this section, the company and every officer who is in default shall be liable to a
penalty of one thousand rupees for every day during which the default continues but not exceeding
Lesson 10 • Governance and Compliance Risk 307

one lakh rupees. Further as per sub-section (9) the registrar may cause a physical verification of
the registered office of the company, in case of reasonable doubts and in case any default is found,
he may proceed to initiate action for the removal of the name of the company from the register of
companies.
• Alteration of memorandum or articles to be noted in every copy – Section 15(2): If a company
makes any default in complying with the provisions of sub-section (1), the company and every
officer who is in default shall be liable to a penalty of one thousand rupees for every copy of the
memorandum or articles issued without such alteration.
• Copies of memorandum, articles etc to be given to members-Section 17(2): If a company
makes any default in complying with the provisions of this section, the company and every officer
of the company who is in default shall be liable for each default, to a penalty of one thousand rupees
for each day during which such default continues or one lakh rupees, whichever is less.
• Issue of application forms for securities – Section 33(3): If a company makes any default in
complying with the provisions of this section, it shall be liable to a penalty of fifty thousand rupees
for each default.
• Allotment of securities by company – Section 39(5): In case of any default under sub-section
(3) or sub-section (4), the company and its officer who is in default shall be liable to a penalty, for
each default, of one thousand rupees for each day during which such default continues or one lakh
rupees, whichever is less.
• Offer or invitation of subscription of securities on private placement – Section 42(10): If
a company makes an offer or accepts monies in contravention of this section, the company, its
promoters and directors shall be liable for a penalty which may extend to the amount raised
through the private placement or two crore rupees, whichever is lower, and the company shall also
refund all monies with interest as specified in sub-section (6) to subscribers within a period of
thirty days of the order imposing the penalty.
• Publication of authorised, subscribed and paid-up capital – Section 60(2): If any default is
made in complying with the requirements of sub-section (1), the company shall be liable to pay a
penalty of ten thousand rupees and every officer of the company who is in default shall be liable to
pay a penalty of five thousand rupees, for each default.
• Register of Members, etc. As per section 88(5) of the Companies Act, 2013, If a company does not
maintain a register of members or debenture-holders or other security holders or fails to maintain
them in accordance with the provisions of sub-section (1) or sub-section (2), the company shall be
liable to a penalty of three lakh rupees and every officer of the company who is in default shall be
liable to a penalty of fifty thousand rupees.
• Power to close register of members or debenture-holders or other security holders-
Section91(2): If the register of members or of debenture-holders or of other security holders is
closed without giving the notice as provided in sub-section (1), or after giving shorter notice than
that so provided, or for a continuous or an aggregate period in excess of the limits specified in that
sub- section, the company and every officer of the company who is in default shall be liable to a
penalty of five thousand rupees for every day subject to a maximum of one lakh rupees during
which the register is kept closed.
• Annual Return- Section 92(5): If any company fails to file its annual return under sub-section
(4), before the expiry of the period specified therein, such company and its every officer who is in
default shall be liable to a penalty of ten thousand rupees and in case of continuing failure, with
further penalty of one hundred rupees for each day during which such failure continues, subject to
a maximum of two lakh rupees in case of a company and fifty thousand rupees in case of an officer
who is in default.
• Annual Return- Section 92(6): If a company secretary in practice certifies the annual return
otherwise than in conformity with the requirements of this section or the rules made thereunder,
he shall be liable to a penalty of two lakh rupees.
308 Lesson 10 • PP-GRMCE

• Place of keeping and inspection of registers, returns, etc. – section 94(4): If any inspection or
the making of any extract or copy required under this section is refused, the company and every
officer of the company who is in default shall be liable, for each such default, to a penalty of one
thousand rupees for every day subject to a maximum of one lakh rupees during which the refusal
or default continues.
• Circulation of members‘ resolution – Section 111(5): If any default is made in complying with
the provisions of this section, the company and every officer of the company who is in default shall
be liable to a penalty of twenty-five thousand rupees.
• Minutes of proceedings of general meeting, meeting of Board of Directors and other meeting
and resolutions passed by postal ballot – Section 118(11): If any default is made in complying
with the provisions of this section in respect of any meeting, the company shall be liable to a penalty
of twenty-five thousand rupees and every officer of the company who is in default shall be liable to
a penalty of five thousand rupees.
• Inspectionofminute-booksofgeneralmeeting–Section119(3):Ifanyinspectionundersub-section(1)
is refused, or if any copy required under sub-section (2) is not furnished within the time specified
therein, the company shall be liable to a penalty of twenty-five thousand rupees and every officer
of the company who is in default shall be liable to a penalty of five thousand rupees for each such
refusal or default, as the case may be.
• Financial Statement, Board’s Report, etc.- Section 134(8): If a company is in default in complying
with the provisions of this section, the company shall be liable to a penalty of three lakh rupees and
every officer of the company who is in default shall be liable to a penalty of fifty thousand rupees.
• Right of member to copies of audited financial statement – Section 136(3): If any default is
made in complying with the provisions of this section, the company shall be liable to a penalty of
twenty-five thousand rupees and every officer of the company who is in default shall be liable to a
penalty of five thousand rupees.
• Meetings of Board-Section 173(4): Every officer of the company whose duty is to give notice
under this section and who fails to do so shall be liable to a penalty of twenty-five thousand rupees.
• Register of contracts or arrangements in which directors are interested-Section 189(6):
Every director who fails to comply with the provisions of this section and the rules made thereunder
shall be liable to a penalty of twenty-five thousand rupees.
• Contract of employment with managing or whole-time directors-Section 190(3): If any
default is made in complying with the provisions of sub-section (1) or sub-section (2), the company
shall be liable to a penalty of twenty-five thousand rupees and every officer of the company who is
in default shall be liable to a penalty of five thousand rupees for each default.
• Penalty for furnishing false statement, mutilation, destruction of documents – Section (229):
Where a person who is required to provide an explanation or make a statement during the course
of inspection, inquiry or investigation, or an officer or other employee of a company or other body
corporate which is also under investigation, – (a) destroys, mutilates or falsifies, or conceals or
tampers or unauthorisedly removes, or is a party to the destruction, mutilation or falsification or
concealment or tampering or unauthorised removal of, documents relating to the property, assets
or affairs of the company or the body corporate; (b) makes, or is a party to the making of, a false
entry in any document concerning the company or body corporate; or (c) provides an explanation
which is false or which he knows to be false, he shall be punishable for fraud in the manner as
provided in section 447.
• Penalty for frauds by officers- Section 337: If any person, being at the time of the commission of
the alleged offence an officer of a company which is subsequently ordered to be wound up by the
Tribunal under this Act,– (a) has, by false pretences or by means of any other fraud, induced any
person to give credit to the company; (b) with intent to defraud creditors of the company or any
other person, has made or caused to be made any gift or transfer of, or charge on, or has caused or
connived at the levying of any execution against, the property of the company; or (c) with intent to
Lesson 10 • Governance and Compliance Risk 309

defraud creditors of the company, has concealed or removed any part of the property of the company
since the date of any unsatisfied judgment or order for payment of money obtained against the
company or within two months before that date, he shall be punishable with imprisonment for a
term which shall not be less than one year but which may extend to three years and with fine which
shall not be less than one lakh rupees but which may extend to three lakh rupees.
• Fee for filing, etc.- Section 403(2): Where a company fails or commits any default to submit, file,
register or record any document, fact or information under sub-section (1) before the expiry of the
period specified in the relevant section, the company and the officers of the company who are in
default, shall, without prejudice to the liability for the payment of fee and additional fee, be liable
for the penalty or punishment provided under this Act for such failure or default
• Punishment where no specific penalty or punishment is provided – Section 450: If a company
or any officer of a company or any other person contravenes any of the provisions of this Act or
the rules made thereunder, or any condition, limitation or restriction subject to which any approval,
sanction, consent, confirmation, recognition, direction or exemption in relation to any matter has
been accorded, given or granted, and for which no penalty or punishment is provided elsewhere in
this Act, the company and every officer of the company who is in default or such other person shall
be liable to a penalty of ten thousand rupees, and in case of continuing contravention, with a further
penalty of one thousand rupees for each day after the first during which the contravention continues,
subject to a maximum of two lakh rupees in case of a company and fifty thousand rupees in case of an
officer who is in default or any other person.
• Adjudication of penalties-Section 454:
(1) The Central Government may, by an order published in the Official Gazette, appoint as many
officers of the Central Government, not below the rank of Registrar, as adjudicating officers
for adjudging penalty under the provisions of this Act in the manner as prescribed in Rule 3
of The Companies (Adjudication of Penalties) Rules, 2014.
(2) The adjudicating officer may, by an order-
(a) impose the penalty on the company, the officer who is in default, or any other person,
as the case may be, stating therein any non-compliance or default under the relevant
provisions of this Act; and
(b) direct such company, or officer who is in default, or any other person, as the case may
be, to rectify the default, wherever he considers fit.
• Adjudication of penalties-Section 454(8)(i): Where company fails to comply with the order
made under sub-section (3) or sub-section (7), as the case may be, within a period of ninety days
from the date of the receipt of the copy of the order, the company shall be punishable with fine
which shall not be less than twenty five thousand rupees but which may extend to five lakh rupees
(ii)Where an officer of a company or any other person who is in default fails to comply with the
order made under sub-section (3) or sub-section (7), as the case may be within a period of ninety
days from the date of the receipt of the copy of the order, such officer shall be punishable with
imprisonment which may extend to six months or with fine which shall not be less than twenty-five
thousand rupees but which may extend to one lakh rupees, or with both.
� Section 13(1) of the Foreign Exchange Management Act 1999 imposes a penalty on every person
who contravenes any provision of this Act, or contravenes any rule, regulation, notification, direction
or order issued in exercise of the powers under this Act, or contravenes any condition subject to which
an authorisation is issued by the Reserve Bank. The said penalty can equal up to three times the sum
involved in such contravention where the amount is quantifiable, or up to two lakh rupees where the
amount is not quantifiable. Where such contravention continues, further penalties can be levied of up to
five thousand rupees for each day after the first day during which the contravention continues.
(1A) If any person is found to have acquired any foreign exchange, foreign security or immovable property,
situated outside India, of the aggregate value exceeding the threshold prescribed under the proviso to
sub-section (1) of section 37A, he shall be liable to a penalty up to three times the sum involved in such
310 Lesson 10 • PP-GRMCE

contravention and confiscation of the value equivalent, situated in India, the Foreign exchange, foreign
security or immovable property
� Section 21 of the Maternity Benefit Act 1961 states that every employer who does not comply with the
provisions of the Act shall be punishable with imprisonment of up to three months which may extend up
to one year and with a fine which shall not be less than 2000 rupees but which may extend up to 5000
rupees.
� Section 22A of the Minimum Wages Act 1948 imposes a penalty on every employer who contravenes
any provision of this Act or any rule or order made thereunder with a fine of up to 500 rupees.
� Section 43A of the Competition Act 2002 imposes penalties on any person or enterprise who fails to
give notice to the commission with respect to forming a combination. The penalty imposed may extend
to one per cent of either the total turnover or the assets, whichever is the higher amount.
� Penalty for non- filing of Income Tax Return attracts interest u/s 234A of the Income Tax Act,
1961 and i.e. if the assessee fails to file its income tax return within the time prescribed by section 139,
the he shall be liable to pay interest @ 1% per month or part of the month from the due date of filing of
return to the actual date of filing of its return. A further penalty can be levied up to Rs. 5,000 for non-filing
of tax returns us 271F.
� Additional fee is leviable for Non-filing of Annual RoC forms as per specified MCA slabs, which may extend
upto 12 times of original fees. Apart from this, provisions for striking off the company and prosecution
are also present.
2) Criminal Charges: Criminal charges are a potential consequence for certain regulatory non-compliance.
Failure to comply in areas pertaining to staff management, workplace safety, marketing, supply chain, corporate
governance, stock management and due diligence laws could result in jail time for director or board member or
other officials.
Criminal Liability for Mis-statements in Prospectus: In terms of section 34 of the Companies Act, 2013,
where a prospectus, issued, circulated or distributed under Chapter III , includes any statement which is untrue
or misleading in form or context in which it is included or where any inclusion or omission of any matter is
likely to mislead, every person who authorizes the issue of such prospectus shall be liable under section 447.
Search and Seizure- Section 209(3) : The provisions of the Code of Criminal Procedure, 1973 relating to
searches or seizures shall apply, mutatis mutandis, to every search and seizure made under this section.
Investigation into affairs of Company by Serious Fraud Investigation Office – Section 212(6):
Notwithstanding anything contained in the Code of Criminal Procedure, 1973, offence covered under section
447 of this Act shall be cognizable and no person accused of any offence under those sections shall be released
on bails or on his own bond unless (i) the Public Prosecutor has been given opportunity to oppose the
application for such release; and (ii) where the Public Prosecutor opposes the application, the court is satisfied
that there are reasonable grounds for believing that he is not guilty of such offence and that he is not likely to
commit any offence while on bail.
3) Reputational Damage: A business’ public image is a key to its success. When a company is thrust into the
public eye for failing to comply with regulations, there are reputational repercussions, which eventually lead
to distrust. Once that happens, loyal customers may leave, new customers may be put off and potentially
beneficial partnerships may never develop.
Today because of the increased awareness and focus on good governance practices, all the stakeholders want
to do business with companies practicing legally and ethically. Compliance violations can turn customers or
suppliers away which damages the reputation of the company. The companies tend to lose existing customer
base and there are few to no new customers to vouch for the trustworthiness of the company. The damage to
brand reputation can often cost even more than those fines.
The proliferation of litigation alleging reputational damage has likely been inevitable, as reputation risk
management has quickly become the most difficult and elusive challenge organizations face. A well-known
Lesson 10 • Governance and Compliance Risk 311

Deloitte study, citing the World Economic Forum, estimated that more than 25% of a company’s market value is
directly attributable to the organization’s reputation.
As a consequence, reputational damage has become a paramount concern for corporate leaders. In fact, most
governance oversight organizations have emphatically concluded that reputation risk oversight is the exclusive
province of the board of directors. And among the many drivers of reputational harm, corporate litigation ranks
among the highest. The inevitability of litigation claims, particularly securities claims, should come as no surprise
given the value at stake.
In the recent probe in the matter pertaining to allegations related to a US$500 million loan to Videocon Group
by ICICI Bank has put a spotlight on corporate governance at the ICICI Bank and posed risks to its reputation. An
investigation into allegations that India’s ICICI Bank extended a loan with a potential conflict of interest raises
questions over the bank’s governance and created severe reputational risks.
In 2017, one of the top candies and chocolate makers Cadbury India (Mondelez India Foods) paid a consultant
who helped them to obtain a license by bribing government officials. This destroyed the reputation of the
company and the it was imposed with sky touching fines.
4) Access to Markets and Product Delays: Every country has its own labour and employment laws, and
multinational companies are obligated to comply with local laws and regulations. Also businesses are required
to meet a host of regulations if they wish to do business with government. Non-compliance across enterprise
and business network could result in exclusion from the tendering processes and supplier databases. In
addition, companies that place value on corporate compliance may avoid doing business with companies
which are non-compliant as they would want to ensure that they meet their own regulatory obligations. Non
compliances may also result into financially damaging events like having products/ services blocked at the
border, forced to issue a recall or forced to destroy merchandise due to compliance issues etc.
5) Roadblock in Funding: The pre-requisite of any funding exercise is the status of tax and regulatory
compliances. A company cannot get funded, even at the seed investment level, whose compliances are not up
to date. Banks also require compliance documents like audited financials, auditor’s report, auditor’s certificate
for the last 3 years or as the case may be. Chances of a non-compliant company availing bank loans are next to
zero per cent.

Other distinct areas that present risk for non- compliance can also be stated as under
FINANCIAL PERSONAL OPERATIONAL REGULATORY
• Monetary fines • Increased personal • Expensive and • Greater regulatory
liability time- consuming scrutiny
• End of a business
remedial actions
or business line • Forced changes • More regulation,
including redress
to senior cost and
• Increased
management • Enforced changes complexity for all
capital, liquidity
to business
or solvency • Need for more
requirements highly- priced risk • Expensive and
and compliance time- consuming
• Impact on share
skills use of third party or
price
skilled persons
• Claw-backs
• Competitive
invoked on • Inability to recruit
disadvantages
bonuses and retain high
• Opportunity costs quality skilled
of non-compliance resources
312 Lesson 10 • PP-GRMCE

Illustrative Table Showing Possible Risks of Non – Compliance (Area Wise)

Compliance area (illustrative) Possible risk of Non-compliance

Direct tax compliance • Imposition of penalty Prosecution of directors

• Loss of reputation

Indirect tax compliance • Cancellation of licences Withdrawal of tax benefits Stoppage of operations
• Loss of reputation

Labour law compliance • Imposition of penalty

• Prosecution of directors / occupier Loss of reputation
• Employee dissatisfaction

Environment, health & safety laws • Stoppage of operations

• Loss of reputation
• Imposition of penalty

Corporate law compliance • Imposition of penalty

• Vacation / prosecution of directors or management
• Loss of reputation

COMPLIANCE RISK MANAGEMENT

Compliance risk management is the process of managing corporate compliance to meet regulations within
a workable timeframe and budget. Compliance risk management is part of the collective governance, risk
management and compliance discipline. The three fields frequently overlap in the areas of incident management,
internal auditing, operational risk assessment, and compliance with various regulations.
In recent years, perception of compliance has undergone a sea change. The traditional and narrow outlook that
compliance is limited to statutory filings, required to run a business, has widened considerably. Compliance
practices are now a cross-functional responsibility. They need to be integrated in the policies and procedures
of various functions like HR, quality, risk, facilities, finance, delivery, sales, marketing, procurement, security
and more.
Further, laws and regulations in different countries at the national, state and local levels have made compliance
more complicated. Therefore, a culture must be instilled in an enterprise to ensure minimum statutory
compliance and compliance to other commitments such as social, industry, client consumer etc. This calls for a
systematic approach towards compliance management.
As compliance risk continues to be a focal point for regulators, compliance officers are encouraged to take
steps to ensure that compliance risk is adequately managed. Best practices for compliance management ensure
that compliance risk is adequately managed. On a periodic basis, management should identify and assess the
primary compliance risk issues applicable to all business activities including the related control mechanisms
utilized to identify measure, monitor and control the relevant risks as compliance challenges will only increase
with time.
Lesson 10 • Governance and Compliance Risk 313

STEPS IN COMPLIANCE RISK MANAGEMENT

Understand
Evaluate
compliance
performance
obligations

Address all
Assess risks
compliance risks

1. Understand compliance obligations : The primary element to manage compliance is to understand

compliance obligation in the light of strategic goals and objectives. Compliance obligations stem from: Laws
and regulations, industry or generic standards, internal policies, processes and procedures and contracts
executed with clients and other stakeholders.
It is important to understand that obligations are either requirements or commitments. Obligations that
an enterprise has no control over are termed as compliance requirements, for example, one resulting from
new laws and regulations. While obligations that an enterprise may choose to abide by – for example certain
industry standards or best practices – are termed as compliance commitments.
Here, a mechanism to ensure compliance obligations are kept up-to-date must be established. An enterprise
may choose to restrict the scope of compliance management to compliance requirements but for a higher
assurance, it may include compliance commitments, too.
2. Assess risks : Once compliance obligations are established, a compliance risk assessment exercise should be
undertaken to identify risks, causes, the areas they impact and the consequences thereof. An analysis to have
better understanding of the risks should follow. Such an analysis should consider the factors affecting the
consequences and likelihood of these consequences occurring as well as the controls in place. After receiving an
analysis of the level of risk involved, a compliance risk evaluation should be done to take appropriate decisions
on treatment. This exercise is not only a tool to accept the presence of risk but can effectively use to prioritise
the treatment. Compliance risks analysed as low should also be monitored and subjected to corrective action
for a timely precaution.
3. Address all compliance risks : An enterprise should ensure an effective action plan to address all compliance
risks with clear ownership, responsibility, accountability and closure timelines. This can be driven with ease, if
the enterprise ensures a documented compliance policy, objectives, processes and procedures. Further, compliance
responsibilities must be clearly identified, assigned and established as part of the job descriptions at different levels.
To ensure risks are addressed effectively, the management should ensure that all employees with compliance
obligation are competent. Periodic training and awareness must be carried out and any other medium to
communicate assigned responsibilities should be explored. A continuous communication mechanism is
required to ensure all employees understand compliance and contribute to it by reporting risks and discharging
their responsibilities effectively.
4. Evaluate performance : A mechanism to measure and monitor the performance of the compliance practices
and its impact on strategic goals and objectives must be developed. Developing compliance performance
indicators is one of the tools. It can be as simple as the number of employees trained on compliance practices
to mature indicators such as risks of non-compliance and trends. Feedbacks from clients, stakeholders,
suppliers, vendors, employees and government agencies are a good source of data to ascertain compliance
performance. Governance mechanisms, in the form of management reviews, internal audits and periodic
compliance reporting, give great insights on the performance of compliance practices.
314 Lesson 10 • PP-GRMCE

COMPLIANCE RISK MITIGATION

New ethics, compliance, and reputational risks appear each day. At the same time, the recent global recession
has forced many organizational functions to closely examine their budgets and resources. Together, these
factors have created a tension between growing regulatory obligations and the pressure to do more with
less. To help resolve this situation and continue to add value to their organizations, ethics and compliance;
professionals need to be sure they understand the full spectrum of compliance risks lurking in each part of the
organization. They then need to assess which risks have the greatest potential for legal, financial, operational,
or reputational damage and allocate limited resources to mitigate those risks. There are a number of critical
questions organizations should ask related to compliance risks and the program(s) in place to mitigate those
risks:
• What kinds of compliance failures would create significant brand risk or reputational damage? Could the
failures arise internally, in the supply chain, or with regard to third parties operating on the organization’s
behalf ?
• What is the likely impact of that damage on the organization’s market value, sales, profit, customer loyalty,
or ability to operate?
• What kinds of compliance missteps could cause the organization to lose the ability to sell or deliver
products/services for a period of time?
• How should the compliance program design, technology, processes, and resource requirements change in
light of growth plans, acquisitions, or product/category/ service expansions?
• Is the organization doing enough to inform customers, investors, third parties, and other stakeholders
about its vision and values? Is it making the most of its ethics, compliance, and risk management
investments as potential competitive differentiators?
• What are the total compliance costs—beyond salaries and benefits at the centralized level—and how
are costs aligned with the most significant compliance risks that could impact the brand or result in
significant fines, penalties, and/ or litigation?
• How well-positioned is the compliance function? Does it have a seat “at the table” in assessing and
influencing strategic decisions?
• What are the personal and professional exposures of executive management and the board of directors
with respect to compliance?
While it is impossible to eliminate all of an organization’s risk exposure, the risk framework and methodology
help the organization prioritize which risks it wants to more actively manage. Developing a framework and
methodology helps organizations determine the extent to which the organization’s existing risk-mitigation
activities (for example, testing and monitoring or employee training programs) are able to reduce risk.
Effective risk mitigation activities may reduce the likelihood of occurrence of the risk event, as well as the
potential severity of its impact on the organization. When an organization evaluates inherent risk in light of
its existing control environment and activities, the degree of risk that results is known as the “residual risk.”
If existing risk mitigation strategies are insufficient at reducing residual risk to an acceptable level, this is an
indication that additional measures are in order.
Embedding compliance with all key legislation in the organisation is a function of certain critical activities
and stems from collaboration across key functions such as Legal, Compliance Risk Management, Business and
Internal Audit. These functions all form part of the “three lines of defence”. The success of any compliance
management and monitoring program depends on the existence, functioning and integration of these lines of
defence in the performance of their duties.
Lesson 10 • Governance and Compliance Risk 315

Management Assurance • Assists in setting and executing strategies.

• Provides direction, guidance and oversight
• Promotes a strong risk culture & sustainable risk return thinking
• Promotes a strong compliance culture and management of risk exposure.
• Ongoing monitoring and management of risks.

Risk Management, Legal & Com- • Formal, robust and effective risk management within which theorganisation’s
pliance policies and minimum standards are set.
• Objective oversight and the ongoing challenge of risk mitigation, management
and performance while reporting is achieved across the business units.
• Overarching risk oversight across all risk types.
• Compile and maintain a legislative universe for the organisation.
• Facilitate the risk prioritisation of all pieces of legislation in the regulatory
universe.
• Initiate new legislative requirements within the organisation.
• Analyse and send out alerts on the new law to inform the organisation of the
new requirements.
• Facilitate an executive review of the legislation by Legal Analysts.
• Facilitate the completion of the Compliance Risk Management Plan (“CRMP”)
• Update compliance monitoring plans on the CRMP.
• Escalate compliance matters to management.
• Undertake quarterly compliance reporting.

Internal Audit & other Indepen- • Independent and objective assurance of overall adequacy and effectiveness of
dent Assurance Providers governance, risk management and internal controls within the organisation
• Ability to link business risks with established processes and provide assurance
on the effectiveness of mitigation plans to effectively manage organisational
risks.

The Risk Management function should support the Compliance Office with the risk rating of the relevant legislation
once such legislation becomes operational in the business. A compliance risk register for the regulatory universe,
showing both the inherent and residual ratings of each piece of legislation, based on impact and likelihood, should
be the product of this process. The penalties - financial, imprisonment, etc - and other business risks associated with
key provisions of the legislation should be identified and captured on the compliance risk register for the regulatory
universe as management should know if a piece of legislation will affect shareholder value.
Business should also have its own Business Operational Compliance Officer / Champion who, upon receipt from the
Legal / Compliance Officer, the information containing the executive review, compliance alert, CRMP and presentation
material, will commence the operational monitoring of the compliance of business processes to the legislative
requirements. Again, depending on the size and maturity of the organization, the roles of Legal / Compliance Officer
can be combined with that of the Business Operational Compliance Officer, even that of the Risk Officer. This, of
course, should be with due consideration of the nature and magnitude of business operations, the risk profiles as
well as the cost and benefits of combining or separating the functions. Business should readily be able to provide
Internal Audit with the legislative universe of the organisation for the commencement of a compliance audit.
Internal Audit, as the assurance provider, is responsible for reviewing the adequacy and effectiveness of the
functioning of controls implemented by management to ensure compliance with legislative requirements.
316 Lesson 10 • PP-GRMCE

In conducting a review of compliance within the organisation, Internal Audit should ask the following questions:
• What are the pieces of legislation that should be reviewed?
• What new processes are being put in place as a result of compliance requirements?
• What new systems are being put in place to support and monitor compliance?
The span of the internal audit review will be: Legislation – Policy – Procedures – Systems / Processes.
Internal Auditors should be able to map the legislation to the existence of a policy and a risk map. They need to
substantiate and audit compliance risk ratings that have changed, especially where residual ratings show improved
controls. For example, if the organisation has had many complaints escalated to an ombudsman, it is a likely indication
of non-compliance and hence the applicable residual rating cannot be acceptable (green); it should probably be
yellow or red.
From their review, Internal Auditors should be able to validate or provide the following inputs to the CRMP:
• Impacted Areas – processes, systems and policies
• Existing Controls
• Additional Controls – arising from amendments to, or new legislation
• Risk Exposure – High, Medium, Low
• Responsible Party – Affected Parties
• Monitoring Plan – Business Unit Compliance
Thus the compliance framework needs to be comprehensive, dynamic, and customizable, allowing the organization
to identify and assess the categories of compliance risk to which it may be exposed. Some compliance risks are
specific to an industry or organization—for example, worker safety regulations for manufacturers or rules governing
the behavior of sales representatives in the pharmaceutical industry. Other compliance risks transcend industries or
geographies, such as conflicts of interest, harassment, privacy, and document retention.

ESSENTIALS OF A SUCCESSFUL COMPLIANCE-RISK MANAGEMENT PROGRAM

Active board and senior

An effective board and senior management oversight is the
management oversight
cornerstone of an effective compliance risk management process.

Effective policies and Compliance risk management policies and procedures should be
procedures clearly defined and consistent with the nature and complexity of an
institution’s activities.

Compliance risk analysis and Organizations should use appropriate tools in compliance risk analysis like
comprehensive controls self-assessment, risk maps, process flows, key indicators and audit reports;
which enables establishing an effective system of internal controls.

Effective compliance Organizations should ensure that they have adequate management
monitoring and reporting information systems that provide management with timely reports on
compliance like training, effective complaint system and certifications.

Testing Independent testing should be conducted to verify that compliance-

risk mitigation activities are in place and functioning as intended
throughout the organization.
 Lesson 10 • Governance and Compliance Risk 317

NEW DEVELOPMENTS- GOVERNANCE, RISK MANAGEMENT AND COMPLIANCE (GRC)

Until fairly recent, compliance was seen as a separate business practice, along with governance and risk management.
However, over the past decade, these three disciplines have developed a considerable number of overlapping activities,
such as internal audits, incident management, operational risk assessment, or compliance with regulatory programs.
Today, many companies take an integrated approach to these three areas, referring to them collectively as Governance,
Risk Management and Compliance (GRC).
Importance of GRC can be observed not only by Companies but also by the legislators. The infamous PNB scandal is
a glaring example to make this case.

PNB Scam- Case Study

On 14 February 2018, PNB revealed that fraudulent transactions by billionaire jeweler Nirav Modi and related
entities amounted to 110 billion rupees (US$1.77 billion). The key accused in the case were jeweler and designer
Nirav Modi, his maternal uncle Mehul Choksi, and other relatives and some PNB employees. Nirav Modi and his
relatives escaped India in early 2018, days before the news of the scam became public.
Nirav Modi and the companies linked to him colluded with bank officials to get guarantees or letters of undertaking
to help fund buyer’s credit from other overseas banks.Multiple fake LoUs were opened in favour of branches of
Indian banks for import of pearls for a period of one year, for which Reserve Bank of India guidelines lay out a
total time period of 90 days from the date of shipment but the guidelines were ignored by overseas branches of
Indian banks. They failed to share any document/information with PNB, which were made available to them by
the firms at the time of availing credit from them.
The Enforcement Directorate (ED) recovered bank token devices of the foreign dummy companies used by the
fugitive diamond trader to transfer the fraudulent funds. The probe agency found that Nehal Modi, brother of
Nirav Modi had destroyed the devices and had even secured a server located in the United Arab Emirates (UAE)
soon after the scam broke out. These dummy firms had been receiving the fraudulent PNB LoUs and were based
out in British Virgin Island and other tax havens.
This case was a result of the mismanagement from the internal regulatory bodies within the PNB itself and
also from the side of the Reserve Bank of India (RBI). This is not the only instance in itself where the public
sector banks have failed to perform their duties and therefore major changes need to be incorporated into the
regulatory mechanisms to prevent such frauds.
In the aftermath of this case, RBI has directed banks to integrate SWIFT and core banking systems. It has also
constituted a committee to look into the reasons for high divergence observed in asset classification, various
incidents of fraud and necessary interventions (also in terms of information technology) to prevent such frauds.
The government passed the Fugitive Economic Offenders Act (2018) which came into force on 21st April 2018.
The Act was enacted to prevent economic offenders in the ilk of Nirav Modi from escaping the country.

Governance, risk management, and compliance are three related facets that aim to assure that an organization
reliably achieves objectives, addresses uncertainty and acts with integrity:
• Governance is the combination of processes established and executed by the directors (or the board of
directors) that are reflected in the organization’s structure and how it is managed and led toward achieving
goals. Governance describes the overall management approach through which senior executives direct and
control the entire organization, using a combination of management information and hierarchical management
control structures. Governance activities ensure that critical management information reaching the executive
team is sufficiently complete, accurate and timely to enable appropriate management decision making, and
provide the control mechanisms to ensure that strategies, directions and instructions from management are
carried out systematically and effectively.
• Risk management is predicting and managing risks that could hinder the organization from reliably achieving
its objectives under uncertainty. Risk management is the set of processes through which management identifies,
analyzes, and, where necessary, responds appropriately to risks that might adversely affect realization of the
organization’s business objectives. The response to risks typically depends on their perceived gravity, and
318 Lesson 10 • PP-GRMCE

involves controlling, avoiding, accepting or transferring them to a third party, whereas organizations routinely
manage a wide range of risks (e.g. technological risks, commercial/financial risks, information security risks etc.)
• Compliance refers to adhering with the mandated boundaries (laws and regulations) and voluntary boundaries
(company’s policies, procedures, etc.). Compliance means conforming to the stated requirements. At an
organizational level, it is achieved through management processes which identify the applicable requirements
(defined for example in laws, regulations, contracts, strategies and policies), assess the state of compliance,
assess the risks and potential costs of non-compliance against the projected expenses to achieve compliance,
and hence prioritize, fund and initiate any corrective actions deemed necessary.
GRC is the integrated collection of capabilities that enable an organization to reliably achieve objectives, address uncertainty
and act with integrity. Governance, risk and compliance (GRC) refers to a strategy for managing an organization’s overall
governance, enterprise risk management and compliance with regulations. GRC is a set of processes and practices that
runs across departments and functions. GRC might be enabled by a dedicated platform and other tools, although this is
not mandatory. While organizations generally don’t need to maintain a separate GRC department, most organizations
have a team in place to manage the GRC platform and tools. The scope of GRC doesn’t end with just governance, risk, and
compliance management, but also includes assurance and performance management, information security management,
quality management, ethics and values management, and business continuity management.
Effective GRC implementation helps the organization to reduce risk and improve control effectiveness, security
and compliance through an integrated and unified approach that reduces the ill effects of organizational silos and
redundancies.
As the world becomes more complex, enterprises need a range of GRC skills and capabilities that may not all be
present with a single provider or a single business function. Some may lie with a consulting firm, others with a
data or content firm, and still others with a technology platform provider or a system integrator. Going forward,
the emphasis will be on how we can bring more of these companies and their capabilities together in a single,
comprehensive GRC community – one that fosters open and transparent communication, and enables people to
learn from each other’s best practices and mistakes.
GRC professionals are increasingly being given a seat at the company strategy table, the revenue generating side. Decision-
makers need them to interpret risk profiles and data, and provide intelligence on how to increase revenue and sales.
Soon, operating controls will not only help mitigate operational risk, but also enable faster go-to-market opportunities.
Similarly, vendor risk management won’t just be about calculating vendor risks, but also tying those metrics to vendor
performance and charge backs. The emphasis, more and more, will be on linking GRC to business performance.

YES Bank Crisis- Case study

YES Bank was once the country’s fifth-largest private lender by market capitalization. YES Bank had been founded
by Rana Kapoor and Ashok Kapoor in 2004. The bank was ranked number 1 bank in the Business Today-KPMG
Best Banks Annual Survey 2008. YES Bank was the first institution globally to receive funding through IFC’s
Managed Co-Lending Portfolio Programme and the first Indian bank to raise loan under IFC’s A/B loan facility.

What has led to a crisis at YES Bank?

The bank’s loan book on March 31, 2014, was Rs 55,633 crore, and its deposits were Rs 74,192 crore. Since then,
the loan book has grown to nearly four times as much, at Rs 2.25 trillion as on September 30, 2019. While deposit
growth failed to keep pace and increased at less than three times to Rs 2.10 trillion. The bank’s asset quality
also worsened and it came under regulator RBI’s scanner. Yes bank was lending aggressively disregarding the
risk limits and also under-reporting the bad loans. They were lending to corporates that were already in very
risk businesses and facing some challenges in their business like the Anil Ambani-led Reliance group, DHFL
and IL&FS. All this happened in Rana Kapoor’s (Founder of Yes Bank) tenure. The exposure of loans to such bad
performing companies was huge in Yes Bank’s case, and to add up they were hiding the NPAs (Non-performing
assets) or misreporting the same. After the above fiasco, Ravneet Gill took charge of Yes Bank but struggled to
revive as deposits kept depleting and he wasn’t able to raise enough capital given the loss of confidence in the
market. The tipping point came when one of the bank’s independent directors Uttam Prakash Agarwal, resigned
from the board in January 2020 citing governance issues.
Lesson 10 • Governance and Compliance Risk 319

Several reasons behind the crisis of YES bank were:

1. NPAs: YES Bank ran into trouble following the central bank’s asset quality reviews in 2017 and 2018, which
led to a sharp increase in its impaired loans ratio and uncovered significant governance lapses that led to a
complete change of management. The bank subsequently struggled to address its capitalisation issues. YES
Bank suffered a dramatic doubling in its gross NPAs between April and September 2019 to Rs 17,134 crore.
2. NBFC crisis: The crisis in India’s shadow-banking space started with the unravelling of Infrastructure
Leasing & Financial Services (IL&FS) and then extended to Dewan Housing Finance Limited (DHFL). YES
Bank’s total exposure to IL&FS and DHFL was 11.5 per cent as of September 2019. In April 2019, the bank
had classified about Rs 10,000 crore of its exposures, representing 4.1 per cent of its total loans under
watch list, as potential non-performing loans over the next 12 months.
3. Governance issue: YES Bank faced several governance issues that led to its decline. On January 10,
independent director Uttam Prakash Agarwal quit citing deteriorating corporate governance standards
and compliance failure at the lender. In 2018-19, the bank under-reported NPAs to the tune of Rs 3,277
crore, prompting RBI to dispatch R Gandhi, one of its former deputy governors, to the board of the bank.
Rana Kapoor, who was instrumental in building YES Bank from scratch, was asked to step down as chief
executive in January 2019.
4. Excessive withdrawals: YES Bank’s financial condition dissuaded many depositors from keeping funds in
the bank over a longer term. The bank showed a steady withdrawal of deposits, which burdened its balance
sheet and added to its woes. The bank had a deposit book of Rs 2.09 trillion at the end of September 2019.

Steps taken by RBI against YES Bank

1. RBI has taken over the YES Bank management
2. The central has imposed a moratorium on the lender
3. RBI announced a draft ‘Scheme of Reconstruction’ that entails SBI investing capital to acquire a 49% stake
in the restructured private lender.

How can such conflicts between Management and Board be avoided?

The global best practice recommends that at least three-quarters of board members should be independent, the
board should have an independent chairman and not an individual who serve the role of both CEO & Chairman
of the board, annual board elections should be conducted as this forces directors to make more careful decisions
and be more attentive to shareholders because they can cast the vote to keep or eliminate a director each year.
Also, every year board self-assessment practices should be conducted, independent directors should annually/
quarterly meet and openly discuss various policies, management, and compensation without concerns about
management influence.

CONCLUSION
The complexity of the risk landscape and the penalties for non-compliance make it essential for organizations to
conduct thorough assessments of their compliance risk exposure. This is particularly true for those organizations
that operate on a global scale.
A good ethics and compliance risk assessment includes both a comprehensive framework and a methodology
for evaluating and prioritizing risk. With this information in hand, organizations will be able to develop effective
mitigation strategies and reduce the likelihood of a major noncompliance event or ethics failure, setting themselves
apart in the marketplace from their competitors.
Thus, policy-makers best serve the public interest when they allow for flexibility in setting up corporate governance
rules. Companies also have a responsibility to establish a corporate culture and tone at the top that promote a values-
based rather than compliance-based mindset to governance. Management, internal auditors, boards of directors and
external auditors share the responsibility of executing their respective roles with healthy skepticism, transparency
and robust communication.
320 Lesson 10 • PP-GRMCE

LESSON ROUND UP
• The risks that may stem from non-compliance with key legislative requirements can be very costly and
damaging to an organisation.
• The key to managing these risks is installing controls that confirm the organization is complying with its
internal and external requirements on a consistent and regular basis.
• A compliance management system is the method by which corporate manage the entire compliance process.
It includes the compliance program, compliance audit, compliance report etc.
• The Company Secretary is the professional who guides the Board and the company in all matters, renders
advice in terms of compliance and ensures that the Board procedures are duly followed, best global practices
are brought in and the organisation is taken forward towards good corporate citizenship.
• Compliances, good governance and risk management in turn promotes corporate access to capital, increased
investment, sustainable growth and financial stability.

GLOSSARY
Corporate A corporate compliance program is generally defined as a formal program specifying an
Compliance organization’s policies, procedures, and actions within a process to help prevent and detect
violations of laws and regulations.
Risk Its a systematic process of evaluating the potential risks that may be involved in a projected
Assessment activity or undertaking.
Corporate Corporate citizenship involves the social responsibility of businesses, and the extent to which
Citizen they meet legal, ethical and economic responsibilities, as established by shareholders.
Compliance Compliance risk is exposure to legal penalties, financial forfeiture and material loss an
Risk organization faces when it fails to act in accordance with industry laws and regulations,
internal policies or prescribed best practices.
Internal Audit Internal audit is a dynamic profession involved in helping organisations achieve their objectives.
It is concerned with evaluating and improving the effectiveness of risk management, control
and governance processes in an organisation.

TEST YOURSELF
(These are meant for recapitulation only. Answer to these questions are not to be submitted for evaluation).
1. What is Compliance risk? State briefly the need of compliance risk management in the emerging scenario.
2. Can you explain the consequences/ risks of non-compliance.
3. Please advise some of the steps in effective compliance risk management.
4. Briefly explain the essentials of a successful compliance-risk management.
Lesson 11 Corporate Governance Forums

Key Concepts One Learning Objectives

Should Know
To understand the:
• Corporate
Governance Forums • Global Corporate Governance Forums

• Standards • Its Objectives, structure

of Corporate • Initiatives of Global Corporate Governance Forums
Governance
• Stewardship

Lesson Outline
• Introduction
• Corporate Governance Forums
1) The Institute of Company Secretaries of India
2) National Foundation for Corporate Governance
3) The Organization for Economic Co-operation and Development
4) The Institute of Directors (IOD), UK
5) The International Corporate Governance Network
6) The European Corporate Governance Institute
7) Conference Board
8) The Asian Corporate Governance Association
9) Corporate Secretaries International Association
10) International Integrated Reporting
• Conclusion
• LESSON ROUND UP
• GLOSSARY
• TEST YOURSELF
• LIST OF FURTHER READING
322 Lesson 11 • GRMCE

INTRODUCTION
With the passage of time corporate governance became pervasive and an integral element of a corporate house
whether private limited or public limited or operating in public or private sector. Moreover, with the onset of
globalization the globe has become a borderless village with soaring business activities across the borders, thereby
triggering the need for espousing best governance practices in order to ensure sustainability and growth of business
organizations as well as protection of the interests of stakeholders.
Thus, taking the cognizance of the fact of protecting the interests of stakeholders of business organization as well
as to ensure sustainability and growth of business organisations, world over various forums came into existence,
such as, National Foundation for Corporate Governance, Organisation for Economic Cooperation and Development
(OECD), International Corporate Governance Network (ICGN) etc.
Theses forums are playing a crucial role in upholding the tenets of best governance practices by sensitizing the
doyens of corporate sector and various stakeholders regarding the quintessence of corporate governance by
focusing on critical areas- National Governance, Human Governance, Societal Governance, Economic Governance
and Political Governance.

REGULATORY FRAMEWORK

Sl. No. Description

1 Institute of Company Secretaries of India (ICSI)
2 National Foundation for Corporate Governance (NFCG)
3 Organization for Economic Co-operation and Development (OECD)
4 Institute of Directors (IOD), UK
5 International Corporate Governance Network (ICGN)
6 European Corporate Governance Institute (ECGI)
7 Conference Board
8 Asian Corporate Governance Association (ACGA)
9 Corporate Secretaries International Association (CSIA)
10 International Integrated Reporting Council (IIRC)
11 Common Wealth Association of Corporate Governance

A. INSTITUTE OF COMPANY SECRETARIES OF INDIA (ICSI)

ICSI’s Philosophy on Corporate Governance

The ICSI, after extensive research, has taken a
giant leap in defining Corporate Governance as Vision
“the application of best management practices, To be a global leader in promoting Good Corporate Governance
compliance of law in letter and spirit and
Mission
adherence to ethical standards for effective
management and distribution of wealth and To develop high caliber professionals facilitating good
discharge of social responsibility for sustainable Corporate Governance
development of all stakeholders.”
ICSI Initiatives

• Corporate Governance Research and Training and Centre of Excellence, Hyderabad - ICSI has set up the
ICSI- Centre for Governance Research and Training (CCGRT) and Centre of Excellence, Hyderabad with the
Lesson 11 • Corporate Governance Forums 323

objective of fostering and nurturing Governance Research and Training (CCGRT) with the objective of fostering
and nurturing research initiatives among members of the Company Secretaries profession and other researchers.
• ICSI National Award for Excellence in Corporate Governance was instituted by the ICSI in 2001 to identify,
foster and reward the culture of evolving global best practices of corporate governance among Indian companies.
Each year, the award is conferred upon two best governed companies and ICSI Life Time Achievement Award for
Translating Excellence in Corporate Governance into Reality is bestowed on an eminent personality.
• Focus on Corporate Governance in the Course Curriculum - Considering corporate governance as core
competency of Company Secretaries, education and training for Company Secretary significantly focuses
on corporate governance. One full paper on Corporate Governance titled “Governance, Risk Management,
Compliances and Ethics” forms part of the syllabus in the Professional Programme.
• PMQ Course in Corporate Governance - ICSI has launched a Post Membership Qualification Course in Corporate
Governance to enable its members gain acumen, insight and thorough expertise in corporate governance.
• Secretarial Standards – As a pioneering initiative, ICSI issues Secretarial Standards to integrate, harmonise
and standardise the diverse secretarial practices prevalent in the corporate sector. Two Secretarial Standards
issued by ICSI i.e. SS-1: Secretarial Standard on Meetings of the Board of Directors and SS-2: Secretarial Standard
on General Meetings have been notified in the Official Gazette under Section 118 (10) of the Companies Act
2013 which provides that every company shall observe Secretarial Standards with respect to General and
Board Meetings specified by the Institute of Company Secretaries of India and approved as such by the Central
Government. They have been effective from July 1, 2015. The introduction of Secretarial Standard has marked a
new era of healthy secretarial practices among professional.
• Corporate Governance Publications – The Institute regularly brings out publications of interest to members
and corporate sector to inculcate the culture of good governance.
• Directors Development and Capacity Building Programmes - Recognizing that leadership development in
boardroom is the key driver to better governance, the Institute organizes directors’ development programmes.
The Institute also conducts extensive programmes throughout India and abroad strengthening specialization in
corporate governance.
• Investor Education and Awareness – Committed to the cause of investor education, ICSI is actively engaged in
activities relating to investor awareness and education. So far, the Institute has organised more than 4500 such
programmes. Booklets to educate investors have also been issued by the Institute in English, Hindi as well as
other regional languages.
• ICSI Recommendations to Strengthen Corporate Governance Framework – ICSI after a detailed study
of corporate governance standards, principles and practices across the world, made its recommendations to
strengthen the Corporate Governance Framework.
• Repository of Independent Directors – The Institute jointly with other professional statutory bodies under
the active encouragement of the Ministry of Corporate Affairs, maintains a Repository of Independent Directors
to facilitate the individuals who are eligible and willing to act as Independent Directors and also to facilitate
Companies to select the persons who are eligible and willing to act as Independent Directors under provisions
of the Companies Act, 2013.
• National Policy on Corporate Governance – The Ministry of Corporate Affairs had constituted a Committee to
formulate a Policy Document on Corporate Governance under the chairmanship of Mr. Adi Godrej. The President,
ICSI was the Member Secretary/Convener. The concept paper prepared by ICSI was the base paper for discussion
for this committee. The Committee submitted its report, which is articulated in the form of Guiding Principles of
Corporate Governance, to the Government of India on 18th September, 2012.
• Customied Training Programme – As an initiative towards propagating and creating awareness on good
corporate governance, the Institute has been organising customised training programmes for Regulatory bodies,
Banks and Public sector companies on Corporate Laws and Governance.
• Founder Trustee of National Foundation for Corporate Governance – The ICSI is one of the four founder
trustees of National Foundation for Corporate Governance, alongwith MCA, CII and ICAI. The vision of NFCG is:
Be a Catalyst in making India the Best in Corporate Governance Practices.
324 Lesson 11 • GRMCE

• Founder member of Corporate Secretaries International Association (CSIA) – ICSI is a founder member
of Corporate Secretaries International Association, alongwith the Chartered Secretaries Institutes of Australia,
Hong Kong, Malaysia, Singapore, South Africa, UK and Zimbabwe. CSIA was launched in March 2010 and has
issued ‘Twenty Practical Steps to Better Corporate Governance’.
• Linkages of International Bodies – The Institute has linkages with various International bodies involved in
promoting Corporate Governance such as World Bank, Organisation for Economic Co- operation and Development
(OECD), International Corporate Governance Network (ICGN), Global Corporate Governance Forum GCGF (IFC
- Washington), Global Reporting Initiative (GRI), Asia Corporate governance Association (ACGA). The Institute
also holds various Joint programmes with, these institutions and also with professional bodies like CASS Business
School (London), ICSA Singapore, ICSA Malaysia, etc.

B. NATIONAL FOUNDATION FOR CORPORATE GOVERNANCE (NFCG)

With the goal of promoting better corporate governance practices in India, the Ministry of Corporate Affairs,
Government of India, has set up National Foundation for Corporate Governance (NFCG) in the year 2003 in
partnership with Confederation of Indian Industry (CII), Institute of Company Secretaries of India (ICSI) and Institute
of Chartered Accountants of India (ICAI). In the year 2010, Institute of Cost Accountants of India and National Stock
Exchange and in 2013 Indian Institute of Corporate Affairs were included in NFCG as trustees.
NFCG endeavours to build capabilities in the area of research The vision of NFCG
in corporate governance and to disseminate quality and
timely information to concerned stakeholders. It works to “Be the Key Facilitator and Reference Point for
foster partnerships with national as well as international highest standards of Corporate Governance in India.”
organisations.
At the national level, NFCG works with premier management
The Mission of NFCG
institutes as well as nationally reputed professional
• To foster a culture of good governance, organizations to design and ad- minister Directors Training
voluntary compliance and facilitate effective Programmes. The Foundation provides accreditation to
participation of different stakeholders; these organisations based on their meeting the eligibility
• To catalyse capacity building in new criteria designed along with continuing adherence to the
emerging areas of Corporate Governance; same. On obtaining the accreditation these organisations,
with the support of NFCG, would set-up a “National Center
• To create a framework of best practices, for Corporate Governance (NCCG)” to provide a training to
structure, processes and ethics; Directors, conduct research and build capability in the area of
corporate governance.
NFCG also would work to have arrangements with globally reputed organisations with the aim of promoting bilateral
initiatives to improve regulatory framework and practices of corporate governance in a concerted and coordinated
manner.
Objectives of NFCG

• To catalyze capacity building in new emerging areas of Corporate Governance.

• To further research, scholarship, and education in corporate governance in India.
• To foster a culture of good governance, voluntary compliance and facilitate effective participation of different
stakeholders.
• To create a framework of best practices, structure, processes and ethics.
Governance Structure

The internal governance structure of NFCG consists:

• Governing Council
• Board of Trustees
• Executive Directorate
Lesson 11 • Corporate Governance Forums 325

Governing Council
Governing Council of NFCG works at the apex level for policy making. It is chaired by Minister in-charge, Ministry of
Corporate Affairs, Government of India. The members of the Governing Council are: -
• Secretary, Ministry of Corporate Affairs, Government of India - Vice Chairman of the Governing Council;
• Second Vice Chairman of the Governing Council (Industry);
• President, Confederation of Indian Industry (CII);
• President, Institute of Chartered Accountants of India (ICAI);
• President, Institute of Company Secretaries of India (ICSI);
• President , The Institute of Cost Accountants of India (ICAI-CMA);
• Director General, Confederation of Indian Industry (CII);
• Secretary, Institute of Chartered Accountants of India (ICAI);
• Secretary, Institute of Company Secretaries of India (ICSI);
• Secretary, The Institute of Cost Accountants of India (ICAI-CMA);
• Chairman, Indian Banks Association;
• Chairman, Insurance Regulatory and Development Authority;
• Chairman, Securities and Exchange Board of India;
• Secretary, Banking Division, Ministry of Finance;
• Secretary, Department of Pubic Enterprises;
• MD and CEO , National Stock Exchage (NSE);
• Director General & CEO, Indian Institute of Corporate Affairs (IICA);
• Eminent Industrialists (4).
Board of Trustees
Board of Trustees deal with the implementation of policies and programmes and laying down the procedure for the
smooth functioning. It is chaired by Secretary, Ministry of Corporate Affairs, Government of India. The members of
the Board of Trustees are: -
• Director General, Confederation of Indian Industry (CII);
• Secretary, Institute of Chartered Accountants of India (ICAI);
• Secretary, Institute of Company Secretaries of India (ICSI);
• Secretary, The Institute of Cost Accountants of India (ICAI-CMA);
• Representative, National Stock Exchange (NSE); and
• Director General & CEO, Indian Institute of Corporate Affairs (IICA).
Executive Directorate
The Executive Directorate provides the internal support to NFCG activities and implements the decisions of the
Board of Trustees. The Executive Director is the Chief Executive Officer of NFCG. The Executive Directorate exercises
such powers as may be delegated to it by the Board of Trustees to carry out such functions as may be entrusted to it
by the Board. The Executive Director also functions as the Secretary of the Council and the Board and is supported
by full time dedicated professional secretariat.

C. ORGANIZATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENT (OECD)

The Organisation for Economic Co-operation and Development (OECD) was established on 30th September 1961.
The OECD was one of the first nongovernment organizations to spell out the principles that should govern corporates.
The OECD Principles of Corporate Governance set out a framework for good practice which was agreed by the
governments of all 39 countries that are members of the OECD. They were designed to assist governments and
326 Lesson 11 • GRMCE

regulatory bodies in both OECD countries and elsewhere in drawing up and enforcing effective rules, regulations
and codes of corporate governance. They also provide guidance for stock-exchanges, investors, companies and
others that have a role in the process of developing good corporate governance.
The original OECD Principles which were first issued in 1999, have become the international benchmark in corporate
governance. They have been adopted as one of the Financial Stability Board’s Key Standards for Sound Financial
Systems and endorsed by the G20. The G20/OECD Principles of Corporate Governance help policy makers evaluate
and improve the legal, regulatory, and institutional framework for corporate governance. They also provide guidance
for stock exchanges, investors, corporations, and others that have a role in the process of developing good corporate
governance. The 2015 edition considers developments in both the financial and corporate sectors that may influence
the efficiency and relevance of corporate governance policies and practices. OECD Corporate Governance Principles
are divided in six different chapters, which are:
1. Ensuring the basis for an effective corporate governance framework
2. The rights and equitable treatment of shareholders and key ownership functions
3. Institutional investors, stock markets, and other intermediaries
4. The role of stakeholders in corporate governance V. Disclosure and transparency VI. The responsibilities of the board
5. Disclosure and transparency
6. The responsibilities of the board
The OECD Steering Group on Corporate Governance co-ordinates and guides the Organisation’s work on corporate
governance and related corporate affairs issues, including state-owned assets, market integrity, company law,
insolvency and privatization.
The mission of OECD has been to help its member countries to achieve sustainable economic growth and
employment and to raise the standard of living in member countries while maintaining financial stability - all this
in order to contribute to the development of the world economy. In order to contribute to the development of the
world economy, the OECD’s focus include a growing number of other countries, in addition to its 39 members. It
now shares its expertise and accumulated experience with more than 70 developing and emerging market. The
OECD Principles of Corporate Governance has provided governments, regulators and other standard setters with
an international benchmark. The OECD works closely with a large number of developing and emerging market
countries. In particular, the OECD organises Regional Corporate Governance Roundtables in Asia, Latin America,
Eurasia, Southeast Europe and Russia. These Roundtables have used the OECD Principles to formulate regional
reform priorities and are now actively engaged in implementing these recommendations.
Organisation structure

COUNCIL
Oversight and strategic direction
Representatives of member countries
and the European Commission provide
strategic orientations for the OECD.
Chaired by the Secretary-General,
decisions are taken by consensus.

COMMITTEES SECRETARIAT
Discussion and review Evidence and analysis
Committees, expert and working groups OECD directorates collect data, provide
bring together countries and partners to analysis and formulate recommendations
share policy experiences, innovate and to inform committee discussions, based
review policy implementation and impact. on the Council’s mandate.
Lesson 11 • Corporate Governance Forums 327

D. THE INSTITUTE OF DIRECTORS (IoD), UK

The IoD is a non-party-political business organisation established in United Kingdom in 1903. The IoD seeks to
provide an environment conducive to business success.
The board of IoD is responsible for the overall leadership of the Institute of Directors (IoD) and setting its values,
standards, aims and objectives and delivering them in line with the objects of the Royal Charter. The board is
composed of the chair, a majority of non-executive directors, and the director general and executive directors. It acts
as a unitary board and has the following powers and responsibilities:
• to manage the affairs and long-term success of the institute
• to approve the strategy of the institute, business and financial planning, to hold the executive to account and
ensure financial and risk stewardship
• to approve the annual report and accounts
• to appoint, reappoint and remove (acting by the non-executive directors only) the director general and other
executive directors, as the board permits
• to ensure open and transparent engagement with all stakeholders when carrying out its duties
• to establish and dissolve committees and groups of the board.
The council is the guardian of the IoD constitution, ensuring that the objects of the IoD’s Royal Charter are delivered.
It comprises 11 members of geographical areas, 13 elected members and the IoD chairman. The council carries out
the following responsibilities:
• to appoint, reappoint and remove the non-executive directors and to determine their independence, having
considered any recommendations of the nomination committee
• to hold the board to account for the delivery of the charter objects and adherence to the laws of the institute
• to provide critique and opinion to the board on the overall progress of the institute
• to monitor the board’s engagement with membership and stakeholders
• to appoint and remove a senior independent council member who will act as deputy chair of the council.
The objects of the Institute are:
a) to promote for the public benefit high levels of skill, knowledge, professional competence and integrity on the
part of directors, and equivalent office holders however described, of companies and other organisations;
b) to promote the study, research and development of the law and practice of corporate governance, and to publish,
disseminate or otherwise make available the useful results of such study or research;
c) to represent the interests of members and of the business community to government and in all public fora and to
encourage and foster a climate favourable to entrepreneurial activity and wealth creation; and
d) to advance the interests of members of the Institute, and to provide facilities, services and benefits for them.

E. INTERNATIONAL CORPORATE GOVERNANCE NETWORK (ICGN)

The International Corporate Governance Network (“ICGN”) is a not-for-profit company limited by guarantee and not
having share capital under the laws of England and Wales founded in 1995.
ICGN’s positions are guided by the ICGN Global Governance Principles and Global Stewardship Principles, which
were first published in 2003, as a statement on shareholder stewardship responsibilities both of which are
implemented by:
• Influencing policy by providing a reliable source of investor ICGN’s mission is to promote effective
opinion on governance and stewardship; standards of corporate governance and investor
• Connecting peers at global events to enhance dialogue stewardship to advance efficient markets and
between companies and investors around long-term value sustainable economies world-wide.
creation; and
328 Lesson 11 • GRMCE

• Informing dialogue through education to enhance the professionalism of governance and stewardship
practices.
It has four primary purposes:
i) to provide an investor-led network for the exchange of views and information about corporate governance issues
internationally;
ii) to examine corporate governance principles and practices;
iii) to develop and encourage adherence to corporate governance standards and guidelines; and
iv) to generally promote good corporate governance.
Membership of ICGN is open to those who are committed to the development
ICGN’s mission is to develop of good corporate governance. The Membership section explains the benefits
and encourage adherence to of membership, the different types of membership and how to join the ICGN.
corporate governance standards
and guidelines, and to promote The ICGN is governed by the ICGN Memorandum and Articles of Association.
good corporate governance The management and control of ICGN affairs are the responsibility of the
worldwide. Board of Governors. The Board in turn appoints a number of committees to
recommend policy positions, to implement approved projects and to perform
such functions that the Board may specify. The Institute of Company Secretaries of India is a member of ICGN and
also the country correspondent from India.
The ICGN Global Governance principles describe the responsibilities of board of directors and investors respectively
and aim to enhance dialogue between the two parties. They embody ICGN’s mission to inspire effective standards of
governance and to advance efficient markets worldwide. The combination of responsibilities of boards of directors
and investors in a single set of Principles emphasizes a mutual interest in protecting and generating sustainable
corporate value. These principles were first initiated in 1995. Last updated in 2013, the global Governance Principles
are reviewed periodically to ensure relevance with regulatory or market-led developments relating to high standards
of Corporate Governance. ICGN Global Corporate Governance Principles are:
Principle 1: Board role and responsibilities
The board should act on an informed basis and in the best long-term interests of the company with good faith, care
and diligence, for the benefit of shareholders, while having regard to relevant stakeholders, including creditors.
Principle 2: Leadership and independence
Board leadership calls for clarity and balance in board and executive roles and an integrity of process to protect the
interests of minority investors and promote success of the company as a whole.
Principle 3: Composition and appointment
There should be a sufficient mix of directors with relevant knowledge, independence, competence, industry experience
and diversity of perspectives to generate effective challenge, discussion and objective decision-making.
Principle 4: Corporate culture
The board should adopt high standards of business ethics, ensuring that its vision, mission and objectives are sound
and demonstrative of its values. Codes of ethical conduct should be effectively communicated and integrated into the
company’s strategy and operations, including risk management systems and remuneration structures.
Principle 5: Risk oversight
The board should proactively oversee, review and approve the approach to risk management regularly or with any
significant business change and satisfy itself that the approach is functioning effectively.
Principle 6: Remuneration
Remuneration should be designed to effectively align the interests of the CEO and executive officers with those
of the company and its shareholders to help ensure long-term performance and sustainable value creation. The
board should also ensure that aggregate remuneration is appropriately balanced with the needs to pay dividends to
shareholders and retain capital for future investment.
Lesson 11 • Corporate Governance Forums 329

Principle 7: Reporting and audit

Boards should oversee timely and high quality company disclosures for investors and other stakeholders relating to
financial statements, strategic and operational performance, corporate governance and material environmental and
social factors. A robust audit practice is critical for necessary quality standards.
Principle 8: Shareholder rights
Rights of all shareholders should be equal and must be protected. Fundamental to this protection is ensuring that
shareholder voting rights are directly linked to the shareholder’s economic stake, and that minority shareholders
have voting rights on key decisions or transactions which affect their interest in the company.

F. EUROPEAN CORPORATE GOVERNANCE INSTITUTE (ECGI)

The European Corporate Governance Institute (ECGI) was founded in 2002. It has been established to improve
corporate governance through fostering independent scientific research and related activities.
The ECGI is an international scientific non-profit association. It provides a forum for debate and dialogue between
academics, legislators and practitioners, focusing on major corporate governance issues and thereby promoting
best practice.

Vision Statement of ECGI:

• Corporate governance lies at the heart of our capitalist systems. It is the interface between capital markets
and companies, between employees and executives, and between society and the corporate sector. It is the
driver of what companies do, how they do it and the effects they have on others. In other words, it sits at the
centre of the success and failure of our economic systems.
• As such it warrants knowledge, research and insights of the best thinkers, practitioners and policymakers of
our age. That is precisely what ECGI seeks to provide. It draws on the finest minds in academia from all over
the world to tackle some of the most important issues that confront business and governments today. It uses
the power of research to change ideas, influence practice and formulate policy to benefit all of us.
• Corporate governance refers to the way in which private and public companies, enterprises, entrepreneurship
and financial institutions are governed and run in relation to their purpose, values, ownership, representation,
accountability, financing, investment, performance, leadership, direction, management, employment, law,
regulation and taxation.

Its primary role is to undertake, commission and disseminate research on corporate governance. Based upon
impartial and objective research and the collective knowledge and wisdom of its members, it advises on the
formulation of corporate governance policy and development of best practice and undertake any other activity that
will improve understanding and exercise of corporate governance.
It acts as a focal point for academics working on
corporate governance in Europe and elsewhere, Mission Statement of ECGI:
encouraging the interaction between the different The mission of ECGI is to assist the top academics in the
disciplines, such as economics, law, finance and field of corporate governance in bringing their research
management. to the attention of leading practitioners, policymakers
The Institute articulates its work by expanding on and thought leaders by making state of the art knowledge
the activities of the European Corporate Governance accessible and relevant to them. It promotes the
Network, disseminating research results and development of new ideas through research that extends
other relevant material. It draws on the expertise the boundaries of our understanding of how corporate
of scholars from numerous countries and brings governance contributes to the flourishing of business,
together a critical mass of expertise and interest to economies and societies.
bear on this important subject.
It draws on the expertise of scholars from numerous countries and brings together a critical mass of expertise and
interest to bear on this important subject.
330 Lesson 11 • GRMCE

G. CONFERENCE BOARD
The Conference Board was established in year 1916 in the United States of America. The Conference Board is a global,
independent business membership and research association working in the public interest and is a not-for-profit
organization. The Conference Board creates and disseminates knowledge about management and the marketplace
to help businesses strengthen their performance and serve the society in a better way.
It works as a global, independent membership organization in the public
Mission: The Conference Board
interest, it conducts research, convenes conferences, makes forecasts,
is dedicated to equipping the
assesses trends, publishes information and analysis, and brings executives world’s leading corporations with
together to learn from one another. the practical knowledge they need
The Conference Board governance programs helps companies improve to improve their performance
their processes, inspire public confidence, and ensure they are complying and better serve society. It is an
with regulations. objective, independent source of
economic and business knowledge
The Conference Board Directors’ Institute is a premiere provider of
with only one agenda: to help our
governance education for directors. Through the Directors’ Institute, the
members understand and deal with
program provides corporate directors with a non-academic, impartial forum
the most critical issues of our time.
for open dialogue about the real-world business challenges they face.
The Corporate Governance program at The Conference Board has helped corporations develop strong core principals
by improving their governance processes through a variety of programs including director training and global ethics
education.
The Conference Board Global Corporate Governance Research Center brings together a distinguished group of
senior corporate executives from leading worldclass companies and influential institutional investors in a non-
adversarial setting. In small groups of prominent senior executives, all discussions are confidential, enabling a
free-flowing exchange of ideas and effective networking. This highly unique forum allows industry leaders to
debate, develop, and advance innovative governance practices, and to drive landmark research in corporate
governance.

H. ASIAN CORPORATE GOVERNANCE ASSOCIATION (ACGA)

The Asian Corporate Governance Association (ACGA) is an independent, non-profit membership organisation
dedicated to working with investors, companies and regulators in the implementation of effective corporate
governance practices throughout Asia. ACGA was founded in 1999 from a belief that corporate governance is
fundamental to the long-term development of Asian economies and capital markets.
ACGA’s scope of work covers three areas:
1. Research:
Tracking corporate governance developments across 12 markets in Asia Pacific and producing independent
analysis of new laws and regulations, investor activism and corporate practices.
2. Advocacy:
Engaging in a constructive dialogue with financial regulators, stock exchanges, institutional investors and
companies on practical issues affecting the regulatory environment and the implementation of better corporate
governance practices in Asia.
3. Education:
Organising conferences and seminars that foster a deeper understanding of the competitive benefits of sound
corporate governance and ways to implement it effectively.
ACGA is funded by a network of sponsors and corporate members, including leading pension and investment
funds, other financial institutions, listed companies, multinational corporations, professional firms and educational
institutions. It is incorporated under the laws of Hong Kong and is managed by a secretariat based there. Its governing
Council comprises directors from around Asia and other parts of the world.
ACGA’s membership comprises 111 organisations operating or investing in Asia and with an interest in corporate
governance. ACGA members come from 17 markets across the globe, including pension and sovereign wealth funds
Lesson 11 • Corporate Governance Forums 331

(and investment managers linked to them), investment managers, listed and unlisted companies, insurance and
insurance-related firms, multilateral development banks, accounting firms, business associations, educational
institutions.

I. CORPORATE SECRETARIES INTERNATIONAL ASSOCIATION LIMITED (CSIA)

Corporate Secretaries International Association Limited (CSIA) was
established on February 10, 2017 as a Company limited by Guarantee Vision Statement: To be the Global
in Hong Kong. It is international federation of governance professional Voice of Corporate Secretaries and
bodies for corporate secretaries & governance professional and Governance Professionals.
represents those who work as frontline practitioners of governance
Mission Statement: To create a
throughout the world.
global profession that develops,
CSIA is governed by a council consisting of the honorary members grows and promotes best practice
(President, Vice-President, Secretary and Treasurer as elected from the in corporate secretarial, corporate
member bodies), past presidents, co-opted members and representatives governance and compliance
of each national member organisation. services by improving professional
standards, the quality of governance
Objectives:
practice and organizational
• Promote the professional status of suitably qualified chartered performance.
secretaries, Corporate Secretaries, Company Secretaries, board
secretaries and other governance professionals.
• Establish and maintain good relations and exchanges between organisations dedicated to the promotion and
practice of secretaryship and/or the promotion of good governance.
• Develop and improve their services and professionalism of their members.
• Assist in the creation of such organisations in countries or regions in which they do not currently exist.
• Promote the growth, development, study and practice of secretaryship and assist their members develop and
improve their services and professional standards.
• Advocate for good governance through carrying out research, developing standards and raising awareness.
• Promote the recognition and influence in respect of secretaryship and its professional practitioners to national
governments and their supplementary/sponsored organisations, international organisations and the global
business community.

J. INTERNATIONAL INTEGRATED REPORTING COUNCIL (IIRC)

The IIRC, is a powerful, international cross section of leaders from the corporate, investment, accounting, securities,
regulatory, academic and standard-setting sectors as well as civil society.
The IIRC was established in 2010 in recognition of the need to move
Mission:
to-wards an International Integrated Reporting Framework that is
fit-for-purpose for the 21st century.The IIRC seeks to build upon, The IIRC’s mission is to establish
enhance and support the work that has been done to date, and is integrated reporting and thinking within
ongoing, to achieve a reporting framework that: mainstream business practice as the
norm in the public and private sectors.
• communicates the organization’s strategy, business model,
performance and plans against the background of the context in Vision:
which it operates;
The IIRC’s vision is to align capital
• provides a coherent framework within which market and allocation and corporate behaviour
regulatory driven reporting requirements can be integrated; to wider goals of financial stability
and sustainable development through
• is internationally agreed, so as to encourage convergence of
the cycle of integrated reporting and
approach and hence more ready understanding of information
thinking.
presented;
• reflects the use of and effect on all of the resources and relationships or “capitals” (human, natural and social as
well as financial, manufactured and intellectual) on which the organization and society depend for prosperity; and
332 Lesson 11 • GRMCE

• reflects and communicates the interdependencies between the success of the organization and the value it
creates for investors, employees, customers and, more broadly, society.
The IIRC is developing an International Integrated Reporting Framework that will facilitate the development of
reporting over the coming decades. The core objective of the Framework is to guide organizations on communicating
the broad set of information needed by investors and other stakeholders to assess the organization’s long-term
prospects in a clear, concise, connected and comparable format. This will enable those organizations, their investors
and others to make better short-and long-term decisions.

CG FORUMS AT A GLANCE

ICSI, 1968
To be global leader in
promoting good
IIRC, 2010 Corporate governance
NFCG, 2003
Establishing integrated
reporting and thinking Be the Key Facilitator and
within mainstream Reference Point for
business practice as the highest standards of
norm in the public and Corporate Governance
private sector. in India.

CSIA, 2017
OECD, 1961
To be global voice of
Corporate Secretaries Promote policies that will
and Governance improve the economic
Professionals and social well being of
people.

CG
Forums

AGCA, 1999 IoD, UK- 1903

Implementation of effective Promoting good corporate

CG practices throughout governance for UK
Asia Business

ICGN, 1995
Conference Board, 1916 Promote effective
Help companies improve standards of CG and
their process inspire investor stewardshipto
public confidence and advance efficient markets
ECGI, 2002
compliance with and sustainable
regulations Improve CG through fostering economies
independent scientific
research and related
activities
Lesson 11 • Corporate Governance Forums 333

CONCLUSION
Why do we need Corporate Governance forum? Does Corporate Governance forum really help the cause of corporate
governance? There is no doubt that more corporate governance forums are emerging in the national, regional and
international arena. Corporates, Institutions, regulators and other intermediaries are the members of such forum,
which help in spreading the awareness of good corporate governance. The forums are a platform where debate
and dialogue take place between researchers, companies, regulators, policy makers, activists, practitioners on
major issues of corporate governance, thereby promoting best practice. These forums also undertake survey and
research work, which helps in creation of knowledge and provide a guidance to the regulatory bodies world over in
incorporating changes in the corporate governance code.

LESSON ROUND UP
• The International Corporate Governance Network (“ICGN”) is a not-for-profit company limited by guarantee
under the laws of England and Wales. The Network’s mission is to develop and encourage adherence to
corporate governance standards and guidelines, and to promote good corporate governance worldwide.
• The European Corporate Governance Institute (ECGI) was founded in 2002. It has been established to improve
corporate governance through fostering independent scientific research and related activities.
• The Conference Board was established in 1916 in the United States of America. The Conference Board
governance programs helps companies improve their processes, inspire public confidence, and ensure they
are complying with regulations.
• The Asian Corporate Governance Association (ACGA) is an independent, non-profit membership organisation
dedicated to working with investors, companies and regulators in the implementation of effective corporate
governance practices throughout Asia.
• CSIA is dedicated to promoting the values and practices of governance professionals in order to create, foster
or enhance the environment in which business can be conducted in a fair, profitable and sustainable manner.

GLOSSARY
Capacity Building Process by which organisations obtain, improve and retain the skills, knowledge and other
resources needed to do their jobs competently.
Trustee An individual person or member of the Board given control or powers of administration of
properties interest with a legal obligation to administer it solely for the specified purpose.
Peer Reviews Peer review process is a process through which the performance of individual countries
is monitored by their peers, all carried out at committee-level, are at the heart of our
effectiveness.

TEST YOURSELF
(These are meant for recapitulation only. Answers to these questions are not to be submitted for evaluation)
1. Can you explain in detail the initiatives of the Institute of Company Secretaries of India in the area of Corporate
Governance.
2. Do you know about the scope of work undertaken by the National Foundation for Corporate governance?
Explain.
3. Can you discuss about the Organisation for Economic Co-operation and Development?
4. Write notes on:
(a) Commonwealth Association for Corporate Governance
334 Lesson 11 • GRMCE

(b) Institute of Directors

(c) International Corporate Governance Network
(d) European Corporate Governance Institute
(e) Conference Board
(f) Asian Corporate Governance Association
(g) Corporate Secretaries International Association.

LIST OF FURTHER READING

Publications : OECD publications are a prime vehicle for disseminating the Organisation’s intellectual output.
OECD publishes regular outlooks, annual overviews and comparative statistics. Among them:
• OECD Economic Outlook assesses prospects for member and major non-member economies.
• OECD Factbook is a key reference tool for everyone working on economic and policy issues.
• OECD Economic surveys provide individual national analyses and policy recommendations.
• Going for Growth 2017 presents comparative indicators and evaluations of national performance.
Following are the links of international forums, students may refer at the websites of these institutions for latest
updates and information.
• http://www.nfcgindia.org
• www.oecd.org/daf/corporateaffairs/principles/text
• http://www.iod.com
• http://www.icgn.org/
• www.ecgi.org/
• http://www.conference-board.org/
• http://www.acga-asia.org/
• www.csiaorg.com
• http://www.ecgi.org/codes/code.php?code_id=24
Lesson 12 Risk Management

Key Concepts One Learning Objectives Regulatory Framework

Should Know
• Risk Identification To understand the: 1. Section 143(12) of the
Essentials • Concepts, processes and merits Companies Act, 2013
• Risk Analysis and of risk mitigation 2. Section 143(15) of the
Assessment • Risk management for an Companies Act, 2013
• Risk Mitigation organisation to overcome the 3. Section 134(3) (n) of the
Strategy challenges posed by various Companies Act, 2013
forms of risks.
• Risk Management 4. Regulation 21 of SEBI (LODR)
Frameworks and • Various Risk management
frameworks and Standards Regulations, 2015
Standards
• Role of Company Secretary in 5. Section 203(1)(ii) of the
• Risk Governance Companies Act, 2013
Risk management
• Model Risk
Management Policy
• Risk Matrix
Lesson Outline
• Risk
• Classification of Risks
• Risk Management
• Advantages of Risk Management
• Steps in Risk Management Process
– Risk Identification
– Risk Analysis
– Risk Assessment
– Handling of Risk
• Risk Mitigation Strategy
• Formulation and Implementation of Risk Strategy
• Risk Management : Fraud
• Reputation Risk Management
• Responsibility of Risk Management
• Role of Company Secretary in Risk Management
• Risk Governance
• Risk Management Frameworks And Standards
– Enterprise Risk Management – Integrated Framework (2004)
– ISO 31000: International Standard for Risk Management
• Risk Management and Internal Controls
• Risk Matrix
• Model Risk Management Policy
• LESSON ROUND UP
• GLOSSARY
• TEST YOURSELF
336 Lesson 12 • PP-GRMCE

RISK
Managing risk has become a critical element within most companies. The management of risk, though, can be
structured differently within companies even for those within the same sector. So what is risk? In the business
world, the word risk has come to mean an impediment to the achievement of an organization’s objectives
It is to be noted that term Risk is used in many ways and is given
different definitions depending on the field and context. Commonly As per the Oxford Dictionary – “Risk is
used terminologies for risks are uncertainty and undesirable Exposure to the possibility of loss, injury, or
outcomes. The other definitions of risks from various perspectives other adverse or unwelcome circumstance;
are as under: a chance or situation involving such a
possibility’.
1. Generic: ‘A probability or threat of damage, injury, liability,
loss, or any other negative occurrence thatis caused by external or internal vulnerabilities, and that may be
avoided through preemptive action.’
2. Finance Perspective: ‘The probability that an actual return on an investment will be lower than the expected
return. Financial risk is divided into the following categories: Basic risk, Capital risk, Country risk, Default
risk, Delivery risk, Economic risk, Exchange rate risk, Interest rate risk, Liquidity risk, Operations risk,
Payment system risk, Political risk, Refinancing risk, Reinvestment risk, Settlement risk, Sovereign risk and
Underwriting risk.’
3. Food industry: ‘The possibility that due to a certain hazard in food there will be an negative effect to acertain
magnitude.’
4. Insurance: A situation where the probability of a variable (such as burning down of a building) is known but a
mode of occurrence or the actual value of the occurrence (whether the fire will occur at a particular property) is not.
5. Securities trading: The probability of a loss or drop in value. Trading risk is divided into two general categories:
(1) Systemic risk affects all securities in the same class and is linked to the overall capital- market system and
therefore cannot be eliminated by diversification also called market risk.
(2) Non- systematic risk is any risk that isn’t market-related or is not systemic also called non-market risk,
extra- market risk, or un-systemic risk.

CLASSIFICATION OF RISKS

Systemic Risk Unsystemic Risk

• It is not fully uncontrollable by an organisation. • It is usually controllable by an organisation.
• It is not entirely predictable. • It is reasonably predictable.
• It is usually of a macro nature. • It is normally micro in nature.
• It usually affects a large number of organisations • If not managed, it directly affects the individual
organisation first.
• operating under a similar stream.
• It can be usually assessed well in advance with
• It cannot be fully assessed and anticipated in
reasonable efforts and risk mitigation can be
advance in terms of timing and gravity.
planned with proper understanding and risk
• Example of such type of risks is Interest Rate assessment techniques.
Risk, Market Risk, Purchasing Power Risk.
• Examples of such risk are Compliance
Risk, Credit Risk, Operational Risk.

Types of Risks on the basis of impact on finance

The risks may also be broadly segregated as Financial Risk and Non-financial Risk. These are not necessarily mutually
exclusive but it is good to understand the primary categorisation. Often both financial and non financial risks are
present in any situations which need to be managed and understood.
Lesson 12 • Risk Management 337

Financial Risk Non-Financial Risk

The risk which has some direct financial impact on These types of risk do not usually have direct and
the entity is treated as financial risk. This risk may be immediate financial impact on the business, but the
Market Risk, Credit Risk, Liquidity Risk, Operational consequences are very serious and later do have
Risk, Legal Risk and Country Risk. The following chart significant financial impact if these risks are not
depicts some of the various types of Financial Risks. controlled at the initial stage. This type of risk may
include Business/Industry & Service Risk, Strategic
Risk, Compliance Risk, Industry Fraud Risk, Reputation
Risk, Transaction Risk, Disaster Risk.

Types of Financial Risks

(i) Market Risk This type of risk is associated with market ups and down. It refers to the risk of loss
arising from the change/volatility in the market prices or economic values which are
the deciding factors for the pricing of the product/financial assets. The market risks
may be Absolute Risk (when it can be measured in rupee/currency term) and Relative
Risk (relative to bench mark index). Hence the market risk may be defined as the risk
to a firm due to the adverse changes in interest rates, currency rates, equity prices and
commodity prices.
(a) Interest Rate Risk
The financial assets, which are connected with interest factors such as bonds/
debentures, faces the interest rate risk. For example Interest rate risk adversely
affects value of fixed income securities. Any increase in the interest reduces the
price of bonds and debts instruments in debt market and vice - versa. So it can be
said that the changes in the interest rates have an inverse relationship with the
price of bonds.
(b) Currency Risk
The volatility in the currency rates is called the currency risk. These risks affect the
firms which have international operations of business and the quantum of the risk
depends on the nature and extent of transactions with the external market.
(c) Equity Risk
It means the depreciation in one’s investment due to the change in market index. For
example in the context of securities, Beta of a stock tells us the market risk of that
stock and it is associated with the day-to-day fluctuations in the market.
(d) Commodity Risk
This type of risk is associated with the absolute changes in the price of the commodity.
Since commodities are physical assets, hence the prices change on account of the
demand and supply factor.

(ii) Credit Risk When a counter party is unable or unwilling to fulfill their contractual obligation, the
credit risk arises. This type of risk is related to the probability of default and recovery
date. Its effect is measured by cost of replacing cash flow if the other party defaults. For
example, in case of loan given by a bank to the borrower and the borrower defaults in
making payments of the installments or due interest on the due date, is termed as credit
risk.
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(iii) Liquidity Risk The liquidity risk arises due to mis-matches in the cash flow i.e. absence of adequate
funds. Liquidity is altogether different from the word solvency. A firm may be in sound
position as per the balance sheet, but if the current assets are not in the form of cash or
near cash assets, the firm may not make payment to the creditors which adversely affect
the reputation of the firm. The liquidity risk may be of two types, trading risk and funding
risk.
(a) Trading Risk
It may mean the absence of the liquidity or enough
products or securities etc to actually undertake Liquidity risk was not
buying and selling activities. e.g. in the context of taken seriously by the
securities trading inability to enter into derivative governments before the
transactions with counter parties or make sales or global financial crisis of
purchase of securities. late 2000’s which caused
severe liquidity crises
(b) Funding Risk in the economy. It was
It refers to the inability to meet the obligations only after this, that the
e.g. inability to manage funds by either borrowing financial models began
or the sale of assets/securities. It arises where the incorporating liquidity
balance sheet of a firm contains illiquid financial risks into their analysis.
assets which cannot be turned in to cash within a
very short time.
(iv) 
Operational/ It arises due to inadequate systems, system capacities, system failure, obsolescence risk,
System/ management failure on account of co-ordination, and faulty control or human error. Some
Management best practice against the operational risk includes clear separation of responsibilities
Risk with strong internal control and regular contingency planning.

(v) 
Obsolescence In the rapid changing world Obsolescence risk is fast emerging and unless the companies
Risk are able to cope up with this timely, the impact will be quite heavy and may lead to closure
of the units also. Nokia is the latest example on this.

Example of Obsolescence Risk?

A publishing company is an example of one that faces obsolescence risk. As computers,
tablets, and smartphones have become more popular and affordable, more consumers
have started reading magazines, newspapers, and books on these devices instead of in
their print forms. For the publishing company to remain competitive, it must minimize
its investments in the old paper publications and maximize its investments in new
technologies. Even as it makes this shift, it must remain alert to new and unimagined
technologies that could supplant the currently popular ways of reading and require
still more investment.

(vi) Legal Risk This risk arises when a counter party does not have the legal or regulatory authority to
engage in the transactions. It also includes the compliance and regulatory risk like insider
trading, market manipulations, defaults and mismanagement of legal affairs etc.

(vii) Political/ Political risk may be on account of declaration of elections in the territory, area specific
Country Risk risk and political uncertainty. The Country risk arises where the firm has its business
operations abroad. This risk may arise due to out-break of war between countries,
imposition of the ban on the business transaction of particular commodity/product.
These can also be existing risks due a country’s legal or political structure which drives
other institutions like judiciary, legislative and general environment for business.
Lesson 12 • Risk Management 339

Types of Non Financial Risks

(i) 
Business/ Business risks implies uncertainty in profits or danger of loss and the events that
Industry & could pose a risk due to some unforeseen events in future, which causes business to
Services Risk fail. Business risk refers to the possibility of inadequate profits or even losses due
to uncertainties e.g., changes in tastes, preferences of consumers, strikes, increased
competition, change in government policy, obsolescence etc. Every business
organization contains various risk elements while doing the business. Such type of
risk may also arise due to business dynamics, competition risks affecting tariff prices,
customer relation risk etc.

(ii) Strategic Risk Business plans which have not been developed properly and comprehensively since
inception may lead to strategic risk. For example, strategic risk might arise from making
poor business decisions, from the substandard execution of decisions, from inadequate
resource allocation, or from a failure to respond well to changes in the business
environment.

(iii) Compliance This risk arises on account of non-compliance or breach of laws/ regulations which the
Risk entity is supposed to adhere. It may result in deterioration of reputation in public eye,
penalty and penal provisions

(iv) Fraud Risk Fraud is perpetrated through the abuse of systems, controls, procedures and working
practices. It may be perpetrated by an outsider or insider. Fraud may not be usually
detected immediately and thus the detection should be planned for on a proactive basis
rather than on a reactive basis..

(v) 
Reputation This type of risk arises from the negative public opinion. Such type of risk may arise
Risk from e.g. from the failure to assess and control compliance risk and can result in harm to
existing or potential business relationships

(vi) 
Transaction Transaction risk arises due to the failure or inadequacy of internal system, information
Risk channels, employee’s integrity or operating processes..

(vii) Disaster Risk On account of natural calamities like floods, fire, earthquake, man-made risks due to
extensive exploitation of land for mines activity, land escalation, risk of failure of disaster
management plans formulated by the company etc.

(viii) Regulatory On account of change in Government policies and perceptions. Especially this type of risks
Risk is associated with Food & Beverages and Pharmaceuticals Industries.

(ix) 
Technology Failure of system caused due to tampering of data access to critical information, non-
Risk availability of data and lack of controls.

Audit Risk

Audit risk is the risk that financial statements are materially incorrect, even though the audit opinion states that the
financial reports are free of any material misstatements. The purpose of an audit is to reduce the audit risk to an
appropriately low level through adequate testing and sufficient evidence.
Over the course of an audit, an auditor makes inquiries and performs tests on the general ledger and supporting
documentation. If any errors are caught during the testing, the auditor requests that management propose correcting
journal entries. At the conclusion of an audit, after any corrections are posted, an auditor provides a written opinion
as to whether the financial statements are free of material misstatement. Auditing firms carry malpractice insurance
to manage audit risk and the potential legal liability.
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Types of Audit Risks

The two components of audit risk are the risk of material misstatement and detection risk.
Risk of Material Misstatement
Risk of material misstatement is a function of inherent risk and control risk. In effect, the risk of material
misstatement is the susceptibility of the financial statements, accounts, and assertions to material misstatement,
and the risk that the client’s current internal controls would be ineffective in proactively identifying and correcting
the misstatements. The risk of material misstatement exists at the financial statement level and assertion level for
all transaction classes, account balances, presentation, and disclosure. The auditor will perform risk assessment
procedures to observe and assess the risk of material misstating the financial statements due to either fraud or error.
Detection Risk
Detection risk is the risk that the auditor’s procedures do not detect a material misstatement. For example, an
auditor needs to perform a physical count of inventory and compare the results to the accounting records. This work
is performed to prove the existence of inventory. If the auditor’s test sample for the inventory count is insufficient to
extrapolate out to the entire inventory, the detection risk is higher.

RISK MANAGEMENT
Different types of risk existing in the business are to be controlled, mitigated and managed. Risk management has
become the mechanism to manage risks so that the negative consequences are kept within acceptable tolerances.
Risk management is relevant to all organisations large
“Risk Management" is a term used to describe
or small. Effective risk management practices support
the processes which aim to assist organisations to
accountability, performance measurement and reward; and
identify, understand, evaluate and take action on
can enable efficiency at all levels through the organisation.
their risks with a view to increasing the probability
Risk management requires a detailed knowledge and
of their success and reducing the impact and
understanding of the organization (both internal and
likelihood of failure. Effective risk management gives
external) and the processes involved in the business.
comfort to shareholders, customers, employees,
To effectively manage risk, and seize the opportunity within other stakeholders and society at large that a
every challenge, institutions must manage a variety of business is being effectively managed and also helps
business dimensions. In today’s world they must focus on the company or organisation confirm its compliance
maximizing digital capabilities, building ongoing expertise, with corporate governance requirements
driving fluid collaboration, developing top-notch analytics
and fostering a risk culture that can withstand disruptive change.
Better risk management techniques provide early warning signals so that the same may be addressed in time. In
traditional concept the natural calamities like fire, earthquake, flood, etc. were only treated as risk and keeping the
safe guard equipments etc. were assumed to have mitigated the risk. But due to rapid changes in the technologies,
business dimensions and complexities, regulatory changes and environmental concerns, new and various types of
risks have emerged. So in the era of fast changing global economy, multiplicity of legal compliances, cross border
business transactions and to ensure the survival, viability and sustainability of business, the management of various
types of risks have gained utmost importance.
Risk management requires commitment from the top management. It is no longer a discretion. It is a tool necessary
to have for creating opportunities for the businesses as they develop during the risk management process. Thus,
Risk Management Process provides a framework to:
• Ensure that all the foreseeable risks involved are actually understood and accepted before important decisions
are taken.
• Monitor new projects and ongoing operations to ensure that they continue to develop satisfactorily and no
problems or new risks emerge.
It is desirable to have a holistic approach to risk management that avoids compartmentalization of risks.
Risk management is part of the corporate strategy. It is a key management tool to safeguard the business assets to be
used for the productive purposes. Risk Management is a logical and systematic process of establishing the context,
 Lesson 12 • Risk Management 341

identifying, analysing, evaluating, treating, monitoring and communicating risks associated with any activity,
function or process, in a way that enables an organisation to minimise losses and maximise opportunities.

ADVANTAGES OF RISK MANAGEMENT

Risk management plays vital role in strategic planning. It is an integral part of project management. An effective risk
management plan focuses on identifying and assessing possible risks. Some of the key advantages of having risk
management are as under:
• Risk management in the long run always results in significant cost savings and prevents wastage of time and
effort in firefighting. It develops robust contingency planning.
• It can help plan and prepare for the opportunities that unravel during the course of a project or business.
• Risk Management improves strategic and business planning. It reduces cost by limiting legal action or
preventing breakages.
• It improves reliability among the stake holders leading to an enhanced reputation.
• Sound ‘risk management practices’ reassure key stakeholders throughout the organization

STEPS IN RISK MANAGEMENT PROCESS

The process of risk management consists of the following logical and sequential steps:

Risk Identification Risk Analysis Risk Assessment Handling of Risk

I. RISK IDENTIFICATION
Risk identification is the first stage of the risk management strategy. The origin/source of the risk is identified. For
example a risk may be due to transport of hazardous raw material to the factory. So the source of the risk origin is
utmost important and from this point the journey start to manage the risks.
By risk identification the organization is able to study the activities and places where its resources are placed to risk.
Correct risk identification ensures effective risk management. If risk managers do not succeed in identifying all possible
losses or gains that challenge the organization, then these non-identified risks will become non manageable. The first task
of the risk management is to classify the corporate risks according to their different types. The first step in organizing
the implementation of the risk management function is to establish the crucial observation areas inside and outside the
corporation. Then, the departments and the employees must be assigned with responsibilities to identify specific risks.
The results of risk identification are normally documented in a risk register, which includes a list of identified risks
along with their sources, potential risk responses and risk categories. This information is used for risk analysis,
which in turn will support creating risk responses. Identified risks can also be represented in a risk breakdown
structure - a hierarchical structure used to categorize potential project risks by its source.
Objective : The objective of the risk identification process is to ensure that all potential project risks are identified.
The ultimate purpose of risk identification is to minimize the negative impact of project hiccups and threats, and
to maximize the positive impact of project opportunities. Awareness of potential project risks reduces the number
of surprises during the project delivery and thus, improves the chances of project success, allowing the team to
meet the time, schedule and quality objectives of the project. Finally, the purpose of risk identification is to provide
information for the next step of the risk management process.
Process of Risk Identification : The process for risk identification starts by taking inventory of the potential project
risks that can affect the project delivery. This step is crucial for efficient risk management throughout the project.
The outputs of the risk identification are used as an input for risk analysis, and they reduce a project manager’s
uncertainty. Though the major work on risk identification is usually done in the beginning of a project, it is important
to remember that risk identification is an iterative process; new risks can be identified throughout the project’s life
cycle as the result of internal or external changes to a project. The process needs to be rigorous to make sure that all
possible risks are identified. An effective risk identification process should include the following steps:
1. Creating a systematic process - The risk identification process should begin with project objectives and success factors.
342 Lesson 12 • PP-GRMCE

2. Gathering information from various sources - Reliable and high quality information is essential for effective risk
management.
3. Applying risk identification tools and techniques - The choice of the best suitable techniques will depend on the
types of risks and activities, as well as organizational maturity.
4. Documenting the risks - Identified risks should be documented in a risk register and a risk breakdown structure,
along with its causes and consequences.
5. Documenting the risk identification process - To improve and ease the risk identification process for future
projects, the approach, participants, and scope of the process should be recorded.
6. Assessing the process’ effectiveness - To improve it for future use, the effectiveness of the chosen process should
be critically assessed after the project is completed.

Seven Identification Essentials

Identification is a process of brainstorming. It isn’t an exact science and should involve continuous
implementation as new phases, experiences, and viewpoints are introduced. Being vital to the management
process, there are some essentials to risk identification that guarantee maximum results.
1. Team Participation: Face-to-face interactions between the project managers and the team, which
promises better and more comprehensive communication. The team must feel comfortable to find
and share hidden or elusive risks.
2. Repetition: Information changes appear as the risk management process proceeds. Keeping identified
risks current and updated means the system is focused on mitigating the most prevalent issues.
3. Approach: Certain objectives require distinct approaches to best combat identification failure. One
method is to identify all root causes, undesirable events and map their potential impacts. Another is
to identify essential functions the project must enact, then find possible issues with each function or
goal. Both methods work well, but the latter may be easier due to its defined scope.
4. Documentation: Consistent and exhaustive documentation leads to comprehensive and reliable
solutions for a specific project or future risk management team’s analysis. Most communication is
recorded by a project manager and data is copied, stored, and updated for continued risk prevention.
5. Roots and Symptoms: It is essential in the risk identification phase to find the root causes of a risk
instead of mistaking them with the symptoms. A symptom can be confused with the root cause,
making it critical to discover the origin of risks and denote what are their symptoms. Other essentials
of risk identification involve the analysis phase. This is where identified risks are further researched
and understood.
6. Project Definition Rating Index (PDRI): PDRI is a risk assessment tool that helps develop mitigation
programs for high-risk areas. It facilitates the team’s risk assessment within the defined project
scope, budget and deadlines. It also provides further detail of individual risks and their magnitude,
represented by a score. The summation of scores is statistically compared to the project performance
as a certainty level for the entire project
7. Event Trees: Commonly used in reliability studies and probabilistic risk assessments; event trees
represent an event followed by all factors and faults related to it. The top of the tree is the event and
it is supported by any condition that may lead to that event, helping with likelihood visibility

II. RISK ANALYSIS

After identification of the risk parameters, the second stage is of analyzing the risk which helps to identify and
manage potential problems that could undermine key business initiatives or projects.
To carry out a Risk Analysis, first identify the possible threats and then estimate the likelihood that these threats
will materialize. The analysis should be objective and should be industry specific. Within the industry, the scenario
based analysis may be adopted, taking into consideration the possible events that may occur and its alternative ways
to achieve the given target.
 Lesson 12 • Risk Management 343

Risk Analysis can be complex, as it requires to draw analysis on detailed information such as project plans, financial
data, security protocols, marketing forecasts and other relevant information. However, it’s an essential planning
tool, and one that could save time, money, and reputations.
Risk analysis is useful in many situations like:
• While planning projects, to help in anticipating and neutralizing possible problems.
• While deciding whether or not to move forward with a project.
• While improving safety and managing potential risks in the workplace.
• While preparing for events such as equipment or technology failure, theft, staff sickness, or natural disasters.
• While planning for changes in environment, such as new competitors coming into the market, or changes to
government policy.
• When all the permutations-combinations of possible events/ threats are listed while analyzing the risk
parameters and the steps taken to manage such risks, the risk matrix is designed / popped-up before the
decision making and implementing authority.

Process of Risk Analysis

Identify
Threats Estimate Risk

a) Identify Threats: The first step in Risk Analysis is to identify the existing and possible threats that one might
face. These can come from many different sources. For instance, they could be:
• Human – Illness, death, injury, or other loss of a key individual.
• Operational – Disruption to supplies and operations, loss of access to essential assets or failures in
distribution.
• Reputational – Loss of customer or employee’s confidence, or damage to market reputation.
• Procedural – Failure of accountability, internal systems, or controls, or from fraud.
• Project – Going over budget, taking too long on key tasks, or experiencing issues with product or service
quality.
• Financial – Business failure, stock market fluctuations, interest rate changes, or non-availability of funding.
• Technical – Advances in technology, or from technical failure.
• Natural – Weather, natural disasters, or disease.
• Political – Changes in tax, public opinion, government policy, or foreign influence.
• Structural – Dangerous chemicals, poor lighting, falling boxes, or any situation where staff, products, or
technology can be harmed.
A number of different approaches can be used to carry out a thorough analysis:
• Run through a list such as the one above to see if any of these threats are relevant.
• Think about the systems, processes, or structures used and analyze risks to any part of these.
• Ask others who might have different perspectives. Ask for input from team members and consult others
in the organization, or those who run similar projects.
• Tools such as SWOT Analysis and Failure Mode and Effects Analysis can also help to uncover threats,
while the Scenario Analysis tool helps to explore possible future threats.
b) Estimate Risk: Once the threats are identified, it is required to calculate both the likelihood of these threats
being realized, and their possible impact. One way of doing this is to make best estimate of the probability of
344 Lesson 12 • PP-GRMCE

the event occurring, and then to multiply this by the amount it will cost to set things on the right track. This
gives a value for the risk:
Risk Value = Probability of Event × Cost of Event

As a simple example, imagine that a risk has been identified that your rent may increase substantially.
You think that there’s 80 percent chance of this happening within the next year, because your landlord has
recently increased rents for other businesses. If this happens, it will cost your business an extra Rs. 500,000
over the next year. So the risk value of the rent increase is:
0.80 (Probability of Event) x Rs.500, 000 (Cost of Event) = Rs. 400,000 (Risk Value)
You can also use a Risk Impact/Probability Chart to assess risk. This will help you to identify which risks
you need to focus on.

III. RISK ASSESSMENT

Risk assessment is the way in which enterprises get a handle on how significant each risk is to the achievement of
their overall goals. To accomplish this, enterprises require a risk assessment process that is practical, sustainable,
and easy to understand. The process must proceed in a structured and disciplined fashion. It must be correctly sized
to the enterprise’s size, complexity, and geographic reach.
When assessing risks, it’s important to determine whether Difference between risk analysis and risk
the risk is - inherent risk, residual risk, or both. Inherent assessment?
risk is the risk to an entity in the absence of any actions/ A risk assessment involves many steps and forms
preventions management might take to alter either the risk’s the backbone of your overall risk management
likelihood or impact. Residual risk is the risk remaining after plan. A risk analysis is one of those steps—
management’s response to the risk. Some entities interpret: the one in which you determine the defining
characteristics of each risk and assign each a
• inherent risk to be level of risk assuming, responses score based on your findings.
currently in place fail, and
• residual risk to be the level of risk assuming, existing responses operate according to design.
Some other entities interpret inherent risk to be the current level of risk assuming existing responses operate
according to design and residual to be the estimated risk after responses under consideration are put into place. The
first approach is focused more on controls effectiveness of the current environment and the second approach on
evaluating risk response options. There is no one right answer and either approach may be useful depending upon
the purpose of the assessment and the nature of the risks being considered.
Effective and Develop
sustainable assessment
risk
criteria
assessment
process

Response to Process of Risk

Assessment Assess risks
risks

Assess risk
Priortize risks interaction
 Lesson 12 • Risk Management 345

1. Develop assessment criteria: The first activity within the risk assessment process is to develop a
common set of assessment criteria to be deployed across business units, corporate functions, and large
capital projects. Risks and opportunities are typically assessed in terms of impact and likelihood. Many
enterprises recognize the utility of evaluating risk along with additional dimensions such as vulnerability
and speed of onset.
2. Assess risks: Assessing risks consists of assigning values to each risk and opportunity using the defined
criteria. An initial screening of the risks and opportunities is performed using qualitative techniques
followed by a more quantitative treatment of the most important risks and opportunities lending
themselves to quantification (not all risks are meaningfully quantifiable). Qualitative assessment consists
of assessing each risk and opportunity according to descriptive scales as described in the previous section.
Quantitative analysis requires numerical values for both impact and likelihood using data from a variety
of sources.
The quality of the analysis depends on the accuracy and completeness of the numerical values and the
validity of the models used. Model assumptions and uncertainty should be clearly communicated and
evaluated using techniques such as sensitivity analysis. Both qualitative and quantitative techniques
have advantages and disadvantages. Most enterprises begin with qualitative assessments and develop
quantitative capabilities over time as their decision-making needs dictate.
For qualitative assessments, the most commonly used assessment techniques are interviews, cross-
functional workshops, surveys, benchmarking, and scenario analysis. Quantitative techniques range
from benchmarking and scenario analysis to generating forward looking point estimates (deterministic
models) and then to generating forward looking distributions (probabilistic models). Some of the most
powerful probabilistic models from an enterprise-wide standpoint include causal at-risk models used
to estimate gross profit margins, cash flows, or earnings over a given time horizon at given confidence
levels.
3. Assess risk interactions: Risks do not exist in isolation. Enterprises have come to recognize the
importance of managing risk interactions. Even seemingly insignificant risks on their own have
the potential, as they interact with other events and conditions, to cause great damage or create
significant opportunity. Therefore, enterprises are gravitating toward an integrated or holistic view of
risks using techniques such as risk interaction matrices, bow-tie diagrams, and aggregated probability
distributions.
4. Prioritize risks: Once the risks have been assessed and their interactions documented, it’s time to view
the risks as a comprehensive portfolio to enable the next step – prioritizing for risk response and reporting
to different stakeholders. Risk prioritization is the process of determining risk management priorities by
comparing the level of risk against predetermined target risk levels and tolerance thresholds. While each risk
captured may be important to management at the function and business unit level, the prioritization helps
provide focus to senior management and board in addressing and giving attention to key risks. Ranking and
prioritizing is often done in a two-step process.
• First, the risks are ranked according to one, two, or more criteria such as impact rating multiplied by
likelihood rating or impact multiplied by vulnerability.
• Second, the ranked risk order is reviewed in light of additional considerations such as impact alone,
speed of onset, or the size of the gap between current and desired risk level (risk tolerance threshold). If
the initial ranking is done by multiplying financial loss by likelihood, then the final prioritization should
take qualitative factors into consideration.
5. Response to Risks: The results of the risk assessment process then serve as the primary input to risk
responses, whereby response options are examined (accept, reduce, share, or avoid), cost-benefit analyses
performed, a response strategy formulated, and risk response plans are developed.
6. Effective and sustainable risk assessment process: To be effective and sustainable, the risk assessment
process needs to be simple, practical, and easy to understand.. To be efficient, they must be supported by the
right technology.
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IV. HANDLING OF RISK

The ownership of risk should be allocated. Responsibilities and accountabilities of the person handling risks need
to be identified and assigned. The person concerned when the risk arises, should document it and report it to the
higher ups in order to have the early measures to get it minimized. Risk may be handled in the following ways:

Risk Retension/
Absorption
Risk Avoidance
• Active risk retension
• Passive risk retension

Risk Trasfer
• By tort
Risk Reduction • By contract other than
Insurance
• By contract of Insurance

1) Risk Avoidance: Risk Avoidance means to avoid taking high risk project or choosing of less risky business/
project. For example one may avoid investing in stock market due to price volatility in stock prices and may
prefer to invest in debt instruments.
2) Risk Retention/absorption: The enterprise handles the unavoidable risk internally and the firm bears/
absorbs it due to the fact that either insurance cannot be purchased of such type of risk or it may be too
expensive to cover the risk and much more cost-effective to handle the risk internally. Usually, retained risks
occur with greater frequency, but have a lower severity. An insurance deductible is a common example of risk
retention to save money, since a deductible is a limited risk that can save money on insurance premiums for
larger benefit. There are two types of retention methods for containing losses as under:
– Active Risk Retention: Where the risk is retained as part of deliberate management strategy after conscious
evaluation of possible losses and causes.
– Passive Risk Retention: Where risk retention occurred through negligence. Such type of retaining risk is
unknown or because the risk taker either does not know the risk or considers it a lesser risk than it actually is.
3) Risk Reduction: In many ways physical risk reduction (or loss prevention, as it is often called) is the best way
of dealing with any risk situation and usually it is possible to take steps to reduce the probability of loss. The
ideal time to think of risk reduction measures is at the planning stage of any new project when considerable
improvement can be achieved at little or no extra cost. The cautionary note regarding risk reduction is that,
as far as possible expenditure should be related to potential future savings in losses and other risk costs; in
other words, risk prevention generally should be evaluated in the same way as other investment projects.
4) Risk Transfer: This refers to legal assignment of cost of certain potential losses to another. The insurance of
‘risks’ is to occupy an important place, as it deals with those risks that could be transferred to an organization
that specialises in accepting them, at a price. Usually, there are 3 major means of loss transfer viz.,
• By Tort,
• By contract other than insurance,
• By contract of insurance.
The main method of risk transfer is insurance. The value of the insurance lies in the financial security that a firm
can obtain by transferring to an insurer, in return for a premium, the risk of losses arising from the occurrence of a
specified peril. Thus, insurance substitutes certainty for uncertainty. Insurance does not protect a firm against all
perils but it offers restoration, atleast in part of any resultant economic loss.

RISK MITIGATION STRATEGY

Risk mitigation is defined as taking steps to reduce adverse effects. Risk mitigation is the process by which
an organization introduces specific measures to minimize or eliminate unacceptable risks associated with its
 Lesson 12 • Risk Management 347

operations. Risk mitigation measures can be directed towards reducing the severity of risk consequences, reducing
the probability of the risk materializing, or reducing the organizations exposure to the risk. The risk mitigation
step involves development of mitigation plans, designed to manage, eliminate, or reduce risk to an acceptable level.
Once risks have been identified and assessed, the strategies to manage the risk fall into one or more of the following
categories:
i) Transfer Risk: Normally in projects, assignments or multifaceted exercises, execution is fought with risks.
Different agencies work together and these agencies take care to transfer risk in their areas to another agency
which is better equipped to take care of a risk for a consideration. Here the concept of core competence curves
in and whenever a particular agency, individual or a firm finds that it is dealing in an area where it does not have
the core competence to deal with, it seeks the help of another agency which has the specific core competence
to transfer its own risk. The risk may be in the form of loss of reputation or sub quality performance and this
risk is taken care of through transfer.
ii) Tolerate Risk or Risk Retention: It is retention of the risk. It is accepting the loss when it occurs. True self-
insurance falls in this category. Risk retention is a viable strategy for small risks where the cost of insuring
against the risk would be greater over time than the total losses sustained. All risks that are not avoided,
reduced or transferred are retained by default. This includes risks that are so large or catastrophic that they
either cannot be insured against or the premiums would be infeasible.
War is an example since most property and risks are not insured against war, so the loss attributed by war is
retained by the insured. Also any amount of potential loss (risk) over the amount insured is retained risk. This
may also be acceptable if the chance of a very large loss is small or if the cost to insure for greater coverage
amount is so great it would hinder the goals of the organization too much.
iii) Reduce Risk: By far the greater number of risks will belong to this category. The purpose of treatment is not
necessarily to obviate the risk, but more likely to contain the risk to an acceptable level. Internal controls are
actions instigated from within the organization (although their effects may be felt outside of the organization)
which are designed to contain risk to acceptable levels.
Outsourcing could be an example of risk reduction if the outsourcer can demonstrate higher capability at
managing or reducing risks. In this case companies outsource only some of their departmental needs. For
example, a company may outsource only its software development, the manufacturing of hard goods, or
customer support needs to another company, while handling the business management itself. This way,
the company can concentrate more on business development without having to worry as much about the
manufacturing process.
Modern software development methodologies reduce risk by developing and delivering software incrementally.
Earlier methodologies suffered from the fact that they only delivered software in the final phase of development;
any problems encountered in initial phases meant costly rework and often jeopardized the whole project.
iv) Avoid Risk: This method results in complete elimination of exposure to loss due to a specific risk. It can be
established by either avoiding to undertake the risky project or discontinuance of an activity to avoid risk. This
means that no risky projects are undertaken. Alternatively, a project may be abandoned midway to mitigate the
risk while handling a project.
It is not performing an activity which could carry risk. An example would be not buying a property or business
in order to not take on the liability that comes with it. Another would be not flying in order to not take the risk
that the aeroplane were to be hijacked. Avoidance may seem the answer to all risks, but avoiding risks also
means losing out on the potential gain that accepting (retaining) the risk may have allowed. Not entering a
business to avoid the risk of loss also avoids the possibility of earning profits.
v) Combine Risk: When the business faces two or three risks, the overall risk is reduced by combination.
This strategy is suitable mainly in the areas of financial risk. Different financial instruments say, shares and
debentures are taken in a single portfolio to reduce the risk.
vi) Sharing Risk: Insurance is a method of sharing risk for a consideration. For example by paying insurance
premium the company shares the risk with companies and the insurance companies themselves share their
risk by doing re-insurance.
vii) Hedging Risk: Exposure of funds to fluctuations in foreign exchange rates, prices etc., bring about financial
risks resulting in losses or gain. The downside risk is often taken care.
348 Lesson 12 • PP-GRMCE

MAINTAINING THE RISK STRATEGY

It has already been noted that the risk environment of any organization is constantly changing and developing, and
that the priorities of objectives and the consequent importance of risks will shift and change. The risk management
process is therefore a dynamic and ongoing one. The process has to allow for periodic review of risks and for
consequent adjustment of the control response.
Whatever option is adopted, it is important that those charged with control of the risk management process should
regularly review it. One useful technique for doing this is to actively review the risks associated with each of the key
organizational objectives.
Suitable tools needs to be identified to assist with the task of keeping the risk strategy up to date. A key tool is the
use of ongoing Control and Risk Self Assessment (CRSA) procedures. This procedure embeds review of risk and
control into the organization at every level and uses the knowledge and experience of the staff that are closest to
each function to assess the movement in risks and the appropriateness of control.

FRAUD RISK MANAGEMENT

Fraud is a deliberate action to deceive another person with the intention of gaining some things. Fraud can loosely be
defined as “any behavior by which one person intends to gain a dishonest advantage over another”. In other words,
fraud is an act or omission which is intended to cause wrongful gain to one person and wrongful loss to the other,
either by way of concealment of facts or otherwise.
Section 25 of the Indian Penal Code, 1860 defines the word, “Fraudulently”, which means, a person is said to do a
thing fraudulently if he does that thing with intent to defraud but not otherwise.
Further according to section 17 of the Indian Contract Act, 1872, ‘fraud’ means and includes any of the following acts
committed by a party to a contract, or with his connivance (intentional active or passive acquiescence), or by his
agent with intent to deceive or to induce a person to enter into a contract.
1. The suggestion that a fact is true when it is not true and the persons making the suggestion does notbelieve it
to be true;
2. The active concealment of a fact by a person having knowledge or belief of the fact;
3. A promise made without any intention of performing it;
4. Any other act fitted to deceive;
5. Any such act or omission as the law specially declares to be fraudulent.
The Companies Act 2013 has also explained fraud. Explantion to Section 447 defines “fraud”, which reads as under:
“fraud” in relation to affairs of a company or anybody corporate, includes any act, omission, concealment of any fact
or abuse of position committed by any person or any other person with the connivance in any manner, with intent to
deceive, to gain undue advantage from, or to injure the interests of, the company or its shareholders or its creditors
or any other person, whether or not there is any wrongful gain or wrongful loss.
A definition of fraud has been suggested in the context of electronic banking in the Report of RBI Working Group on
Information Security, Electronic Banking, Technology Risk Management and Cyber Frauds, which reads as under:
“A deliberate act of omission or commission by any person, carried out in the course of a banking transaction or in
the books of accounts maintained manually or under computer system in banks, resulting into wrongful gain to any
person for a temporary period or otherwise, with or without any monetary loss to the bank”.
For prevention of the fraud, there should be in existence a robust internal check and control systems. For example in
banking there is a concept of ‘maker’ and ‘checker’. The day today transactions are entered by the maker and another
person validates the transactions. So it is a self- balancing system. Further the internal/ concurrent audit also helps
in early detection of the frauds. The management should be pro-active in fraud related matter. A fraud is usually not
detected until and unless it is unearthed.
Fraud Risk Management Policy should be incorporated, aligned to its internal control and risk management. Such policy/
plan protects the company from any kind of uncertain happening which leads the company to a huge loss or damage
(brand reputation, financial loss, assets). The Fraud Risk Management Policy will help to strengthen the existing anti-
fraud controls by raising the awareness across the Company and (i) Promote an open and transparent communication
 Lesson 12 • Risk Management 349

culture (ii) Promote zero tolerance to fraud/misconduct (iii) Encourage employees to report suspicious cases of fraud/
misconduct. (iv) Spread awareness amongst employees and educate them on risks faced by the company.

Fraud Risk Management

Such a policy may include the following:
• Defining fraud: This shall cover activities which the company would consider as fraudulent.
• Defining Role & responsibilities: The policy may define the responsibilities of the officers who shall be
involved in effective prevention, detection, monitoring & investigation of fraud. The company may also
consider constituting a committee or operational structure that shall ensure an effective implementation
of anti-fraud strategy of the compan y. This shall ensure effective investigation in fraud cases and prompt
as well as accurate reporting of fraud cases to appropriate regulatory and law enforcement authorities.
• Communication channel: Encourage employees to report suspicious cases of fraud/misconduct. Any person
with knowledge of suspected or confirmed incident of fraud/misconduct must report the case immediately
through effective and efficient communication channel or mechanism.
• Disciplinary action: After due investigations, disciplinary action against the fraudster may be considered as
per the company's policy.
• Reviewing the policy: The employees should educate their team members on the importance of complying
with Company's policies & procedures and identifying/ reporting of suspicious activity, where a situation
arises. Based on the developments, the policy should be reviewed on periodical basis.

Reporting of Fraud under Companies Act, 2013

The Companies Act, 2013 has introduced many new reporting requirements for the statutory auditors of companies.
One of these requirements is given under the Section 143(12) of the Companies Act, 2013 which requires the
auditors to report to the Central Government about the fraud/suspected fraud committed against the company by
the officers or employees of the company.
Consequence of non-compliance: Sub-section 15 of section 143 states that if any auditor, cost accountant or company
secretary in practice do not comply with the provisions of sub-section (12), he shall be punishable with fine which
shall be five lakh rupees in case of a listed company and one lakh rupees in case of any other company.
Section 143(12) includes only fraud by officers or employees of the company and does not include fraud by third
parties such as vendors and customers.

REPUTATION RISK MANAGEMENT

The Reserve Bank of India in its Master Circular number RBI/2015-16/85 DBR.No.BP.BC.4./21.06.001/2015-
16 dated July 1, 2015 has defined the Reputation Risk as the risk arising from negative perception on the part
of customers, counterparties, shareholders, investors, debt-holders, market analysts, other relevant parties or
regulators that can adversely affect a bank’s ability to maintain existing, or establish new business relationships
and continued access to sources of funding (e.g. through the interbank or securitization markets). Reputational
Risk is multidimensional and reflects the perception of other market participants. Furthermore, it exists throughout
the organisation and exposure to reputational risk is essentially a function of the adequacy of the bank’s internal
risk management processes, as well as the manner and efficiency with which management responds to external
influences on bank-related transactions.
Loss of Reputation has long lasting damages like:
• It destroys the Brand Value
• Steep downtrend in share value.
• Ruined of Strategic Relationship
• Regulatory relationship is damaged which leads to stringent norms.
• Recruitment to fetch qualified staff as well the retention of the old employees becomes difficult.
350 Lesson 12 • PP-GRMCE

For managing the reputation risk, the following principles are worth noting:
• Integration of risk while formulating business strategy.
• Effective board oversight.
• Image building through effective communication.
• Promoting compliance culture to have good governance.
• Persistently following up the Corporate Values.
• Due care, interaction and feedback from the stakeholders.
• Strong internal checks and controls Peer review and evaluating the company’s performance.
• Quality report/ newsletter publications
• Cultural alignments

RESPONSIBILITY OF RISK MANAGEMENT

• Section 134(3) (n) of the Companies Act, 2013 provides that a statement indicating development and
implementation of a risk management policy for the company including identification therein of elements of
risk, if any, which in the opinion of the Board may threaten the existence of the company must be included In
the Board of Director’s report to be attached in the financial statement of the company.
• SEBI (LODR) Regulations, 2015 also provides that company shall lay down procedures to inform Board
members about the risk assessment and minimization procedures. The Board shall be responsible for framing,
implementing and monitoring the risk management plan for the company.
• The Risk Management Plan must include all elements of risks. The traditional elements of potential likelihood
and potential consequences of an event must be combined with other factors like the timing of the risks, the
correlation of the possibility of an event occurring with others, and the confidence in risk estimates.
• Risk management policies should reflect the company’s risk profile and should clearly describe all elements of
the risk management & internal control system and any internal audit function. A company’s risk management
policies should clearly describe the roles and accountabilities of the board, audit committee, or other
appropriate board committee, management and any internal functionaries.
• A company should have identified Chief Risk Officer manned by an individual with the vision and the diplomatic
skills to forge a new approach. He may be supported by “risk groups” to oversee the initial assessment work
and to continue the work till it is completed.
• Regulation 21 of SEBI (LODR) Regulations, 2015, requires that every listed company should have a
Risk Management Committee (details are provided under the chapter of Board Committees) The company
secretaries are governance professionals, whose role is to enforce a compliance framework to safeguard the
integrity of the organization and to promote high standards of ethical behavior. He has a significant role in
assisting the board of the organization to achieve its vision and strategy. The activities of the governance
professional encompass legal and regulatory duties & obligations, and additional responsibilities assigned by
the employer. However, in essence, the functions of a governance professional include:

• Advising on best practice in governance, risk management and compliance.

• Championing the compliance framework to safeguard organizational integrity.
• Promoting and acting as a ‘sounding board’ on standards of ethical and corporate behavior.
• Balancing the interests of the Board or governing body, management and other stakeholders.

The listing agreement also provides for the establishment of the Risk Management Committee as per
Regulations. Since it is the part of the Corporate Governance norms and non-compliance of the same is to be
reported by the Company Secretary.
In terms of Section 203(1)(ii), a Company Secretary is a Key Managerial Person. Hence being a top level
officer and board confidante, a Company Secretary can play a role in ensuring that a sound Enterprise -wide
 Lesson 12 • Risk Management 351

Risk Management [ERM] which is effective throughout the company, is in place. The board of directors may
have a risk management sub-committee assisted by a Risk Management Officer. As an advisor to the board
in ensuring good governance, a Company Secretary shall ensure that there is an Integrated Framework on
which a strong system of internal control is built. Such a framework will become a model for discussing
and evaluating risk management efforts in the organization. Risk and control consciousness should spread
throughout the organization. A Company Secretary can ensure that this happens so that the risk factor will
come into consideration at the every stage of formulation of a strategy. It will also create awareness about
inter- relationship of risks across business units and at every level of the organization. A Company Secretary
can ensure that the following questions [an illustrative list] are effectively addressed at the board level:

• What is the organization’s risk management philosophy?

• Is that philosophy clearly understood by all personnel?
• What are the relationships among ERM, performance, and value?
• How is ERM integrated within organizational initiatives?
• What is the desired risk culture of the organization and at what point has its risk appetite been set?
• What strategic objectives have been set for the organization and what strategies have been or will be
implemented to achieve those objectives?
• What related operational objectives have been set to add and preserve value?
• What internal and external factors and events might positively or negatively impact the organization’s
ability to implement its strategies and achieve its objectives?
• What is the organization’s level of risk tolerance?
• Is the chosen risk response appropriate for and in line with the risk tolerance level?
• Are appropriate control activities (i.e., approvals, authorizations, verifications, reconciliations,
reviews of operating performance, security of assets, segregation of duties) in place at every level
throughout the organization?
• Is communication effective – from the top down, across, and from the bottom up the organization?
• How effective is the process currently in place for exchanging information with external parties?
• What is the process for assessing the presence and performance quality of all eight ERM components
over time?

RISK GOVERNANCE
Risk governance includes the skills, infrastructure (i.e., organization structure, controls and information systems), and
culture deployed as directors exercise their oversight. Good risk governance provides clearly defined accountability,
authority, and communication/reporting mechanisms.
A process for risk management cannot be initiated unless there is a perception and knowledge of risk surrounding
the business. Businesses evolve and are exposed to change dynamics of the external environment. Hence it is
important to have the risk oversight function, as one of the areas of responsibility of the board of directors of any
enterprise. The Board may form a separate committee to support the board function depending on the complexities
of the business enterprise and the complexities associated with its transactions and events.
The board shall have to identify the extent and type of risks it faces and the planning necessary to manage and
mitigate the same for ensuring growth for the benefit of all the stakeholders. Therefore, the Board has to define a
risk philosophy and the extent to which it is willing to accept any consequence of taking of risks by the organisation
and its functionaries in its day to day functioning.
A strengthened management information system (MIS) supported by robust information technology platform is
a necessary pre-requisite for enhancing Board efficiency in oversight and decision making. Similarly, augmented
skill sets and experience at the level of independent directors would go a long way in enhancing the Board capacity.
Strong MIS facilitates risk reporting to the boards in an effective and comprehensive manner, which in turn enhances
352 Lesson 12 • PP-GRMCE

transparency and causes informed decision taking. Robust information technology systems are a necessary condition
for supporting the MIS framework as the quality of risk information that the Boards and the top management receive
depends largely on the quality and robustness of the information technology systems.
In addition to prescribing the risk appetite for the company, the board also needs to lay down appropriate risk
strategy and ensure that this is institutionalised throughout the organization. This would entail, aligning risk
management processes with the overall business strategy, clearly defining the roles and responsibilities down the
hierarchy, establishing accountability and reinforcing change with communication and training. The Board and
the senior management oversight must be supplemented with effective leadership by the Chairman and the chief
executive officer (CEO), and informed non-executive directors. The Boards must get much more intimately involved
in risk matters and have a firmer understanding of the key risks faced by the business.
Effective risk governance also demands that each director is aware of the breadth of risks faced by the company.
Directors add value to the Board when they have financial expertise, are aware of risk fundamentals and techniques,
and are able to manage dynamics with executives.
Here, the risk management committees have an important role to play in the overall risk governance framework.
Apart from monitoring the company’s strategic-risk profile on an on-going basis, such committees would also be
responsible for defining the company’s overall risk appetite; approving major transactions above a company’s risk
threshold, and; establishing limit structures and risk policies for use within individual businesses.
Board members need to have a good understanding of risk management, even when they lack expertise in that area.
Boards may lean on the expertise of outside consultants to help them review company risk management systems
and analyze business specific risks. Boards should perform a formal review of risk management systems, atleast
once in a year.
As part of the annual review, boards should review risk oversight policies and procedures at the board and committee
levels and assess risk on an ongoing basis. It’s helpful to familiarize the board with expectations within the industry
or regulatory bodies that the organization operates in by arranging for a formal presentation on risk management
best practices. The annual risk management review should include communication from management about lessons
learned from past mistakes.
Risk oversight is the responsibility of the entire Board and the same can be achieved through a review mechanism
which inter-alia could include::
1. Developing policies and procedures around risk that are consistent with the organization’s strategy and risk
appetite.
2. Taking steps to foster risk awareness.
3. Encourage an organizational culture of risk adjusting awareness
4. Maintenance of a Risk Register
5. A compliance certificate on the identification of risks and establishment of mitigation measures.

RISK MANAGEMENT FRAMEWORKS AND STANDARDS

Many standards and guidelines have been developed worldwide to help organisations implement risk management
systematically and effectively. These standards seek to establish a common view on frameworks, processes and
practice, and are generally set by recognised internati0onal standards bodies or by industry groups. Risk management
is a fast-moving discipline and standards are regularly supplemented and updated.
The different standards reflect the different motivations and technical focus of their developers, and are appropriate
for different organisations and situations. Standards are normally voluntary, although adherence to a standard may
be required by regulators or by contract.

1. Enterprise Risk Management – Integrated Framework (2004)

In response to a need for principles-based guidance to help entities design and implement effective enterprise-
wide approaches to risk management, Committee of Sponsoring Organizations of the Treadway Commission
(COSO) issued the Enterprise Risk Management – Integrated Framework in 2004. This framework defines essential
enterprise risk management components, discusses key ERM principles and concepts, suggests a common ERM
 Lesson 12 • Risk Management 353

language, and provides clear direction and guidance for enterprise risk
The Committee of Sponsoring
management. The guidance introduces an enterprise-wide approach to
Organizations of the Treadway
risk management as well as concepts such as: risk appetite, risk tolerance,
Commission (COSO) issued Internal
portfolio view. This framework is now being used by organizations
Control – Integrated Framework to
around the world to design and implement effective ERM processes.
help businesses and other entities
The Enterprise Risk Management – Integrated Framework which is one assess and enhance their internal
of the most widely recognized and applied enterprise risk management control systems. This framework
frameworks in the world. It provides a principles-based approach to was actually developed by
help organizations design and implement enterprise-wide approaches PricewaterhouseCoopers who were
to risk management. commissioned to do so by COSO.
Enterprise risk management deals with risks and opportunities affecting
value creation or preservation, defined as follows:

Enterprise risk management is a process, effected by an entity’s board of directors, management and other
personnel, applied in strategy setting and across the enterprise, designed to identify potential events that may
affect the entity, and manage risk to be within its risk appetite, to provide reasonable assurance regarding the
achievement of entity objectives.

This definition is purposefully broad. It captures key concepts fundamental to how companies and other
organizations manage risk, providing a basis for application across organizations, industries, and sectors. It focuses
directly on achievement of objectives established by a particular entity and provides a basis for defining enterprise
risk management effectiveness.
Value is maximized when management sets strategy and objectives to strike an optimal balance between growth and
return goals and related risks, and efficiently and effectively deploys resources in pursuit of the entity’s objectives.

Enterprise risk management encompasses:

• Aligning risk appetite and strategy – Management considers the entity’s risk appetite in evaluating
strategic alternatives, setting related objectives, and developing mechanisms to manage related risks.
• Enhancing risk response decisions – Enterprise risk management provides the rigor to identify and select
among alternative risk responses – risk avoidance, reduction, sharing, and acceptance.
• Reducing operational surprises and losses – Entities gain enhanced capability to identify potential events
and establish responses, reducing surprises and associated costs or losses.
• Identifying and managing multiple and cross-enterprise risks – Every enterprise faces a myriad of risks
affecting different parts of the organization, and enterprise risk management facilitates effective response
to the interrelated impacts, and integrated responses to multiple risks.
• Seizing opportunities – By considering a full range of potential events, management is positioned to identify
and proactively realize opportunities.
• Improving deployment of capital – Obtaining robust risk information allows management to effectively
assess overall capital needs and enhance capital allocation.

Components of Enterprise Risk Management

Enterprise risk management consists of eight interrelated components. These are derived from the way management
runs an enterprise and are integrated with the management process. These components are:
• Internal Environment – The internal environment encompasses the tone of an organization, and sets the basis
for how risk is viewed and addressed by an entity’s people, including risk management philosophy and risk
appetite, integrity and ethical values, and the environment in which they operate.
• Objective Setting – Objectives must exist before management can identify potential events affecting their
achievement. Enterprise risk management ensures that management has in place a process to set objectives and
that the chosen objectives support and align with the entity’s mission and are consistent with its risk appetite.
354 Lesson 12 • PP-GRMCE

Internal
Environment

Information and Objective

Communication Setting

Enterprise
Risk
Management Event
Control
Activities Identification

Risk Risk
Response Assessement

• Event Identification – Internal and external events affecting achievement of an entity’s objectives must be
identified, distinguishing between risks and opportunities.
Opportunities are channeled back to management’s strategy or objective-setting processes.
• Risk Assessment – Risks are analyzed, considering likelihood and impact, as a basis for determining how they
should be managed. Risks are assessed on an inherent and a residual basis.
• Risk Response – Management selects risk responses – avoiding, accepting, reducing, or sharing risk – developing
a set of actions to align risks with the entity’s risk tolerances and risk appetite.
• Control Activities – Policies and procedures are established and implemented to help ensure the risk responses
are effectively carried out.
• Information and Communication – Relevant information is identified, captured, and communicated in a form
and timeframe that enable people to carry out their responsibilities. Effective communication also occurs in a
broader sense, flowing down, across, and up the entity.
• Monitoring – The entirety of enterprise risk management is monitored and modifications made as necessary.
Monitoring is accomplished through ongoing management activities, separate evaluations, or both.
Enterprise risk management is not strictly a serial process, where one component affects only the next. It is a
multidirectional, iterative process in which almost any component can and does influence another.

CASE STUDY

Infosys: Mitigating water risk at India-based hubs

For over 15 years, Infosys - provider of business consulting, IT and outsourcing services - has maintained a plan
to mitigate its operational risks related to water supply. Collaboration between the enterprise risk management
(ERM) and sustainability functions enables Infosys to address risks at the facility-level while conducting overall
monitoring activities at the enterprise level. Implementing measures to save and monitor water availability makes
Infosys a steward of its environment while also delivering value to its business and its stakeholders.
Lesson 12 • Risk Management 355

Risk of water scarcity

Infosys employs more than 200,000 people at 116 global development centers, with 40 of its largest in India. The
rapidly growing Indian population and increased demand for water resources has created a growing concern over
water availability in the country. Because of its large campuses in major Indian cities, Infosys considers water
stress and scarcity a significant near-term risk to its business operations India.
Water supports the company’s human capital (i.e., cooking, cleaning, bathrooms and drinking) at their campuses
and is also necessary for landscaping and cooling towers.2 Water shortages during dry periods have the potential
to halt operations at affected campuses, which would negatively impact the company’s ability to fulfill contractual
obligations with customers and achieve performance goals.

Response to water risks

To address water risks, Infosys encourages collaboration between ERM and sustainability functions. The Infosys
sustainability team conducts detailed risk assessments at individual facility locations while ERM conducts
assessments at the corporate level. The company undertakes an iterative process: first assessing inherent risk
and subsequently applying control measures and assessing residual risk.
Infosys chooses among five risk response types in line with COSO’s ERM framework: accept, avoid, pursue, reduce,
escalate and share. In locations where water scarcity risk is high, avoiding or accepting the risk is not an option.
In these cases, the company chooses to “reduce” the risk. Infosys uses site-based water risk assessments and root
cause analyses to develop action plans for reducing risks to “low” or “moderate” levels. If actions taken do not
fully mitigate the risks, Infosys may decide to reduce the impact by temporarily moving business operations or by
reducing their footprint in the affected development center.
Infosys emphasizes the use of root cause analysis so that action plans focus on the underlying problem rather
than symptoms. In the case of water scarcity, this approach has helped them determine what is influencing
the water shortages: water access, lack of water storage or other issues. Following this analysis, the company
implements mitigation measures to address the root cause and reduce risks to acceptable levels. These measures
have included:
• Water conservation through reduce, recycle and reuse measures (e.g., water efficient fixtures, wastewater
treatment)
• Aquifer recharge through injection wells
• Rainwater harvesting and reuse
• Construction of underground reservoirs that hold water to last for at least five days across locations
• Efficiency programs led by smart water metering program that monitors water consumption and encourages
water use reduction
These measures are designed so that Indian campuses can sustain themselves for seven days using stored
rainwater and potable water in the case of extreme water shortages. The sustainability team monitors water
resources at all campuses and develops tailored responses at each campus.

Monitoring water scarcity

Sustainability and ERM work together to monitor water scarcity across the enterprise.
Sustainability teams collect and use the following types of data to monitor and assess water risk at its campuses:
• Rainfall data over a 10-year period for each geographic area;
• Water table data for each geographic area;
• Storage capacity of rainwater on each campus;
• Availability and cost of water via water tankers for delivery;
• Freshwater usage from municipalities, private providers, ground water and rainwater.
Corporate ERM monitors water scarcity as an emerging risk. It tracks an enterprise-wide metric of “per capita
water consumption” using information provided by sustainability teams. Per capita water consumption is
356 Lesson 12 • PP-GRMCE

calculated by dividing the average monthly water consumption at Infosys locations by the average employee
count per month, which is the sum of the swipe counts for employees and support staff in the Infosys offices.
Corporate ERM actively tracks this metric to determine if water risk will become a higher corporate level priority
in future years.

Business outcomes of managing water risk

Infosys’ risk management approach to water scarcity at the site and regional levels has been critical for realizing
value for its customers, employees and communities. The company’s water risk management strategy in India
enables the company to:
• Open new campuses in locations where competitors may not be able to operate due to water shortages.
• Maintain continuity in operations using stored water in times of scarcity, which helps maintain customer
confidence and profitability.
The outcomes stem from Infosys’ organizational structure, which encourages sustainability to assess and mitigate
risk at the local level while ERM maintains an enterprise wide view. Further, root cause analysis of local water
issues empowered Infosys to develop effective responses and mitigation approaches at individual campuses.

Limitations
While enterprise risk management provides important benefits, limitations exist. In addition to factors discussed
above, limitations result from the realities that human judgment in decision making can be faulty, decisions on
responding to risk and establishing controls need to consider the relative costs and benefits, breakdowns can occur
because of human failures such as simple errors or mistakes, controls can be circumvented by collusion of two or
more people, and management has the ability to override enterprise risk management decisions.
These limitations preclude a board and management from having absolute assurance as to achievement of the
entity’s objectives.

Roles and Responsibilities

Everyone in an entity has some responsibility for enterprise risk management. The chief executive officer is
ultimately responsible and should assume ownership. Other managers support the entity’s risk management
philosophy, promote compliance with its risk appetite, and manage risks within their spheres of responsibility
consistent with risk tolerances. A risk officer, financial officer, internal auditor, and others usually have key
support responsibilities.
Other entity personnel are responsible for executing enterprise risk management in accordance with established
directives and protocols. The board of directors provides important oversight to enterprise risk management, and
is aware of and concurs with the entity’s risk appetite. A number of external parties, such as customers, vendors,
business partners, external auditors, regulators, and financial analysts often provide information useful in effecting
enterprise risk management, but they are not responsible for the effectiveness of, nor are they a part of, the entity’s
enterprise risk management.

2. ISO 31000: International Standard for Risk Management

ISO 31000 is the international standard for risk management. This standard is published on the 13th of November
2009. By providing comprehensive principles and guidelines, this standard helps organizations with their risk
analysis and risk assessments.
ISO 31000 applies to most business activities including planning, management operations and communication
processes. Whilst all organizations manage risk to some extent, this international standard’s best-practice
recommendations were developed to improve management techniques and ensure safety and security in the
workplace at all times.
By implementing the principles and guidelines of ISO 31000 in organization, the organisation is able to improve
operational efficiency, governance and stakeholder confidence, while minimising losses. This international standard
also helps to boost health and safety performance, establish a strong foundation for decision making and encourage
proactive management in all areas.
 Lesson 12 • Risk Management 357

Scope
ISO 31000:2009 provides generic guidelines for the design, implementation and maintenance of risk management
processes throughout an organization. This approach to formalizing risk management practices will facilitate
broader adoption by companies who require an enterprise risk management standard that accommodates multiple
‘silo-centric’ management systems.
ISO 31000 is not developed for a particular industry group, management system or subject matter field in mind,
rather it provides best practice structure and guidance to all operations concerned with risk management. The scope
of this approach to risk management is to enable all strategic, management and operational tasks of an organization
throughout projects, functions, and processes be aligned to a common set of risk management objectives.
Accordingly, ISO 31000:2009 is intended for a broad stakeholder group including:
• executive level stakeholders
• appointment holders in the enterprise risk management group
• risk analysts and management officers
• line managers and project managers
• compliance and internal auditors
• independent practitioners.

Benefits of ISO 31000

ISO 31000 contains 11 key principles that position risk management as a fundamental process in the success of the
organization.
ISO 31000 is designed to help organizations:
• Increase the likelihood of achieving objectives
• Encourage proactive management
• Be aware of the need to identify and treat risk throughout the organization
• Improve the identification of opportunities and threats
• Comply with relevant legal and regulatory requirements and international norms
• Improve financial reporting
• Improve governance
• Improve stakeholder confidence and trust
• Establish a reliable basis for decision making and planning
• Improve controls
• Effectively allocate and use resources for risk treatment
• Improve operational effectiveness and efficiency
• Enhance health and safety performance, as well as environmental protection
• Improve loss prevention and incident management
• Minimize losses
• Improve organizational learning
• Improve organizational resilience.
• Proactively improve operational efficiency and governance

Managing risk
ISO 31000:2009 gives a list on how to deal with risk:
1. Avoiding the risk by deciding not to start or continue with the activity that gives rise to the risk
2. Accepting or increasing the risk in order to pursue an opportunity
3. Removing the risk source
358 Lesson 12 • PP-GRMCE

4. Changing the likelihood

5. Changing the consequences
6. Sharing the risk with another party or parties (including contracts and risk financing)
7. Retaining the risk by informed decision
STRATEGIC RISK MANAGEMENT
Strategic risk management is a crucial but often overlooked aspect of enterprise risk management (ERM). While
ERM has traditionally focused on financial and, more recently, operational risk, the fact is that strategic risk is far
more consequential.
Studies of the largest public companies indicate that strategic risks account for approximately 60 percent of major
declines in market capitalization. Operational risks have just half that impact (about 30 percent), and financial risks
generate about 10 percent.
Why do many ERM programs seem to stand these priorities on their heads? Part of the reason is ERM’s roots in
corporate finance, but it is also true that until recently, strategic risks were difficult to measure, not to mention
evaluate, against one another on an apples-to-apples basis.

Meaning of Strategic Risk

It may be easiest to describe strategic risk by what it is often confused with—operational risk. Good operations
mean doing things right, while good strategy means doing the right things. Strategic risk arises when a company fails
to anticipate the market’s needs in time to meet them.
A company that has unmatched manufacturing processes will still fail if consumers no longer want its products. That
was the lesson even the most efficient buggy whip makers learned once Henry Ford introduced the Model T in 1908.
Cellphone handset makers faced a similar existential crisis when the Apple® iPhone® arrived on the scene.
Strategic risk management is the process of identifying, quantifying, and mitigating any risk that affects or is inherent
in a company’s business strategy, strategic objectives, and strategy execution. These risks may include:
• Shifts in consumer demand and preferences
• Legal and regulatory change
• Competitive pressure
• Merger integration
• Technological changes
• Senior management turnover
• Stakeholder pressure

Strategic risk is a bell curve

Distribution of Outcomes

Worst case Expected

performance performance
 Lesson 12 • Risk Management 359

Like any risk, strategic risk falls along a classic bell curve, with results along the x-axis and likelihood along the y-axis.
The expected result of a given strategy would represent the peak of this curve. Most strategic planning considers
only this peak while ignoring the slopes to either side.
But imagine two strategic initiatives, each with a similar expected result. One falls along a narrow, steep curve,
indicating a low risk of failure and little upside opportunity. The other is represented by a wider bell, with greater
chances of both under- and over-performance. Which to choose? The answer depends on an individual company’s
appetite for risk.

Strategic risk management: shifting the curve

Now imagine a third curve with that same expected result. This one rises steeply from the left but slopes more gently
downward on the right. Here, downside risk has been minimized, and upside opportunity increased. That is the goal
of strategic risk management: to shape the curve in a way that favors success.

Measuring and managing strategic risk

As the saying goes, you can’t manage what you can’t measure. So, in order to understand how to manage strategic
risk, we will begin by examining how to measure it. A key tenet of ERM is measuring risk with the same yardsticks
used to measure results. In this way, companies can calculate how much inherent risk their initiatives contain.

Strategic risk can be measured with two key metrics:

1. Economic capital is the amount of equity required to cover unexpected losses based on a predetermined
solvency standard. Typically, this standard is derived from the company’s target debt rating. Economic capital
is a common currency with which any risk can be quantified. Importantly, it applies the same methodology
and assumptions used in determining enterprise value, making it ideal for strategic risk.
2. Risk-adjusted return on capital (RAROC) is the anticipated after-tax return on an initiative divided by its
economic capital. If RAROC exceeds the company’s cost of capital, the initiative is viable and will add value. If
RAROC is less than the cost of capital, it will destroy value.

Managing strategic risk involves five steps which must be integrated within the strategic planning and
execution process in order to be effective:
1. Define business strategy and objectives. There are several frameworks that companies commonly use to
plan out strategy, from simple SWOT analysis to the more nuanced and holistic Balanced Scorecard. The one
thing that these frameworks have in common, however, is their failure to address risk. It is crucial, then, that
companies take additional steps to integrate risk at the planning stage.
2. Establish key performance indicators (KPIs) to measure results. The best KPIs offer hints as to the levers the
company can pull to improve them. Thus, overall sales makes a poor KPI, while sales per customer lets the
company drill down for answers.
3. Identify risks that can drive variability in performance. These are the unknowns, such as future customer
demand, that will determine results.
4. Establish key risk indicators (KRIs) and tolerance levels for critical risks. Whereas KPIs measure historical
performance, KRIs are forward-looking leading indicators intended to anticipate potential roadblocks.
Tolerance levels serve as triggers for action.
5. Provide integrated reporting and monitoring. Finally, companies must monitor results and KRIs on a
continuous basis in order to mitigate risks or grasp unexpected opportunities as they arise.

RISK MANAGEMENT AND INTERNAL CONTROLS

Risk management focuses on identifying threats and opportunities, while internal control helps counter threats
and take advantage of opportunities. Proper risk management and internal control assist organizations in making
informed decisions about the level of risk that they want to take and implementing the necessary controls to
effectively pursue their objectives.
360 Lesson 12 • PP-GRMCE

Successful organizations integrate effective governance structures and processes with performance-focused risk
management and internal control at every level of an organization and across all operations.
The risk profile of a company may be represented through a Risk Register, a suggestive template of which is illustrated
below:

Sl.No Risk Area Key risks Root cause Mitigation measures

1. Business Risk Decreasing market Lack of innovation, Keeping a vigil on latest
share market survey etc., developments and
continuous monitoring
2. Financial risk Leveraging capital Inability to assess the Adopting a Resource
structure and the cash appropriate funding planning policy
flows requirements
3. Regulatory and Non-compliance of Not keeping abreast of Knowledge updation &
Compliance Risk applicable laws the latest changes in the maintenance of a robust
Regulatory environment compliance check list

RISK MATRIX
Risk Matrix is a matrix that is used during Risk & Control Self -Assessment (RCSA) activity to define the various
levels of risk at each stage, activity, process and sub-process. Risk Matrix comprises of :
1) Impact analysis
2) Likelihood
3) Operating Effectiveness
4) Design Effectiveness
Ratings are assigned to all above categories, pre and post control environment. Based on the ratings a Gross/
Inherent Risk Level and Residual Risk level is determined (HIGH/MEDIUM/LOW), respectively.
In the event where Residual Risk level is HIGH and/ or a particular control environment is weak, these are mitigated
with additional controls.
The Inherent and Residual Risks follow the RED-AMBER-GREEN color coding mapped to HIGH-MEDIUM- LOW
Risks, respectively.

MODEL RISK MANAGEMENT POLICY

A risk management policy serves two main purposes: to identify, reduce and prevent undesirable
incidents or outcomes and to review past incidents and implement changes to prevent or reduce future
incidents. A risk management policy should include the
following sections:
• Risk management and internal control objectives (governance)
• Statement of the attitude of the organisation to risk (risk strategy)
• Description of the risk aware culture or control environment
• Level and nature of risk that is acceptable (risk appetite)
• Risk management organisation and arrangements (risk architecture)
• Details of procedures for risk recognition and ranking (risk assessment)
• List of documentation for analysing and reporting risk (risk protocols)
• Risk mitigation requirements and control mechanisms (risk response)
• Allocation of risk management roles and responsibilities
Lesson 12 • Risk Management 361

LESSON ROUND UP
• Risk is inherent in the business. Different types of risk exist in the business according to the nature of the
business and they are to be controlled and managed.
• In traditional concept the natural calamities like fire, earthquake, flood, etc. were only treated as
risk and keeping the safe guard equipments etc. were assumed to have mitigated the risk. But due to
rapid changes, the various types of risks have emerged viz. Compliance risk, legal risk, country risk,
operational risk.
• Risk may be controllable or uncontrollable. In other words, the systematic risk which stands at macro level is not
controllable, but the unsystematic risk which is at micro level is controllable with the risk mitigation techniques.
• The risk may broadly be segregate as Financial Risk and Non-financial Risk.
• Financial Risk includes market risk, credit risk Liquidity risk, Operational Risk, Legal Risk and Country Risk.
Non-financial risk does not have immediate financial impact on the business, but its consequence is serious.
• Non-Financial Risk do not have immediate financial impact on the business, but its consequence are very
serious and later may have the financial impact. This type of risk may include, Business/ Industry & Service
Risk, Strategic Risk, Compliance Risk, Fraud Risk, Reputation Risk, Transaction risk, Disaster Risk.
• To mitigate the various types of risks, which a business entity faces, a proper risk management process should
be in force. It is a continuous process and is applied across the organisation. It is basically the identification
of risk areas, assessment thereof, evaluating the impact of such risk, develop the risk mitigation techniques,
establishing the sound internal control process and continuous monitoring thereof, setting of standards for
each process and abnormal variances to be vetted.
• Risk management plays vital role in strategic planning. It is an integral part of project management. An
effective risk management focuses on identifying and assessing possible risks.
• The process of risk management consists of the following logical and sequential steps, Identification of risk,
Assessment of risk, Analysing and evaluating the risk, Handling of risk (Risk may be handled through the
Risk Avoidance, Risk Retention/ absorption, Risk Reduction, Risk Transfer) and Implementation of risk
management decision.
• ISO 31000 published as a standard on the 13th of November 2009, provides a standard on the implementation
of risk management. ISO 31000 contains 11 key principles that position risk management as a fundamental
process in the success of the organization.
• Fraud has been defined as, ‘A deliberate act of omission or commission by any person, carried out in the
course of a banking transaction or in the books of accounts maintained manually or under computer system
in banks, resulting into wrongful gain to any person for a temporary period or otherwise, with or without
any monetary loss to the bank”.
• Reputation Risk as the risk arising from negative perception on the part of customers, counterparties,
shareholders, investors, debt-holders, market analysts, other relevant parties or regulators that can adversely
affect a bank’s ability to maintain existing, or establish new, business relationships and continued access to
sources of funding (e.g. through the interbank or securitisation markets).
• SEBI (LODR) Regulations, 2015 requires that every listed company should have a Risk Management Committee.
• Secretarial Audit is a process to check compliance with the provisions of all applicable laws and rules/
regulations/procedures; adherence to good governance practices with regard to the systems and processes
of seeking and obtaining approvals of the Board and/or shareholders, as may be necessary, for the business
and activities of the company, carrying out activities in a lawful manner and the maintenance of minutes and
records relating to such approvals or decisions and implementation.
• Secretarial Audit helps the companies to build their corporate image. Secretarial Audit facilitates
monitoring compliances with the requirements of law through a formal compliance management
programme which can produce positive results to the stakeholders of a company.
362 Lesson 12 • PP-GRMCE

GLOSSARY
Risk Risk management is the identification, evaluation, and prioritization of risks followed by
Management coordinated and economical application of resources to minimize, monitor, and control the
probability or impact of unfortunate events or to maximize the realization of opportunities.
Fraud Risk A fraud risk assessment is a tool used by management to identify and understand risks to its
business and weaknesses in controls that present a fraud risk to the organization
Secretarial Secretarial Audit is an audit to check compliance of various legislations including the Companies
Audit Act and other corporate and economic laws applicable to the company. It provides necessary
comfort to the management, regulators and the stakeholders, as to the statutory compliance,
good governance and the existence of proper and adequate systems and processes.

TEST YOURSELF
(These are meant for recapitulation only. Answers to these questions are not to be submitted for evaluation)
1. What do you mean by Risk Management?
2. Discuss about the Controllable and Un-controllable Risks.
3. Elaborate on different types of Financial and Non-financial Risk.
4. Describe the Risk Management Process and its advantages?
5. What do you understand by Fraud risk? What strategy can adopt to mitigate such a risk?
6. Write short notes on:
a) ISO 31000:2009 relating to the Risk Management.
b) Fraud Risk Management
c) Reputation Risk Management.
d) Reporting of fraud by Statutory Auditor
Lesson 13 Internal Control

Key Concepts One Learning Objectives Regulatory Framework

Should Know
• Standard on Auditing 315 (SA
• Control To understand the:
315)
environment • Concept of Internal Control and
• Regulation 17(8) of SEBI
its elements
• Entity risk (LODR) Regulations, 2015
assessment • Adequacy and effectiveness of
• Part B of Schedule II of SEBI
the compliance system
• Control activities (LODR) Regulations, 2015
• Internal compliance reporting
• Internal check • Regulation 18(3) of SEBI
mechanism and the best
• Internal control (LODR) Regulations, 2015
practices available for the
questionnaire good governance principles for • Part C of Schedule II of SEBI
• COSO International compliance issues. (LODR) Regulations, 2015
Control framework • Section 134(3) of the
Companies Act, 2013 deals
with Director’s responsibility
statement

Lesson Outline
• Introduction
• Regulatory Framework
• Objectives of Internal Control
• Nature of Internal Control
• Classification of Internal Control
• Elements of Internal Control
• Components of Internal Control
• Limitations of Internal Control
• Considerations Specific to Smaller Entities
• Division of Internal Control into Components
• Techniques of Internal Control System
• Internal Audit
• Steps for Internal Control
• COSO’s Internal Control Framework
• Difference between Internal Control, Internal Check and Internal Audit
• Components of Internal Control as defined by COSO
• Table of 5 Components and 17 Principles of Internal Control
• Role and Responsibilities with Regard to Internal Control
• LESSON ROUNDUP
• GLOSSARY
• TEST YOURSELF
364 Lesson 13 • PP-GRMCE

INTRODUCTION
Internal control, as defined in accounting and auditing, is a process for assuring achievement of an organization’s
objectives in operational effectiveness and efficiency, reliable financial reporting, and compliance with laws,
regulations and policies. It is a means by which an organization’s resources are directed, monitored, and measured. It
plays an important role in detecting and preventing fraud and protecting the organization’s resources, both physical
(e.g., machinery and property) and intangible (e.g., reputation or intellectual property such as trademarks).
It is to be mentioned here that internal control is not necessarily a control over finance only. Its scope is wider. It
covers the control of the whole management system.
At the organizational level, internal control objectives relate to the reliability of financial reporting, timely
feedback on the achievement of operational or strategic goals, and compliance with laws and regulations.
At the specific transaction level, internal controls refers to the actions taken to achieve a specific objective (e.g., how
to ensure the organization’s payments to third parties are for valid services rendered.) Internal control procedures
reduce process variation, leading to more predictable outcomes.
Merriam-Webster defines Internal Control as “a system or plan of accounting and financial organization within a
business comprising all the methods and measures necessary for safeguarding its assets, checking the accuracy
of its accounting data or otherwise substantiating its financial statements, and policing previously adopted rules,
procedures, and policies as to compliance and effectiveness”.
Investopedia describes that the “Internal controls are the mechanisms, rules, and procedures implemented by a company
to ensure the integrity of financial and accounting information, promote accountability and prevent fraud. Besides
complying with laws and regulations, and preventing employees from stealing assets or committing fraud, internal
controls can help improve operational efficiency by improving the accuracy and timeliness of financial reporting”.

The Standard on Auditing 315 (SA 315) defines internal control. According to SA 315 the internal control
is “the process designed, implemented and maintained by those charged with governance, management
and other personnel to provide reasonable assurance about the achievement of an entity’s objectives with
regard to reliability of financial reporting, effectiveness and efficiency of operations, and compliance with
applicable laws and regulations. The term “controls” refers to any aspects of one or more of the components
of internal control.”

OBJECTIVES OF INTERNAL CONTROL

From the various definitions of the internal control, the objective behind the establishment of the internal control
may be list out as under:
• Internal Control is a policy matter, designed and implemented by the company concerned.
• The Internal Control describes the rules and procedures to ensure the integrity of the financial statement.
• The Internal Control provides the mechanism of work flow in such a manner that no single person may carry
out the process from the beginning to end.
• It takes care and ensures that work is segregated in small parts and is checked and processed by an independent
person.
• Internal controls improves operational efficiency by improving the accuracy and timeliness of financial
reporting.
• It gives a reasonable assurance about the achievement of an entity’s objectives with regard to reliability
of financial reporting, effectiveness and efficiency of operations, and compliance with applicable laws and
regulations.
• It plays an important role in detecting and preventing fraud and protecting the organization’s resources.
• It reduces the process variations and arbitrary intervention in the work flow process.
 Lesson 13 • Internal Control 365

NATURE OF INTERNAL CONTROL

The nature of internal control is to establish preventing measures in the organization. It follows the principle that
key activities in the organisations should be processed by one person and be checked by the independent person so
that mistake at one stage may be checked by another independent person. This prevents the occurrence of the fraud
and so of deliberate attempts made any insider may be withheld at once. Thus the nature of the internal control is
preventive.
From the definition provided by the SA 315 the nature of the internal control depicts the following points:

• Internal control is a process designed, implemented and maintained by those charged with the
governance, management and other personnel.
• It provides reasonable assurance about the achievement of an entity’s objectives in the categories of
financial reporting, effectiveness and efficiency of operations, safeguarding of assets and compliance
with applicable laws and regulations.

CLASSIFICATION OF INTERNAL CONTROL

Internal control can broadly be classified into two categories viz.:
1. Accounting controls/financial controls, and
2. Administrative controls.

(1) Accounting controls

Accounting controls comprise the plan of organisation and all methods and procedures that are concerned
mainly with and relate to, the safeguarding of assets and the reliability of the financial information. They
generally include such controls as the system of authorisation and approval, separation of duties concerned
with record keeping and accounting reports from those concerned with operations of assets custody, physical
controls over assets and internal auditing e.g. budgetary controls.
Examples of each are (i) maintaining inventory is an accounting control whereas (ii) recording of visits by a
salesman is the administrative control.
Internal control relating to accounting system aims at ensuring that:
• the transactions are executed in accordance with the management’s authorisation;
• all transactions are promptly recorded in an appropriate manner to permit the preparation of financial
information and to maintain accountability for assets;
• the access to assets is permitted only in accordance with the management authorisation;
• the assets are reviewed and verified at reasonable intervals and appropriate action is taken with regard
to the variances.
It can safely be said that scope of internal control is much wider than that of accounting controls. Thus, internal
checks, internal audit, quantitative controls, budgetary controls etc. can be said to be a part of the accounting
controls, in so far as they deal with quantitative aspects. On a wider footing, accounting controls, operational
controls, policy planning/review, reporting etc. can be said to be a part of internal control.

(2) Administrative Controls

A number of controls falling under operational controls can also be administrative controls. Examples
of operational controls are: quality control, works standards, periodic reporting, policy appraisal etc.
Administrative controls are very wide in their scope. They include all other managerial controls concerned
with decision- making process. They are concerned with the authorisation of transactions and include
anything from plan of organisation to procedures, record keeping, distribution of authority and the process of
decision-making. They include controls such as time and motion studies, quality control through inspection,
366 Lesson 13 • PP-GRMCE

performance budgeting, responsibility accounting and performance evaluation etc. Administrative controls
have an indirect relationship with financial records and the auditor may evaluate only those administrative
controls which have a bearing on the financial records.
However, for the purposes of understanding the internal control we may study it in four parts as:
1. Accounting controls
2. Operational controls
3. Internal checks
4. Internal audit.
These are explained below summarily for a better comprehension of the subject, even though at the cost of
repetition.
1. Accounting controls pertain purely to the accounting system which enter finally in the preparation of
financial statements and information which are subject to the expression of opinion by the auditors.
2. Operational controls are those which help in improving the efficiency, productivity and not necessarily
enter the accounting systems. Works standards, quality control, methods study and motion study, critical
path method etc. may be many examples of operational controls.
3. Internal check is a built in device in the day to day working by separating the duties and functions of
the staff in such a way that the work of one is automatically checked by the other e.g. posting of cash
transactions in the ledger is done by a person other than who handles the cash and writes the cash book
– the cashier. This part shall be dealt with subsequently in detail.
4. Internal audit is an appraisal function to be performed on the principles and practices of audit. The
scope of this extends to all the quantifiable information.

ELEMENTS OF INTERNAL CONTROL

The essential requirements for the success of a business are the implementation of organisational objectives, plans
and philosophy. With this end in view the following may be considered as the elements of internal control.
i) Segregation of duties
The division of an operation into a series of sub-operations undertaken by different people, allows for internal
checks to take place. Such a control merely reduces the chance of error or irregularity occurring, but it does
not eliminate the risk. It reduces the risk of intentional manipulation and error and increases the element of
checking. Function which should be separated includes those of authorisation, execution, custody, recording
and in the case of a computer based accounting system- systems development and daily operations.
ii) Organisational structure
The structure or pattern of an organisation will mean system of arrangements and relations as between various
levels of personnel for carrying out of plans and policies towards achievement of objectives for which the
business stands. Enterprises should have a plan of their organisation, defining and allocating responsibilities
and identifying lines of reporting for all aspects of the enterprise’s operations, including the controls. The
delegation of authority and responsibility should be clearly specified. It is important that critical operations
are provided with the appropriate status and communications within the organisations. A common cause of
irregularity is imbalance between responsibility, status and remuneration.
iii) Objectives and Policy Statements
Objectives are the aims, goals, purposes or accomplishments which the top management lay down and expect
the staff members to achieve. The functional segments of the company should comply with the policies, plans,
procedures, external laws and regulations and the work should be performed in a coordinated manner.
Policies and procedures give an indication as to the nature of personnel behaviour in their functioning
and reflect the attitude of management. Functions of different staff members should be integrated in a
manner that is complementary and each acts as check on the other. For instance, wage sheets should
be prepared and checked by different set of staff and their disbursement should be in the presence of a
responsible official.
 Lesson 13 • Internal Control 367

iv) Authorisation and approval

All transactions should require authorisation or approval by an appropriate responsible person. The limits of
these authorisations should be specified. While designing procedures, provision should be made for proper
authorization, to establish full accountability for the actions taken.
v) Personnel
There should be procedures to ensure that personnel have capabilities commensurate with their responsibilities.
In fact, the proper functioning of any system depends on the competence and integrity of those operating
it. The qualifications, selection and training as well as the innate personal characteristics of the personnel
involved are important features to be considered in setting up any control system.
vi) Management
Management is responsible for establishing, monitoring and reviewing the systems of internal control. In
practice, management may delegate the reviewing function to internal auditor. It is, thus the duty of internal
auditor to provide management with reassurance concerning the efficiency and effectiveness of internal
controls.
vii) Records and Reports
The accounting and other records should be maintained accurately and adequately so as to assist the
management in formulating present and future events in decision making and planning.
In order to make reporting effective, it should be timely, tailor-made and present all facts concerning problem
areas, assessments etc.
viii) Accounting Controls
These are the controls within the recording function which check that the transactions to be recorded and
processed have been authorised, and that they are all included and that they are correctly recorded and
accurately processed. Such controls include checking the arithmetical accuracy of the records, the maintenance
and checking of totals, reconciliations, control accounts and trial balances, and accounting for documents.
ix) Protection of assets
These are concerned mainly with the custody of assets and involve procedures and security measures designed
to ensure that access to assets is limited to authorised personnel. These include both direct access and indirect
access via documentation. These controls assume importance in the case of valuable, portable, exchangeable
or desirable assets.
x) Supervision
Any system of internal control should include the supervision by responsible officials of day-to-day transactions
and the recording thereof. The supervisory role undertaken by staff should be allocated to those with proper
training and suitability to such a function.

COMPONENTS OF INTERNAL CONTROL

The internal control system may involve the following points to support the achievement of an entity’s mission,
strategies and related business objectives. The Appendix 1 of SA 315 provides the Internal Control Components.
These are described as under:

1. Control Environment:
The control environment encompasses the following elements:
(a) Communication and enforcement of integrity and ethical values. The effectiveness of controls
cannot rise above the integrity and ethical values of the people who create, administer, and monitor
them. Integrity and ethical behavior are the product of the entity’s ethical and behavioral standards, how
they are communicated, and how they are reinforced in practice. The enforcement of integrity and ethical
values includes, for example, management actions to eliminate or mitigate incentives or temptations
that might prompt personnel to engage in dishonest, illegal, or unethical acts. The communication of
368 Lesson 13 • PP-GRMCE

entity policies on integrity and ethical values may include the communication of behavioral standards to
personnel through policy statements and codes of conduct and by example.
(b) Commitment to competence. Competence is the knowledge and skills necessary to accomplish tasks
that define the individual’s job.
(c) Participation by those charged with governance. An entity’s control consciousness is influenced
significantly by those charged with governance. The importance of the responsibilities of those charged
with governance is recognized in codes of practice and other laws and regulations or guidance produced
for the benefit of those charged with governance. Other responsibilities of those charged with governance
include oversight of the design and effective operation of whistle blower procedures and the process for
reviewing the effectiveness of the entity’s internal control.
(d) Management’s philosophy and operating style. Management’s philosophy and operating style
encompass a broad range of characteristics. For example, management’s attitudes and actions toward
financial reporting may manifest themselves through conservative or aggressive selection from available
alternative accounting principles, or conscientiousness and conservatism with which accounting
estimates are developed.
(e) Organizational structure. Establishing a relevant organizational structure includes considering key
areas of authority and responsibility and appropriate lines of reporting. The appropriateness of an
entity’s organizational structure depends, in part, on its size and the nature of its activities.
(f) Assignment of authority and responsibility. The assignment of authority and responsibility may include
policies relating to appropriate business practices, knowledge and experience of key personnel, and resources
provided for carrying out duties. In addition, it may include policies and communications directed at ensuring
that all personnel understand the entity’s objectives, know how their individual actions interrelate and
contribute to those objectives, and recognize how and for what they will be held accountable.
(g) Human resource policies and practices. Human resource policies and practices often demonstrate
important matters in relation to the control consciousness of an entity. For example, standards for
recruiting the most qualified individuals – with emphasis on educational background, prior work
experience, past accomplishments, and evidence of integrity and ethical behavior – demonstrate an entity’s
commitment to competent and trustworthy people. Training policies that communicate prospective roles
and responsibilities and include practices such as training schools and seminars illustrate expected levels
of performance and behavior. Promotions driven by periodic performance appraisals demonstrate the
entity’s commitment to the advancement of qualified personnel to higher levels of responsibility.

2. Entity’s Risk Assessment Process

For financial reporting purposes, the entity’s risk assessment process For example, the entity’s
includes how management identifies business risks relevant to the risk assessment process
preparation of financial statements in accordance with the entity’s may address how the entity
applicable financial reporting framework, estimates their significance, considers the possibility of
assesses the likelihood of their occurrence, and decides upon actions to unrecorded transactions
respond to and manage them and the results thereof. or identifies and analyzes
Risks relevant to reliable financial reporting include external and internal significant estimates recorded
events, transactions or circumstances that may occur and adversely affect in the financial statements.
an entity’s ability to initiate, record, process, and report financial data
consistent with the assertions of management in the financial statements.
Management may initiate plans, programs, or actions to address specific risks or it may decide to accept a risk
because of cost or other considerations. Risks can arise or change due to circumstances such as the following:
• Changes in operating environment: Changes in the regulatory or operating environment can result in
changes in competitive pressures and significantly different risks.
• New personnel: New personnel may have a different focus on or understanding of internal control. New
or revamped information systems: Significant and rapid changes in information systems can change the
risk relating to internal control.
• New or revamped information systems: Significant and rapid changes in information systems can
change the risk relating to internal control.
 Lesson 13 • Internal Control 369

• Rapid growth: Significant and rapid expansion of operations can strain controls and increase the risk of
a breakdown in controls.
• New technology: Incorporating new technologies into production processes or information systems
may change the risk associated with internal control.
• New business models, products, or activities: Entering into business areas or transactions with which
an entity has little experience may introduce new risks associated with internal control.
• Corporate restructurings: Restructurings may be accompanied by staff reductions and changes in
supervision and segregation of duties that may change the risk associated with internal control.
• Expanded foreign operations: The expansion or acquisition of foreign operations carries new and
often unique risks that may affect internal control, for example, additional or changed risks from foreign
currency transactions.
• New accounting pronouncements: Adoption of new accounting principles or changing accounting
principles may affect risks in preparing financial statements.

3. Information System, Including the Related Business Processes, Relevant to Financial Reporting, and
Communication:
An information system consists of infrastructure (physical and hardware components), software, people,
procedures, and data. Many information systems make extensive use of information technology (IT).
The information system relevant to financial reporting objectives, which includes the financial reporting
system, encompasses methods and records that:
• Identify and record all valid transactions.
• Describe on a timely basis the transactions in sufficient detail to permit proper classification of
transactions for financial reporting.
• Measure the value of transactions in a manner that permits recording their proper monetary value in the
financial statements.
• Determine the time period in which transactions occurred to permit recording of transactions in the
proper accounting period.
• Present properly the transactions and related disclosures in the financial statements.
The quality of system-generated information affects management’s ability to make appropriate decisions in
managing and controlling the entity’s activities and to prepare reliable financial reports.
Communication, which involves providing an understanding of individual roles and responsibilities pertaining
to internal control over financial reporting, may take such forms as policy manuals, accounting and financial
reporting manuals, and memoranda. Communication also can be made electronically, orally, and through the
actions of management.

4. Control Activities
Generally, control activities that may be relevant to an audit may be categorized as policies and procedures that
pertain to the following:
• Performance reviews: These control activities include reviews and analyses of actual performance
versus budgets, forecasts, and prior period performance; relating different sets of data – operating or
financial – to one another, together with analyses of the relationships and investigative and corrective
actions; comparing internal data with external sources of information; and review of functional or
activity performance.
• Information processing: The two broad groupings of information systems control activities are
application controls, which apply to the processing of individual applications, and general IT controls,
which are policies and procedures that relate to many applications and support the effective functioning
of application controls by helping to ensure the continued proper operation of information systems.
Examples of application controls include checking the arithmetical accuracy of records, maintaining
370 Lesson 13 • PP-GRMCE

and reviewing accounts and trial balances, automated controls such as edit checks of input data and
numerical sequence checks, and manual follow-up of exception reports. Examples of general IT controls
are program change controls, controls that restrict access to programs or data, controls over the
implementation of new releases of packaged software applications, and controls over system software
that restrict access to or monitor the use of system utilities that could change financial data or records
without leaving an audit trail.
• Physical controls: Controls that encompass:
– The physical security of assets, including adequate safeguards such as secured facilities over access
to assets and records.
– The authorization for access to computer programs and data files.
The periodic counting and comparison with amounts shown on control records (for example, comparing the
results of cash, security and inventory counts with accounting records).
• The extent to which physical controls intended to prevent theft of assets are relevant to the reliability of
financial statement preparation, and therefore the audit, depends on circumstances such as when assets
are highly susceptible to misappropriation
• Segregation of duties: Assigning different people the responsibilities of authorizing transactions,
recording transactions, and maintaining custody of assets. Segregation of duties is intended to reduce
the opportunities to allow any person to be in a position to both perpetrate and conceal errors or fraud
in the normal course of the person’s duties.
• Certain control activities may depend on the existence of appropriate higher level policies established by
management or those charged with governance. For example, authorization controls may be delegated
under established guidelines, such as investment criteria set by those charged with governance;
alternatively, non-routine transactions such as major acquisitions or divestments may require specific
high level approval, including in some cases that of shareholders.

5. Monitoring of Controls
An important management responsibility is to establish and maintain internal control on an on-going basis.
Management’s monitoring of controls includes considering whether they are operating as intended and that
they are modified as appropriate for changes in conditions. Monitoring of controls may include activities
such as management’s review of whether bank reconciliations are being prepared on a timely basis, internal
auditors’ evaluation of sales personnel’s compliance with the entity’s policies on terms of sales contracts, and
a legal department’s oversight of compliance with the entity’s ethical or business practice policies. Monitoring
is done also to ensure that controls continue to operate effectively over time. For example, if the timeliness and
accuracy of bank reconciliations are not monitored, personnel are likely to stop preparing them.
Internal auditors or personnel performing similar functions may contribute to the monitoring of an entity’s
controls through separate evaluations. Ordinarily, they regularly provide information about the functioning
of internal control, focusing considerable attention on evaluating the effectiveness of internal control, and
communicate information about strengths and deficiencies in internal control and recommendations for
improving internal control.
Monitoring activities may include using information from communications from external parties that may
indicate problems or highlight areas in need of improvement. Customers implicitly corroborate billing data
by paying their invoices or complaining about their charges. In addition, regulators may communicate with
the entity concerning matters that affect the functioning of internal control, for example, communications
concerning examinations by bank regulatory agencies. Also, management may consider communications
relating to internal control from external auditors in performing monitoring activities.

LIMITATIONS OF INTERNAL CONTROL

The limitations of Internal Control as laid down by SA 315 are:
• Internal control, no matter how effective, can provide an entity with only reasonable assurance about achieving
the entity’s financial reporting objectives. The likelihood of their achievement is affected by the inherent
 Lesson 13 • Internal Control 371

limitations of internal control. These include the realities that human judgment in decision- making can be
faulty and that breakdowns in internal control can occur because of human error. For example, there may be
an error in the design of, or in the change to, a control. Equally, the operation of a control may not be effective,
such as where information produced for the purposes of internal control (for example, an exception report) is
not effectively used because the individual responsible for reviewing the information does not understand its
purpose or fails to take appropriate action.
• Additionally, controls can be circumvented by the collusion of two or more people or inappropriate management
override of internal control. For example, management may enter into side agreements with customers that
alter the terms and conditions of the entity’s standard sales contracts, which may result in improper revenue
recognition. Also, edit checks in a software program that are designed to identify and report transactions that
exceed specified credit limits may be overridden or disabled.
• Further, in designing and implementing controls, management may make judgments on the nature and extent
of the controls it chooses to implement, and the nature and extent of the risks it chooses to assume.

CONSIDERATIONS SPECIFIC TO SMALLER ENTITIES

• Smaller entities often have fewer employees which may limit the extent to which segregation of duties is
practicable. However, in a small owner-managed entity, the owner-manager may be able to exercise more
effective oversight than in a larger entity. This oversight may compensate for the generally more limited
opportunities for segregation of duties.
• On the other hand, the owner-manager may be more able to override controls because the system of internal
control is less structured. This is taken into account by the auditor when identifying the risks of material
misstatement due to fraud.

DIVISION OF INTERNAL CONTROL INTO COMPONENTS

• The division of internal control into the following five components, for purposes of the SAs, provides a useful
framework for auditors to consider how different aspects of an entity’s internal control may affect the audit:
(a) The control environment;
(b) The entity’s risk assessment process;
(c) The information system, including the related business processes, relevant to financial reporting, and
communication;
(d) Control activities; and
(e) Monitoring of controls.
• The division does not necessarily reflect how an entity designs, implements and maintains internal control,
or how it may classify any particular component. Auditors may use different terminology or frameworks
to describe the various aspects of internal control, and their effect on the audit than those used in this SA,
provided all the components described in this SA are addressed.
Characteristics of manual and automated elements of internal control relevant to the auditor’s risk assessment
• An entity’s system of internal control contains manual elements and often contains automated elements. The
characteristics of manual or automated elements are relevant to the auditor’s risk assessment and further
audit procedures based thereon.
• The use of manual or automated elements in internal control also affects the manner in which transactions are
initiated, recorded, processed, and reported:
– Controls in a manual system may include such procedures as approvals and reviews of transactions, and
reconciliations and follow-up of reconciling items. Alternatively, an entity may use automated procedures
to initiate, record, process, and report transactions, in which case records in electronic format replace
paper documents.
– Controls in IT systems consist of a combination of automated controls (for example, controls embedded
in computer programs) and manual controls. Further, manual controls may be independent of IT, may
372 Lesson 13 • PP-GRMCE

use information produced by IT, or may be limited to monitoring the effective functioning of IT and of
automated controls, and to handling exceptions. When IT is used to initiate, record, process or report
transactions, or other financial data for inclusion in financial statements, the systems and programs may
include controls related to the corresponding assertions for material accounts or may be critical to the
effective functioning of manual controls that depend on IT.
An entity’s mix of manual and automated elements in internal control varies with the nature and complexity of the
entity’s use of IT.
• Generally, IT benefits an entity’s internal control by enabling an entity to:
– Consistently apply predefined business rules and perform complex calculations in processing large
volumes of transactions or data;
– Enhance the timeliness, availability, and accuracy of information;
– Facilitate the additional analysis of information;
– Enhance the ability to monitor the performance of the entity’s activities and its policies and procedures;
– Reduce the risk that controls will be circumvented; and
– Enhance the ability to achieve effective segregation of duties by implementing security controls in
applications, databases, and operating systems.
• IT also poses specific risks to an entity’s internal control, including, for example:
– Reliance on systems or programs that are inaccurately processing data, processing inaccurate data, or both.
– Unauthorised access to data that may result in destruction of data orimproper changes to data, including
the recording of unauthorised or nonexistent transactions, or inaccurate recording of transactions.
Particular risks may arise where multiple users access a common database.
– The possibility of IT personnel gaining access privileges beyond those necessary to perform their
assigned duties thereby breaking down segregation of duties.
– Unauthorised changes to data in master files.
– Unauthorised changes to systems or programs.
– Failure to make necessary changes to systems or programs.
– Inappropriate manual intervention.
– Potential loss of data or inability to access data as required.
• Manual elements in internal control may be more suitable where judgment and discretion are required such
as for the following circumstances:
– Large, unusual or non-recurring transactions.
– Circumstances where errors are difficult to define, anticipate or predict.
– In changing circumstances that require a control response outside the scope of an existing automated
control.
– In monitoring the effectiveness of automated controls.
• Manual elements in internal control may be less reliable than automated elements because they can be
more easily bypassed, ignored, or overridden and they are also more prone to simple errors and mistakes.
Consistency of application of a manual control element cannot therefore be assumed. Manual control elements
may be less suitable for the following circumstances:
• High volume or recurring transactions, or in situations where errors that can be anticipated or predicted
can be prevented, or detected and corrected, by control parameters that are automated.
• Control activities where the specific ways to perform the control can be adequately designed and automated.
• The extent and nature of the risks to internal control vary depending on the nature and characteristics
of the entity’s information system. The entity responds to the risks arising from the use of IT or from use
of manual elements in internal control by establishing effective controls in light of the characteristics of
the entity’s information system.
 Lesson 13 • Internal Control 373

TECHNIQUES OF INTERNAL CONTROL SYSTEM

Any business that hires employees runs the risk of fraudulent activity. Fraud can have a large negative impact on one’s
business’s bottom line. In some cases, a trusted employee who has easy access to a business’s finances may abuse his
authority by stealing company funds. A variety of internal control techniques can help prevent improprieties. The
following points in this regard are worth mentioned:
• There should be clear division of the work.
• Segregation of the work should be in such a manner that the work done by one person is the beginning of the
work for another person.
• There should be the clarity of the responsibility.
• The work flow process be documented or standardized so that the staff may perform the work as suggested
in the work flow chart.
• No single persons should be allowed to have access or control over any important business operation.
• There should be job rotation of the staff duties periodically.
• Staff should be asked to go on mandatory leave periodically so that other person may come to know if someone
is playing foul with the system.
• Persons having the charge of the important assets should not be allowed to have access to the books of accounts.
• Periodical inspection of the physical assets be carried out to ensure its physical existence as well in good
working conditions.
• The valuable items like cash and others, by physically inspected and the periodicity should be at irregular
intervals, so that the person under whose charge the assets are, cannot know in advance, when the inspection
will took place and manage the affairs.
The following methods are adopted for Internal Control in modern organisation:
1. Internal Check
2. Internal Audit
3. Flow Charts
4. Internal Control Questionnaire
5. Inter-firm and Intra-firm Comparisons.

Internal Check
Accurate, complete and reliable record of accounting is a pre-requisite of
good working of an organisation. The allocation of duties and responsibilities ‘Internal check’ refers to
of an organisation should be such that the working is proved trust worthy. allocation of duties in such a
To help it further, the procedures and methods should also be designed manner that the work of one
accordingly. person is checked by another
while that other is performing
Internal check has been defined differently by different authors and his own duties in a normal way.
institutions connected with subject. The Institute of Chartered Accountants Internal check is the organisation
of England and Wales defines internal check as the allocation of authority and of duties of staff in a scientific way
work in such a manner as to effort the checks on the day to day transactions so that no one is responsible for
which operate continuously as part of routine system whereby the work of all phases of the transaction and
one person is automatically proved independently or is complementary to the work of one employee is so
the work of another, the object being prevention or early detection of error distributed that the discrepancies
and frauds. are revealed in the process of
It is also defined as those measures and methods adopted within the performance of duties of that
organisation itself to safeguard the cash and other assets of the company as employee. The duties are divided
well as to check clerical accuracy of book keeping. and sub-divided in such a manner
that discrepancies flow out from
Briefly speaking, the internal check system may be referred to as a system of
the system itself.
instituting checks on the day- to-day transactions which operate continuously
374 Lesson 13 • PP-GRMCE

as a part of routine system whereby the work of one person is complementary to the work of another, the object
being the prevention or early detection of errors or fraud. The objective of such allocation of duties is that no single
individual has an exclusive control over any one transaction or group of transactions.
The following are the important objects of internal check system:
i) To assign to a specific person, the responsibility of particular acts, defaults or omissions by allocation of
specific duties.
ii) To obtain physical and financial confirmation of facts and entries physical and financial by creation and
preservation of necessary records.
iii) To facilitate the breakdown of accounting procedures where required so as to avoid bottlenecks and establish
an even flow of work and operations.
iv) To reduce the possibilities of fraud and errors.
The main purpose of introducing internal check is ensured by division of labour. The internal check should be
arranged after the proper study of the requirement of each business.
As specified by Special Committee on Terminology, American Institute of Accountants, “Internal check—a system
under which the accounting methods and details of an establishment are so laid out that the accounts and procedures
are not under the absolute and independent control of any person - that on the contrary, the work of an employee is
complementary to that of another and that a continuous audit of the business is made by the employees”.
Essential Features of Internal Check
Essential features of internal check are given hereunder:
1. There should be proper division of work and responsibilities.
2. The duties of each person should be properly defined so as to fix definite responsibilities of each individual.
3. Possibilities of giving absolute control to anybody should not be left out unchecked.
4. Too much confidence on a person should be avoided.
5. The duties of staff should be rotated and one person should not be allowed to occupy a particular area of
operation for long.
6. Necessary safeguards should be provided so as to avoid collusion of thoughts which quite often leads to
commission of fraud.
7. The person handling cash, stock, securities should be given compulsory leave so as to prevent their having
uninterrupted control.
8. Physical inventory of fixed assets and stocks should be taken periodically.
9. Assets should be protected from unauthorised use.
10. To prevent loss or misappropriation of cash, mechanical devices such as the automatic cash register, should
be employed.
11. The financial and administrative powers should be distributed very judiciously among different officers and
the manner in which these are actually exercised should be reviewed periodically.
12. Accounting procedures should be laid down for periodical verification and testing of different sections of
accounting records to ensure that they are accurate.
Objectives of Internal Check : The objectives of the Internal Check may be list out as under:
• Division of work : In the process of internal check, the work is divided in such a manner that no complete
process is done by the single/few persons, thus it facilitates the division of the work in small portion.
• Fixation of responsibility : Since the employee is supposed to undertake the small portion of the work
assigned to him, so fixation of the responsibility becomes easier. The employee concerned is also more cautious
to observed due diligence while performing his duties.
 Lesson 13 • Internal Control 375

• Increasing efficiency of employees : As small portion of the entire process is to be performed by the employee
concerned, so he gradually gets expertise in performing that task with speed and accuracy.
• Minimization of errors : The same type of work is being performed repeatedly, so the probability of errors
also minimizes.
• Prevention of frauds : As the end process of one person becomes the start process for the another person
and no one person is entitled to carry out the entire process, thus the modus operandi of the employee can be
judged from the start to end, which minimizes the occurrence of frauds.
• Quick preparation of annual accounts : The internal check system facilitates the quick preparation of the
annual accounts, since the accounting work is being consistently performed in an efficient manner and free
from error.
• Facilitating of smooth audit work : Last but not least the sound internal check system also facilitates the
audit task smoothly, whether it be the internal audit or external audit. The auditor may rely where the sound
internal check system is in vogue.
For introducing any system of internal check the work should be allotted on the basis of specialisation. The grey area
where internal check could prove to be of much help are receipts and payments of cash, payment of wages, credit
purchases etc. The nature and size of operation should also be given consideration while installing or introducing
internal check system in any organisation. The success of internal check system would, by and large, depend upon
the in-built safeguards introduced in the system. Instituting internal check system would reduce the work load of
the auditor and make the accounting system more reliable. The internal check is of great importance to small as well
as large companies, although this method of operation will necessarily vary from that adopted in major concerns. In
small organisation the number of employees is too few to establish an adequate division of duties so that supervisors
or owners must claim more responsibility.
It is of importance that accounting procedures and working in any organisation is liable to changes and the system
of internal check will have to be modified to suit the changed conditions. The pitfalls in the system are a warning
to the auditor that something is wrong. If he disregards such a warning by failing to make the additional tests
necessitated by the disclosed weaknesses he will not be able to perform his duties well and is liable to commit
mistakes.

Internal Audit

Internal auditing though part of an internal control is a function in itself as administration, production, personnel,
marketing etc. Whereas internal check devises the form and flow of operations of an entity so that automatic checks
are carried out as the transactions occur; internal audit is a critical appraisal of functioning of various operations
of an enterprise including the system of internal check. This is evident in its definition itself as “an independent
appraisal function”.
‘Internal auditing’ in its traditional parlance, meant an audit on behalf of management to ensure only:
a) the adequacy and effectiveness of internal controls;
b) accuracy and timeliness of financial and other records and reports;
c) adherence to the laid down policies and procedures by each unit of the organisation.
Thus, with major emphasis on detection of frauds and ensuring accuracy of financial records, internal auditing was
merely concerned with financial security by conducting routine checks. However, the modern world has witnessed
dynamic changes in the manner of conducting activities by industrial and commercial organisations. Fast rising
wages, increasing costs, cut throat competition, government’s regulatory policies and globalisation have resulted
in management’s search for all round improvements, efficiency, economy and making an endeavour to provide the
society with the best products at the most economical prices. As a result, the scope of internal auditing has been
progressively widened to circumscribe a complete intra- company financial and operational review and fulfill its
role as a tool of effective management control.
376 Lesson 13 • PP-GRMCE

It is seen that internal auditing is not only confined to traditional

The Institute of Internal Auditors has defined
functions like review of custodianship, safeguarding of assets
internal audit as under: “Internal auditing
and checking the reliability of accounting information but also
is an independent, objective assurance and
encompasses new areas like review of economical and efficient
consulting activity designed to add value and
use of resources and ensuring optimum organizational
improve an organization’s operations. It helps
performance. It is thus:
an organization accomplish its objectives by
1. an independent appraisal function; bringing a systematic, disciplined approach to
2. established within the organization; evaluate and improve the effectiveness of risk
management, control, and governance processes.”
3. to examine and evaluate the activities as a service to the
management;
4. to assist the members for effective discharge of their responsibilities;
5. to furnish with analyses, appraisals, suggestions etc.
The scope of internal auditing within an organization is broad and may involve topics such as an organization’s
governance, risk management and management controls over: efficiency/effectiveness of operations (including
safeguarding of assets), the reliability of financial and management reporting, and compliance with laws and
regulations. Internal auditing may also involve conducting proactive fraud audits to identify potentially fraudulent
acts; participating in fraud investigations under the direction of fraud investigation professionals, and conducting
post investigation fraud audits to identify control breakdowns and establish financial loss.
The following are the main aspects of internal auditing:
1. Review, appraisal and evaluation of the soundness, adequacy and application of financial, accounting and
other operating controls.
2. Ascertaining the adequacy and reliability of management information and control systems.
3. Ascertaining the achievement of management objectives and compliance with established plans, policies and
procedures.
4. Ensuring proper safeguards for assets - their utilization and accounting thereof.
5. Detection and prevention of fraud and error.
6. Ascertaining the integrity of management data in an organisation.
7. Identifying the areas of cost reduction, coupled with increased production, improved productivity and
improved systems.
8. Ascertaining the quality of performance and undertaking ‘value for money’ exercises.
9. Compliance with statutory laws and rules including adherence to the Companies (Auditors’ Report) Order,
2003 to avoid adverse comments from the statutory auditors.
10. Undertaking special reviews and assignments directed by management to ensure economical and efficient use
of resources.
11. To provide for a channel of communicating new ideas to the top management.
Over the last few years, the need to manage risks has become recognised as an essential part of good corporate
governance practice. This has put organisations under increasing pressure to identify all the business risks they
face and to explain how they manage them. In fact, the activities involved in managing risks have been recognised
as playing a central and essential role in maintaining a sound system of internal control. While the responsibility for
identifying and managing risks belongs to management, one of the key roles of internal audit is to provide assurance
that those risks have been properly managed.
Risk based Internal Audit (RBIA) is an internal methodology which is primarily focused on the inherent risk involved
in the activities or system and provide assurance that risk is being managed by the management within the defined
risk appetite level It is the risk management framework of the management and seeks at every stage to reinforce the
responsibility of management and BOD (Board of Directors) for managing risk.
Lesson 13 • Internal Control 377

Existing in the fast changing business environment the biggest challenge the Internal Audit currently faces is
whether it is now in a position to add value to an organization. Economic events in the recent history of global
financial markets emphasized the importance of management understanding the risks facing an organization and
the impact of not implementing an effective risk management process. Internal audit functions historically followed
a compliance based approach that adds little value with organizations now facing ever changing risks. Heading
in the right direction of alignment with corporate objectives and adding value to the business the Internal Audit
function is becoming one of the critical functions finding its justified place within corporate

STEPS FOR INTERNAL CONTROL

In order to establish the internal control mechanism the following points are to be kept in view:

Identify the key areas where the internal control mechanism is to be established.

Every work flow should be so documented that it is not complete if another person has not checked
it out.

The other person’s role should start when the first person’s role comes to an end.

Establish the surprise check mechanism where the money matters are involved.

Reporting of the non-adherence of key compliance areas.

Review mechanism of the control units.

Establishment of Vigil Mechanism: The organization should establish a vigil mechanism as per the
provisions of Rule 7 of the companies (Meetings of board and its Powers) Rules 2014. The relevant
rule and its applicability is appended below.

COSO’S INTERNAL CONTROL FRAMEWORK

COSO is the abbreviation of, The Committee of Sponsoring Organizations of the Treadway Commission (COSO). It
is a joint initiative of the five private sector organizations (American Accounting Association, American Institute of
CPA, Financial Executives International, The Association of Accountants and Financial Professionals in Business and
The Institute of Internal Auditors) and is dedicated to providing thought leadership through the development of
frameworks and guidance on enterprise risk management, internal control and fraud deterrence.
In 1992 the COSO released its Internal Control–Integrated Framework (the original framework). In the twenty years
since the inception of the original framework, business and operating environments have changed dramatically,
becoming increasingly complex, technologically driven, and global. At the same time, stakeholders are more engaged,
378 Lesson 13 • PP-GRMCE

seeking greater transparency and accountability for the integrity of systems of internal control that support business
decisions and governance of the organization.
On May 14, 2013, COSO released its revisions and updates to the 1992 document Internal Control - Integrated
Framework. COSO’s goal in updating the framework was to increase its relevance in the increasingly complex and
global business environment so that organizations worldwide can better design, implement, and assess internal
control. COSO believes this framework will provide organizations significant benefits; for example, increased
confidence that controls mitigate risks to acceptable levels and reliable information supporting sound decision
making.

As per definition given by COSO, the Internal control is a process, effected by an entity’s board of directors,
management, and other personnel, designed to provide reasonable assurance regarding the achievement of
objectives relating to operations, reporting, and compliance.

The fundamental concepts from the definition of Internal Control are:

• Geared to the achievement of objectives in one or more separate but overlapping Categories.
• A process consisting of ongoing tasks and activities – it is a means to an end, not an end in itself.
• Effected by people – it is not merely about policy and procedure manuals, systems, and forms, but about people
and the actions they take at every level of an organization to effect internal control.
• Able to provide reasonable assurance, not absolute assurance, to an entity’s senior management and board of
directors.
• Adaptable to the entity structure – flexible in application for the entire entity or for a particular subsidiary,
division, operating unit, or business process.
COSO’s Internal Control Framework includes enhancements and clarifications that are intended to ease use and
application. One of the more significant enhancements is the formalization of fundamental concepts introduced in
the original framework as principles. These principles, associated with the five components, provide clarity for the
user in designing and implementing systems of internal control and for understanding requirements for effective
internal control.
The Framework has been enhanced by expanding the financial reporting category of objectives to include
other important forms of reporting, such as non-financial and internal reporting. Also, the Framework reflects
considerations of many changes in the business, operating, and regulatory environments over the past several
decades, including:
• Expectations for governance oversight.
• Globalization of markets and operations.
• Changes and greater complexity in the business.
• Demands and complexities in laws, rules, regulations, and standards.
• Expectations for competencies and accountabilities.
• Use of, and reliance on, evolving technologies.
• Expectations relating to preventing and detecting fraud.
Objectives: The Framework sets forth three categories of objectives, which allow organizations to focus on separate
aspects of internal control:
• Operations Objectives: These pertain to effectiveness and efficiency of the entity’s operations, including
operational and financial performance goals, and safeguarding assets against loss.
• Reporting Objectives : These pertain to internal and external financial and non-financial reporting and may
encompass reliability, timeliness, transparency, or other terms as set forth by regulators, standard setters, or
the entity’s policies.
• Compliance Objectives: These pertain to adherence to laws and regulations to which the entity is subject.
Lesson 13 • Internal Control 379

Difference between Internal Control, Internal Check and Internal Audit

Basis Internal Control Internal Check Internal Audit

Meaning Internal Control means the Internal check means Internal auditing means an
process designed, implemented an arrangement that a audit on behalf of management
and maintained by those charged transaction is processed by to ensure the adequacy and
with governance, management two or more persons and effectiveness of internal controls,
and other personnel to provide each one is independent accuracy and timeliness of
reasonable assurance about and starts with when the financial and other records and
the achievement of an entity’s predecessor has completed reports and adherence to the laid
objectives with regard to the task. down policies and procedures by
reliability of financial reporting, each unit of the organization.
effectiveness and efficiency of
operations, and compliance with
applicable laws and regulations.

Verification It is a self-balancing mechanism One person’s work is The entire work process / system
implemented by the independently checked by is checked and reviewed by the
management, so as to ensure another person(s). internal auditor.
that the entire work process
is divisible in parts, so that not
a single person may have the
access to complete the entire
process.

Reporting It is a mechanism introduced by No such report is prepared. Internal auditor submit its report
the management. Only one person’s work is to the management.
independently checked by
another person.

What it is? It is a system introduced by the Internal check is the part It is an activity done by the
management. of the internal control internal auditor.
mechanism.

When it is Internal Control is a policy As soon as one part or process Its periodicity may be yearly
done? decision by the management is completed, it is checked by or half yearly or quarterly, as
and is a continuous process. another person(s). decided by the management.

Purpose Formulation and circulation Safeguarding or minimis-ing Detecting and reporting errors
of management principles errors and frauds in actions and frauds and irregularities
and policies and effective and transactions and records, regarding assets committed, if
speedy execution thereof with and profacting assets. So any detection and prevention
the help of internal checking as to ensure the efficient activity.
and internal audit activities. running of business.

Scope Wider in scope than internal Rather restricted to Limited to a continuous internal
check and internal audit as formulation and working system of checking financial
specified above. of proper accounting and and non-financial operations
other operational systems and reporting to internal top
and reporting or offering management.
suggestions to appropriate
internal authorities.
380 Lesson 13 • PP-GRMCE

Components of Internal Control as defined by COSO

1. Control environment: The control environment describes a set of standards, processes, and structures that
provide the basis for carrying out internal control across the organization. According to the Institute of Internal
Auditors (IIA), a control environment is the foundation on which an effective system of internal control is built
and operated in an organization that strives to:
• achieve its strategic objectives,
• provide reliable financial reporting to internal and external stakeholders,
• operate its business efficiently and effectively,
• comply with all applicable laws and regulations, and
• safeguard its assets.
2. Risk Assessment: The risk assessment forms the basis for determining how risks will be managed. A risk
is defined as the possibility that an event will occur and adversely affect the achievement of organizational
objectives. Risk assessment requires management to consider the impact of possible changes in the internal
and external environment and to potentially take action to manage the impact.
3. Control Activities: Control activities are actions (generally described in policies, procedures, and standards)
that help management mitigate risks in order to ensure the achievement of objectives. Control activities may
be preventive or detective in nature and may be performed at all levels of the organization.
4. Information: Information is obtained or generated by management from both internal and external sources in
order to support internal control components. Communication based on internal and external sources is used
to disseminate important information throughout and outside of the organization, as needed to respond to
and support meeting requirements and expectations. The internal communication of information throughout
an organization also allows senior management to demonstrate to employees that control activities should be
taken seriously.
5. Monitoring Activities: Monitoring activities are periodic or ongoing evaluations to verify that each of the five
components of internal control, including the controls that affect the principles within each component, are
present and functioning around their products.
The 2013 Framework is a flexible, reliable, and cost-effective approach to the design and evaluation of internal
control systems for organizations looking to achieve operational, compliance, and reporting objectives. The 2013
Framework can be applied regardless of organization size or type: public companies, privately held companies, not-
for-profit entities, and governmental entities.

The COSOs Cube

 Lesson 13 • Internal Control 381

Table of Five Components and Seventeen Principles of Internal Control

Five Components Seventeen Principles

1. Control environment 1. Demonstrates commitment to integrity and ethical values
2. Exercises oversight responsibility
3. Establishes structure, authority, and responsibility
4. Demonstrates commitment to competence
5. Enforces accountability
2. Risk Assessment 6. Specifies suitable objectives
7. Identifies and analyzes risk
8. Assesses fraud risk
9. Identifies and analyzes significant change
3. Control Activities 10. Selects and develops control activities
11. Selects and develops general controls over technology
12. Deploys control activities through policies and procedures
4. Information and 13. Uses relevant information
communication 14. Communicates internally
15. Communicates externally
5. Monitoring Activities 16. Conducts ongoing and/or separate evaluations
17. Evaluates and communicates deficiencies

Control Testing and Evaluation

One central element of COSO’s updated framework is its continued emphasis on the linkage among objectives, risk,
and control. Organizations seek to accomplish objectives, and those objectives need to be articulated. There are
risks to achieving the objectives, whether they relate to operations, compliance, or reporting, and those risks need
to be identified. The key is to link controls to risks and objectives: The only reason that controls exist is to mitigate
risks and thereby increase the probability that the organization will accomplish its objectives. Control, therefore, is
subservient to risk — and to the objectives they help achieve.

Efficiency of Internal Controls and its Review

The Internal control should be adequate to cover all the key and sensitive areas of the organization. No one person
should be allowed to complete one set of transactions. The control mechanism once established should be reviewed
periodically in order to assess the lacunas and to remove the same. The password sharing should be strictly prohibited
and stringent action should be taken against the erring staff. The efficacy of the internal control mechanism depends
when the employees accepts this philosophy in the true letter and spirit.

What Internal Control Can Do?

• Internal control can help an entity achieve its performance and profitability targets, and prevent loss of resources.
• It can help ensure reliable financial reporting.
• It can help ensure that the enterprise complies with laws and regulations, avoiding damage to its
reputation and other consequences.
• In sum, it can help an entity get to where it wants to go, and avoid pitfalls and surprises along the way.

Limitation of Internal control

• Internal control cannot change an inherently poor manager into a good one.
• Internal control cannot ensure success, or even survival in case of shifts in government policy or programs,
competitors’ actions or economic conditions, since these are beyond the management’s control.
382 Lesson 13 • PP-GRMCE

• An internal control system, no matter how well conceived and operated, can provide only reasonable not
absolute--assurance to management and the board regarding achievement of an entity’s objectives.
• The likelihood of achievement is affected by limitations inherent in all internal control systems.
• Controls can be circumvented by the collusion of two or more people, and management has the ability to
override the system.
• Another limiting factor is that the design of an internal control system must reflect the fact that there are
resource constraints, and the benefits of controls must be considered relative to their costs.
• Thus, while internal control can help an entity achieve its objectives, it is not a panacea.

ROLE AND RESPONSIBILITIES WITH REGARD TO INTERNAL CONTROL

Everyone in an organization has responsibility for internal control.
Management: The chief executive officer is ultimately responsible and should assume “ownership” of the system.
More than any other individual, the chief executive sets the “tone at the top” that affects integrity and ethics and
other factors of a positive control environment. In a large company, the chief executive fulfills this duty by providing
leadership and direction to senior managers and reviewing the way they’re controlling the business. Senior
managers, in turn, assign responsibility for establishment of more specific internal control policies and procedures
to personnel responsible for the unit’s functions. In a smaller entity, the influence of the chief executive, often an
owner-manager is usually more direct. In any event, in a cascading responsibility, a manager is effectively a chief
executive of his or her sphere of responsibility. Of particular significance are financial officers and their staffs, whose
control activities cut across, as well as up and down, the operating and other units of an enterprise.

SEBI (LODR) Regulations, 2015

Regulation 17(8): The chief executive officer and the chief financial officer shall provide
the compliance certificate to the board of directors as specified in Part B of Schedule II.

Part B of Schedule II-Compliance Certificate

The following compliance certificate shall be furnished by chief executive officer and chief financial officer:
A They have reviewed financial statements and the cash flow statement for the year and that to the best of
their knowledge and belief :
1. these statements do not contain any materially untrue statement or omit any material fact or contain
statements that might be misleading;
2. these statements together present a true and fair view of the listed entity’s affairs and are in compliance
with existing accounting standards, applicable laws and regulations.
B There are, to the best of their knowledge and belief, no transactions entered into by the listed entity’s during
the year which are fraudulent, illegal or violative of the company’s code of conduct.
C They accept responsibility for establishing and maintaining internal controls for financial reporting and
that they have evaluated the effectiveness of internal control systems of the listed entity’s pertaining to
financial reporting and they have disclosed to the auditors and the Audit Committee, deficiencies in the
design or operation of such internal controls, if any, of which they are aware and the steps they have taken
or propose to take to rectify these deficiencies.
D They have indicated to the auditors and the Audit committee:
1. significant changes in internal control over financial reporting during the year;
2. significant changes in accounting policies during the year and that the same have been disclosed in the
notes to the financial statements; and
3. instances of significant fraud of which they have become aware and the involvement therein, if any, of
the management or an employee having a significant role in the listed entity’s internal control system
over financial reporting.
Lesson 13 • Internal Control 383

Regulation 18(3) : The role of the audit committee and the information to be reviewed
by the audit committee shall be as specified in Part C of Schedule II.
Part C of Schedule II:

ROLE OF THE AUDIT COMMITTEE AND REVIEW OF INFORMATION BY

AUDIT COMMITTEE
A. The role of the audit committee shall include the following:
1. oversight of the listed entity’s financial reporting process and the disclosure of its financial information to
ensure that the financial statement is correct, sufficient and credible;
2. recommendation for appointment, remuneration and terms of appointment of auditors of the listed entity;
3. approval of payment to statutory auditors for any other services rendered by the statutory auditors;
4. reviewing, with the management, the annual financial statements and auditor’s report thereon before
submission to the board for approval, with particular reference to:
(a) matters required to be included in the director’s responsibility statement to be included in the board’s
report in terms of clause (c) of sub-section (3) of Section 134 of the Companies Act, 2013;
(b) changes, if any, in accounting policies and practices and reasons for the same;
(c) major accounting entries involving estimates based on the exercise of judgment by management;
(d) significant adjustments made in the financial statements arising out of audit findings;
(e) compliance with listing and other legal requirements relating to financial statements;
(f) disclosure of any related party transactions;
(g) modified opinion(s) in the draft audit report;
5. reviewing, with the management, the quarterly financial statements before submission to the board for
approval;
6. reviewing, with the management, the statement of uses / application of funds raised through an issue
(public issue, rights issue, preferential issue, etc.), the statement of funds utilized for purposes other than
those stated in the offer document / prospectus / notice and the report submitted by the monitoring agency
monitoring the utilisation of proceeds of a public or rights issue, and making appropriate recommendations
to the board to take up steps in this matter;
7. reviewing and monitoring the auditor’s independence and performance, and effectiveness of audit process;
8. approval or any subsequent modification of transactions of the listed entity with related parties;
9. crutiny of inter-corporate loans and investments;
10. valuation of undertakings or assets of the listed entity, wherever it is necessary;
11. evaluation of internal financial controls and risk management systems;
12. reviewing, with the management, performance of statutory and internal auditors, adequacy of the internal
control systems;
13. reviewing the adequacy of internal audit function, if any, including the structure of the internal audit
department, staffing and seniority of the official heading the department, reporting structure coverage and
frequency of internal audit;
14. discussion with internal auditors of any significant findings and follow up there on;
15. reviewing the findings of any internal investigations by the internal auditors into matters where there is
suspected fraud or irregularity or a failure of internal control systems of a material nature and reporting the
matter to the board;
16. discussion with statutory auditors before the audit commences, about the nature and scope of audit as well
as post-audit discussion to ascertain any area of concern;
384 Lesson 13 • PP-GRMCE

17. to look into the reasons for substantial defaults in the payment to the depositors, debenture holders,
shareholders (in case of non-payment of declared dividends) and creditors;
18. to review the functioning of the whistle blower mechanism;
19. approval of appointment of chief financial officer after assessing the qualifications, experience and
background, etc. of the candidate;
20. Carrying out any other function as is mentioned in the terms of reference of the audit committee.
21. reviewing the utilization of loans and/ or advances from/investment by the holding company in the
subsidiary exceeding rupees 100 crore or 10% of the asset size of the subsidiary, whichever is lower
including existing loans / advances / investments existing as on the date of coming into force of this
provision.]
B. The audit committee shall mandatorily review the following information:
1. management discussion and analysis of financial condition and results of operations;
2. statement of significant related party transactions (as defined by the audit committee), submitted
by management;
3. management letters / letters of internal control weaknesses issued by the statutory auditors;
4. internal audit reports relating to internal control weaknesses; and
5. the appointment, removal and terms of remuneration of the chief internal auditor shall be subject to
review by the audit committee.
6. statement of deviations:
(a) quarterly statement of deviation(s) including report of monitoring agency, if applicable,
submitted to stock exchange(s) in terms of Regulation 32(1).
(b) annual statement of funds utilized for purposes other than those stated in the offer document/
prospectus/notice in terms of Regulation 32(7).

Board of Directors: Management is accountable to the board of directors, which provides governance, guidance and
oversight. Effective board members are objective, capable and inquisitive. They also have a knowledge of the entity’s
activities and environment, and commit the time necessary to fulfill their board responsibilities. Management may
be in a position to override controls and ignore or stifle communications from subordinates, enabling a dishonest
management which intentionally misrepresents results to cover its tracks. A strong, active board, particularly when
coupled with effective upward communications channels and capable financial, legal and internal audit functions, is
often best able to identify and correct such a problem.

Directors’ Responsibility Statement:

Section 134(3)(c) of the Companies Act, 2013 provides that there shall be attached to statements laid before
a company in general meeting, a report by its Board of Directors, which shall include Directors’ Responsibility
Statement.
In terms of sub-clause (e) of sub-section (5) of section 134 the Directors’ Responsibility Statement shall state that –
(e) the directors, in the case of a listed company, had laid down internal financial controls to be followed by the
company and that such internal financial controls are adequate and were operating effectively.
Explanation. – For the purposes of this clause, the term “internal financial controls” means the policies and
procedures adopted by the company for ensuring the orderly and efficient conduct of its business, including
adherence to company’s policies, the safeguarding of its assets, the prevention and detection of frauds and
errors, the accuracy and completeness of the accounting records, and the timely preparation of reliable
financial information;
f) the directors had devised proper systems to ensure compliance with the provisions of all applicable laws
and that such systems were adequate and operating effectively.
Lesson 13 • Internal Control 385

Internal Auditors: Internal auditors play an important role in evaluating the effectiveness of control systems, and
contribute to ongoing effectiveness. Because of organizational position and authority in an entity, an internal audit
function often plays a significant monitoring role.
Other Personnel: Internal control is, to some degree, the responsibility of everyone in an organization and therefore
should be an explicit or implicit part of everyone’s job description. Virtually all employees produce information used
in the internal control system or take other actions needed

CONCLUSION
Internal control has two components, internal check and internal audit. Internal control enables an entity to achieve
desired performance, profitability, and prevent loss of resources through the effective internal checks supported by
the internal audit.
Principles of Corporate Governance requires adherence to the applicable laws and regulations through adequate disclosures,
transparency and reliable financial reporting. The law abiding entity improves the image among stakeholders, improved
relations with regulators, and avoid pitfalls. All this may happen only due to perfect internal controls.
COSO has enunciated seventeen principles on internal control. The principles have been recognized world over.
While it discusses the responsibility for establishing of the internal control measures in the organization, it also
describes what internal control can do and what it cannot do. An internal control system, no matter how well
conceived and operated, can provide only reasonable, not absolute, assurance to management and the board
regarding achievement of an entity’s objectives. The likelihood of achievement is affected by limitations inherent
in all internal control systems. These include the realities that judgments in decision- making can be faulty, and
that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the
collusion of two or more people, and management has the ability to override the system.
Another limiting factor is that the design of an internal control system must reflect the fact that there are resource
constraints, and the benefits of controls must be considered relative to their costs.

LESSON ROUND UP
• The Information Systems Control and Audit Association (ISACA) has defined the Internal Control Systems as, ‘The
policies and procedures, practices and organizational structures, designed to provide reasonable assurance that
business objectives will be achieved and that undesired events will be prevented or detected and corrected’.
• As per definition given by COSO, the Internal control is a process, effected by an entity’s board of directors,
management, and other personnel, designed to provide reasonable assurance regarding the achievement of
objectives relating to operations, reporting, and compliance.
• Components of Internal Control include internal check and internal audit. Internal check means an arrangement
that a transaction is process by two or more persons and each one is independent and starts with when the
predecessor has completed the task. So, it is a self-balancing system which have in-built systems of independent
checking of the work done by other. Internal audit may be done by the own staff or by engaging any professional
person outside of the organisation. The scope of the internal audit is determined by the management. Internal
Auditor is required to submit its report to the management (who is appointing authority).
• COSO’s Internal Control Framework includes enhancements and clarifications that are intended to ease use
and application. One of the more significant enhancements is the formalization of fundamental concepts
introduced in the original framework as principles. These principles, associated with the five components,
provide clarity for the user in designing and implementing systems of internal control and for understanding
requirements for effective internal control.
• The COSO Framework sets forth three categories of objectives, which allow organizations to focus on separate
aspects of internal control. These are Operations Objectives, Reporting and Objectives Compliance Objectives.
• The Framework sets out five components of internal control and seventeen principles representing the
fundamental concepts associated with components. Control Environment (5 principles), Risk Assessment
(4 Principles), Control Activities (3 Principles), Information and Communication (3 Principles), Monitoring
Activities (2 Principles)
• Everyone in an organization (viz: Management, Board of Directors, Internal Auditor and Other persons) all
have the responsibility for internal control.
386 Lesson 13 • PP-GRMCE

GLOSSARY
Internal Control The Internal control is a process, effected by an entity’s board of directors, management, and
other personnel, designed to provide reasonable assurance regarding the achievement of
objectives relating to operations, reporting, and compliance.
Internal Check: Internal check is an arrangement of as duties allocated in such a way that the work of one
clerk is automatically checked by another while internal audit is an independent review of
operations and records undertaken by the staff specially appointed for the purpose.
Internal Audit Internal audit is a dynamic profession involved in helping organisations achieve their objectives.
It is concerned with evaluating and improving the effectiveness of risk management, control
and governance processes in an organisation.

REFERENCE FOR FURTHER READING

• https://en.wikipedia.org/wiki/Internal_control
• https://www.coso.org/Documents/COSO-CROWE-COSO-Internal-Control-Integrated-Framework.pdf

TEST YOURSELF
(These are meant for recapitulation only. Answers to these questions are not to be submitted for evaluation)
1. Do you know the components and principles of Internal Control? Briefly explain.
2. Discuss briefly the efficacy of Internal Control.
3. Can you discuss in detail about the COSO’s Internal Control Framework.
4. Please explain the roles and responsibilitie
Lesson 14 Reporting

Key Concepts One Learning Objectives Regulatory Framework

Should Know
• Global Reporting Initiative
• Financial To understand the:
• Regulation 34(2)(f) of the SEBI
Reporting • Concept of Reporting which (LODR) Regulations, 2015
includes the financial as well as
• Sustainability • Business Responsibility Report
non-financial reporting.
Reporting Format by SEBI
• The legal provisions and
• Business • National Guidelines on
regulations with regard to
Responsilibily Responsible Business Conduct
Board’s Report, CSR Report and
Reporting (NGRBC)
BRR reports have also been
• Integrated dealt. • International Integrated
Reporting Reporting Framework (IIRC)
• The concepts of sustainability
reporting and contemporary
developments like integrated
reporting.

Lesson Outline
• Introduction
• Regulatory Framework
• Financial Reporting
• Objectives of Financial Reporting
• Importance of Financial Reporting
• Limitations of Financial Reporting
• Non-Financial Reporting
• Board’s Report
• Corporate Social Responsibility Report
• Corporate Sustainability Reporting
• Benefits of Sustainability Reporting
• GRI - Sustainability Reporting Framework
• Sustainability Reporting Framework in India
• Challenges in Mainstreaming Sustainability Reporting
• Towards Integrated Reporting
• Integrated Reporting By Listed Entities in India
• Relation between Integrated Reporting and Sustainability Reporting
• LESSON ROUND-UP
• GLOSSARY
• TEST YOURSELF
388 Lesson 14 • PP-GRMCE

INTRODUCTION
Reporting may mean to provide the information to the stakeholders as per the requirement of the law. Reporting is
not the new concept. The companies are reporting through their annual report which is a comprehensive report on
a company’s activities throughout the preceding year. Annual reports are intended to give shareholders and other
interested people information about the company’s activities and financial performance. The annual report contains
the financial reporting as well as non-financial reporting.

FINANCIAL REPORTING
Financial reporting is the process of producing statements that disclose an organisation’s financial status to
management, investors and the government.
Financial reporting serves two primary purposes. First, it helps management to engage in effective decision- making
concerning the company’s objectives and overall strategies. The data disclosed in the reports can help management
discern the strengths and weaknesses of the company, as well as its overall financial health. Second, financial
reporting provides vital information about the financial health and activities of the company to its stakeholders
including its shareholders, potential investors, consumers, and government regulators. It’s a means of ensuring that
the company is being run appropriately.
Financial Reporting involves the disclosure of financial information to the various stakeholders about the financial
performance and financial position of the organisation over a specified period of time. These stakeholders include
– investors, creditors, public, debt providers, governments & government agencies. In case of listed companies the
frequency of financial reporting is quarterly & annual.
The main components of financial reporting are:

The financial statements – Balance Sheet, Statement of Profit & Loss, Cash flow
statement & Statement of changes in stock holder’s equity

The notes to financial statements

Quarterly & Annual reports (in case of listed companies)

Prospectus (In case of companies going for IPOs)

Management Discussion & Analysis (In case of public companies)

The Institute of Chartered Accounts of India (ICAI) has issued various accounting standards and guidance notes
which are applied for the purpose of financial reporting. This ensures uniformity across various diversified industries
when they prepare and present their financial statements.

Objectives of Financial Reporting

The following points may be summed up as the objectives and purposes of financial reporting –
1. Providing information to management of an organisation which is used for the purpose of planning, analysis,
benchmarking and decision making.
 Lesson 14 • Reporting 389

2. Providing information to investors, promoters, debt provider and creditors which is used to enable them to
male rational and prudent decisions regarding investment, credit etc.
3. Providing information to shareholders & public at large in case of listed companies about various aspects of
an organisation.
4. Providing information about the economic resources of an organisation, claims to those resources (liabilities &
owner’s equity) and how these resources and claims have undergone change over a period of time.
5. Providing information as to how an organisation is procuring & using various resources.
6. Providing information to various stakeholders regarding performance management of an organisation as to
how diligently & ethically they are discharging their fiduciary duties & responsibilities.
7. Providing information to the statutory auditors which in turn facilitates audit.
8. Enhancing social welfare by looking into the interest of employees, trade union & Government.

Importance of Financial Reporting

The importance of financial reporting cannot be over emphasized. It is required by each and every stakeholder for
multiple reasons and purposes. The following points highlight the importance of financial reporting –
1. In helps and organisation to comply with various statues and regulatory requirements. The organisations are
required to file financial statements to ROC, Government Agencies. In case of listed companies, quarterly as
well as annual results are required to be filed to stock exchanges and published.
2. It facilitates statutory audit. The statutory auditors are required to audit the financial statements of an
organisation to express their opinion.
3. Financial Reports forms backbone for financial planning, analysis, bench marking and decision making. These
are used for above purposes by various stakeholders.
4. Financial reporting helps organisations to raise capital both domestic as well as overseas.
5. On the basis of financials, the public in large can analyze the performance of the organisation as well as of its
management.
6. For the purpose of bidding, labour contract, government supplies etc., organisations are required to furnish
their financial reports & statements.
7. Financial reporting also facilitates an introspection of the organization. It takes stock of various affairs which
would have been missed in absence of any financial system.

Limitations of Financial Reporting

Corporate reporting is an essential means by which companies communicate with investors as part of their
accountability and stewardship obligations. The current financial reporting model was developed in the 1930’s
for an industrial world. In general, the model provides a backwards-looking review of performance and does not
provide enough relevant information for decision- making today.
The financial reporting model is like “looking in the rear-view mirror,” when in fact the road ahead is very turbulent
and there are huge impacts on the company, both societal and environmental.
It is not necessarily the volume of information, but the lack of a comprehensive story, which is where improvements
in corporate reporting are needed. Investors expect information about:
• Business model and strategy,
• Intangible factors and sustainability (i.e. economic, environmental, social) commitments,
• Impacts and performance that affect a company’s value today and its ability to create value in the future,
• Key aspects of corporate governance,
• Internal controls,
• Human rights / diversity practices and policies,
• Key financial ratios.
390 Lesson 14 • PP-GRMCE

NON-FINANCIAL REPORTING
Apart from financial reporting, the non-financial reporting under the annual reports is also being made by the
companies. It contains the information relating to the company’s performance during the previous year, future
projections, award achievements and penalty imposed, if any by any regulators, are apprised to the Stake holders by
way of reporting in the annual report.
It is a structured way of presenting information about ones performance. Non-financial reporting is the practice of
measuring, disclosing and being accountable to internal and external stakeholders for organisational performance
towards the goal of sustainable and inclusive development.
There has been a general perception that right from the time of Industrial Revolution, economic development has come
at the cost of environment and has brought about large scale destruction of nature and growth process has not been
inclusive. Due to the negative externalities of economic development, the practice of non-financial reporting started
largely in response to pressure from non-governmental organisations (NGOs) and civic society, which claimed that
many firms lacked social and environmental responsibility. It epitomises that a company’s financial health is dependent
on much more than the assets on its balance sheet and the movements on its profit and loss account.
Non-financial reporting is an opportunity to communicate in an open and transparent way with stakeholders.
In their non-financial reports, firms volunteer an overview of their environmental and social impact during the
previous year. The information in nonfinancial reports contributes to building up a company’s risk-return profile.
Non-financial reporting includes-

• Board’s Report,
• Corporate Social Responsibility Report
• Corporate Sustainability Reporting

BOARD’S REPORT
The Companies Act, 2013, requires the Board of Directors of every company to attach its report to the financial
statements to be laid before the members at the annual general meeting. The Board’s Report is an important means
of communication by the Board of Directors of a company with its stakeholders. The Board’s Report provides the
stakeholders with both financial and non-financial information, including the performance and prospects of the
company, relevant changes in the management and capital structure, recommendations as to the distribution of
profits, future and on-going programmes of expansion, modernisation and diversification, capitalisation of reserves,
further issue of capital and other relevant information.
The Companies Act, 2013, mandates certain disclosures to be made in the Board’s Report. A listed company is also
required to comply with certain additional requirements as stated under the Securities and Exchange Board of India
(Listing Obligations and Disclosure Requirements) Regulations, 2015.
Similarly, a company, whose securities are listed on an overseas stock exchange, is required to comply with additional
requirements as may be specified by such stock exchange. Further, a company which is regulated under other laws,
may also be required to make additional disclosures in its Board’s Report as stated in the respective applicable laws.
The Board’s Report should be based on the company’s standalone financial statement and not on the consolidated
financial statement and should relate to the financial year for which such financial statement is prepared. The
Board’s Report should avoid repetition of information. If any information is mentioned elsewhere in the financial
statement, a reference thereof should be given in Board’s Report instead of repeating the same.
A board’s report should typically include information under following heads-
• Company Specific Information
• General Information
• Capital and Debt Structure
• Credit Rating of Securities
• Investor Education and Protection Fund (IEPF)
 Lesson 14 • Reporting 391

• Management
• Disclosures Relating to Subsidiaries, Associates and Joint Ventures
• Details of Deposits
• Particulars of Loans, Guarantees And Investments
• Particulars of Contracts or Arrangements with Related Parties
• Corporate Social Responsibility (CSR)
• Conservation of Energy, Technology Absorption
• Foreign Exchange Earnings and Outgo
• Risk Management including management perception to Risk
• Details of Establishment of Vigil Mechanism
• Material Orders of Judicial Bodies /Regulators
• Auditors Report
• Secretarial Audit Report
• Explanations in Response to Auditors’ Qualifications
• Compliance With Secretarial Standards
• Compliance of applicable regulations
• Corporate Insolvency Resolution Process Initiated under the Insolvency and Bankruptcy Code, 2016 (IBC)
• Failure to Implement any Corporate Action
• Annual Return
• Additional Disclosures Under Listing Regulations
• Disclosures Pertaining to the Sexual Harassment of Women at the Workplace (Prevention, Prohibition And
Redressal) Act, 2013 etc.

CORPORATE SOCIAL RESPONSIBILITY REPORT

Section 134(3)(o) of the Companies Act, 2013 prvovides that there shall be attached to statements laid
before a company in general meeting, a report by its Board of Directors, which shall include the details about
the policy developed and implemented by the company on corporate social responsibility initiatives taken
during the year.
The Annexure-I of the Companies (CSR Policy) Rules, 2014 provide the format for reporting of CSR activities
to be included in the Board’s Report for the Financial Year Commenced Prior to 1str Day of April, 2020, which
is as under:

[Annexure - I]

Format for the Annual Report on CSR Activities to be included in the Board’s Report [For
Financial Year Commenced Prior To 1st Day of April, 2020]
1. A brief outline of the company’s CSR policy, including overview of projects or programs proposed to be
undertaken and a reference to the web-link to the CSR policy and projects or programs.
2. The Composition of the CSR Committee.
3. Average net profit of the company for last three financial years
4. Prescribed CSR Expenditure (two per cent of the amount as in item 3 above)
392 Lesson 14 • PP-GRMCE

5. Details of CSR spent during the financial year.

(a) Total amount to be spent for the financial year;
(b) Amount unspent, if any;
(c) Manner in which the amount spent during the financial year is detailed below.

(1) (2) (3) (4) (5) (6) (7) (8)

S.No. CSR Sector in Projects or Amount Amount spent on the Cumulative Amount
project or which the programs outlay projects or programs expenditure spent: Direct
activity Project is (budget) Sub-heads: upto to the or through
1. Local area or
identified covered project or reporting implementing
other 1. Direct expenditure
programs period. agency*
on projects or
2. Specify the wise
programs.
State and
district where 2. Overheads:
projects or
programs was
undertaken
1
2
3
TOTAL
*Give details of implementing agency:
6. In case the company has failed to spend the two per cent of the average net profit of the last three financial
years or any part thereof, the company shall provide the reasons for not spending the amount in its Board
report.
7. A responsibility statement of the CSR Committee that the implementation and monitoring of CSR Policy, is
in compliance with CSR objectives and Policy of the company.

Sd/- Sd/- Sd/-

(Chief Executive Officer (Chairman CSR Committee) (Person specified under clause (d) of sub-section
or Managing Director or (1) of section 380 of the Act) (wherever applicable)
Director)

[Annexure -II]

Format For The Annual Report on CSR Activities to be Included in the Board’s Report For
Financial Year Commencing on or After 1st Day of April, 2020
1. Brief outline on CSR Policy of the Company.
2. Composition of CSR Committee:

Sl. No. Name of Director Designation / Nature Number of meetings Number of meetings of
of Directorship of CSR Committee held CSR Committee attended
during the year during the year
Lesson 14 • Reporting 393

3. Provide the web-link where Composition of CSR committee, CSR Policy and CSR projects approved by the
board are disclosed on the website of the company.
4. Provide the details of Impact assessment of CSR projects carried out in pursuance of sub-rule (3) of rule 8 of
the Companies (Corporate Social responsibility Policy) Rules, 2014, if applicable (attach the report).
5. Details of the amount available for set off in pursuance of sub-rule (3) of rule 7 of the Companies (Corporate
Social responsibility Policy) Rules, 2014 and amount required for set off for the financial year, if any

Sl. No. Financial Year Amount available for set-off from Amount required to be set-off for the
preceding financial years (in Rs) financial year, if any (in Rs)

Total

6. Average net profit of the company as per section 135(5).

7 (a) Two percent of average net profit of the company as per section 135(5)
(b) Surplus arising out of the CSR projects or programmes or activities of the previous financial years.
(c) Amount required to be set off for the financial year, if any
(d) Total CSR obligation for the financial year (7a+7b-7c).
8(a) CSR amount spent or unspent for the financial year:

Total Amount Amount Unspent (in Rs.)

Spent for the
Financial Year. Total Amount transferred to Amount transferred to any fund specified under
(in Rs.) Unspent CSR Account as per Schedule VII as per second proviso to section
section 135(6). 135(5).
Amount. Date of transfer. Name of the Amount. Date of transfer.
Fund

(b) Details of CSR amount spent against ongoing projects for the financial year:

(1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11)

Sl. Name Item from Local Location of the Project Amount Amount Amount Mode of Mode of
No. of the the list of area project. duration. allocated spent transferred to Implementation Implementation
Project. activities (Yes/ for the in the Unspent CSR - Direct (Yes/ - Through
in No). project current Account for No). Implementing
Schedule (in Rs.). financial the project as Agency
VII to the Year per Section
Act. State. District. (in Rs.). 135(6) Name CSR
(in Rs.). Registration
number.

1.

2.

3.

Total
394 Lesson 14 • PP-GRMCE

(c) Details of CSR amount spent against other than ongoing projects for the financial year:

(1) (2) (3) (4) (5) (6) (7) (8)

Sl. No. Name Item from the Local Location of the Amount Mode of Mode of implementation
of the list of activities area project. spent for the implementation - Through implementing
Project in schedule VII (Yes/ project - Direct agency.
to the Act. No). State. District. (in Rs.). (Yes/No). Name. CSR
registration
number.
1.
2.
3.
Total
(d) Amount spent in Administrative Overheads
(e) Amount spent on Impact Assessment, if applicable
(f) Total amount spent for the Financial Year (8b+8c+8d+8e)
(g) Excess amount for set off, if any

Sl. No. Particular Amount (in Rs.)

(i) Two percent of average net profit of the company as per section 135(5)
(ii) Total amount spent for the Financial Year
(iii) Excess amount spent for the financial year [(ii)-(i)]
(iv) Surplus arising out of the CSR projects or programmes or activities of the
previous financial years, if any
(v) Amount available for set off in succeeding financial years [(iii)-(iv)]
9. (a) Details of Unspent CSR amount for the preceding three financial years:

Sl. No. Preceding Amount Amount Amount transferred to Amount

Financial Year. transferred to spent in the any fund specified under remaining to
Unspent CSR reporting Schedule VII as per section be spent in
Account under Financial 135(6), if any. succeeding
section 135 Year (in Rs.). Name of Amount Date of financial
(6) (in Rs.) the Fund (in Rs). transfer. years. (in Rs.)
1.
2.
3.
Total
(b) Details of CSR amount spent in the financial year for ongoing projects of the preceding financial year(s):

(1) (2) (3) (4) (5) (6) (7) (8) (9)

Sl. Project Name Financial Project Total Amount Cumulative Status
No. ID. of the Year in duration. amount spent on amount of the
Project. which the allocated the project spent at project -
project was for the in the the end of Completed
commenced. project reporting reporting /Ongoing.
(in Rs.). Financial Financial
Year (in Rs). Year. (in Rs.)
1
2
3
Total
 Lesson 14 • Reporting 395

10. In case of creation or acquisition of capital asset, furnish the details relating to the asset so created or
acquired through CSR spent in the financial year
(asset-wise details).
a) Date of creation or acquisition of the capital asset(s).
b) Amount of CSR spent for creation or acquisition of capital asset.
c) Details of the entity or public authority or beneficiary under whose name such capital asset is
registered, their address etc.
d) Provide details of the capital asset(s) created or acquired (including complete address and location of
the capital asset).
11. Specify the reason(s), if the company has failed to spend two per cent of the average net profit as per section
135(5).

Sd/- Sd/- Sd/-

(Chief Executive Officer (Chairman CSR Committee). [Person specified under
or Managing Director or clause (d) of sub-section (1)
Director). of section 380 of the Act]
(Wherever applicable).

CORPORATE SUSTAINABILITY REPORTING

Sustainability reporting can help organizations to measure, understand and communicate their economic,
environmental, social and governance performance, and then set goals, and manage change more effectively. A
sustainability report is the key platform for communicating sustainability performance and impacts – whether
positive or negative.
Internal benefits of sustainability reporting for companies and organizations can include:
• Increased understanding of risks and opportunities
• Emphasizing the link between financial and non-financial performance
• Influencing long term management strategy and policy, and business plans
• Streamlining processes, reducing costs and improving efficiency
• Benchmarking and assessing sustainability performance with respect to laws, norms, codes, performance
standards, and voluntary initiatives
• Avoiding being implicated in publicized environmental, social and governance failures
Comparing performance internally, and between organizations and sectors External benefits of sustainability
reporting can include:
• Mitigating – or reversing – negative environmental, social and governance impacts.
• Improving reputation and brand loyalty
• Enabling external stakeholders to understand the organization’s true value, and tangible and intangible assets
• Demonstrating how the organization influences, and is influenced by, expectations about sustainable
development.
396 Lesson 14 • PP-GRMCE

Some of the key drivers of sustainability reporting are-

Regulations

Investors Customers

Companies Sustainability Loyalty

themselves Reporting

Peer
pressure NGO’s and
from other the media
companies

Employees

• Regulations: Governments, at most levels have stepped up the pressure on corporations to measure the
impact of their operations on the environment. Legislation is becoming more innovative and is covering an
ever wider range of activities. The most notable shift has been from voluntary to mandatory sustainability,
monitoring and reporting.
• Customers: Public opinion and consumer preferences are a more abstract but powerful factor that exerts
considerable influence on companies, particularly those that are consumer oriented. Customers significantly
influence a company’s reputation through their purchasing choices and brand.
• Loyalty: This factor has led the firms to provide much more information about the products they produce,
the suppliers who produce them, and the product’s environmental impact starting from creation to disposal.
• NGO’s and the media: Public reaction comes not just from customers but from advocates and the media, who
shape public opinion. Advocacy organisations, if ignored or slighted, can damage brand value.
• Employees: Those who work for a company bring particular pressure to bear on how their employers behave;
they, too, are concerned citizens beyond their corporate roles.
• Peer pressure from other companies: Each company is part of an industry, with the peer pressures and
alliances that go along with it. Matching industry standards for sustainability reporting can be a factor;
particularly for those who operate in the same supply chain and have environmental or social standards they
expect of their partners.
• Companies themselves: Corporations, as public citizens, feel their own pressure to create a credible
sustainability policy, with performance measures to back it up, but with an eye on the bottom line as well.
Increasingly, stakeholders are demanding explicit sustainability reporting strategies and a proof of the results.
• Investors: Increasingly, investors want to know that companies they have targeted have responsible,
sustainable, long-term business approaches. Institutional investors and stock exchange CEOs, for example,
have moved to request increased sustainability reporting from listed companies, and environmental, social
and corporate governance indices have been established such as the Dow Jones Sustainability Index.
 Lesson 14 • Reporting 397

GLOBAL REPORTING INITIATIVE - SUSTAINABILITY REPORTING FRAMEWORK

Sustainability reporting can help organizations to
measure, understand and communicate their economic, A sustainability report is a report published by
environmental, social and governance performance, a company or organization about the economic,
and then set goals, and manage change more effectively. environmental and social impacts caused by its
A sustainability report is the key platform for everyday activities. A sustainability report also
communicating sustainability performance and impacts presents the organization’s values and governance
– whether positive or negative. model, and demonstrates the link between its strategy
and its commitment to a sustainable global economy.
Sustainability reporting can be considered as
synonymous with other terms for non-financial reporting; triple bottom line reporting, corporate social responsibility
(CSR) reporting, and more. It is also an intrinsic element of integrated reporting; a more recent development that
combines the analysis of financial and non-financial performance.

Global Reporting Initiative Standards (GRI Standards):

The GRI Standards represent global best practice for reporting publicly on a range of economic, environmental
and social impacts. Sustainability reporting based on the Standards provides information about an organization’s
positive or negative contributions to sustainable development.
The modular, interrelated GRI Standards are designed primarily to be used as a set, to prepare a sustainability
report focused on material topics. The three universal Standards are used by every organization that prepares a
sustainability report. An organization also chooses from the topic-specific Standards to report on its material topics
– economic, environmental or social.
Preparing a report in accordance with the GRI Standards provides an inclusive picture of an organization’s material
topics, their related impacts, and how they are managed. An organization can also use all or part of selected GRI
Standards to report specific information.
GRI Sustainability Reporting Standards (GRI Standards) help businesses, governments and other organizations
understand and communicate the impact of business on critical sustainability issues. Some of the distinctive
elements of the GRI Standards – and the activity that creates them – include:

Multi-
stakeholder
input

Shared Record of use

development and
costs endorsement
GRI
Standards

Governmental
Independence references and
activities

• Multi-stakeholder input: The approach is based on multi-stakeholder engagement, representing the best
combination of technical expertise and diversity of experience to address the needs of all report makers
and users. This approach enables to produce universally-applicable reporting guidance. All elements of
398 Lesson 14 • PP-GRMCE

the Reporting Framework are created and improved using a consensus-seeking approach, and considering
the widest possible range of stakeholder interests which includes business, civil society, labor, accounting,
investors, academics, governments and sustainability reporting practitioners.
• A record of use and endorsement: Of the world’s largest 250 corporations, 92% report on their sustainability
performance and 74% of these use GRI’s Standards to do so. With over 23,000 GRI Reports recorded in the
database, sustainability reporting using the GRI Standards continues to grow. New audiences for sustainability
information, like investors and regulators, are now calling for more and better performance data. Annual
growth in the number of reporters is expected to continue, as we work towards a key area of our strategy:
more reporters and better reporting.
• Governmental references and activities: Enabling policy is a key aspect of overall strategy and GRI work with
governments, international organizations and capital markets to further this agenda. As a result, 35 countries
use GRI in their sustainability policies and look for guidance as the world’s most widely used sustainability
reporting standards. In addition GRI have long-standing collaborations with over 20 international organizations
such as the UNGC, OECD and the UN Working Group on Business & Human Rights.
• Independence: The creation of the Global Sustainability Standards Board in 2014, and related governance
structure changes, have strengthened the independence of the standards aspect funding approach also ensures
independence. GRI is a stichting – in Dutch, a non-profit foundation – with a business model that aims for
a degree of self-sufficiency. Funding is secured from diverse sources; governments, companies, foundations,
partner organizations and supporters.
• Shared development costs: The expense of developing GRI’s reporting guidance is shared among many users
and contributors. For companies and organizations, this negates the cost of developing in-house or sector-
based reporting frameworks.

The GRI Standards are as under:

Universal Standards: The GRI Standards begin with three Universal Standards to disclose general information
about an organization and its approaches to sustainability management. Further topic-specific standards outline
approaches to disclosing qualitative and quantitative information deemed material to each reporting organization.
GRI-101: Foundation: The starting point for using the GRI Standards
GRI-102: General Disclosure: Used to report contextual information about the organization.
GRI-103: Management Approach: Used to disclose how the organization manages impacts related to each of its
material topics
Internal benefits for companies and organizations can include:
• Increased understanding of risks and opportunities
• Emphasizing the link between financial and non-financial performance
• Influencing long term management strategy and policy, and business plans
• Streamlining processes, reducing costs and improving efficiency
• Benchmarking and assessing sustainability performance with respect to laws, norms, codes, performance
standards, and voluntary initiatives
• Avoiding being implicated in publicized environmental, social and governance failures
• Comparing performance internally, and between organizations and sectors.

External benefits of sustainability reporting can include:

• Mitigating – or reversing – negative environmental, social and governance impacts
• Improving reputation and brand loyalty
• Enabling external stakeholders to understand the organization’s true value, and tangible and intangible assets
• Demonstrating how the organization influences, and is influenced by, expectations about sustainable
development.
Lesson 14 • Reporting 399

SUSTAINABILITY REPORTING FRAMEWORK IN INDIA

Considering the importance of sustainability in businesses,
MCA launched Corporate Social Responsibility Voluntary Business Responsibility Report is a disclosure of
Guidelines in 2009. This voluntary CSR Policy addresses adoption of responsible business practices by a listed
six core elements – Care for all Stakeholders, Ethical company to all its stakeholders. This is important
functioning, Respect for Workers’ Rights and Welfare, considering the fact that these companies have
Respect for Human Rights, Respect for Environment and accessed funds from the public, have an element of
Activities for Social and Inclusive Development. To take this public interest involved, and are obligated to make
further, in 2011 MCA issued ‘National Voluntary Guidelines exhaustive disclosures on a regular basis
on Social, Environmental and Economical Responsibilities
of Business’ which encourages reporting on environment, social and governance issues.
In line with the National Voluntary Guidelines on Social, Environmental and Economic Responsibilities of Business
and considering the larger interest of public disclosure regarding steps taken by listed entities from a Environmental,
Social and Governance (“ESG”) perspective, SEBI decided to mandate inclusion of Business Responsibility Reports
(“BRR reports”) as part of the Annual Reports for listed entities.
SEBI in its (Listing Obligations and Disclosure Requirements) Regulations, 2015 has mandated the requirement of
submission of BRR for top 1000 listed entities describing initiative taken by them from an environmental, social and
governance perspective in the prescribed format [Regulation 34(2)(f)].

Regulation 34(2)(f) of SEBI(LODR) Regulations 2015:

34(2)The annual report shall contain the following:
(f) for the top one thousand listed entities based on market capitalization (calculated as on March 31 of every
financial year), business responsibility report describing the initiatives taken by them from an environmental,
social and governance perspective, in the format as specified by the Board from time to time:
Provided that listed entities other than top one thousand listed companies based on market capitalization
and listed entities which have listed their specified securities on SME Exchange, may include these business
responsibility reports on a voluntary basis in the format as specified.

SEBI vide its circular No. SEBI/HO/CFD/CMD-2/P/CIR/2012/562 dated 10th May, 2021 issued a circular on
Business responsibility and sustainability reporting by listed entities. The circular states that-
1. In recent times, adapting to and mitigating climate change impact, inclusive growth and transitioning to a
sustainable economy have emerged as major issues globally. There is an increased focus of investors and other
stakeholders seeking businesses to be responsible and sustainable towards the environment and society.
Thus, reporting of company’s performance on sustainability related factors has become as vital as reporting
on financial and operational performance.
2. 2. SEBI vide Circular no. CIR/CFD/CMD/10/2015 dated November 04, 2015 has prescribed the format for the
Business Responsibility Report (BRR) in respect of reporting on ESG (Environment, Social and Governance)
parameters by listed entities.
3. In terms of amendment to regulation 34 (2) (f) of LODR Regulations vide Gazette notification no. SEBI/LAD-
NRO/GN/2021/22 dated May 05, 2021, it has now been decided to introduce new reporting requirements on
ESG parameters called the Business Responsibility and Sustainability Report (BRSR). The BRSR is accompanied
with a guidance note to enable the companies to interpret the scope of disclosures. The format of the BRSR
and the guidance note are detailed in Annexure I and Annexure II respectively. [These Annexures have been
provided at the end of this chapter]
4. The BRSR seeks disclosures from listed entities on their performance against the nine principles of the ‘National
Guidelines on Responsible Business Conduct’ (NGBRCs) and reporting under each principle is divided into
essential and leadership indicators. The essential indicators are required to be reported on a mandatory basis
while the reporting of leadership indicators is on a voluntary basis. Listed entities should endeavor to report
the leadership indictors also.
5. The BRSR is intended towards having quantitative and standardized disclosures on ESG parameters to enable
comparability across companies, sectors and time. Such disclosures will be helpful for investors to make
400 Lesson 14 • PP-GRMCE

better investment decisions. The BRSR shall also enable companies to engage more meaningfully with their
stakeholders, by encouraging them to look beyond financials and towards social and environmental impacts.
6. The listed entities already preparing and disclosing sustainability reports based on internationally accepted
reporting frameworks (such as GRI, SASB, TCFD or Integrated Reporting) may cross-reference the disclosures
made under such framework to the disclosures sought under the BRSR.

Applicability
7. In terms of the aforesaid amendment, with effect from the financial year 2022-2023, filing of BRSR shall be
mandatory for the top 1000 listed companies (by market capitalization) and shall replace the existing BRR.
Filing of BRSR is voluntary for the financial year 2021-22.
8. The Stock Exchanges are advised to bring the provisions of this circular to the notice of all listed entities and
also disseminate the same on their websites.
9. The Circular is issued in exercise of the powers conferred under Section 11(1) of the Securities and Exchange
Board of India Act, 1992 read with Regulation 101 of the LODR.

W.e.f. the financial year 2022-2023, filing of BRSR shall be mandatory for the top 1000 listed companies
(by market capitalization) and shall replace the existing BRR. Filing of BRSR is voluntary for the financial

year 2021-22.

CHALLENGES IN MAINSTREAMING SUSTAINABILITY REPORTING

Since the Sustainability Reporting is relatively a new concept, many organizations find it difficult to prepare
sustainability. Following may be considered as the challenges in mainstreaming sustainability reporting:
1. Government Encouragement: In many jurisdictions, there are no guidelines on sustainability reporting to
encourage the corporate sector. While on the other hand, there are voluntary as well as mandatory guidelines
from regulators for reporting on Sustainability aspects like in India we have SEBI framework of Business
Responsibility Report. In South Africa, listed companies are required to prepare Integrated Report which is
one step ahead of sustainability reporting. It is the need of the hour that governments should encourage the
corporate in their jurisdiction to adopt the sustainability reporting as a measure of good corporate governance.
2. Awareness: lack of awareness about the emerging concept of sustainability reporting is also a major challenge
which the government and corporate governance bodies need to address by arranging the sustainability
awareness programme for the Professionals, Board of Directors and Management in the corporate sector, as these
are the persons who will drive sustainability reporting initiative for an organisation. The government/regulators
should organize such awareness programme jointly with the experts in the field of Sustainability Reporting.
3. Expertise Knowledge: Sustainability Reporting is relatively a new concept in many jurisdictions and
organization found it very difficult to prepare a sustainability report in the absence of expert guidance on the
subject. The Sustainability Reporting concept is emerging as a good tool to showcase the corporate governance
practices of an orgainsation and this area demand professionals having expert knowledge of sustainability
reporting. The professional bodies in various jurisdictions should impart the expert knowledge of sustainability
reporting to their members to develop a good cadre of experts in this emerging area of sustainability reporting.
4. Investor Behaviour: It is a recognized principle that investors should consider the Environmental, Social and
Governance (ESG) issues while making investment decisions. There are specific regulators guidelines for the
institutional investor to be vigilant on voting aspects and be concerned about the governance practices of the
companies in which they invest. However, the investor behaviour may vary from company to company and
sometimes they invest in companies without considering the ESG issues either due to lack of awareness on
ESG issues or some other business reasons. It should be made a practice that the investor fund flow to those
organization following the good governance including reporting on sustainability aspects.

TOWARDS INTEGRATED REPORTING

Integrated reporting is a new approach to corporate reporting which is rapidly gaining international recognition.
Integrated reporting is founded on integrated thinking, which helps demonstrate interconnectivity of strategy,
strategic objectives, performance, risk and incentives and helps to identify sources of value creation. Integrated
 Lesson 14 • Reporting 401

reporting is a concept that has been created to better articulate the broader
Integrated Reporting is
range of measures that contribute to long-term value and the role, organisations
conducted by organisations to
play in society. Central to this is the proposition that value is increasingly
communicate how their strategy,
shaped by factors additional to financial performance, such as reliance on the
governance and performance has
environment, social reputation, human capital skills and others. This value
led to the creation of sustainable
creation concept is the backbone of integrated reporting.
value in the short, medium
In addition to financial capital, integrated reporting examines five additional and long term. In other words,
capitals that should guide an organisation’s decision-making and long-term it is a holistic representation
success — its value creation in the broadest sense. While integrated reports of financial and non-financial
benefit a broad range of stakeholders, they’re principally aimed at long-term performance of an organisation.
investors. Integrated reporting starts from the position that any value created as
a result of a sustainable strategy — regardless of whether it becomes a tangible
or intangible asset — will translate, at least partially, into performance. Market value will therefore be impacted.
Integrated Reporting is one step ahead of sustainability reporting
Why do businesses need Integrated and its set to become the way companies report their annual
Reporting? financial and sustainability information together in one report.
In the wake of the global financial crisis, The aim of an integrated report is to clearly and concisely tell the
the need to promote financial stability and organization’s stakeholders about the company and its strategy
sustainable development by better linking and risks, linking its financial and sustainability performance in a
investment decisions, corporate behaviour and way that gives stakeholders a holistic view of the organization and
reporting has become increasingly important. its future prospects.
Both regulators and companies now realise Sustainable organisations create value by combining a broad
the need for a fundamental change in reporting range of resources controlled by the organisation or third parties.
where the focus is not on the fina ncial capital, They are increasingly expected to generate positive outcomes
but on demonstrating the value created by an for society that go beyond returns for their shareholders or
entity while operating within its economic, investors — outcomes that can be instrumental in improving
social and environmental system. an organisation’s long-term financial performance.
Understanding this co-creation and shared value process is fundamental to Integrated Reporting. Other
considerations include:
• An organisation’s value creation potential depends on its ability to identify all of the resources available to it, whether
tangible or intangible, owned by the organisation or third parties, and to align them with its corporate strategy.
• Any value created, including that which benefits society as a whole, has the potential to impact on the
organisation’s value and profitability.
• An organisation that communicates its strategy to the market and quantifies this broader contribution may
well be stimulating value creation in itself. However, to increase stakeholder confidence the information must
be credible.

Key stakeholders of Integrated Reporting

The key stakeholders of Integrated Reporting are:
1. Organisations
Integrated reporting helps organisations to understand and communicate their impact and how they create
value in a holistic way. This can help improve relationships with all stakeholders, reduce cost of capital and
facilitate improved long-term performance, resilience and sustainable development.
2. Investors and other key stakeholders such as customers, employees, and regulators
Integrated reporting provides an understanding of businesses and their prospects, enabling better informed
decisions.
3. Society
Enhanced business and investor performance increases economic prosperity, while appropriate consideration
and management of all the capitals over the short, medium and long term promotes sustainable development
and financial stability.
402 Lesson 14 • PP-GRMCE

Integrated Reporting and Governance

Integrated reporting can facilitate effective communication of overall governance framework to stakeholders.
It involves the consolidation of multiple aspects of an organisation’s activities and operations and encourages
articulation of how an organisation’s strategy, governance, performance and prospects, in the context of its operating
environment, can lead to value creation over time. An integrated report embodies all the following four pillars of
governance:

Accountability Transparency

Pillars of
Governance

Integrity Stewardship

Accountability
This refers to clarity of roles and responsibilities in an organisation. Defining who does what and how each role
adds value is critical to a well-run organisation. Accountability involves tools, such as position descriptions and key
performance indicators, aligned with strategic objectives, as well as an understanding of the skills required in an
organisation to support its strategy.

Transparency
This refers to openness and clarity in internal and external reporting. Stakeholders have increasing expectations of
organisations’ reporting being more transparent than in the past.

Integrity
This is at the heart of good governance practice and drives how decisions are made, the values the organisation
adheres to and its culture. When an organisation effectively builds integrity internally, this will drive the quality of
relationships it has with all stakeholders.

Stewardship
This refers to how an organisation is ‘steered’ or guided to achieve long-term sustainability. Stewardship is a key
responsibility of the board and involves maximising the employment of human, financial, natural, intellectual, social
and relationship, as well as manufactured capital to add value and support the future prosperity of the organisation.
The practice of integrated reporting has been widely accepted since the release of an international framework
by the International Integrated Reporting Council (IIRC), a global coalition of regulators, investors, accounting
professionals, companies and non-governmental organisations. The international framework was released in 2013
and stands as a more holistic form of reporting the value that businesses create.

International Integrated Reporting Council (IIRC)

The IIRC is a global coalition of regulators, investors, companies, standard setters, the accounting professionl and
NGOs. Together, this coalition shares the view that communication about value creation should be the next step in
the evolution of corporate reporting.
The IIRC embodies the shared, common interest of a global coalition of parties in the adoption of Integrated Reporting
on an international basis as a means to improve communication about value creation, advance the evolution of
corporate reporting, and make a lasting contribution to financial stability and sustainable development.
 Lesson 14 • Reporting 403

The coalition comprises entities drawn from broad global

Mission: The IIRC’s mission is to establish
communities, including business and other reporting entities;
integrated reporting and thinking witin
providers of financial capital; policy makers, regulators and
mainstream business practice as the norm
exchanges; the accounting profession; reporting framework
in the public and private sectors.
developers and standard setters; civil society; and academia.
Vision: The IIRC’s vision is a world in which
The International Framework has been developed to meet this need
capital allocation and corporate behaviour
and provide a foundation for the future.
are aligned to the wider goals of financial
Integrated Reporting (IR) promotes a more cohesive and efficient stability and sustainable development
approach to corporate reporting and aims to improve the quality through the cycle of integrated reporting
of information available to providers of financial capital to enable a and thinking.
more efficient and productive allocation of capital. The IIRC’s long
term vision is a world in which integrated thinking is embedded within mainstream business practice in the public
and private sectors, facilitated by as the corporate reporting norm.

AN INTEGRATED REPORT
The primary purpose of an integrated report is to explain to providers of financial capital how an organization
creates value over time. An integrated report benefits all stakeholders interested in an organization’s ability to
create value over time, including employees, customers, suppliers, business partners, local communities, legislators,
regulators and policy-makers.
The International Framework (the Framework) takes a principles-based approach. The intent is to strike
an appropriate balance between flexibility and prescription that recognizes the wide variation in individual
circumstances of different organizations while enabling a sufficient degree of comparability across organizations to
meet relevant information needs. It does not prescribe specific key performance indicators, measurement methods,
or the disclosure of individual matters, but does include a small number of requirements that are to be applied
before an integrated report can be said to be in accordance with the Framework.
An integrated report may be prepared in response to existing compliance requirements, and may be either a standalone
report or be included as a distinguishable, prominent and accessible part of another report or communication. It
should include, transitionally on a comply or explain basis, a statement by those charged with governance accepting
responsibility for the report.

FUNDAMENTAL CONCEPTS
An integrated report aims to provide insight about the resources and relationships used and affected by an
organization – these are collectively referred to as “the capitals” in this Framework. It also seeks to explain how the
organization interacts with the external environment and the capitals to create value over the short, medium and
long term.
The capitals are stocks of value that are increased, decreased or transformed through the activities and outputs of
the organization. They are categorized in this Framework as financial, manufactured, intellectual, human, social and
relationship, and natural capital, although organizations preparing an integrated report are not required to adopt
this categorization or to structure their report along the lines of the capitals.
The ability of an organization to create value for itself enables financial returns to the providers of financial capital.
This is interrelated with the value the organization creates for stakeholders and society at large through a wide
range of activities, interactions and relationships. When these are material to the organization’s ability to create
value for itself, they are included in the integrated report.

THE FRAMEWORK
The purpose of this Framework is to establish Guiding Principles and Content Elements that govern the overall
content of an integrated report, and to explain the fundamental concepts that underpin them. The Framework:
• Identifies information to be included in an integrated report for use in assessing the organization’s ability to
create value; it does not set benchmarks for such things as the quality of an organization’s strategy or the level
of its performance
404 Lesson 14 • PP-GRMCE

• Is written primarily in the context of private sector, for-profit companies of any size but it can also be applied,
adapted as necessary, by public sector and not-for-profit organizations.

GUIDING PRINCIPLES
The following Guiding Principles underpin the preparation of an integrated report, informing the content of the
report and how information is presented:
• Strategic focus and future orientation: An integrated report should provide insight into the organization’s
strategy, and how it relates to the organization’s ability to create value in the short, medium and long term, and
to its use of and effects on the capitals
• Connectivity of information: An integrated report should show a holistic picture of the combination,
interrelatedness and dependencies between the factors that affect the organization’s ability to create value
over time
• Stakeholder relationships: An integrated report should provide insight into the nature and quality of the
organization’s relationships with its key stakeholders, including how and to what extent the organization
understands, takes into account and responds to their legitimate needs and interests
• Materiality: An integrated report should disclose information about matters that substantively affect the
organization’s ability to create value over the short, medium and long term
• Conciseness: An integrated report should be concise
• Reliability and completeness: An integrated report should include all material matters, both positive and
negative, in a balanced way and without material error
• Consistency and comparability: The information in an integrated report should be presented: (a) on a basis
that is consistent over time; and (b) in a way that enables comparison with other organizations to the extent it
is material to the organization’s own ability to create value over time.

CONTENT ELEMENTS
An integrated report includes eight Content Elements that are fundamentally linked to each other and are not
mutually exclusive:
• Organizational overview and external environment: What does the organization do and what are the
circumstances under which it operates?
• Governance: How does the organization’s governance structure support its ability to create value in the short,
medium and long term?
• Business model: What is the organization’s business model?
• Risks and opportunities: What are the specific risks and opportunities that affect the organization’s ability to
create value over the short, medium and long term, and how is the organization dealing with them?
• Strategy and resource allocation: Where does the organization want to go and how does it intend to get
there? Performance: To what extent has the organization achieved its strategic objectives for the period and
what are its outcomes in terms of effects on the capitals?
• Outlook: What challenges and uncertainties is the organization likely to encounter in pursuing its strategy,
and what are the potential implications for its business model and future performance?
• Basis of presentation: How does the organization determine what matters to include in the integrated report
and how are such matters quantified or evaluated?

SIX CAPITAL DISCLOSURES

Integrated reporting relies on business disclosures through six capitals that guide businesses in decision-making
and planning:
• Financial Capital: The pool of funds that is available to an organisation for use in the production of goods or
the provision of services and obtained through financing, such as debt, equity or grants, or generated through
operations or investments.
 Lesson 14 • Reporting 405

• Manufactured Capital: Manufactured physical objects (as distinct from natural physical objects) that are
available to an organisation for use in the production of goods or the provision of services, including: buildings,
equipment, infrastructure (such as roads, ports, bridges and waste and water treatment plants).
• Intellectual capital: Intellectual capital (patents, software, etc.) includes reporting issues, such as expenditures
on sustainability-related R&D, monitoring of sustainability related targets.
• Human capital: Human capital includes reporting on people’s competencies, capabilities and experience and
their motivations to innovate, including their alignment with and support for an organisation’s governance
framework and risk management approach, and ethical values, such as recognition of human rights, ability
to understand, develop and implement an organisation’s strategy, loyalties and motivations for improving
processes, goods and services, including their ability to lead, manage and collaborate.
• Social capital: Social capital (employees, community and customers) includes reporting issues related
to employee well-being, such as adoption and enforcement of human and labour rights and community
engagement programmes.
• Natural capital: Natural capital (clean air, land, water, forests, biodiversity, etc.) involves reporting issues
related to a company’s understanding of scarcity of these natural resources, climate change strategy, carbon
emission, water consumption and recycling.

Benefits of Integrated Reporting

The key benefits of adopting integrated reporting are:
• Improved decision-making: Management teams have found that integrated reporting provides greater
insights into factors driving business performance. It has helped them better understand and connect the
disparate sources and drivers of long-term value to enable better strategy formulation, decision-making and
implementation through their business model.
• Improved reputation and stakeholder relationships: Disclosure of key risks and opportunities enables
investors to assess the short, medium and long-term impact. According to a research conducted by Fortune
magazine, which found growing evidence to suggest that stocks of companies that meet high standards for ESG
factors are likely to outperform the market.
• More efficient reporting: This has led to companies witnessing improved data quality by applying metrics
for financial and non-financial performance. This action of improved data collection has led to a more efficient
reporting process for companies.
• Employee engagement: As organisations begin integrating aspects of social development and governance
within their business models, its employees feel more motivated and supportive towards their tasks and
responsibilities.
• Improved gross margins: It has been highlighted that any financial benefit of adopting integrated reporting
may take time to realise as investors and other stakeholders assess the impact of the company and its alignment
of ESG related risks and opportunities with a company’s business model and strategies. Further, organisations
have been able to identify cost savings by analysing financial and non-financial metrics together.

Integrated Reporting by Listed Entities in India

SEBI vide its circular No. SEBI/ HO/ CFD/ CMD /CIR /P/2017/ 10 dated 6th February, 2017, issued a circular on
Integrated reporting by Listed entities, in exercise of the powers conferred under Section 11 read with Section
11A of the Securities and Exchange Board of India Act, 1992. The text of the aforesaid circular is as under:
1. SEBI has mandated the requirement of submission of Business Responsibility Report (‘BRR’) for top 500 listed
entities under Regulation 34(2)(f) of SEBI (Listing Obligations and Disclosure Requirements) Regulations
2015 (“SEBI LODR”). The key principles which are required to be reported by the entities pertain to areas such
as environment, governance, stakeholder’s relationships, etc.

Amendment in Regulation 34(2)(f) of SEBI(LODR) Regulations 2015:

SEBI (Listing Obligations and Disclosure Requirements) (Fifth Amendment) Regulations, 2019, with effect
from December 26, 2019 mandated that the annual report of the top 1000 thousand listed entities based
on market capitalization shall contain a business responsibility report as per clause (f) of sub regulation
(2) of regulation 34 of Listing Regulations. 
406 Lesson 14 • PP-GRMCE

In terms of amendment to regulation 34 (2) (f) of LODR Regulations vide Gazette notification no.
SEBI/LAD-NRO/GN/2021/22 dated May 05, 2021, it has now been decided to introduce new reporting
requirements on ESG parameters called the Business Responsibility and Sustainability Report (BRSR).

2. Today an investor seeks both financial as well as non-financial information to take a well-informed investment
decision. An integrated report aims to provide a concise communication about how an organisation’s strategy,
governance, performance and prospects create value over time. Further it may be noted that the concept of
integrated reporting is being discussed at various international forums. The purpose of integrated reporting
is to provide shareholders and interested stakeholders with relevant information that is useful for making
investment decisions.
3. Also regulation 4(1)(d) of SEBI LODR states “the listed entity shall provide adequate and timely information
to recognised stock exchange(s) and investors”. IOSCO Principle 16 states “there should be full, accurate and
timely disclosure of financial results, risks and other information that is material to investors´ decisions.”
4. In this regard, the International Integrated Reporting Council (‘IIRC’) has prescribed Guiding Principles
which underpin the preparation of an integrated report, specifying the content of the report and how
information is to be presented.
• Strategic focus and future orientation: An integrated report should provide insight into the organization’s
strategy and how it relates to the organization’s ability to create value in the short, medium and long
term, and to its use of and effects on capital
• Connectivity of information: An integrated report should show a holistic picture of the combination,
interrelatedness and dependencies between the factors that affect the organization’s ability to create
value over time
• Stakeholder relationships: An integrated report should provide insight into the nature and quality of the
organization’s relationships with its key stakeholders, including how and to what extent the organization
understands, takes into account and responds to their legitimate needs and interests
• Materiality: An integrated report should disclose information about matters that substantively affect the
organization’s ability to create value over the short, medium and long term
• Conciseness: An integrated report should be concise
• Reliability and completeness: An integrated report should include all material matters, both positive and
negative, in a balanced way and without material error
• Consistency and comparability: The information in an integrated report should be presented:
(a) on a basis that is consistent over time; and
(b) in a way that enables comparison with other organizations to the extent it is material to the
organization’s own ability to create value over time.
5. All organizations depend on various forms of capital for their success. It is important that all such forms of
capital are disclosed to stakeholders to enable informed investment decision making. IIRC has categorized the
forms of capital as follows:
• Financial capital
• Manufactured capital
• Intellectual capital
• Human capital
• Social and relationship capital
• Natural capital
6. The Integrated Reporting Framework prescribed by International Integrated Reporting Council (‘IIRC’)
is available at web link: http://integratedreporting.org/wp-content/uploads/2015/03/13-12-08-
THEINTERNATIONAL-IR-FRAMEWORK-2-1.pdf 7.
 Lesson 14 • Reporting 407

7. It has been observed that certain listed entities in India and other jurisdictions have already been making
disclosures by following the principles of integrated reporting. Towards the objective of improving disclosure
standards, in consultation with industry bodies and stock exchanges, the listed entities have been advised to
adhere to the following by the SEBI vide this circular:
(a) Integrated Reporting may be adopted on a voluntary basis from the financial year 2017-18 by top 500
companies which are required to prepare BRR.
(b) The information related to Integrated Reporting may be provided in the annual report separately or by
incorporating in Management Discussion & Analysis or by preparing a separate report (annual report
prepared as per IR framework).
(c) In case the company has already provided the relevant information in any other report prepared in
accordance with national/international requirement / framework, it may provide appropriate reference
to the same in its Integrated Report so as to avoid duplication of information.
(d) As a green initiative, the companies may host the Integrated Report on their website and provide
appropriate reference to the same in their Annual Report.

RELATION BETWEEN INTEGRATED REPORTING AND SUSTAINABILITY REPORTING

Sustainability reporting is a process that assists organizations in setting goals, measuring performance and managing
change towards a sustainable global economy – one that combines long term profitability with social responsibility
and environmental care. Sustainability reporting – mainly through but not limited to a sustainability report – is the
key platform for communicating the organization’s economic, environmental, social and governance performance,
reflecting positive and negative impacts. The Aspects that the organization deems to be material, in response to its
stakeholders’ expectations and interests, drive sustainability reporting. Stakeholders can include those who are
invested in the organization as well as those who have other relationships with the organization.
Integrated reporting is an emerging and evolving trend in corporate reporting, which in general aims primarily to
offer an organization’s providers of financial capital with an integrated representation of the key factors that are
material to its present and future value creation. Integrated reporters build on sustainability reporting foundations
and disclosures in preparing their integrated report. Through the integrated report, an organization provides a
concise communication about how its strategy, governance, performance and prospects lead to the creation of
value over time. Therefore, the integrated report is not intended to be an extract of the traditional annual report
nor a combination of the annual financial statements and the sustainability report. However, the integrated report
interacts with other reports and communications by making reference to additional detailed information that is
provided separately.
Although the objectives of sustainability reporting and integrated reporting may be different, sustainability
reporting is an intrinsic element of integrated reporting. Sustainability reporting considers the relevance of
impact of sustainability trends, risks and opportunities on the long term prospects and financial performance of
the organization. Sustainability reporting is fundamental to an organization’s integrated thinking and reporting
process in providing input into the organization’s identification of its material issues, its strategic objectives, and the
assessment of its ability to achieve those objectives and create value over time.
Difference between Integrated Reporting, Sustainability Reporting And Financial Reporting

  Integrated Reporting Sustainability Reporting Financial Reporting

Meaning  It is a process that results The practice of Financial Reports are formal
in communication by an measuring, disclosing records of the financial activities
organisation, about value and being accountable and position of a business, person,
creation over time  to both internal and or other entity. Like a balance sheet,
external stakeholders for statement of profit and loss, reports
the progress towards a on a company’s assets, liabilities,
more sustainable future.  and owners equity at a given point
in time. 
408 Lesson 14 • PP-GRMCE

Information Financial and non-financial Primarily non-financial Only Financial statements and
information information accounts 
Focus Focus on past, present and Backward looking – Backward looking and presentday
futurelinked (short, medium impact of existing CSR financials
and long-term) strategies projects
Purpose  Explain to providers of financial Communicate the entity’s The purpose of financial statement
capital how value is created broader social and analysis is to evaluate the past,
over time environmental impacts, current, and future performance and
strategies and goals financial position of the company for
the purpose of making investment,
credit, and other economic decisions. 
Audience  Providers of financial capital Multi-stakeholder  Shareholders and investors 
and others interested in the
organization’s ability to create
value. 
Scope  • Organizational overview • Economic Financial statements and accounts 
and external environment
• Environmental
• Governance
• Social, including
• Business model labour practices,
human rights and
• Risks and opportunities
broader societal
• Strategy and resource influences
allocation
• Governance 
• Performance
• Outlook
• Strategies impacted for
value creation
Framework  Reporting as per International Reporting as per GRI Reporting in compliance with
Framework provided by IIRC guidelines to measure and regulations and standards
disclose sustainability
data 

LESSON ROUND UP
• Financial reporting is the process of producing statements that disclose an organisation’s financial status to
management, investors and the government.
• Non financial reporting is the practice of measuring, disclosing and being accountable to internal and external
stakeholders for organisational performance towards the goal of sustainable and inclusive development.
• Corporate sustainability is an approach that creates long-term stakeholder value by implementing a business
strategy that considers every dimension of how a business operates in the ethical, social, environmental,
cultural, and economic spheres.
• SEBI in its (Listing Obligations and Disclosure Requirements) Regulations, 2015 has mandated the
requirement of submission of BRR for top 1000 listed entities describing initiative taken by them from an
environmental, social and governance perspective in the prescribed format [Regulation 34(2)(f)].
• Business Responsibility Report is a disclosure of adoption of responsible business practices by a listed
company to all its stakeholders. This is important considering the fact that these companies have accessed
funds from the public, have an element of public interest involved, and are obligated to make exhaustive
disclosures on a regular basis.
Lesson 14 • Reporting 409

• Integrated reporting is a concept that has been created to better articulate the broader range of measures
that contribute to long-term value and the role, organisations play in society.
• An Integrated Report is “a concise communication about how an organisation’s strategy, governance,
performance and prospects, in the context of its external environment, lead to the creation of value over the
short, medium and long term”.
• The Guiding principles of International Integrated Reporting Framework are: Strategic focus and future
orientation, Connectivity of information, Stakeholder relationships, Materiality, Conciseness, Reliability and
completeness, Consistency and comparability.

GLOSSARY
Financial Reporting Financial reporting is the process of producing statements that disclose an
organization’s financial status to management, investors and the government.
Annual Report An annual report is a comprehensive report on a company’s activities throughout the
preceding year. Annual reports are intended to give shareholders and other interested
people information about the company’s activities and financial performance.
Sustainability Report A sustainability report is a report published by a company or organization about the
economic, environmental and social impacts caused by its everyday activities
Business Responsibility Business Responsibility Report is a disclosure of adoption of responsible business
Report practices by a listed company to all its stakeholders.
Integrated Reporting Integrated reporting (IR) is a “process that results in communication, most visibly a
periodic “integrated report”, about value creation over time.

TEST YOURSELF
(These are meant for recapitulation only. Answers to these questions are not to be submitted for evaluation)
1. Do you know about Integrated Reporting? Write a brief note.
2. Apart from the Financial Reporting, Non-financial reporting has become an integral part of the Annual
Report. Please explain your views.
3. Is there are limitations of financial reporting. Explain.
4. Do you know what is Sustainability Report? Write a brief note on Sustainability Report.
5. Can you discuss the integrated reporting by listed entities in India?
410 Lesson 14 • PP-GRMCE
Lesson 15 Ethics and Business

Key Concepts One Learning Objectives

Should Know
• Business Ethics To understand the:
• Concept of Business Ethics
• Fundamental
Ethical Principles • Advantages of Ethics
• Ethical dilemma • Importance of Business Ethics and its advantages to the organization
• Code of Ethics • Inner Conscience and its Linkage to Governance
• Ideal Ethical
Organisation
• Code of Conduct

Lesson Outline
• Introduction
• Ethics
• Business Ethics
• Organisation Structure and Ethics Ethical Dilemma
• Code of Ethics Indian Ethos Code of Conduct
• Advantages of Business Ethics
• Conclusion
• LESSON ROUND-UP
• GLOSSARY
• TEST YOURSELF
412 Lesson 15 • PP-GRMCE

INTRODUCTION

Today, the corporate world as a whole is in the process of acquiring a moral conscience. The new and emerging
concepts in management like corporate governance, business ethics and corporate sustainability are some of the
expressions through which this emerging ethical instinct in the corporate world is trying to express and embody
itself in the corporate life. In this study we examine the concept of ethics and its importance for the business,
corporate governance and governance through inner conscience and sustainability.

WHAT IS ETHICS
As per the Oxford Dictionary the meaning of ethics is a “system of moral
principles, rules and conduct.” Ethics is a “Science of morals.” The word The term ‘ethics’ can commonly
ethics has emerged from Latin ‘Ethicus’ or in Greek ‘Ethicos’. The origin refer to the rules and principles
of these two words is from ‘ethos’ meaning character. Character unlike that define right and wrong conduct
behavior is an intrinsic or basic factor which derives from inner most. of individuals (Robbins, Bergman,
Stagg and Coulter, 2003, p.150).
Ethics is the study of morality and application of reasons for taking any
Ethical Behavior is accepted as
decision or choosing any course of action, morality is related to norms,
“right” or “good” in the context of
values and beliefs embedded in social process.
a governing moral code. Ethics can
Ethics refers to well-founded standards of right and wrong that prescribe be viewed as a way of behaving that
what humans ought to do, usually in terms of rights, obligations, benefits to can be prescribed and imposed
society, fairness, or specific virtues. by the work environment (Garcia-
Zamor, 2003).
Thus, ethics relates to the standards of conduct and moral judgements that
differentiate right from wrong. Ethics is not a natural science but a creation
of the human mind. For this reason, it is not absolute and is open to the influence of time, place and situation.

BUSINESS ETHICS
Business Ethics, as a subject is the study of business situations, activities and decisions where the issues of right and
wrong is addressed.
Business ethics constitute the ethical/moral principles and challenges that arise in a business environment. Some of
the areas related with – and not limited to- business ethics include the following:
1. Finance and Accounting: Creative accounting, Earnings management, Financial analysis, Insider trading,
Securities Fraud, Facilitation payment.
2. Human Resource Management: Executive compensation, Affirmative action, Workplace surveillance, Whistle
blowing, Occupational safety and health, Indentures servitude, Union busting, Sexual Harassment, Employee
raiding.
3. Sales and Marketing: Price fixing, price discrimination, green washing, spamming, using addictive messages/
images in advertising, Marketing to children, False advertising, Negative campaigning.
Business Ethics is the application of ethical principles and methods of analysis to business. Business ethics deals
with the topic of study that has been given its due importance in business, commerce and industry since last three
decades.

Context and relevance of Business Ethics in today’s business

Present day global crisis has raised questions about the legitimacy of capitalism. Ethical failures certainly played
a role. While it remains to be seen whether and how many people blatantly broke the law, there are abundant
signs of various forms of potentially unethical behavior. These include greed, unreasonable amounts of leverage,
subtle forms of corruption (such as ratings agencies that appear to have had a conflict of interest), complex financial
instruments that no one really understood, and herd behavior where people just followed along and failed to exercise
independent judgment. Business leaders must use their personal moral compasses to make ethical decisions. As
for the business’s compass, it should be oriented toward satisfying customers above all stakeholders. That is the
orientation that allows for the greatest competitive success and profitability.
Lesson 15 • Ethics and Business 413

What sort of changes will be needed in business management principles and practices to build
companies that are truly fit for the future?
Gary Hamel, World’s most influential business thinker (The Wall Street) and world’s leading expert on business
strategy (Fortune), answered this question which is basically conclusions of one International Conference in
California organized by The Management Lab - a Silicon Valley based research organization, with the support
of McKinsey & Company, where 35 top management scholars and practitioners of the world met for two days to
debate the future of management. These are the points:
• “Modern” management much of which dates back to the late nineteenth century has reached the limits of
improvement.
• Unless management innovators tackle those issues, companies will be unable to cope with tomorrow’s
volatile world.
• Management pioneers must find ways to infuse mundane business activities with deeper, soul-stirring
ideals, such as honor, truth, love, justice, and beauty. These timeless virtues have long inspired human
beings to extraordinary accomplishment and can no longer be relegated to the fringes of management.
• Most companies strive to maximize shareholder wealth - a goal that is inadequate. As an emotional catalyst,
wealth maximization lacks the power to fully mobilize human energies Tomorrow’s management systems
must give as much credence to such timeless human ideals as beauty, justice, and community as they do to
the traditional goals of efficiency, advantage, and profit.
• Tomorrow’s managers will require new skills, among them reflective learning, system-based thinking, creative
problem solving, and values- driven thinking. Business Schools and companies must redesign training programs
to help executives develop such skills and reorient management systems to encourage their application.
— Gary Hamel (Director, The Management Lab, a Silicon Valley based research organization) Ref: Harvard and
Business Review, February 2009 issue, p.79-86

Mere professional competence alone does not lead to excellence. In the long-term enduring quality or excellence
comes from values. These universal human values like truth, beauty, goodness and harmony are applicable to
all human activity. But for practical application of these values for a professional activity, we have to take into
consideration the unique and intrinsic nature of that activity.
Now the question is How Values affect the bottom line?
Here comes an important principle, which is beginning to be recognized in the modern corporate life. It is the
pragmatic significance of values. For a moral or spiritual value lived in action releases a corresponding moral or
spiritual force, which in the long-term leads to positive material gains. This is a fact, which was intuitively perceived
by all morally and spiritually sensitive minds but difficult to prove in empirical terms. However, there is at present a
growing body of research, which indicates that moral ideals can lead to financial and business success.
For example, Patricia Aburdene, in her well-known book, “Megatrends 2010/’ states:
“Socially responsible firms repeatedly achieve first-rate financial returns that meet and often beat the market and
their peers, proving morals and money may be curiously compatible, after all.”
Narayan Murthy, founder chairman of Infosys also emphatically said:
“A sound value system is what differentiates long-term players from others. As long as the leaders articulate the
value system very clearly, as long as they show by example, the company can hold on its own in any environment,
even faced with intense competition and avoid the pitfalls of the likes of Enron, WorldCom, Qwest, Tyco and others.”

Let’s read one real life story narrated by Narayan Murthy in a recent interview:
In February 1984, Infosys decided to import a super minicomputer so that we could start developing software
for overseas clients. When the machine landed at Bangalore Airport, the local customs official refused to clear it
unless we “took care of him”—the Indian euphemism for demanding a bribe. A delay could have meant the end
for us before we had even started. When an Infosys manager informed me about the problem, my only question
was, “What is the alternative to paying a bribe?” The manager hesitantly replied that we could pay a customs duty
of 135% and then appeal for a refund. I told him: “Do that.”
414 Lesson 15 • PP-GRMCE

We didn’t have enough money to pay the duty and had to borrow it. However, because we had decided to do
business ethically, we didn’t have a choice. We would not pay bribes. We effectively paid twice for the machine and
had only a slim chance of recovering our money. But a clear conscience is the softest pillow on which you can lay
your head down at night.

However we must note here this link between higher ideals and the bottomline happens only when the pragmatic
values like efficiency, productivity or prosperity, knowledge and competence, innovation, progress & perfection,
quality etc. are not rejected or ignored but properly integrated with the pursuit and actualization of higher values.
In practical terms, it means the values and ideals of the higher mind and spirit should inspire, guide and control our
physical and vital life and cast their refining influence on the body and life of our individual and collective organism.
The corporate world pursues mainly the economic bottomline. But this is not enough for success or even survival
in the emerging world of the future. There are other imperatives or dimensions which need equal attention like the
human, social, environmental and the evolutionary. So, we have suggested Five Bottom Lines of the future.

Five Bottom Lines of the future

Economic Human Social

Bottomline Bottomline Bottomline

Environmental Evolutionary
Bottomline Bottomline

Economic Bottomline: Wealth-creation is the most basic and fundamental dharma of business. A business
organization which doesn’t create wealth for the society is adharmic, unethical. We have to focus more on the
causative factors whic h lead to these economic goals like for example, Technology, Productivity, Quality, Customer,
Service, Innovation or “knowledge”. These are the key-factors of the Economic Bottomline.
Human Bottomline: The Key Result Areas in this domain are those factors which lead to a better quality of the
work-force like for example, Leadership, Teamwork, Motivation, Creativity, Ethics, Values and Wellness.
Social Bottomline: An organization is an integral part of the larger social environment. In the long-term, well- being
of the organization depends on the wellbeing of the society. This is the rationale behind the concept of Corporate Social
Responsibility (CSR) which is gaining increasing acceptance among corporate leaders. However, here also the concept
and practice of CSR has to progress beyond isolated charitable projects to embrace the community as a whole.
A business organization is not merely an economic entity but also a social organism, a human community. The highest
aim of CSR must be to integrate the communal life of the organization with the communal life of the surrounding
environment and harmonise the organizational goals with the developmental goals of the larger community of
which it is a part. In this broader perspective, the corporation has to share with the community not only its wealth
but also some of its capabilities or expertise.
There is a concentration of resources, knowledge, competence and skill in a business organization, which it has to
share with the community of which it is a part.

Among business leaders, J.R.D. Tata had a clear perception of this responsibility and also the potentiality of
business for community development. He said “Every company has a special continuing responsibility towards
the people of the area in which it is located. The company should spare its engineers, doctors, managers to advise
the people of the villages and supervise new developments undertaken by cooperative effort between them and
the company.” We must note here that JRD’s conception of corporate responsibility goes far beyond charity or
sharing of wealth towards sharing of capabilities.

Environmental Bottomline: We are not only part of society but also part of Nature. Any human group which draws
energy and resources from Nature has a responsibility to use them prudently within the laws and limits set by
Nature. Here again as with CSR, the highest aim of ecological responsibility is to harmonize the communal life of the
 Lesson 15 • Ethics and Business 415

group (especially the economic and material life) and the resource-energy management strategies, with the laws of
Nature and the natural environment. However, for long-term effectiveness, social and ecological bottomlines should
not remain as mere decorative, idealistic, showy “projects” at the fringe of the corporate life. They have to become
part of the core strategy of the organization.
Evolutionary Bottomline: This is something which has not been recognized in the corporate world.
We humans, as a species, are an unfinished project. We have not yet realized all our potentialities hidden within
us, especially in the moral, psychological and spiritual realms of our consciousness. We have to progress or evolve
further to reach our highest potential as human being. The work and life of the modern corporate world provides a
rich field of experience not only for professional growth but also for evolution of the individual. For someone who
is seeking for moral and spiritual development, the corporate world provides a more effective field of experience
for accelerated inner growth than an isolated ashram, monastery or forest. The problems, difficulties, challenges,
temptation and conflicts of the corporate world, are a fertile arena for becoming fully conscious of our weaknesses
and strengths and also for expressing our inner potentialities. Secondly, the modern corporate experiences provide
the right anvil for testing the quality and genuineness of our inner growth.
But a corporate leader or manager may ask: How can it be called a bottom- line? Why should a business organization
bother about the personal growth of the employees, which is his personal business? There are two reasons why. The
first reason is that personal growth will have its ultimate impact on the four bottom lines. Most of the moral and
spiritual disciplines can also make the employee a better professional.
For example the discipline of inner peace, equanimity and loving kindness to all which are common disciplines in all
eastern spiritual traditions can lead to greater clarity in thought, better judgement, more effective decision- making,
less stress and a more harmonious interpersonal relationship or team-work. Similarly the spiritual discipline of
karma yoga can lead to a greater efficiency, creativity and skill in action.
The second reason is that prophetic insights of seers have perceived this inner growth in the moral psychological
and spiritual realms as the next step in human evolution and whichever group takes up this higher evolution as a
part of its vision and strategy will be among the leaders of the future.

As Sri Aurobindo said,

“In the next stage of human progress it is not a material but a spiritual, moral and psychical progress that has to
be made” and therefore “whatever race or country seizes on the lines of that new evolution and fulfills it will be the
leader of humanity.”

Importance of Business Ethics

i) Business is existing because of society: Philip Kotler had said “we sell products in the society not in the market”
It is the society and the values of the people which creates desire.
ii) Business relates to people and ethics are essential to people.
iii) Ethical practices would result to social contribution.
iv) Business malpractices can adversely effect all stakeholders, apart from Govt., environment etc.
v) Business will have positive effects on customers who will have the trust on the brand, either product or service.
There will not be any trust unless the company follows ethical standards.
vi) Cultivates strong team work& productivity among employees resulting to enhanced employee growth.
vii) Helps to build a strong public image.

ORGANISATION STRUCTURE AND ETHICS

An organization’s structure is important to the study of business ethics. In a centralized organization, decision-
making authority is concentrated in the hands of top-level managers, and very little authority is delegated to the
lower levels. Responsibility, both internal and external, rests with top management. This structure is especially
suited for organizations that make high-risk decisions, and whose lower-level managers are not highly skilled in
decision-making. It is also suitable for organizations in which production processes are routine and efficiency is of
primary importance.
416 Lesson 15 • PP-GRMCE

These organizations are usually extremely bureaucratic, and the division of labour is typically very well defined.
Each worker knows his/her job and what is specifically expected of him/her, and each has a clear understanding of
how to carry out assigned tasks. Centralized organizations stress on formal rules, policies, and procedures, backed
up by elaborate control systems. Their codes of ethics may specify the techniques to be used for decision-making.
Because of the top-down approach and the distance between employee and decision-maker, centralized organizational
structures can lead to unethical acts. If the centralized organization is very bureaucratic, some employees may
behave according to “the letter of the law” rather than the spirit.
In a decentralized organization, decision-making authority is delegated as far down the chain of command as possible.
Such organizations have relatively few formal rules, coordination and control are usually informal and personal. They
focus on increasing the flow of information. As a result, one of the main strengths of decentralized organizations
is their adaptability and early recognition of external change. This provides greater flexibility to managers and
they can react quickly to changes in their ethical environment. Weakness of decentralized organizations lies in
the fact that they have difficulty in responding quickly to changes in policy and procedures established by the top
management. In addition, independent profit centers within a decentralized organization may sometimes deviate
from organizational objectives.
Organisational structure touches on many issues related to ethics. Such as:
1. The alienation experienced by workers doing repetitive work
2. The feelings of oppression created by the exercise of authority
3. The responsibilities heaped on the shoulders of managers.
4. The power tactics employed by managers who are anxious to advance their career ambitions.
5. Health problems created by unsafe working conditions.
6. The absence of due process for non-unionised employees.

A manager of any organization must ensure consistency between the structures of the organization, the scale of its
operations, the tasks at hand, the needs of all stakeholders and the strategic direction of the organization.
This consistency between structure and operations distinguishes successful organizations from less successful
ones. According to Kreitner and Kinicki (2001, p.92), there is a tendency among managers to act unethically in the
face of perceived pressure for results. Terms of employment and compensation schemes can also create incentives
for unethical conduct (Carson, 2003). This can cause managers to unwittingly set the stage for unethical shortcuts by
employees who seek to please the organization. Adequate training, good communication channels and a cooperative
working environment within the hierarchies can help reduce the unethical practices.
The rewarding of ethical behavior can be a practice organizations can adopt. The rewards could come in the form
of recognition or praise and not necessary money (Minkes, Small, Chatterjee, 1999). This can help promote and
encourage ethical behavior within the organization.
Conflict of interest in business arises when an employee or manager of a company is engaged in carrying out a task
on behalf of the company and the employee has private interest in the outcome of the task:
1. Possibly antagonistic to the best interests of the company
2. Substantial enough that it does or reasonably might affect.
3. The independent judgement of the company expects the employee to exercise on its behalf. Sometimes, there
are situations in the organization where there is conflict of interest and lack of independence.
One who is internal auditor should not report to Head of Finance or Accounts, which would dilute his independence.
Persons looking after materials should not also be in charge of finance and accounts .Executives in internal audit/
vigilance should not be party to commercial decisions.

Four Fundamental Ethical Principles

1. The Principle of Respect for autonomy
Autonomy is Latin for “self-rule” We have an obligation to respect the autonomy of other persons, which is
to respect the decisions made by other people concerning their own lives. This is also called the principle of
human dignity. It gives us a negative duty not to interfere with the decisions of competent adults, and a positive
duty to empower others for whom we’re responsible.
 Lesson 15 • Ethics and Business 417

Corollary principles: honesty in our dealings with others &

obligation to keep promises. Principle
of Respect
2. The Principle of Beneficence for
autonomy
We have an obligation to bring about good in all our actions.
Corollary principle? We must take positive steps to prevent harm.
However, adopting this corollary principle frequently places us
in direct conflict with respecting the autonomy of other persons. Principle Fundamental Principle of
of justice Ethical Beneficence
3. The Principle of non maleficence Priciples
(It is not “non-maleficence,” which is a technical legal term,
& it is not “non-malevolence,” which means that one did not
intend to harm.)
The Priciple
We have an obligation not to harm others: “First, do no harm”. of non
Corollary principle: Where harm cannot be avoided, we are maleficence
obligated to minimize the harm we do.
Corollary principle: Don’t increase the risk of harm to others.
Corollary principle: It is wrong to waste resources that could be used for good.
Combining beneficence and non-maleficence: Each action must produce more good than harm.
4. The Principle of justice
We have an obligation to provide others with whatever they are owed or deserve. In public life, we have an
obligation to treat all people equally, fairly, and impartially.
Corollary principle: Impose no unfair burdens.
Combining beneficence and justice: We are obligated to work for the benefit of those who are unfairly treated.

ETHICAL DILEMMA

Dilemma is a situation that requires a A dilemma could be a right vs. wrong situation in which the right
choice between options that are or seem would be more difficult to pursue and wrong would be more
equally unfavorable or mutually exclusive. convenient. A right versus wrong dilemma is not so easy to resolve.
By definition, an ethical dilemma involves It often involves an apparent conflict between moral imperatives,
the need to choose from among two or more in which to obey one would result in transgressing the other. This
morally acceptable courses of action, when is also called an ethical paradox.
one choice prevents selecting the other; An ethical dilemma involves a situation that makes a person
or, the need to choose between equally question what is the ‘right’ or ‘wrong’ thing to do. They make
unacceptable alternatives (Hamric, Spross, individuals think about their obligations, duties or responsibilities.
and Hanson, 2000). These dilemmas can be highly complex and difficult to resolve.
Easier dilemmas involve a ‘right’ versus ‘wrong’ answer; whereas,
complex ethical dilemmas involve a decision between a right and another right choice. However, any dilemma needs
to be resolved.

Addressing Ethical Dilemmas

The ethical dilemma consideration takes us into the grey zone of business and professional life, where things are
no longer black or white and where ethics has its vital role today. A dilemma is a situation that requires a choice
between equally balanced arguments or a predicament that seemingly defies a satisfactory solution.
An ethical dilemma is a moral situation in which a choice has to be made between two equally undesirable
alternatives. Dilemmas may arise out of various sources of behaviour or attitude, as for instance, it may arise out
of failure of personal character, conflict of personal values and organizational goals, organizational goals versus
social values, etc. A business dilemma exists when an organizational decision maker faces a choice between two or
more options that will have various impacts on (i) the organization’s profitability and competitiveness; and (ii) its
stakeholders. ‘In situations of this kind, one must act out of prudence to take a better decision.
418 Lesson 15 • PP-GRMCE

CASE STUDIES ON ETHICAL DILEMMA

Example 1 Peeps into Mythology1 (From Mahabharata)

Let’s have a read of this episode from the Mahabharata.
At the end of imparting training in archery and other martial skill to all the Pandavas and Kauravas, Dronacharya,
their mentor, called up Arjuna and conferred on him the Supreme brahmastra.
Ashwatthama, Drona’s own son and a Kauravite, was incensed at this and argued with his father:
‘What disparity it is to deny the brahmastra to your own son, and bestow it upon Arjuna? I simply cannot take
this lying down. You must give one to me too…’
Drona refused to yield. But the obstinate pressure tactics used by Ashwatthama aroused the sentimental father
in Drona, and he gave away another piece of brahmastra to his son.
Why was Drona so reluctant for long to equip Ashwatthama with this deadliest of weapons?
We have to wait for an answer to this question in the climactic phase of the Mahabharata war, when the leading
Kauravites had fallen in Kurukshetra, and Ashwatthma was at the helm. Violating the strictest injunction of
Drona against the use of the brahmastra, to both Arjuna and Ashwatthama, the latter hurled it to annihilate the
Pandavas in a fit of impetuous anger. The whole earth was in peril because of the impending collision of the two
weapons, for Arjuna too had released his weapon in self-defense. Sensing the imminent catastrophe, the Sage
Vyasa tried to mediate and prevail on them both. Arjuna responded, and could withdraw the weapon he had shot,
but Ashwatthama lacked such capacity. Vyasa did devise a poignant compromise to avert the total devastation
which the unretracted weapon of Ashwatthama could have wrought.
What are the insights embedded in this two-stage drama?
• Drona discriminated in favour of Arjuna and against Ashwatthama on the ground of values alone. He knew,
as a guru, that his son may be no less than Arjuna in skill, but his value- system was in a mess.
• Drona was conscious of the reality that powerful instruments in the hands of ‘value-weak’, ‘skill-strong’ individuals
are apt to be used destructively. Before and since Drona’s time the world has witnessed countless such events.
• The acharya in Drona could initially snub and bridle the father in him. Yet later on, even a man of his
willpower and wisdom succumbed to familial emotions. How much more demanding then is the task of
cultivating and retaining objectivity in managerial roles donned by much lesser mortals! Unaware, the
values of much-hyped objectivity in decision-making are caught in the quick-sands of subjectivity.
• Individuals with a strong sense of values can rise above temporary provocations, can contain their small
egos without nursing a feeling of humiliation or loss of face, even when required to dispense with a
legitimate retaliatory move. This magnanimity is what Arjuna demonstrated when Vyasa pleaded with him.
Is this weakness or strength?

Example 22
In a large public sector undertaking the corporate chief of finance was long engaged in a duel with one of the
profit centre heads for establishing supremacy in financial decisions. Tragically, the profit centre accountant
became the shuttlecock in this game. For observing corporate financial norms he was answerable to the
corporate finance chief. But when he would report financial irregularities, after repeated prior information
to the profit centre head, to the corporate boss, his life would be made difficult by the former. If he did not
report, the CFO would be at his throat. The sensible solution would seem to be that the two bosses met and
resolved their conflicts. But that would never happen – each party continuing to use the junior accountant to
fight out their egoistic battles through proxy. Both the bosses were pursuing a contingency approach – each
waiting for the other to make the first move. One of the ultimate outcomes of these egoistic tussles was the
quitting of the demoralized junior accountant after a few months.

Example 3
Ref: Foundations of Managerial Work: Contributions from Indian Thought by S. K. Chakraborty
1.

Ref: Foundations of Managerial Work: Contributions from Indian Thought by S. K. Chakraborty, p.32,36
2.
Lesson 15 • Ethics and Business 419

The Managing Director-designate of a pharmaceutical company had presented the General Manager – Finance
with an entertainment bill of `15,000/- for reimbursement. But there were no vouchers. The GM was in a moral
fix, for, even LTC allowances to junior officers were being denied unless accompanied by proper papers. So the
GM mustered enough courage to talk about the matter with the MD. It transpired that apparently this sum was
spent by him in Delhi to entertain certain senior officials who held the key to his confirmation as the MD (he
happened to be an MBA from a leading management institute). The entire accounts department was in astir with
this episode. It was a culture-shock for them because the recently-retired MD had for years shown impeccable
integrity in such matters. But the new MD seemed to grab his pound of flesh – at any cost.
Example 43
First-hand experience of Mr. A.K.Chattopadhyay, Sr. Vice President of ACC Ltd., Refractories Divisions, Nagpur,
India. Formerly he was Executive Director, Tata Refractories Ltd. And Deputy Chairman of IRMA.
‘One incident happened sometime back when a man who had previously worked for ACC supplied and installed
some refractory material to one of our customers. He represented himself to his customer as an ACC employee
and claimed that the material had come from ACC, which was not true. So the client agreed to let him do the work
because he used the ACC name. It so happens that the work that he did failed after two months.
‘The customer came to me and talked with me about what had happened. I went through all the purchase orders,
but could not find one for that specific job. Then he mentioned the name of the man who did the work. I told him
that that man had not worked for us for over six months. The customer assured me that this man told him that he
worked for ACC and that he was using ACC materials.
‘In this situation, we had no legal obligation. The work was not done by our people or with our materials. But I felt it was
our moral responsibility to stand behind this job because this customer gave the job to this man based on the ACC name.
I replaced the material and sent my engineer out to install it. We lost heavily as there was no income whatsoever on this
job. Even though I faced a lot of audit queries about this, I had the support of ACC management behind me.
‘People who want to be spiritual-based leaders sometimes face conflict when they try to listen to their inner
self. They are sometimes afraid to follow their conscience because they do not want to lose money. When I gave
the approval to have our people install new material for this job, that we had not originally done, losing a lot of
money on it, I clearly told our people, “I am willing to take this loss, because I know there is a much bigger gain.”
This is the dilemma that we must face sometimes, when we listen to our inner voice. We will face opposition and
difficulties. However, the more the aspiring spiritual-based leaders do this, the more they will be successful. As
a leader I must also help them to achieve these successes. As there are successes, then they will grow in their
courage to continue on this path to being a spiritual-based leader.’
Example 54
V. V. Ranganathan, Senior Partner, Ernst & Young, India, having vast experience in corporate arena shared his
experience how he handled a major mistake. Let’s go through the real life story.
Ernst & Young has a worldwide practice called Environment Management Services that helps governments and
industries to address pollution and other environmental problems. ‘In one project, there was a preliminary
environmental management report that was submitted to the consulate authorities in order to clear a project
that involved the construction of a dam. In a study like this, you must study the flora and fauna to determine what
would happen to the environment if the dam were built in this area. You must also study the people to determine
the social consequences of building this dam. Based on the report that we submitted, it then had to go on to a
national board before permission could be given to start the project.
‘Unfortunately, an overenthusiastic young man, who had only been in our firm for about six months, was working
in this area. He had been trained as an environmental engineer in the USA. He cleared the environmental
report in less than a week; this was something impossible to do within our firm’s normal review process. What
he actually did was to use a draft from another report without going through our review process. Then he sent
the report to the state board on our letterhead, and they adopted it.
‘There were a lot of environmental activists who wanted the building of the dam to be stopped and they suspected

Leading with Wisdom by Peter Pruzen

3.

Leading with Wisdom by Peter Pruzen, p.244

4.
420 Lesson 15 • PP-GRMCE

that this clearance had been done to please the company which was going to build the dam there. So the press
picked it up and said that Ernst & Young was a big fraud in how they cleared this large environmental project report.
‘I got a lot of calls from the press because they saw this as a very juicy story. When a journalist came to my office
we had a totally different conversation. I asked him, “If someone brought you a story and you published it in good
faith, and then you found out it was completely wrong, what would you do? You would come with an apology the
next day. This is exactly what has happened here. The firm has not done anything wrong. It is unfortunate that a very
immature person who was in his position for less than six months did this. We are very sorry that this has happened.
We have officially withdrawn the report and we have agreed to not handle this assignment for our client.”
‘We got many e-mails from environmental groups in the USA, Canada and Europe. I would patiently take each one
of them and reply. My spiritual theme of “seeing God in everyone” helped me in this situation a lot. It allowed me
to come out with the truth and to put it into perspective. It helped me to speak from a conscious mind with no
ulterior motives whatsoever. It helped me to not get mentally agitated at all. I believe that it is only because of this
spiritual basis that I could be so tranquil inside.’
Example 6
Surya meets his best childhood buddy Arnav after a decade. Surya had settled down in a different country after
completing higher studies and has just returned to the country with a new job at a very senior position in a multi-
national company.
Surya discovers that the warmth, camaraderie, openness and joy that they had felt years before had matured
instead of fading out.
When Surya asks Arnav about his work, Arnav initially avoids but on coaxing reveals that he is having serious
issues at his office where his colleagues are taking undue advantage of his simplicity and sincerity. He knows
that Arnav has this innate goodness in him and is aware that this can be taken advantage of by others. On further
probing Surya comes to know that Arnav works in the same organization that he will be joining but at several
levels lower in hierarchy. But he abstains from revealing this to Arnav.
Surya joins the organization on the scheduled date and as expected, after a few days, Arnav comes to know of this.
Arnav visits Surya in his personal chamber and congratulates him. He seems to be genuinely happy that both the
friends share the same workplace.
Concerned that Arnav may make a habit of visiting him often in office as a friend sending wrong signals to others,
Surya gently but expressly tells Arnav to maintain the hierarchical decorum in office. Arnav does not return to his
chamber after that day but the office grapevine finds out about their childhood friendship.
After a few days, Arnav’s appraisal report comes to Surya for his approval. He is shocked to find below average
grades in almost all the parameters of performance. He knows this cannot be a correct assessment but hesitates
to probe into this. He is concerned that his thoughts may be prejudiced or may be considered prejudiced by the
others. So he signs the report. Consequently, Arnav, who is truly honest, sincere and dedicated to his work, is
denied once more of his due appreciation from the organization.
Example 7
Ramesh is in charge of the stationary department of a large software organization. Employees who need notepads,
pens, scissors, and such stationary items enter their employee id, department name, project name and the items
that they take in a register that he maintains. The organization has about a 10,000 employees and there are
hundreds of entries in the register. At the end of the day, he enters these entries into the computer and updates
stock. No one crosschecks the manual entry with the data entered in the system.
At home, he is the only bread-earner of a relatively large family with 3-4 school-going children. One of the children
needed a special marker pen for a project in his school. It is quite an expensive pen and would make Ramesh go
beyond his monthly budget.
Suddenly Ramesh realizes that the inventory that he maintains has these pens and various projects frequently
uses these. There is an initial hesitation rising in him which he dismisses with the reason that the loss is less than
negligible to the organization while it will be an enormous financial relief to him. Thinking thus, he makes an
additional entry in the system for the pen against a project and picks it up for the child at home. When his wife
asks him about the price, he mumbles a random value to her.
Lesson 15 • Ethics and Business 421

Steps to Resolving an Ethical Dilemma

Considering the options

available

Considering Consequences –
Positives and negatives of
each option

Analysing Actions

Decision Making and

Commitment

Evaluate the System

1. What are the options?

List the alternative courses of action available.
2. Consider the consequences
Think carefully about the range of positive and negative consequences associated with each of the different
paths of action available.
Who/what will be helped by what is done?
Who/what will be hurt?
What kinds of benefits and harms are involved and what are their relative values?
What are the short-term and long-term implications?
3. Analyse the actions
Actions should be analysed in a different perspective i.e. viewing the action per se disregard the consequences,
concentrating instead on the actions and looking for that option which seems problematic. How do the
options measure up against moral principles like honesty, fairness, equality, and recognition of social and
environmental vulnerability? In the case you are considering, is there a way to see one principle as more
important than the others?
4. Make decision and act with commitment
Now, both parts of analysis should be brought together and a conscious and informed decision should be made.
Once the decision is made, act on the decision assuming responsibility for it.
5. Evaluate the system
Think about the circumstances which led to the dilemma with the intention of identifying and removing the
conditions that allowed it to arise. Suggest change in the system in consultation with the concerned person.
422 Lesson 15 • PP-GRMCE

RESOLVING ETHICAL DILEMMA – A CASE STUDY

You are a senior manager in a major firm of investment managers.
Your employer is an international firm with a publicly stated commitment to the highest standards of ethical
behaviour. The company is making losses and is due to make a very important presentation to a major corporate
client, and if the deal falls through it would turn around the company. Management feels that this activity will
provide a lucrative return to the successful bidder for the business and a number of major investment managers
have been asked to make presentations.
Your firm is keen to win the mandate for the business and has committed considerable resources to its bid, for
which initial presentations were held last week. Following the initial presentation, you learn that the proposal
was well received and you are on the shortlist against only one other major firm. You realize that there is a
substantial variation in the bid from the original presentation but you leave it to the judgement of the team. It is
soon discovered by you that your team had got hold of the bid book of the competitor which was inadvertently
left by them in the waiting room.
In business, howsoever highly competitive, there are rules and principles to ensure that certain ethical standards
are maintained.
The ethical dilemma projected in this case should be resolved. Applying the steps to resolving an ethical dilemma:
STEP I — List the alternative courses of action available.
What are the Options?
i) Keep quiet and let things take their own course.
ii) Inform the company seeking the bid about the incident and let them decide whether to have a re-bid or not.
iii) Inform your competitor about the incident and let them decide whether to seek for a re-bid or any other
corrective measures at their end.
iv) Withdraw the tender/bid and let the competitor get the deal.
STEP II—What are the consequences and evaluation of action?
Think carefully about the range of positive and negative consequences associated with each of the different paths
of action available.
• Who/what will be helped by what is done?
• Who/what will be hurt?
• What kinds of benefits and harms are involved and what are their relative values?
• What are the short-term and long- term implications?
Option 1
i) In all probability the deal would be awarded to my company. The competitor was careless in leaving the
bid-book, and therefore there is nothing wrong if my team took advantage of the situation. In any case, it is
in the best interest of the company.
ii) There is however a risk that the competitor would discover his mistakes and approach the company seeking
the bid company for a re-bid. In that eventuality, the reputation of my company “as being committed to the
highest ethical standards” will get affected. In addition, my company would not get the deal.
Option 2
i) The company seeking the bid, inspite of knowing about the incident, may award the deal to my company and
not take any cognizance of the incident keeping in view the cost of the tendering process, the time involved,
etc. or may decide to seek bids again.
ii) May award the deal to the competitor by disqualifying my company. (iii) May seek a re-bid.
 Lesson 15 • Ethics and Business 423

Option 3
i) The competitor, in spite of being aware of the incident, may decide not to take up the matter with the
company seeking bids, which may get me the deal.
ii) The competitor may approach the company seeking the bid. I inform them about the incident and tell them
that they were informed by my company about the same, and may : (a) either seek the company making the
bid to seek bids again or; (b) let them decide whether or not to seek the bid again.
Option 4
The deal would rightfully have been awarded to the competitor but for the incident, and hence it is most
appropriate that my company should withdraw.
STEP III – Make decision and act with commitment
Both the parts of the analysis should be complied and conscious decision should be made. Once the decision is
made, it has to be followed through with commitment irrespective of the consequences.
STEP IV – Evaluate the system.
What my team did was ethically wrong. Even if the bid book was carelessly left by the competitor, my team had no
right to capitalize on the same. They should have returned it to the competitor. In any case, the competitors would
have discovered their mistake. This would put the reputation of my company at stake.
The employees of the company need to be sensitized about the ethical practices and the culture of the company
through appropriate training.

CODE OF ETHICS
Managers at all levels and in all functional areas face ethical issues. In fact, there is seldom a decision wherein an
ethical dimension is not involved. Matters of right and wrong, just and unjust, and fairness and unfair arise frequently.
In order to deal with these issues, managers need some guidelines. Organisations, formulate both business and non-
business guidelines in the form of a code of conduct or code of ethics. The need for a corporate code of conduct has
increased due to frequent corporate scandals, inside trading and misuse of funds. With globalisation of business,
more and more companies are developing a code of ethics to be observed. Moreover, every profession has a code
of conduct for its members. The Institute of Company Secretaries of India, Medical Council of India, Bar Council, All
India Management Association (AIMA) and other professional bodies have their own professional codes.
A corporate code of conduct may be defined as a document containing the core values and moral principles which all
those working in the company are expected to follow in the course of their duties as well as in their daily activities.
It reflects commitment of the company to ensure ethical behaviour on the part, of its members. It also indicates how
an employee should act in general or in specific situations. A code of conduct lays down ‘do’s’ and `don’ts’. It describes
socially acceptable and responsible behaviour. Hence, a code of ethics is a tangible guide to ethically desirable behaviour.
It is a corporate code of conduct that helps its members to promote high standards of ethics and practice. It makes
them aware of ethical dilemmas; and by adhering to these codes of conduct, business people can observe elevated
standards of conduct and personal integrity so as to win the trust and confidence of the stakeholders.
A code of ethics should reflect top managements’ desire for compliance with the values, rules, and policies that
support an ethical climate. The development of a code of ethics should involve the President, Board of Directors,
and Chief Executive Officers who should be implementing the code. Legal staff should also ensure that the code has
assessed key areas of risk correctly, and that it provides buffers for potential legal problems.
Corporate code of ethics often contains six core values or principles in addition to more detailed descriptions and
examples of appropriate conduct. The six values that are desirable for codes of ethics include: (1) trustworthiness,
(2) respect, (3) responsibility, (4) fairness, (5) caring, and (6) citizenship.

In the United States of America, Section 406 of the Sarbanes Oxley Act, 2002 requires public companies to
disclose whether they have codes of ethics, and also to disclose any waivers of those codes for certain members
of senior management. Section 406(a) of the Regulation requires companies to disclose:
424 Lesson 15 • PP-GRMCE

• whether they have a written code of ethics that applies to their principal executive officer, principal financial
officer, principal accounting officer or controller, or persons performing similar functions;
• any waivers of the code of ethics for these individuals; and
• any changes to the code of ethics.
If companies do not have a code of ethics, they must explain why they have not adopted one. A company may file
its codes as an exhibit in the annual report, post the codes on the company’s website, or agree to provide a copy
of the codes upon request and without charge.

To create a code of ethics, an organization must define its most important guiding values, formulate behavioural
standards, review the existing procedures for guidance and direction and establish the systems and processes to
ensure that the code of conduct is implemented and effective. Codes of ethics are not easily created from boilerplate.
Ideally, the development of a code is a process in whereby Boards and senior management actively debate and
decide core values, roles, responsibilities, expectations, and behavioural standards
Thus, the code of ethics outlines a set of fundamental principles which could be used as the basis for operational
requirements (things one must do), operational prohibitions (things one must not do). It is based on a set of core
principles and values and is by no means designed for convenience. The employees subjected to the code are required
to understand, internalize, and apply it to situations which the code does not specifically address. Organizations
expect that the principles, once communicated and illustrated, will be applied in every case, and that failure to do
so may lead to disciplinary action.
Code of conduct has now been mandated for the directors and senior officers in listed companies and Central Public
Sector Enterprises (CPSEs) and therefore, also falls under forced and regulatory ethics.

Ideal Ethical Organization

There can be various measures and initiative which may be taken by an organization. Some of them are discussed below.

a) Have reasonable ethical code of conduct, which can reasonably complied with;
b) Top management should always follow ethical practices;
c) Should not discriminate amongst its stakeholders without solid reasons;
d) Reward employees with track record of ethical standards like integrity, honesty, loyalty etc.;
e) Handle stakeholders, mainly employees grievances properly and quickly (many a times
employee grievance leads to unethical practices);
f) Conduct ethics workshop;
g) Have ethics counsellors/ethics committees: for advising on employees with unethical
issues or going through ethical dilemma;
h) Have vigil mechanism, whistle blowing policies etc.

INDIAN ETHOS
The essence of good governance and leadership lies not in the paraphernalia of systems and procedures but on the quality
of people who create, govern or operate the systems. In Indian ethos it is known as Swadharma of each individual.
What depends the quality of the people? It is Consciousness. The essence of a human being is consciousness. And the
quality of our consciousness is not determined by the IQ of our intellect. The swindlers behind most of the scams are
high IQ guys. Who brought down Lehman Brothers and sank the world-economy into the waters of recession? They
are the super smart MBAs of top B-schools of the world.
This is the reason why an intellectual and emotional awakening of the surface nature to ethical values, though helpful
as a beginning, is not enough for a deep and lasting moral change.
Rational analysis, case studies and stories are helpful in creating a preliminary ethical awakening in our surface
nature and in our thinking mind. But this awakening does not have sufficient force to overcome a strong and
 Lesson 15 • Ethics and Business 425

compelling temptation or the gust of nature. The lure and temptation is all the more difficult to resist when it is
sugar-coated with pleasure and immediate gratification.
Here one example from Mahabharata is very relevant. In Mahabharata Duryodhana once said, “I know what is right, but I
have no inclination for it. I also know what is not right, but I can’t resist it.” It recalls the famous verse of Pandava Gita:

Janaami dharmam na cha pravruthi,

Janamyadharmam na cha may nivruthi,
Kenapi devena hrudhi sthithena,
Yada niyuktho asmi karomi.
Pandavagita 57
I know what is right but I am not able to practice it;
I know what is wrong and I am not able to keep away from it.
I act as I am directed to by some mysterious power
that is seated in my heart.

This is the central knot of the immemorial ethical problem. According to Indian ethos the long-term solution lies
in an inner discipline or education which brings a greater light, strength, energy and discrimination to our mind
and heart and our higher aspirations and ultimately transforms our consciousness and life. There are many such
disciplines in the spiritual traditions of the world, especially in the Eastern and Indian Yoga.
However the mental, moral and psychological discipline described in these Indian spiritual traditions provides a
practical system of “value education” which can lead to a deeper and more lasting moral transformation than the
mostly intellectual and superficial approach to ethics taught in modern academic and management education.
The present ethical debate in the corporate world is focused mostly on values like honesty, integrity, fairness or
transparency. But the scope of ethics is not confined to these values only.

CODE OF CONDUCT
The Code of conduct or what is popularly known as the Code of Business Conduct contains standards of business conduct
that must guide actions of the Board of Directors and senior management of the company. The Code of Conduct outlines
specific behaviours that are required or prohibited as a condition of ongoing employment. The code of conduct for a group
or organization is an agreement on rules of behavior for the members of that group or organization. Commonly generated
by corporations themselves, corporate codes of conduct vary extensively in design and objective. Crucially, they are not
directly subject to legal enforcement. In an era acutely aware of the dramatic social and environmental effects of corporate
activity across the world, such codes of conduct have become the focus of considerable attention.
A well-written code of conduct clarifies an organization’s mission, values and principles, linking them with standards
of professional conduct. The code articulates the values the organization wishes to foster in leaders and employees
and, in doing so, defines desired behavior. As a result, written codes of conduct or ethics can become benchmarks
against which individual and organizational performance can be measured.
Additionally, a code is a central guide and reference for employees to support day-to-day decision making. A code
encourages discussions of ethics and compliance, empowering employees to handle ethical dilemmas they encounter
in everyday work. It can also serve as a valuable reference, helping employees locate relevant documents, services
and other resources related to ethics within the organization.
The code of conduct may include the following:
a) Company Values
b) Avoidance of conflict of interests
426 Lesson 15 • PP-GRMCE

c) Accurate and timely disclosure in reports and documents that the company files before Government agencies,
as well as in the company’s other communications
d) Compliance of applicable laws, rules and regulations including Insider Trading Regulations
e) Maintaining confidentiality of the company affairs
f) Standards of business conduct for the company’s customers, communities, suppliers, shareholders,
competitors, employees
g) Prohibition for the Directors and senior management from taking corporate opportunities for themselves or
their families
h) Review of the adequacy of the Code annually by the Board
i) No authority to waive off the Code should be given to anyone in any circumstances. The Code of Conduct for
each Company summarises its philosophy of doing business.
Although the exact details of this code are a matter of discretion, the following principles have been found to occur
in most of the companies:
• Use of company’s assets;
• Avoidance of actions involving conflict of interests;
• Avoidance of compromising on commercial relationship;
• Avoidance of unlawful agreements;
• Avoidance of offering or receiving monetary or other inducements;
• Maintaining confidentiality;
• Collection of information from legitimate sources only;
• Safety at workplace;
• Maintaining and Managing Records;
• Free and Fair competition;
• Disciplinary actions against the erring person.

Difference between a Code of ethics and Code of conduct

The terms “Code of Ethics” and “Code of Conduct” are often mistakenly used interchangeably. They are, in fact, two
unique documents. Codes of ethics, which govern decision-making, and codes of conduct, which govern actions,
represent two common ways that companies self-regulate.
Both are used in an attempt to regulate behavior in very different ways. Ethical standards generally are wide-ranging
and non-specific, designed to provide a set of values or decision-making approaches that enable employees to make
independent judgments about the most appropriate course of action. Conduct standards generally require little
judgment; you obey or incur a penalty, and the code provides a fairly clear set of expectations about which actions
are required, acceptable or prohibited.
Violation of code of ethics may not lead to action against the employee but violation of code of conduct may lead to
disciplinary action.
Similarities
Both a Code of Ethics and a Code of Conduct are similar as they are used in an attempt to encourage specific forms
of behaviour by employees. Ethics guidelines attempt to provide guidance about values and choices to influence
decision making. Conduct regulations assert that some specific actions are appropriate, others in appropriate. In
both cases, the organization’s desire is to obtain a narrow range of acceptable behaviors from employees.

ADVANTAGES OF BUSINESS ETHICS

More and more companies have begun to recognize the relation between business ethics and financial performance.
Companies displaying a “clear commitment to ethical conduct” consistently outperform those companies that do not
display an ethical conduct.
 Lesson 15 • Ethics and Business 427

A company that adheres to ethical values and dedicatedly takes care of its employees is rewarded with equally loyal
and dedicated employees.
1. Attracting and retaining talent
People aspire to join organizations that have high ethical values. Such companies are able to attract the best
talent. The ethical climate matters a lot to the employees. Ethical organizations create an environment that
is trustworthy, making employees willing to rely on company’s policies, ability to take decisions and act on
those decisions. In such a work environment, employees can expect to be treated with respect, and will have
consideration for their colleagues and superiors as well. Thus, company’s policies cultivate teamwork, promote
productivity and support employee-growth.
Retaining talented people is as big a challenge for the company as getting them in the first place. Work is a
mean to an end for the employees and not an end in itself. The relationship with their employer must be a
win- win situation in which their loyalty should not be taken for granted. Talented people will invest their
energy and talent only in organizations with values and beliefs that matches their own. In order to achieve this
equation, managers need to build culture, compensation and benefit packages, and career paths that reflect
and foster certain shared values and beliefs.
2. Investor Loyalty
Investors are concerned about ethics, social responsibility and reputation of the company in which they invest.
Investors are becoming more and more aware that an ethical climate provides a foundation for efficiency,
productivity and profits. Relationship with any stakeholder, including investors, based on dependability, trust
and commitment results in sustained loyalty.
3. Customer satisfaction
Customer satisfaction is a vital factor of a successful business strategy. Repeated purchases/orders and an enduring
relationship with mutual respect is essential for the success of the company. The name of a company should evoke
trust and respect among customers for enduring success. This is achieved by a company only when it adopts ethical
practices. When a company with a belief in high ethical values is perceived as such, the crisis or mishaps along the
way is tolerated by the customers as minor aberrations. Such companies are also guided by their ethics to survive
a critical situation. Preferred values are identified and it is ensured that organizational behavior is aligned to those
values. An organization with a strong ethical environment places its customers’ interests as foremost. Ethical conduct
towards customers builds a strong competitive position for the company. It promotes a strong public image too.
4. Regulators
Regulators eye companies functioning ethically as responsible citizens. The regulator need not always monitor
the functioning of the ethically sound company. Any organisation that acts within the confines of business
ethics not only earns profit but also gains reputation publicly.
To summarise, companies that are responsive to employees’ needs have lower turnover in staff.
• Shareholders invest their money into a company and expect a certain level of return from that money in
the form of dividends and/or capital growth.
• Customers pay for goods, give their loyalty and enhance a company’s reputation in return for goods or
services that meet their needs.
• Employees provide their time, skills and energy in return for salary, bonus, career progression and experience.

CONCLUSION
In making ethics work in an organization it is important that there is synergy in vision statement, mission statement,
core values, general business principles and the code of ethics. A commitment by corporate management to follow an
ethical code of conduct confers a variety of benefits. An effective ethics programme requires continual reinforcement
of strong values. Organisations are challenged with the task to make their employees live and imbibe their ethical
codes and values. To ensure a right ethical climate, a right combination of spirit and structure is required.
Corporate Ethics is much needed to stress the importance of sustainability, social development, stakeholders and
consumers satisfaction. It is an orientation to provide a valuable service instead of displaying more orientation for
profits. Ethics, point out what is good and what is bad and also what is right or wrong. It brings to the notice of the
428 Lesson 15 • PP-GRMCE

business community the importance of honesty, sincerity and fairness which makes them alert and socially conscious. It
reconciles conflicting interest of various sections of the society such as workers, shareholders, consumers, distributors,
suppliers, competitors and government and thus, expedite a better relation between business and the society.

LESSON ROUND UP
• Business ethics is a form of applied ethics. In broad sense ethics in business is simply the application of
moral or ethical norms to business.
• The Board shall lay down a code of conduct for all Board members and senior management of the company.
The code of conduct shall be posted on the website of the company.
• To create a code of ethics, an organization must define its most important guiding values, formulate behavioral
standards to illustrate the application of those values to the roles and responsibilities of the persons affected,
review the existing procedures for guidance and direction as to how those values and standards are typically
applied, and establish the systems and processes to ensure that the code is implemented and is effective.
• An ethical dilemma involves a situation that makes a person question what is the ‘right’ or ‘wrong’ thing
to do. Ethical dilemmas make individuals think about their obligations, duties and responsibilities. These
dilemmas can be highly complex and difficult to resolve. Easier dilemmas involve a ‘right’ versus ‘wrong’
choice; whereas, complex ethical dilemmas involve a decision between a right and a right choice.
• Advantages of business ethics - attracting and retaining talent, investor loyalty, customer satisfaction and
regulators.
• In making ethics work in an organization it is important that there is synergy between vision statement,
mission statement, core values, general business principles and code of ethics.

GLOSSARY
Business Business ethics (also known as corporate ethics) is a form of applied ethics or professional ethics, that
Ethics examines ethical principles and moral or ethical problems that can arise in a business environment.
Indian Indian Ethos in Management refers to the values and practices that can contribute to service,
Ethos leadership and management. These values and practices are rooted in Sanathana Dharma (the
eternal essence), and have been influenced by various strands of Indian philosophy.
CSR Corporate Social Responsibility is a management concept whereby companies integrate social and
environmental concerns in their business operations and interactions with their stakeholders.
Ethical An ethical dilemma or ethical paradox is a decision-making problem between two possible moral
Dilemma imperatives, neither of which is unambiguously acceptable or preferable. The complexity arises out
of the situational conflict in which obeying one would result in transgressing another.
Ethical A code of conduct is a set of rules outlining the social norms, religious rules and responsibilities of,
Dilemma and or proper practices for, an individual.

TEST YOURSELF
(These are meant for recapitulation only. Answers to these questions are not to be submitted for evaluation)
1. Can you discuss about the influence of organization climate and organizational structure on the ethics
programme of a company?
2. Do you know Ethical Dilemma. Briefly describe.
3. Is there any advantages of Business Ethics for an organization? Explain some of the advantages.
4. Can you explain Code of Conduct for a company?
5. Is there any difference between a
Lesson 16 CSR and Sustainability

Key Concepts One Learning Objectives Regulatory Framework

Should Know
To understand the: • Section 135 of Companies Act,
• CSR
• Concept, applicability and 2013
• ESG reporting in respect to • Schedule VII of Companies Act,
• Corporate Corporate Social Responsibility 2013
Sustainability and Sustainability.
• The Companies (Corporate
• Sustainable • Global Principles and Social Responsibility Policy)
development guidelines on Sustainability Rules, 2014
• Business • Concepts of sustainability and • Regulation 34(2)(f) of SEBI
sustainability corporate social responsibility. (LODR) Regulation, 2015

Lesson Outline
• Introduction
• Regulatory Framework
• Corporate Social Responsibility (CSR)
• Why CSR at All?
• Factors Influencing CSR
• Triple Bottom Line Approach of CSR
• Corporate Citizenship – Beyond the Mandate of Law
• Global Principles and Guidelines
• Corporate Sustainability
• United Nations Global Compact’s Ten Principles, 2000
• CSR and Sustainability in India
• National Guidelines on Responsible Business Conduct (NGRBC) - 2019
• Sustainable Development
• The 2030 Agenda for Sustainable Development
• Sustainable Development Goals (SDGs)
• Sustainability Indices
• Measuring Business Sustainability
• LESSON ROUND-UP
• GLOSSARY
• TEST YOURSELF
430 Lesson 16 • PP-GRMCE

INTRODUCTION
The 21st century is characterized by unprecedented challenges and opportunities, arising from globalization, the
desire for inclusive development and the imperatives of climate change. Indian business, which is today viewed globally
as a responsible component of the ascendancy of India, is poised now to take on a leadership role in the challenges
of our times. It is recognized the world over that integrating social, environmental and ethical responsibilities into
the governance of businesses ensures their long term success, competitiveness and sustainability. This approach
also reaffirms the view that businesses are an integral part of society, and have a critical and active role to play in the
sustenance and improvement of healthy ecosystems, in fostering social inclusiveness and equity, and in upholding
the essentials of ethical practices and good governance. This also makes business sense as companies with effective
CSR, have image of socially responsible companies, achieve sustainable growth in their operations in the long run
and their products and services are preferred by the customers.

Corporate Social Responsibility (CSR) is a concept whereby companies not only consider their profitability
and growth, but also the interests of society and the environment by taking responsibility for the impact of
their activities on stakeholders, environment, consumers, employees, communities, and all other members of
the public sphere. The basic premise is that when the corporations get bigger in size, apart from the economic
responsibility of earning profits, there are many other responsibilities attached to them which are more of non-
financial/social in nature. These are the expectations of the society from these corporate to give something in
return to the society with whose explicit or implicit help these entities stand where they are. 

The vedic philosophy of “Sarva loka hitam” i.e. ‘‘the well-being of all stakeholders”, has regained importance in
the current business environment. The concept has evolved over the years and now used as strategy and a business
opportunity to earn stakeholder goodwill.
The old principle of concern, care and share applies to present day corporate where the corporates need to be
concerned for the society, particularly the less privileged class, care about their well being and development and in
order to do that shall share the part of wealth they have or they earn, However, spending money itself does qualify
that a company is socially concerned.
Although scholars and practitioners often interpret Corporate Sustainability and Corporate Social Responsibility
as being nearly synonymous, pointing to similarities and the common domain. The two concepts have different
backgrounds and different theoretical paths. According to management science, the notion of Corporate Sustainability
can be defined first as the capacity of a firm to create value through the product and services it produces, and to
continue operating over the years. Sustainability, in this context, entails the creation of a sustainable competitive
advantage.
Corporate Sustainability can be considered as an attempt to adapt the
According to the Dow Jones
concept of Sustainable Development to the corporate setting, matching the
Sustainability Index, ‘Corporate
goal of value creation with environmental and social considerations.
Sustainability is a business approach
Corporate Sustainability includes an attempt to assimilate the that creates long-term shareholder
environmental and social dimensions into business operations: processes, value by embracing opportunities
products and procedures. In practical terms, the Corporate Sustainability and managing risks deriving from
approach leads to a very concrete and pragmatic problem; how to measure economic, environmental and social
performance based on the three dimensions outlined and how natural and developments’.
social values can be incorporated into corporate accounting.
The evolutionary part of the concept of Corporate Social Responsibility is different from that of the Corporate
Sustainability. The first recognized contribution in the literature dates back to Bowen, who stressed the responsibilities
of businesses, and wrote that social responsibility refers to the obligations of the businessmen to pursue those policies,
to make those decisions, or to follow those lines of action which are desirable in terms of the objectives and values of
our society.
Besides economic and legal responsibilities (that is, to be able to make profits as well as obey the law), companies
are expected to satisfy other requirements, relevant to the conformity to social norms and voluntary contributions to
the community in which they operate. Another important Corporate Social Responsibility approach was developed
during the 1980s in the light of the growth of the stakeholder approach. According to it, firms have obligations to a
larger group of stakeholders than the simple shareholders, where a stakeholder is a group or an individual who can
 Lesson 16 • CSR and Sustainability 431

affect or is affected by the achievement of the firm’s objectives. Business

The Journal of Environmental Strategy
can be understood as a set of relationships among groups which have a
defines corporate sustainability
stake in the activities that make up the business.
as ‘the capacity of an enterprise to
Although Corporate Sustainability and Corporate Social Responsibility maintain economic prosperity in the
have different roots and have developed along diverse theoretical paths, context of environmental responsibility
they have ultimately converged. This strong convergence is evident in and social stewardship. Accountability,
some recent definitions of the Corporate Social Responsibility provided the capability of an organization to
by international organizations, like the Prince of Wales International continue its activities, indefinitely, has
Business Leaders Forum: Corporate Social Responsibility means open taken due account of its impact on
and transparent business practices that are based on ethical values natural, social and human capitals.
and have respect for their employees, communities and environment.
It is designed to deliver sustainable value to society at large, as well as to the shareholders.
The concept of sustainable development has been transposed from the macro to the corporate dimensions.
Companies, in fact, are a productive resource of our socio-economic system, and key to the eventual implementation
of sustainability. According to the management theory, the attempt to include sustainability issues in the
managerial framework can be divided into two separate issues: Corporate Sustainability and Corporate Social
Responsibility. The actualization of the theoretical pillars of Sustainability Development within Corporate
Sustainability/Corporate Social Responsibility seems crucial to effectively respond to the challenges posed by
sustainability.

CORPORATE SOCIAL RESPONSIBILITY (CSR)

CSR is understood to be the way firms integrate social, environmental and economic concerns into their values,
culture, decision making, strategy and operations in a transparent and accountable manner and thereby establish
better practices within the firm, create wealth and improve society. CSR is also called Corporate Citizenship or
Corporate Responsibility of business.
The 1950s saw the start of the modern era of CSR when it
was more commonly known as Social Responsibility. In 1953, According to Business for Social Responsibility
Howard Bowen published his book, “Social Responsibilities (BSR) “Corporate social responsibility is operating
of the Businessman”, and is largely credited with coining the a business in a manner which meets or excels the
phrase ‘corporate social responsibility’ and is perhaps the ethical, legal, commercial and public expectations
Father of modern CSR. Bowen asked: “what responsibilities to that a society has from the business.”
society can business people be reasonably expected to assume?”
Bowen also provided a preliminary definition of CSR: “it refers to the obligations of businessmen to pursue those policies, to
make those decisions, or to follow those lines of action which are desirable in terms of the objectives and values of our society“.
At some point of discussion, it appears that CSR is the major element of Corporate Governance, though governance
issues are much more towards managerial effectiveness which may not directly address social issues.
Business entity is expected to undertake those activities, which are essential for betterment of the society. Every
aspect of business has a social dimension. Corporate Social Responsibility means open and transparent business
practices that are based on ethical values and respect for employees, communities and the environment. It is
designed to deliver sustainable value to society at large as well as to shareholders.
Corporate Social Responsibility is nothing but what an organisation does, to positively influence the society in which
it exists. It could take the form of community relationship, volunteer assistance programmes, special scholarships,
preservation of cultural heritage and beautification of cities. The philosophy is basically to return to the society what
it has taken from it, in the course of its quest for creation of wealth.
With the understanding that businesses play a key role of job and wealth creation in society, CSR is generally
understood to be the way a company achieves a balance or integration of economic, environmental, and social
imperatives while at the same time addressing shareholder and stakeholder expectations.
According to CSR Asia, a social enterprise, “CSR is a company’s commitment to operate in an economically, socially
and environmentally sustainable manner whilst balancing the interests of diverse stakeholders”
CSR is generally accepted as applying to firms wherever they operate in the domestic and global economy. The way
businesses engage/involve the shareholders, employees, customers, suppliers, Governments, non- Governmental
432 Lesson 16 • PP-GRMCE

organizations, international organizations, and other stakeholders is usually a key feature of the concept. While an
organisation’s compliance with laws and regulations on social, environmental and economic objectives set the
official level of CSR performance, it is often understood as involving the private sector commitments and activities
that extend beyond this foundation of compliance with laws.
According to the Commission of the European Communities, 003, “CSR is the concept that an enterprise is
accountable for its impact on all relevant stakeholders. It is the continuing commitment by business to behave fairly
and responsibly and contribute to economic development while improving the quality of life of the work force and
their families as well as of the local community and society at large.”
According to the World Business Council for Sustainable
The term Corporate Social responsibility refers Development, 1999 “Corporate Social Responsibility is the
to the concept of business being accountable continuing commitment by business to behave ethically and
for how it manages the impact of its processes contribute to the economic development while improving the
on stakeholders and takes responsibility for quality of life of the workforce and their families as well as of
producing a positive effect on society. the local community and the society at large.”
CSR is a concept whereby companies integrate social and environmental concerns in their business operations and
in their interaction with their stakeholders on a voluntary basis. The main function of an enterprise is to create
value through producing goods and services that society demands, thereby generating profit for its owners and
shareholders as well as welfare for society, particularly through an ongoing process of job creation. However, new
social and market pressures are gradually leading to a change in the values and in the horizon of business activity.
Philip Kotler said “we sell products in the society, not in the market”. It means that it is the society which creates
demand. Individual values percolate into social values and social values percolate into corporate values. Therefore,
companies cannot sustain in the long run ignoring social values.”
Essentially, Corporate Social Responsibility is an inter-disciplinary subject in nature and encompasses in its fold:
1. Social, economic, ethical and moral responsibility of companies and managers,
2. Compliance with legal and voluntary requirements for business and professional practice,
3. Challenges posed by needs of the economy and socially disadvantaged groups,
4. Management of corporate responsibility activities, and
5. Proper implementation of the projects taken up by the company so that the benefit goes to people in need.
CSR is an important business strategy because, wherever possible, consumers want to buy products from companies
they trust; suppliers want to form business partnerships with companies they can rely on; employees want to
work for companies they respect; and NGOs, increasingly, want to work together with companies seeking feasible
solutions and innovations in areas of common concern. CSR is a tool in the hands of corporates to enhance the market
penetration of their products, enhance its relation with stakeholders. CSR activities carried out by the enterprises
affects all the stakeholders, thus making good business sense, the reason being contribution to the bottom line.

WHY CSR AT ALL?

There is one school of thought which feels that purpose of business is to do business. Social issues, more so,
the social welfare issues are the concern of the ruler or Govt. Traditionally, the ruler/ Govt. would collect taxes,
in whatever name and form, and the money will be spent on social development. Corporates pay taxes on
their profits. The individuals pay taxes on purchase of articles for their consumption. Therefore, why again the
corporates are expected to do social activities. Notwithstanding that the above idea do not have any ground at
all, it is now accepted by the Govt. and by the corporates themselves that yes, corporates have a supporting role
in social development.
Business cannot exist in isolation; business cannot be oblivious to societal development. The social responsibility of
business can be integrated into the business purpose so as to build a positive synergy between the two.
Arguments in favour of CSR are as follows:
1. CSR creates a favourable public image, which attracts customers. Reputation or brand equity of the products
of a company which understands and demonstrates its social responsibilities is very high. Customers trust the
 Lesson 16 • CSR and Sustainability 433

products of such a company and are willing to pay a premium on its products. Organizations that perform well
with regard to CSR can build reputation, while those that perform poorly can damage brand and company value
when exposed. Brand equity, is founded on values such as trust, credibility, reliability, quality and consistency.
2. Corporate Social Responsibility (CSR) activities have its advantages. It builds up a positive image encouraging
social involvement of employees, which in turn develops a sense of loyalty towards the organization, helping
in creating a dedicated workforce proud of its company. Employees like to contribute to the cause of creating
a better society. Employees become champions of a company for which they are proud to work.
3. Society gains through better neighborhoods and employment opportunities, while the organisation benefits
from a better community, which is the main source of its workforce and the consumer of its products.
4. Public needs have changed leading to changed expectations from consumers. The industry/ business owes its
very existence society and has to respond to needs of the society.
5. The company’s social involvement discourages excessive regulation or intervention from the Government or
statutory bodies, and hence gives greater freedom and flexibility in decision-making.
6. The internal activities of the organisation have an impact on the external environment, since the society is an
inter-dependent system.
7. A business organisation has a great deal of power and money, entrusted upon it by the society and should be
accompanied by an equal amount of responsibility. In other words, there should be a balance between the
authority and responsibility.
8. The good public image secured by one organisation by their social responsiveness encourages other
organizations in the neighborhood or in the professional group to adapt themselves to achieve their social
responsiveness.
9. The atmosphere of social responsiveness encourages co-operative attitude between groups of companies. One
company can advise or solve social problems that other organizations could not solve.
10. Companies can better address the grievances of its employees and create employment opportunities for the
unemployed.
11. A company with its “ear to the ground” through regular stakeholder dialogue is in a better position to anticipate
and respond to regulatory, economic, social and environmental changes that may occur.
12. Financial institutions are increasingly incorporating social and environmental criteria into their assessment
of projects. When making decisions about where to place their money, investors are looking for indicators of
effective CSR management.
13. In a number of jurisdictions, governments have expedited approval processes for firms that have undertaken
social and environmental activities beyond those required by regulation.

FACTORS INFLUENCING CSR

Many factors and influences, including the following, have led to increasing attention being devoted to CSR:
→ Globalization – coupled with focus on cross-border trade, multinational enterprises and global supply chains
– is increasingly raising CSR concerns related to human resource management practices, environmental
protection, and health and safety, among other things.
→ Governments and intergovernmental bodies, such as the United Nations, the Organisation for Economic Co-
operation and Development and the International Labour Organization have developed compacts, declarations,
guidelines, principles and other instruments that outline social norms for acceptable conduct.
→ Advances in communications technology, such as the Internet, cellular phones and personal digital assistants,
are making it easier to track corporate activities and disseminate information about them. Non-governmental
organizations now regularly draw attention through their websites to business practices they view as
problematic.
→ Consumers and investors are showing increasing interest in supporting responsible business practices and
environmental issues.
434 Lesson 16 • PP-GRMCE

→ Numerous serious and high-profile breaches of corporate ethics have contributed to elevated public mistrust
of corporations and highlighted the need for improved corporate governance, transparency, accountability
and ethical standards. However, being ethical and being socially responsible in making positive measurable
contribution to society may not be same.
→ Citizens in many countries are making it clear that corporations should meet standards of social and
environmental care, no matter where they operate.
→ There is increasing awareness of the limits of government legislative and regulatory initiatives to effectively
capture all the issues that corporate social responsibility addresses.
→ Businesses are recognizing that adopting an effective approach to CSR can reduce risk of business disruptions,
open up new opportunities, and enhance brand and company reputation.
→ Ethical persons shall be attracted to join the company.
→ Effective CSR will depend on the mindset of executives of the corporate who are taking up CSR initiatives.
→ CSR also depends on the implementing agencies with regard to their seriousness, integrity, honesty
and attitude.

Globalisation

Reduced risk Governement

of business and -inter
governmental
disruptions bodies

Social and
CSR
environmental Communication
care technology

Breach of Consumers and

corporate ethics investors

TRIPLE BOTTOM LINE APPROACH OF CSR

Within the broader concept of corporate social responsibility, the concept of Triple Bottom Line (TBL) is gaining
significance and becoming popular amongst corporates. Coined in 1997 by John Ellington, noted management
consultant, the concept of TBL is based on the premise that business entities have more to do than make just profits
for the owners of the capital, only bottom line people understand. “People, Planet and Profit” is used to succinctly
Lesson 16 • CSR and Sustainability 435

People

Bearable Equitable

Sustainability
Planet Profit

Viable

describe the triple bottom lines. “People” (Human Capital) pertains to fair and beneficial business practices toward
labour and the community and region in which a corporation conducts its business. “Planet” (Natural Capital)
refers to sustainable environmental practices. It is the lasting economic impact the organization has on its economic
environment A TBL company endeavors to benefit the natural order as much as possible or at the least do no harm
and curtails environmental impact. “Profit” is the bottom line shared by all commerce.
The people issues faced by the organisation includes –
• Health
• Safety
• Diversity
• Ethnicity
• Education and literacy
• Prevention of child labour
• Differently-abled.
The planet concerns include-
• Climate change
• Energy
• Water
• Biodiversity and land use
• Chemicals, toxics and heavy metals
• Air pollution
• Waste management
• Ozone layer depletion
• Ocean and fisheries
• Afforestation.
436 Lesson 16 • PP-GRMCE

The Profit includes-

• Creating Employment
• Generating Innovation
• Paying Taxes
• Wealth Creation.

The need to apply the concept of TBL is caused due to –

(a) Increased consumer sensitivity to corporate social behaviour
(b) Growing demands for transparency from shareholders/stakeholders
(c) Increased environmental regulation
(d) Legal costs of compliances and defaults
(e) Concerns over global warming
(f) Increased social awareness
(g) Awareness about and willingness for respecting human rights
(h) Media’s attention to social issues
(i) Growing corporate participation in social upliftment

While profitability is a pure economic bottom line, social and environmental bottom lines are semi or non- economic
in nature so far as revenue generation is concerned but it has certainly a positive impact on long term value that an
enterprise commands.
But discharge of social responsibilities by corporates is a subjective matter as it cannot be measured with
reasonable accuracy.
The current generation people are well aware of what goes on around them. People today know a lot about
environment, how it affects them, how things we do affects the environment in turn. For the aware and conscientious
consumers today, it is important that they buy products that do not harm the environment. They only like to deal
with companies that believe and do things for the greater good of planet earth.

Therefore, TBL leads to three important principles.

1. Company cannot sustain only by making profit and ignoring society or environment;
2. Company cannot run only for the benefit of people and forget the commercial function of making profit;
3. Company cannot run only to protect the environment and forget people and profit

CORPORATE CITIZENSHIP – BEYOND THE MANDATE OF LAW

Corporate citizenship is a commitment to improve community well-being through voluntary business practices
and contribution of corporate resources leading to sustainable growth. Corporate responsibility is achieved when a
business adapts CSR well aligned to its business goals and meets or exceeds, the ethical, legal, commercial and public
expectations that society has of business.
The term corporate citizenship implies the behaviour, which would maximize a company’s positive impact and
minimize the negative impact on its social and physical environment. It means moving from supply driven to more
demand led strategies; keeping in mind the welfare of all stakeholders; more participatory approaches to working
with communities; balancing the economic cost and `benefits with the social; and finally dealing with processes
rather than structures. The ultimate goal is to establish dynamic relationship between the community, business and
philanthropic activities so as to complement and supplement each other.
Corporate citizenship is being adopted by more companies who have come to understand the importance of the
ethical treatment of stakeholders.
Lesson 16 • CSR and Sustainability 437

As a good corporate citizen, the companies are required to focus on the following key aspects:
1. Absolute Value Creation for the Society: Organisations should set their goal towards the creation of
absolute value for the society. Once it is ensured, a corporate never looks back and its sustainability in the
long run is built up.
2. Ethical Corporate Practices: In the short run, enterprise can gain through non-ethical practices.
However those cannot be sustained in the long run. Society denies accepting such products or services. For
example, in Drug and Pharmaceutical industry many products are today obsolete due their side effects which
such companies never disclosed to protect their sales volume. Only when they were banned by the WHO or
other authorities, they had to stop their production.
3. Worth of the Earth through Environmental Protection: Resources which are not ubiquitous and have
economic and social value should be preserved for a long- term use and be priced properly after considering
environmental and social costs. For example, a power plant should build up its cost model efficiently after
taking into account cost of its future raw material sourcing, R&D cost for alternate energy source, cost for
proper pollution control measures and so on.
4. Equitable Business Practices: Corporates should not indulge themselves in unfair means and should create
candid business practices, ensuring healthy competition and fair trade practices.
5. Corporate Social Responsibility: As a Corporate citizen, every corporate is duty bound to its society wherein
it operates and serves. Although there are no hard and fast rules, CSR activities need to be clubbed and
integrated into the business model of the company.
6. Innovate new technology/process/system to achieve eco-efficiency: Innovation is the key to success. Risks
and crisis can be eliminated through innovation. Learning and innovative enterprise gets a cutting edge over
others. These innovative processes bring sustainability if developments are aimed at satisfying human needs,
and ensure quality of life, while progressively reducing ecological impact and resource intensity to a level at
least in line with earth’s estimated carrying capacity.
7. Creating Market for All: Monopoly, unjustified subsidies, prices not reflecting real economic, social
environmental cost, etc. are hindrances to the sustainability of a business. Simultaneously, a corporate has
to build up its products and services in such a way so as to cater to all segments of customers/ consumers.
Customer confidence is the essence of corporate success.
8. Switching over from the Stakeholders Dialogue to holistic Partnership: A business enterprise can
advance its activities very positively if it makes all the stakeholders partner in its progress. It not only builds
confidence of its stakeholders, but also helps the management to steer the business under a very dynamic and
flexible system. This approach offers business, government and other stakeholders of the society to build up an
alliance to bring about common solutions to the common concerns faced by all.
9. Compliance of Statutes: Compliance of statutes, rules and regulations and standards set by various bodies
ensure clinical checkup of a corporate and confers societal license upon it to the corporate to run and operate
its business in the society.

Many companies have prepared and hosted the same in their website a document called “citizenship charter”, where
the above issues are included along with other issues. Making and hosting a citizenship charter is mandatory for CPSUs.
Some of the above issue deal with good governance practices which are beyond normal business ethics. A company
may be ethical but may be practicing all good governance practices. Therefore good governance practices are beyond
ethics or extended business ethics.

CASE STUDY: TATA STEEL – A COMPANY THAT ALSO MAKES STEEL

Tata Steel’s Vision strikes a balance between economic value as well as ecological and societal value by aspiring
to be “a Global Benchmark in Value Creation and Corporate Citizenship”. In the initial years, Tata Steel’s CSR
interventions were more as a ‘provider’ to society where the community was given support for its overall needs,
both for sustenance and development. Gradually, the shift in approach led to Tata Steel being an ‘enabler’ focusing
438 Lesson 16 • PP-GRMCE

on building community capacity through training programmes; focusing on providing technical support rather
than giving aid. At present, CSR interventions of Tata Steel focus on ‘sustainable development’ to enhance the
quality of life of people. It guides the Company in its race to excel in all areas of sustainability. J R D Tata the
Chairman of the Tata Group believed that, “to create good working conditions, to pay the best wages to its
employees and provide decent housing to its employees are not enough for the industry, the aim of an industry
should be to discharge its overall social responsibilities to the community and the society at large, where industry
is located.”
Guided by this mandate, Tata Steel has for decades uses its skills and resources, to the extent it can reasonably
afford, to give back to the community a fair share of the product of its efforts.
It was the first to establish labour welfare practices, even before these were made statutory laws across the world.
The Company also instituted an eight-hour workday in 1912, free medical aid in 1915, a Welfare Department in
1917, leave with pay, Workers Provident Fund and Workmen’s Compensation in 1920 and Maternity Benefit for
ladies in 1928.
The Company supports and propagates the principles of the United Nations Global Compact as a Founder Member,
is a signatory to the World steel Sustainability Charter and supports the Affirmative Action programme of the
Confederation of Indian Industry.
Tata Steel’s approach to business has evolved from the concept that the wealth created must be continuously
returned to society. The responsibility of combining the three elements of society - social, environmental, and
economic - is of utmost importance to the way of life at Tata Steel. Today, Tata Steel’s CSR activities in India
encompass the Company’s Steel Works, Iron ore mines and collieries, reaching out to the city of Jamshedpur,
its peri-urban areas and over 800 villages in the states of Jharkhand, Odisha and Chhattisgarh. Community
involvement is a characteristic of all Tata Steel Group companies around the world. It can take the form of
financial support, provision of materials and the involvement of time, skills and enthusiasm of employees. The
Group contributes to a very wide range of social, cultural, educational, sporting, charitable and emergency
assistance programmes. The Company works in partnership with the Government, national and international
development organisations, local NGOs and the community to ensure sustainable development. The Corporate
Services Division delivers these responsibilities through several institutionalised bodies:
• Tata Steel Corporate Social Responsibility and Accountability Policy
• Corporate Social Responsibility
• Tata Steel Rural Development Society (TSRDS)
• Tribal Cultural Society (TCS)
• Tata Steel Family Initiatives Foundation (TSFIF)
• Tata Steel Skill Development Society (TSSDS)
• Education
• Medical Services
• Urban Services
• Sports Department
• Tata Steel Adventure Foundation
• JUSCO
• Other societies like Ardeshir Dalal Memorial Hospital, Blood Banks, Hospital etc.) Kanti Lal Gandhi
Memorial
• Tata Relief Committee To assess the effectiveness of its social initiatives Tata Steel has innovatively devised
a Human Development Index (HDI). In 2012-13, HDI assessment was completed for 230 villages. The
Corporate Social Responsibility Advisory Council was also created with the objective that this apex body
along with the results of the measurement of HDI will enable the Group to direct its social initiatives better
and allocate resources more efficiently.
 Lesson 16 • CSR and Sustainability 439

GLOBAL PRINCIPLES AND GUIDELINES

A comprehensive guidance for companies pertaining to CSR is available in the form of several globally recognised
guidelines, frameworks, principles and tools, some of which are discussed below. It must be noted that most of these
guidelines relate to the larger concept of sustainability or business responsibility, in keeping with the fact that these
concepts are closely aligned globally with the notion of CSR.
• The UN Guiding Principles on Business and Human Rights: The UN guiding principles provide assistance
to states and businesses to fulfil their existing obligations towards respecting and protecting human rights
and fundamental freedoms and comply with the existing laws. These principles act as global standards for
addressing the risk of human rights violation related to business activity. In circumstances when these laws
are breached or the guidance is not adhered to, suitable remedies have also been recommended. The primary
focus is on the protection of human rights by both, the state and the business enterprises, and the principles
broadly outline the manner in which the framework can be implemented.
• OECD Guidelines: Multinational enterprises: OECD Guidelines for multinational enterprises elaborate on
the principles and standards for responsible business conduct for multinational corporations. These guidelines
were recently updated in 2011. They cover areas such as employment, human rights, environment, information
disclosure, combating bribery, consumer interests, science and technology, competition and taxation. They
contain defined standards for socially and environmentally responsible corporate behaviour, and also provide
procedures for resolving disputes between corporations and communities or individuals adversely impacted
by business activities.
• Institute of Social and Ethical Accountability: Account Ability’s AA1000 series of standards: This is a series
of standards which enable organisations to become accountable, responsible and sustainable. It consists of
the (i) AA1000 accountability principles (AP) standard (ii) AA1000 assurance standard (AS) (iii) AA1000
stakeholder engagement (SE) standard. Since these standards have been formulated through a multi-
stakeholder consultation process, they ensure that those impacted (that is, enterprises, governments and
civil societies) stand to gain. The Vodafone Group Plc has adopted the AA1000AP standard by focusing on
three broad areas: (i) inclusivity (stakeholder engagement to develop and implement a strategic approach to
sustainability) (ii) materiality (assess the management effort required for each material issue and determine
the content of sustainability reports) (iii) responsiveness (respond with solutions to material issues and
challenges).
• Social Accountability International (SAI): SA 8000 Standard: This is one of the world’s first auditable social
certification standard. It is based on ILO, UN and national law conventions, and adopts a management system
approach in order to ensure that companies that adopt this approach also comply with it. This standard
ensures the protection of basic human rights of workers. The nine basic elements of this standard include (i)
child labour (ii) forced and compulsory labour (iii) health and safety (iv) freedom of association and the right
to collective bargaining (v) discrimination (vi) disciplinary practices (vii) working hours (viii) remuneration
(ix) management systems. According to SAAS, there are 695 facilities in India that have been accredited with
this standard. Out of these, Aditya Birla Chemicals (India) Limited, Bhilai Steel Plant Steel Authority of India
Limited, Birla tyres, Dr Reddy’s Laboratories Limited and Reliance Infrastructure Limited figure prominently
in the list of certified facilities within India.
• ISO 26000: Social responsibility: ISO 26000 is the international standard giving guidance on social responsibility
and is intended for use by organizations of all types both public and private sectors, in developed and developing
countries. It provides guidance on principles of social responsibility, the core subjects and issues pertaining
to social responsibility and on ways to integrate socially responsible behaviour into existing organizational
strategies, systems, practices and processes. This is a guidance tool provided by the ISO which enables
organisations to understand the meaning and significance of social responsibility. It is important to note that
this is not a certification but only a guiding tool. Hence, organisations which comply with these standards are
self-certified. It covers six core areas of social responsibility, including (i) human rights (ii) labour practices (iii)
environment (iv) fair operating practices (v) consumer issues (vi) community involvement and development.
This ensures a holistic approach to the concept of social responsibility and sustainable development.
It intends to assist organizations in contributing to sustainable development. It is intended to encourage them
to go beyond legal compliance, recognizing that compliance with law is a fundamental duty of any organization
440 Lesson 16 • PP-GRMCE

and an essential part of their social responsibility. It is intended to promote common understanding in the field
of social responsibility, and to complement other instruments and initiatives for social responsibility, not to
replace them.
ISO 26000 is not a management system standard. It is not intended or appropriate for certification purposes
or regulatory or contractual use.
• Global Compact Self-Assessment Tool
The Global Compact Self Assessment Tool is an easy-to-use guide designed for use by companies of all sizes
and across sectors committed to upholding the social and environmental standards within their respective
operations. The tool consists of 45 questions with a set of three to nine indicators for each question. It
consists of a ‘management section’ and four other sections, including human rights, labour, environment
and anti-corruption that relate to the principles of the UN Global Compact. The tool is in line with the UN
Guiding Principles on Business and Human Rights. For a small company, this tool acts as a measure of the
company’s performance in all areas of the UN Global Compact and how well these issues are managed. For a
large organisation, this tool helps to continuously improve existing policies and systems, engage subsidiaries,
suppliers or other stakeholders, and improves internal and external reporting.

CORPORATE SUSTAINABILITY
Sustainability means meeting of the needs of the
“Sustainability is an economic state where the demand
present without compromising the ability of future
placed upon the environment by people and commerce
generations to meet theirs. It has three main pillars:
can be met without reducing the capacity of the
economic, environmental, and social. These three pillars
environment to provide for future generations. It can
are informally referred to as people, planet and profits. also be expressed in the simple terms of an economic
These three Ps have its priority orders too. One should golden rule for the restorative economy; leave the world
take first take care of the PEOPLE and thereafter the better than you found it, take no more than you need,
PLANET. PROFIT is an economic activity and is much for try not to harm life of environment, make amends if you
the survivial of the unit, but in the array of these three do.” Paul Hawkin’s book – The Ecology of Commerce
Ps, its priority should stand in last and not at the cost of
People and Planet.
Sustainability is based on a simple principle: Everything that we need for our survival and well-being depends,
either directly or indirectly, on our natural environment. Sustainability creates and maintains the conditions under
which humans and nature can exist in productive harmony that permits fulfilling the social, economic and other
requirements of the present and future generations.
Sustainability is important to make sure that we have and will continue to have the water, materials, and resources
to protect human health and our environment.
Corporate sustainability indicates new philosophy, as an alternative to the traditional growth and profit- maximization
model, under which sustainable development comprising of environmental protection, social justice and equity, and
economic development are given more significant focus while recognizing simultaneous growth of the corporate
and profitability.
It is a business approach that creates long-term shareholder value by embracing opportunities and managing risks
deriving from economic, environmental and social developments. Corporate sustainability describes business
practices built around social and environmental considerations.
Corporate sustainability encompasses strategies and
Thomas Dyllick and Kai Hockerts in ‘Beyond practices that aim to meet the needs of the stakeholders today
the Business Case for Corporate Sustainability’ while seeking to protect, support and enhance the human and
define Corporate Sustainability as, “meeting the
natural resources that will be the need of the future. Corporate
needs of a firm’s direct and indirect stakeholders
sustainability leaders achieve long-term shareholder value
(such as shareholders, employees, clients,
by gearing their strategies and management to harness the
pressure groups, and communities) without
market’s potential for sustainability products and services
compromising its ability to meet the needs of
while at the same time successfully reducing and avoiding
future stakeholders as well.”
sustainability costs and risks.
 Lesson 16 • CSR and Sustainability 441

The Australian government defines Corporate Sustainability as “encompassing strategies and practices that aim to
meet the needs of the stakeholders today, while seeking to protect, support, and enhance the human and natural
resources that will be needed in the future.”
Worldwide business communities are recognizing the need to address the environmental and social impacts of their
activities. The fundamental business objectives towards creating economic values, clubbed with the environmental and
social value addition, evolved the concept of ‘triple bottom line’ under sustainable development. Corporate Boards are
required to address issues, such as environment, social justice and economic efficiency to ensure their long-term existence.
Concern towards social, environmental and economical issues, i.e., covering all the segments of the stakeholders, are
now basic and fundamental issues which permit a corporate to operate in the long run sustainably. Following key
drivers need to be garnered to ensure sustainability:
• Internal Capacity Building strength – In order to convert various risks into competitive advantages.
• Social impact assessment – In order to become sensitive to various social factors, like changes in culture and
living habits.
• Repositioning capability through development and innovation: Crystallisation of all activities to ensure
consistent growth.
• Corporate sustainability is a business approach creating shareholder value in the long run. These may be
derived by converting risks arising out of economic, environmental and social activities of a corporate into
business opportunities keeping in mind the principles of a sustainable development.

UNITED NATIONS GLOBAL COMPACT’S TEN PRINCIPLES, 2000

Corporate sustainability starts with a company’s value system and a principled approach to doing business. This
means operating in ways that, at a minimum, meet fundamental responsibilities in the areas of human rights, labour,
environment and anti-corruption. Responsible businesses enact the same values and principles wherever they have
a presence, and know that good practices in one area do not offset harm in another.
The UN Global Compact is a strategic policy initiative for businesses that are committed to aligning their operations
and strategies with ten universally accepted principles in the areas of human rights, labour, environment and anti-
corruption. By incorporating the Global Compact principles into strategies, policies and procedures, and establishing a
culture of integrity, companies are not only upholding their basic responsibilities to people and planet, but also setting
the stage for long-term success. The UN Global Compact’s Ten Principles are derived from: the Universal Declaration of
Human Rights, the International Labour Organization’s Declaration on Fundamental Principles and Rights at Work, the
Rio Declaration on Environment and Development, and the United Nations Convention Against Corruption.

Human Rights Principle 1 Businesses should support and respect the protection of internationally proclaimed
human rights.
Meaning of this Principle:
• Respecting human rights means a business should use due diligence to avoid
infringing human rights (“do no harm”) and should address adverse human rights
impacts with which they are involved.
• In addition, beyond respecting human rights, business is encouraged to take action
to support human rights. This means seeing the opportunity to take voluntary
action to make a positive contribution towards the protection and fulfillment
of human rights whether through core business, strategic social investment/
philanthropy, public policy engagement/advocacy, and/or partnerships and
other collective action.
• Action to support human rights should be a complement to and not a substitute
for action to respect human rights.
• Special attention should be paid to the rights of vulnerable groups, including
women, children, people with disabilities, indigenous peoples, migrant workers,
older persons etc.
442 Lesson 16 • PP-GRMCE

Principle 2 Make sure that they are not complicit in human rights abuses.
Meaning of this Principle:
• Complicity means being implicated in a human rights abuse that another company,
government, individual or other group is causing.
• The risk of complicity in a human rights abuse may be particularly high in areas
with weak governance and/or where human rights abuse is widespread. However,
the risk of complicity exists in every sector and every country.
• The requirement to respect human rights, pursuant to Global Compact Principle 1
and the UN Guiding Principles on Business and Human Rights, includes avoiding
complicity, which is another way, beyond their own direct business activities, that
businesses risk interfering with the enjoyment of human rights.
• The risk of an allegation of complicity is reduced (though not eliminated) if a
company has a systematic management approach to human rights, including due
diligence processes that cover the entity’s business relationships.
• Such processes should identify and prevent or mitigate the human rights risks
with which the company may be involved through links to its products, operations
or services.

Labour Principle 3 Businesses should uphold the freedom of association and the effective recognition of
the right to collective bargaining.
Meaning of this Principle:
• Freedom of association implies respect for the right of all employers and all
workers to freely and voluntarily establish and join groups for the promotion and
defence of their occupational interests.
• Both workers and employers have the right to set up, join and run their own
organizations without interference from the State or any other entity.
• All, including employers, have the right to freedom of expression and opinion,
including on the topic of unions – provided that the exercise of this right does not
infringe a worker’s right to freedom of association.
• As a voluntary initiative, the UN Global Compact does not and cannot require that
employers adopt or express any particular opinion.
• To be able to make a free decision, workers need a climate free of violence,
pressure, fear and threats.
• Association” includes activities of rule formation, administration and the election
of representatives. The freedom to associate involves employers, unions and
other workers representatives freely discussing issues at work in order to reach
agreements that are jointly acceptable. These freedoms also allow for industrial
action to be taken by workers and organizations in defence of their economic and
social interests.
• Collective bargaining is a voluntary process or activity through which employers
and workers discuss and negotiate their relations, in particular terms and
conditions of work and the regulation of relations between employers, workers
and their organizations. Participants in collective bargaining include employers
themselves or their organizations, and trade unions or, in their absence,
representatives freely designated by the workers. An important part of the
effective recognition of the right to collective bargaining is the “principle of good
faith”.
Lesson 16 • CSR and Sustainability 443

Principle 4 The elimination of all forms of forced and compulsory labour.

Meaning of this Principle:
• Forced or compulsory labour is any work or service that is exacted from any
person under the menace of any penalty, and for which that person has not
offered himself or herself voluntarily.
• Providing wages or other compensation to a worker does not necessarily indicate
that the labour is not forced or compulsory.
• By right, labour should be freely given and employees should be free to leave in
accordance with established rules.

Principle 5 The effective abolition of child labour.

Meaning of this Principle:
• Child labour is a form of exploitation that is a violation of a human right and it is
recognized and defined by international instruments.
• It is the declared policy of the international community and of almost all
Governments to abolish child labour.
• While the term “child” covers all girls and boys under 18 years of age, not all
under-18s must be removed from work: the basic rules under international
standards distinguish what constitutes acceptable or unacceptable work for
children at different ages and stages of their development.

Principle 6 The elimination of discrimination in respect of employment and occupation.

Meaning of this Principle:
• Discrimination in employment and occupation means treating people differently
or less favourably because of characteristics that are not related to their merit or
the inherent requirements of the job.
• In national law, these characteristics commonly include: race, colour, sex, religion,
political opinion, national extraction, social origin, age, disability, HIV/AIDS status,
trade union membership, and sexual orientation. However, Principle 6 allows
companies to consider additional grounds where discrimination in employment
and occupation may occur.
• Discrimination can arise in a variety of work-related activities. These include
access to employment, to particular occupations, promotions and to training
and vocational guidance. Moreover, it can occur with respect to the terms and
conditions of the employment, such as, Recruitment, Remuneration, Hours of work
and rest/paid holidays, Maternity protection, Security of tenure, Job assignments,
Performance assessment and advancement, Training and opportunities, Job
prospects, Social security, Occupational safety and health.
• Non-discrimination in employment means simply that employees are selected on
the basis of their ability to do the job and that there is no distinction, exclusion
or preference made on other grounds. Employees who experience discrimination
at work are denied opportunities and have their basic human rights infringed.
This affects the individual concerned and negatively influences the greater
contribution that they might make to society.
444 Lesson 16 • PP-GRMCE

Environment Principle 7 Principle 7: Businesses should support a precautionary approach to environmental

challenges.
Meaning of this Principle:
• Introducing the precautionary approach, Principle 15 of the 1992 Rio Declaration
states that “where there are threats of serious or irreversible damage, lack of full
scientific certainty shall not be used as a reason for postponing cost- effective
measures to prevent environmental degradation”.
• Precaution involves the systematic application of risk assessment, risk
management and risk communication. When there is reasonable suspicion of
harm, decision- makers need to apply precaution and consider the degree of
uncertainty that appears from scientific evaluation.
• Deciding on the “acceptable” level of risk involves not only scientific-technological
evaluation and economic cost- benefit analysis, but also political considerations
such as acceptability to the public. From a public policy view, precaution is
applied as long as scientific information is incomplete or inconclusive and the
associated risk is still considered too high to be imposed on society. The level of
risk considered typically relates to standards of environment, health and safety.

Principle 8 Principle 8: undertake initiatives to promote greater environmental responsibility.

Meaning of this Principle:
• In Chapter 30 of Agenda 21, the 1992 Rio Earth Summit spelled out the role of
business and industry in the sustainable development agenda as: “Business and
industry should increase self-regulation, guided by appropriate codes, charters
and initiatives integrated into all elements of business planning and decision-
making, and fostering openness and dialogue with employees and the public.”
• The Rio Declaration says that business has the responsibility to ensure that
activities within their own operations do not cause harm to the environment.
Society expects business to be good actors in the community. Business gains
its legitimacy through meeting the needs of society, and increasingly society is
expressing a clear need for more environmentally sustainable practices.

Principle 9 Principle 9: encourage the development and diffusion of environmentally friendly

technologies.
Meaning of this Principle:
• Environmentally sound technologies, as defined in Agenda 21 of the Rio
Declaration, should protect the environment, are less polluting, use all resources
in a more sustainable manner, recycle more of their wastes and products and
handle residual wastes in a more acceptable manner than the technologies for
which they were substitutes.
• They include a variety of cleaner production processes and pollution prevention
technologies as well as end-of-pipe and monitoring technologies.
• Moreover, they include know-how, procedures, goods and services and equipment
as well as organizational and managerial procedures.
• Where production processes that do not use resources efficiently generate
residues and discharge wastes, environmentally sound technologies can be
applied to reduce day-to-day operating inefficiencies, emissions of environmental
contaminants, worker exposure to hazardous materials and risks of environmental
disasters.
 Lesson 16 • CSR and Sustainability 445

Anti-Corruption Principle 10 Principle 10: Businesses should work against corruption in all its forms, including
extortion and bribery.
Meaning of this Principle:
• The tenth principle against corruption was adopted in 2004 and commits UN
Global Compact participants not only to avoid bribery, extortion and other forms
of corruption, but also to proactively develop policies and concrete programmes
to address corruption internally and within their supply chains.
• Companies are also challenged to work collectively and join civil society,
the United Nations and governments to realize a more transparent global
economy.
• With the entry into force of the UN Convention Against Corruption (UNCAC) in
2005, an important global tool to fight corruption was introduced. The UNCAC is
the underlying legal instrument for the 10th Principle.
• Corruption can take many forms that vary in degree from the minor use of
influence to institutionalized bribery. Transparency International’s definition of
corruption is “the abuse of entrusted power for private gain”. This can mean not
only financial gain but also non-financial advantages.

UN Global Compact incorporates a transparency and accountability policy known as the Communication on
Progress (COP). The Communication on Progress (COP) is an annual disclosure to stakeholders on progress made
in implementing the ten principles of the UN Global Compact in the areas of human rights, labour, environment and
anti-corruption, and in supporting broader UN development goals. The COP is posted on the Global Compact website
by business participants. Failure to issue a COP will change a participant’s status to non-communicating and can
eventually lead to the expulsion of the participant.
Joining the Global Compact is a widely visible as commitment to the ten principles. A company that signs-on to the
Global Compact specifically commits itself to:
– set in motion changes to business operations so that the Global Compact and its principles become part of
management, strategy, culture, and day-to-day operations;
– publish in its annual report or similar public corporate report (e.g. sustainability report) a description of the
ways in which it is supporting the Global Compact and its principles (Communication on Progress),
– publicly advocate the Global Compact and its principles via communications vehicles such as press releases,
speeches, etc.
Ideally, COPs should be integrated into a participant’s existing communication with stakeholders, such as an
annual or sustainability report. However, in case a participant does not publish such reports, a COP can be a stand-
alone report that is made available for stakeholders through other public communication channels (e.g. websites,
newsletters, intranets, company notice boards, included with payroll, etc.). COPs should be issued in the company’s
working language and, if the company determines a need, in additional languages.
Participants are asked to supply a URL link to their COP and to upload the COP itself (as a PDF, Powerpoint, or word
document) to the Global Compact website in order to meet the COP submission requirement.

CSR AND SUSTAINABILITY IN INDIA

Indian entrepreneurs and business enterprises have a long tradition of working within the values that have defined
our nation’s character for millennia. India’s ancient wisdom, which is still relevant today, inspires people to work for
the larger objective of the well-being of all stakeholders. These sound and all encompassing values are even more
relevant in current times, as organizations grapple with the challenges of modern-day enterprise, the aspirations of
stakeholders and of citizens eager to be active participants in economic growth and development.
The subject of Corporate Social Responsibility has evolved during last few decades from simple philanthropic
activities to integrating the interest of the business with that of the communities in which it operates. By exhibiting
446 Lesson 16 • PP-GRMCE

socially, environmentally and ethically responsible behaviour in governance of its operations, the business can
generate value and long term sustainability for itself while making positive contribution in the betterment of the
society. Although we have seen a period of sustained economic growth in the current decade, we still continue to face
major challenges on the human side in India. The problems like poverty, illiteracy, malnutrition etc. have resulted
in a large section of the population remaining as “un-included” from the mainstream. We need to address these
challenges through suitable efforts and interventions in which all the state and non-state actors need to partner
together to find and implement innovative solutions.
Indian business has traditionally been socially responsible and some of the business houses have demonstrated
their efforts on this front in a laudable manner. However, the culture of social responsibility needs to go deeper in
the governance of the businesses.

CASE STUDY : ITC - “E-CHOUPAL”

ITC’s Agri Business Division, one of India’s largest exporters of agricultural commodities, has conceived e-Choupal
as a more efficient supply chain aimed at delivering value to its customers around the world on a sustainable
basis. e-Choupal’ model unshackles the potential of Indian farmer who has been trapped in a vicious cycle of
low risk taking ability - low investment - low productivity - weak market orientation - low value addition - low
margin - low risk taking ability. This made him and Indian agribusiness sector globally uncompetitive, despite
rich & abundant natural resources.
‘e-Choupal’ leverages Information Technology to virtually cluster all the value chain participants, Real- time
information and customised knowledge provided by ‘e-Choupal’ enhance the ability of farmers to take decisions
and align their farm output with market demand and secure quality & productivity. The aggregation of the
demand for farm inputs from individual farmers gives them access to high quality inputs from established and
reputed manufacturers at fair prices. As a direct marketing channel, virtually linked to the ‘mandi’ system for
price discovery, ‘e-Choupal’ eliminates wasteful intermediation and multiple handling. Thereby it significantly
reduces transaction costs.
Launched in June 2000, ‘e-Choupal’, has already become the largest initiative among all Internet-based
interventions in rural India. ‘e-Choupal’ services today reach out to over 4 million farmers growing a range of
crops - soyabean, coffee, wheat, rice, pulses, shrimp - in over 40,000 villages through 6500 kiosks across ten states
(Madhya Pradesh, Haryana, Uttarakhand, Karnataka, Andhra Pradesh, Uttar Pradesh, Rajasthan, Maharashtra,
Kerela and Tamil Nadu).

Before the enactment of the Companies Act, 2013, various other laws in India took care of the basic CSR included
various legislations under labour laws such as Factories Act, 1948, ESI Act, 1948, Employees Compensation Act,
1923, Contract Labour (Regulation and Abolition) Act, 1970, Equal Remuneration Act, 1976, The Minimum Wages
Act, 1948, Employees’ Provident Fund and Miscellaneous Provisions Act, 1952, environment protection laws such as
The Water (Prevention and Control of Pollution) Act, 1974, The Air (Prevention and Control of Pollution) Act, 1981
and the Environment Protection Act, 1986
The main object of the Factories Act, 1948 is to ensure adequate safety measures and to promote the health and
welfare of the workers employed in factories. The Act also makes provisions regarding employment of women and
young persons (including children and adolescents), annual leave with wages etc.
The Employees’ State Insurance Act, 1948 provides for certain benefits to employees in case of sickness, maternity
and employment injury and also makes provisions for certain other matters in relation thereto.
The Employees Compensation Act, 1923 is a social security legislation. It imposes statutory liability upon an
employer to discharge his moral obligation towards his employees when they suffer from physical disabilities
and diseases during the course of employment in hazardous working conditions. The Act also seeks to help the
dependents of the workmen rendered destitute by the ‘accidents’ and from the hardship arising out from such
accidents.
 Lesson 16 • CSR and Sustainability 447

It is socialist manager’s believe that business is an extension of the society. The society is also the collection of
people who work for the business are also called labor force. The welfare and security regulations, few of which are
mentioned above are also called social security legislations. However, a company doing something for compliance of
Law, other than the CSR activities under the provisions of Companies Act, 2013 will not be considered as CSR as in
any case, they need to be complied with.
In 1972, the Department of Science and Technology set up a National Committee on Environmental Planning
and Coordination to identify and investigate problems of preserving or improving the human environment and
also to propose solutions for environmental problems. In 1977, by an amendment to the Constitution, Article 48A
was introduced imposing a duty on the State to protect and improve the environment and safeguard the forests and
wildlife of the country. Article 51A also, provides for the protection and improvement of the natural environment
including forests, lakes, rivers and wild life and to have compassion for living creatures.
The Water (Prevention and Control of Pollution) Act was enacted in 1974 and the Air (Prevention and Control of
Pollution) Act was passed by the Union of India in 1981.
In 1986, the Government enacted the Environment Protection Act to provide for the protection and improvement of
environment and the prevention of hazards to human beings, other living creatures, plants and property.
The Ministry of Corporate Affairs has adopted the role of an enabler, facilitator and regulator for effective functioning
and growth of the corporate sector. A number of initiatives have been taken on the legislative, service delivery and
capacity building sides so that the corporate sector is provided with a buoyant and enabling regulatory environment
for its growth. Simultaneously, the Ministry is also focusing on various issues related to inclusive growth in relation
to the development of corporate sector.

Corporate Social Responsibility Voluntary Guidelines, 2009

The Corporate Social Responsibility Voluntary Guidelines issued by the MCA in December 2009 was the first step
towards mainstreaming the concept of Business Responsibilities. Through these Guidelines, the Ministry urged
the business sector to adopt the principles contained in the Guidelines for responsible business practices. It was
recommendatory initiative to underline that the business sector also needs to take the responsibility of exhibiting
socially responsible business practices that ensures the distribution of wealth and well-being of the communities in
which the business operates.

National Guidelines on Responsible Business Conduct (NGRBC) 2019

There have been various national and international developments in the past decade that have nudged businesses to be
sustainable and more responsible, prior most being the United Nations Guiding Principles on Business & Human Rights
(UNGPs). These became the key drivers for further revision of the guidelines. Some of these include the thrust of Companies
Act, 2013 on businesses to be more mindful of their stakeholders. The Companies Act casts fiduciary duties on the Directors
of a Company (S. 166) requiring them to promote the objects of the company for the benefit of its members as a whole, and in
the best interests of the company, its employees, the shareholders, the community and for the protection of environment. There
was also a need to demonstrate more visibly India’s implementation of the UNGPs based on UNHRC’s ‘Protect, Respect &
Remedy’ Framework and also make evident India’s commitment to Sustainable Development Goals (SDGs).
The Ministry of Corporate Affairs (MCA), Government of India, released a set of guidelines in 2011 called the
National Voluntary Guidelines on the Social, Environmental and Economic Responsibilities of Business (NVGs). This
was expected to provide guidance to businesses on what constitutes responsible business conduct. In order to align
the NVGs with the Sustainable Development Goals (SDGs) and the ‘Respect’ pillar of the United Nations Guiding
Principles (UNGP) the process of revision of NVGs was started in 2015. In March 2019, the Ministry of Corporate
Affairs has revised the National Voluntary Guidelines on the Social, Environmental and Economic Responsibilities
of Business (NVGs) and has released the National Guidelines on Responsible Business Conduct (NGRBC). These
principles urge businesses to actualize the principles in letter and spirit.
The NGRBC is applicable to all kinds of businesses, irrespective of their size, ownership, size, sector, structure or
location. It is expected that all businesses investing or operating in India or outside to follow these Guidelines.
NGRBC also provides useful framework to guide Indian MNCs for their overseas Operation.
448 Lesson 16 • PP-GRMCE

The nine thematic pillars of business responsibility provided by the NGBRC are:

Businesses should conduct

Businesses should provide Businesses should respect
and govern themselves with
goods and services in a and promote the well -being
integrity, and in a manner
manner that is sustainable of all employees, including
that is ethical, transparent,
and safe. those in their value chains.
and accountable.

Businesses should respect the Businesses should respect

Businesses should respect
interests of and be responsive and make efforts to protect
and promote human rights.
to all its stakeholders. and restore the environment.

Businesses, when engaging in

Businesses should engage
inluencing public and Businesses should promote
with and provide value to
regulatory policy, should do inclusive growth and
their consumers in a
so in a manner that is equitable development.
responsible manner.
responsible and transparent.

The principles and the core elements of each of the principles as recommended by the NGRBC are summarized below:

Principle 1 Businesses should conduct and govern themselves with integrity and in a manner that is
ethical, transparent and accountable.
Brief Description:
• This Principle recognizes that ethical behaviour in all operations, functions and processes, is
the cornerstone of businesses guiding their governance of economic, social and environmental
responsibilities.
• The Principle emphasizes that disclosures on business decisions and actions that impact
stakeholders form the fundamental basis of operationalizing responsible business conduct
and should be accessible to all relevant stakeholders.
• It recognizes that businesses are an integral part of society and that they will hold themselves
accountable for the effective adoption, implementation, and the making of disclosures on
their performance with respect to the Core Elements of these Guidelines.
• The Principle further emphasizes that the governance structure of the business should ensure
this, in line with SDG 16.
Principle 2 Businesses should provide goods and services in a manner that is sustainable and safe.
Brief Description:
• This Principle recognizes the proposition of SDG 12, that sustainable production and
consumption are interrelated, contribute to enhancing the quality of life and towards
protecting and preserving earth’s natural resources.
• The Principle further emphasizes that businesses should focus on safety and resource-
efficiency in the design and manufacture of their products, and use their products in a manner
that creates value while minimizing and mitigating its adverse impacts on the environment
and society through all stages of its life cycle, from design to final disposal. Over time,
businesses should embrace the idea of circularity in all its operations.
Lesson 16 • CSR and Sustainability 449

• The Principle further emphasizes that businesses should focus on safety and resource-
efficiency in the design and manufacture of their products, and use their products in a manner
that creates value while minimizing and mitigating its adverse impacts on the environment
and society through all stages of its life cycle, from design to final disposal. Over time,
businesses should embrace the idea of circularity in all its operations.
• In order to do so, the Principle encourages businesses to understand all material sustainability
issues across their product life cycle and value chain.
Principle 3 Businesses should respect and promote the well-being of all the employees, including
those in their value chains.
Brief Description:
• This Principle encompasses all policies and practices relating to the equity, dignity and well-
being, and provision of decent work (as indicated in SDG 8), of all employees engaged within a
business or in its value chain, without any discrimination and in a way that promotes diversity.
• The principle recognizes that the well-being of an employee also includes the wellbeing of
her/his family.
Principle 4 Businesses should respect the interests of and be responsible to all its stakeholder.
Brief Description:
• This Principle recognizes that businesses operate in an eco-system comprising a number
of stakeholders, beyond shareholders and investors, and that their activities impact natural
resources, habitats, communities and the environment.
• The Principle acknowledges that it is the responsibility of businesses to ensure that the interests
of all stakeholders, especially those who may be vulnerable and marginalized, are protected.
• The Principle further recognizes that businesses have a responsibility to maximize the
positive impacts and minimize and mitigate the adverse impacts of its products, operations,
and practices on all their stakeholders.

Principle 5 Businesses should respect and promote human rights.

Brief Description:
• This Principle recognizes that human rights are rights inherent to all human beings, and that
everyone, individually or collectively, is entitled to these rights, without discrimination. It
further recognizes that human rights are inherent, inalienable, interrelated, interdependent
and indivisible.
• The Principle is inspired, informed and guided by the Constitution of India and the
International Bill of Rights and recognizes the primacy of the State’s duty to protect and fulfil
human rights.
• The Principle is further informed and guided by the UN Guiding Principles on Business and
Human Rights in its articulation of the responsibility of businesses to respect human rights.
It affirms that the responsibility of businesses to respect human rights requires that it avoids
causing or contributing to adverse human rights impacts, and that it addresses such impacts
when they occur.
• The Principle urges businesses to be especially responsive to such persons, individually
or collectively, who are most vulnerable to, or at risk of, such adverse human rights
impacts.
Principle 6 Businesses should respect and make efforts to protect and restore the environment.
Brief Description:
• This Principle recognizes that environmental responsibility is a prerequisite for sustainable
economic growth and for the well-being of society.
450 Lesson 16 • PP-GRMCE

• The Principle emphasizes that environmental issues are interconnected at the local, regional
and global levels, which makes it imperative for businesses to address issues like pollution,
biodiversity conservation, sustainable use of natural resources and climate change (mitigation,
adaptation and resilience) in a just, comprehensive and systematic manner. These are aligned
with SDGs 11, 13, 14 and 15.
• The Principle encourages businesses to assess environment impacts of its products and
operations and take steps to minimize and mitigate its adverse impacts where these cannot
be avoided.
• The Principle encourages businesses to adopt environmental practices and processes that
minimize or eliminate the adverse impacts of its operations and across the value chain.
• The Principle encourages businesses to follow the Precautionary Principle in all its actions.

Principle 7 Businesses, when engaging in influencing public and regulatory policy, should do so in a
manner that is responsible and transparent.
Brief Description:
• This Principle recognizes that businesses operate within specified national and international
legislative and policy frameworks, which guide their growth and also provide for certain
desirable restrictions and boundaries.
• The Principle recognizes the legitimacy of businesses to engage with governments for
redressal of a grievance or for influencing public policy.
• The Principle emphasizes that public policy advocacy must expand public good.

Principle 8 Businesses should promote inclusive growth and equitable development.

Brief Description:
• This Principle recognizes the challenges of social and economic development faced by India,
and builds upon the national and local development agenda as articulated in government
policies and priorities. This is particularly significant in zones affected by social disharmony
and low human development.
• The Principle recognizes the value of the energy and enterprise of businesses and encourages
them to innovate and contribute to the overall development of the country with a specific
focus on disadvantaged, vulnerable and marginalized communities, as articulated in Section
135 of the Companies Act, 2013.
• The Principle also emphasizes the need for collaboration amongst businesses, government
agencies and civil society in furthering this development agenda in line with SDG 17.
• The Principle reiterates that business success, inclusive growth and equitable development
are interdependent.
Principle 9 Businesses should engage with and provide value to their consumers in a responsible
manner.
Brief Description:
• This Principle is based on the fact that the basic aim of a business entity is to provide goods
and services to its consumers that are safe to use, and in a manner that creates value for both.
• The Principle recognizes that consumers have the freedom of choice in the selection and usage
of goods and services, and that the enterprises will strive to make available products that are
safe, competitively priced, easy to use and safe to dispose of, for the benefit of their consumers.
• The Principle also recognizes that businesses should play a key role, along with other relevant
stakeholders, in mitigating the adverse impacts that excessive consumption of its products
may have on the overall well-being of individuals, society and our planet, in line with SDG 12.
Lesson 16 • CSR and Sustainability 451

CSR under the Companies Act, 2013

Section 135 of the Companies Act, 2013
(1) Every company having net worth of rupees five hundred crore or more, or turnover of rupees one thousand
crore or more or a net profit of rupees five crore or more during the immediately preceding financial year shall
constitute a Corporate Social Responsibility Committee of the Board consisting of three or more directors, out
of which at least one director shall be an independent director.
Provided that where a company is not required to appoint an independent director under sub-section (4) of
section 149, it shall have in its Corporate Social Responsibility Committee two or more directors.
(2) The Board’s report under sub-section (3) of section 134 shall disclose the composition of the Corporate Social
Responsibility Committee.
(3) The Corporate Social Responsibility Committee shall,—
(a) formulate and recommend to the Board, a Corporate Social Responsibility Policy which shall indicate the
activities to be undertaken by the company 5[in areas or subject, specified in Schedule VII];
(b) recommend the amount of expenditure to be incurred on the activities referred to in clause (a); and
(c) monitor the Corporate Social Responsibility Policy of the company from time to time.
(4) The Board of every company referred to in sub-section (1) shall,—
(a) after taking into account the recommendations made by the Corporate Social Responsibility Committee,
approve the Corporate Social Responsibility Policy for the company and disclose contents of such Policy
in its report and also place it on the company’s website, if any, in such manner as may be prescribed; and
(b) ensure that the activities as are included in Corporate Social Responsibility Policy of the company are
undertaken by the company.
(5) The Board of every company referred to in sub-section (1), shall ensure that the company spends, in every
financial year, at least two per cent of the average net profits of the company made during the three immediately
preceding financial years or where the company has not completed the period of three financial years since
its incorporation, during such immediately preceding financial years, in pursuance of its Corporate Social
Responsibility Policy:
Provided that the company shall give preference to the local area and areas around it where it operates, for
spending the amount earmarked for Corporate Social Responsibility activities:
Provided further that if the company fails to spend such amount, the Board shall, in its report made under
clause (o) of sub-section (3) of section 134, specify the reasons for not spending the amount and, unless the
unspent amount relates to any ongoing project referred to in sub-section (6), transfer such unspent amount to
a Fund specified in Schedule VII, within a period of six months of the expiry of the financial year.
Provided also that if the company spends an amount in excess of the requirements provided under this sub-
section, such company may set off such excess amount against the requirement to spend under this sub-section
for such number of succeeding financial years and in such manner, as may be prescribed.

Explanation—For the purposes of this section “net profit” shall not include such sums as may be prescribed,
and shall be calculated in accordance with the provisions of section 198.

(6) Any amount remaining unspent under sub-section (5), pursuant to any ongoing project fulfilling such
conditions as may be prescribed, undertaken by a company in persuance of its Corporate Social Responsibility
Policy, shall be transferred by the company within a period of thirty days from the end of the financial year
to a special account to be opened by the company in that behalf for that financial year in any scheduled bank
to be called the Unspent Corporate Social Responsibility Account, and such amount shall be spent by the
company in pursuance of its obligation towards the Corporate Social Responsibility Policy within a period
of three financial years from the date of such transfer, failing which, the company shall transfer the same
to a Fund specified in Schedule VII, within a period of thirty days from the date of completion of the third
financial year.
452 Lesson 16 • PP-GRMCE

(7) If a company is in default in complying with the provisions of sub-section (5) or sub-section (6), the company
shall be liable to a penalty of twice the amount required to be transferred by the company to the Fund specified
in Schedule VII or the Unspent Corporate Social Responsibility Account, as the case may be, or one crore rupees,
whichever is less, and every officer of the company who is in default shall be liable to a penalty of one-tenth of
the amount required to be transferred by the company to such Fund specified in Schedule VII, or the Unspent
Corporate Social Responsibility Account, as the case may be, or two lakh rupees, whichever is less.
(8) The Central Government may give such general or special directions to a company or class of companies as it
considers necessary to ensure compliance of provisions of this section and such company or class of companies
shall comply with such directions.]
(9) Where the amount to be spent by a company under sub-section (5) does not exceed fifty lakh rupees, the
requirement under sub-section (1) for constitution of the Corporate Social Responsibility Committee shall
not be applicable and the functions of such Committee provided under this section shall, in such cases, be
discharged by the Board of Directors of such company.
Report on Corporate Social Responsibility: Section 134(3)(o) states that there shall be attached to
statements laid before a company in general meeting, a report by its Board of Directors, which shall include,
the details about the policy developed and implemented by the company on corporate social responsibility
initiatives taken during the year.
Penal provision for non-compliance: Section 134(8) further states that If a company is in default in
complying with the provisions of this section, the company shall be liable to a penalty of three lakh rupees and
every officer of the company who is in default shall be liable to a penalty of fifty thousand rupees.

The Companies (Corporate Social Responsibility Policy) Rules, 2014

Meaning of Corporate Social Responsibility- Rule 2(d):
“Corporate Social Responsibility (CSR)” means the activities undertaken by a Company in pursuance of its statutory
obligation laid down in section 135 of the Act in accordance with the provisions contained in these rules, but shall
not include the following, namely:-
(i) activities undertaken in pursuance of normal course of business of the company: Provided that any company
engaged in research and development activity of new vaccine, drugs and medical devices in their normal
course of business may undertake research and development activity of new vaccine, drugs and medical
devices related to COVID-19 for financial years 2020-21, 2021-22, 2022-23 subject to the conditions that-
(a) such research and development activities shall be carried out in collaboration with any of the institutes
or organisations mentioned in item (ix) of Schedule VII to the Act;
(b) details of such activity shall be disclosed separately in the Annual report on CSR included in the Board’s
Report.
(ii) any activity undertaken by the company outside India except for training of Indian sports personnel
representing any State or Union territory at national level or India at international level;
(iii) contribution of any amount directly or indirectly to any political party under section 182 of the Act;
(iv) activities benefitting employees of the company as defined in clause (k) of section 2 of the Code on Wages,
2019 (29 of 2019);
(v) activities supported by the companies on sponsorship basis for deriving marketing benefits for its products or
services;
(vi) activities carried out for fulfilment of any other statutory obligations under any law in force in India.
CSR Committee- Rule 2(e): CSR Committee means the Corporate Social Responsibility Committee of the Board
referred to in section 135 of the Act.
CSR Policy- Rule 2(f): “CSR Policy” means a statement containing the approach and direction given by the board
of a company, taking into account the recommendations of its CSR Committee, and includes guiding principles for
selection, implementation and monitoring of activities as well as formulation of the annual action plan.
 Lesson 16 • CSR and Sustainability 453

Net profit- Rule 2(h):

“Net profit” means the net profit of a company as per its financial statement prepared in accordance with the
applicable provisions of the Act, but shall not include the following, namely: -
(i) any profit arising from any overseas branch or branches of the company, whether operated as a separate
company or otherwise; and
(ii) any dividend received from other companies in India, which are covered under and complying with the
provisions of section 135 of the Act: Provided that in case of a foreign company covered under these rules, net
profit means the net profit of such company as per profit and loss account prepared in terms of clause (a) of
sub-section (1) of section 381, read with section 198 of the Act.
Corporate Social Responsibility- Rule 3
(1) Every company including its holding or subsidiary, and a foreign company defined under clause (42) of section
2 of the Act having its branch office or project office in India, which fulfills the criteria specified in sub- section
(I) of section 135 of the Act shall comply with the provisions of section 135 of the Act and these rules:
Provided that net worth, turnover or net profit. of a foreign company of the Act shall be computed in accordance
with balance sheet and Profit and loss account of such company prepared in accordance .with the provisions of
clause (a) of sub-section (1) of section 381 and section 198 of the Act.
(2) Every company which ceases to be a company covered under subsection (1) of section 135 of the Act for three
consecutive financial years shall not be required to -
(a) constitute a CSR Committee; and
(b) comply with the provisions contained in sub-section (2) to (6) of the said section, till such time it meets
the criteria specified in sub-section (1) of section 135.
CSR Implementation- Rule 4
(1) The Board shall ensure that the CSR activities are undertaken by the company itself or through -
(a) a company established under section 8 of the Act, or a registered public trust or a registered society,
registered under section 12A and 80 G of the Income Tax Act, 1961 (43 of 1961), established by the
company, either singly or along with any other company, or
(b) a company established under section 8 of the Act or a registered trust or a registered society, established
by the Central Government or State Government; or
(c) any entity established under an Act of Parliament or a State legislature; or
(d) a company established under section 8 of the Act, or a registered public trust or a registered society,
registered under section 12A and 80G of the Income Tax Act, 1961, and having an established track
record of at least three years in undertaking similar activities.
(2) (a) Every entity, covered under sub-rule (1), who intends to undertake any CSR activity, shall register itself
with the Central Government by filing the form CSR-1 electronically with the Registrar, with effect from
the 01st day of April 2021:
Provided that the provisions of this sub-rule shall not affect the CSR projects or programmes approved
prior to the 01st day of April 2021.
(b) Form CSR-1 shall be signed and submitted electronically by the entity and shall be verified digitally by a
Chartered Accountant in practice or a Company Secretary in practice or a Cost Accountant in practice.
(c) On the submission of the Form CSR-1 on the portal, a unique CSR Registration Number shall be generated
by the system automatically.
(3) International Organisations Engagement for CSR Designing: A company may engage international
organisations for designing, monitoring and evaluation of the CSR projects or programmes as per its CSR
policy as well as for capacity building of their own personnel for CSR.
(4) A Collaboration of other Companies for CSR Expenditure: A company may also collaborate with other
companies for undertaking projects or programmes or CSR activities in such a manner that the CSR committees
454 Lesson 16 • PP-GRMCE

of respective companies are in a position to report separately on such projects or programmes in accordance
with these rules.
(5) CFO Certification: The Board of a company shall satisfy itself that the funds so disbursed have been utilised
for the purposes and in the manner as approved by it and the Chief Financial Officer or the person responsible
for financial management shall certify to the effect.
(6) Ongoing Projects: In case of ongoing project, the Board of a Company shall monitor the implementation
of the project with reference to the approved timelines and year-wise allocation and shall be competent to
make modifications, if any, for smooth implementation of the project within the overall permissible time
period.
CSR Committees- Rule 5
(1) The companies mentioned in the rule 3 shall constitute CSR Committee as under.-
(i) a company covered under subsection (1) of section 135 which is not required to appoint an independent
director pursuant to sub-section (4) of section 149 of the Act, shall have its CSR Committee without
such director ;
(ii) a private company having only two directors on its Board shall constitute its CSR Committee with two
such directors;
(iii) with respect to a foreign company covered under these rules, the CSR Committee shall comprise of at
least two persons of which one person shall be as specified under clause (d) of sub-section (1) of section
380 of the Act and another person shall be nominated by the foreign company.
(2) Mapping of Annual Action for CSR: The CSR Committee shall formulate and recommend to the Board, an
annual action plan in pursuance of its CSR policy, which shall include the following, namely:-
(a) the list of CSR projects or programmes that are approved to be undertaken in areas or subjects specified
in Schedule VII of the Act;
(b) the manner of execution of such projects or programmes as specified in sub-rule (1) of rule 4;
(c) the modalities of utilisation of funds and implementation schedules for the projects or programmes;
(d) monitoring and reporting mechanism for the projects or programmes; and
(e) details of need and impact assessment, if any, for the projects undertaken by the company.
However, the Board may alter such plan at any time during the financial year, as per the recommendation of its
CSR Committee, based on the reasonable justification to that effect.

The Companies (Amendment) Act, 2020, has inserted the provision under Section 135(9) of the Companies
Act, 2013 that where the CSR expenditure does not exceed Rs. 50 Lakh, the requirement for constitution of the
Corporate Social Responsibility Committee shall not be applicable and the functions of such Committee shall be
discharged by the Board of Directors of such company.

CSR Expenditure- Rule 7

New norms introduced for carry forward and set-off excess CSR expenditure
(1) The board shall ensure that the administrative overheads shall not exceed five percent of total CSR expenditure
of the company for the financial year.
(2) Any surplus arising out of the CSR activities shall not form part of the business profit of a company and shall be
ploughed back into the same project or shall be transferred to the Unspent CSR Account and spent in pursuance
of CSR policy and annual action plan of the company or transfer such surplus amount to a Fund specified in
Schedule VII, within a period of six months of the expiry of the financial year.
(3) Where a company spends an amount in excess of requirement provided under sub-section (5) of section 135,
such excess amount may be set off against the requirement to spend under sub-section (5) of section 135 up
to immediate succeeding three financial years subject to the conditions that –
Lesson 16 • CSR and Sustainability 455

(i) the excess amount available for set off shall not include the surplus arising out of the CSR activities, if any,
in pursuance of sub-rule (2) of this rule.
(ii) the Board of the company shall pass a resolution to that effect.
(4) The CSR amount may be spent by a company for creation or acquisition of a capital asset, which shall be
held by -
(a) a company established under section 8 of the Act, or a Registered Public Trust or Registered Society,
having charitable objects and CSR Registration Number under sub-rule (2) of rule 4; or
(b) beneficiaries of the said CSR project, in the form of self-help groups, collectives, entities; or
(c) a public authority:
However, any capital asset created by a company prior to the commencement of the Companies
(Corporate Social Responsibility Policy) Amendment Rules, 2021, shall within a period of one hundred
and eighty days from such commencement comply with the requirement of this rule, which may be
extended by a further period of not more than ninety days with the approval of the Board based on
reasonable justification.
CSR Reporting- Rule 8
(1) Directors Report:
The Company shall annex with its Board Report an annual report on CSR containing particulars specified in
Annexure I (for F.Y. Commenced Prior To 1st day of April, 2020) or Annexure II (w.e.f. F.Y. Commencing on or
after 1st day of April, 2020), as applicable.
(2) In case of a Foreign Company:
The Balance sheet filed u/s 381(1) (b) of the Companies Act, 2013 shall contain ‘an annual report on CSR
containing particulars specified in Annexure I (for F.Y. Commenced prior to 1st day of April, 2020) or Annexure
II (w.e.f. F.Y. Commencing on or after 1st day of April, 2020), as applicable.
(3) Impact Assessment for big CSR projects
(a) Every company having average CSR obligation of ten crore rupees or more in pursuance of sub-section
5) of section 135 of the Act, in the three immediately preceding financial years, shall undertake
impact assessment, through an independent agency, of their CSR projects having outlays of one
crore rupees or more, and which have been completed not less than one year before undertaking the
impact study.
(b) The impact assessment reports shall be placed before the Board and shall be annexed to the annual
report on CSR.
(c) A Company undertaking impact assessment may book the expenditure towards Corporate Social
Responsibility for that financial year, which shall not exceed five percent of the total CSR expenditure for
that financial year or fifty lakh rupees, whichever is less.
Display of CSR activities on its website- Rule 9
The Board of Directors of the Company shall mandatorily disclose the composition of the CSR Committee, and CSR
Policy and Projects approved by the Board on their website, if any, for public access.
Transfer of unspent CSR amount- Rule 10
Until a fund is specified in Schedule VII for the purposes of subsection (5) and(6) of section 135 of the Act, the
unspent CSR amount, if any, shall be transferred by the company to any fund included in schedule VII of the Act.
Activities eligible for CSR: The activities, which are eligible for CSR are contained in Schedule VII. The details of the
activities are as under:
456 Lesson 16 • PP-GRMCE

SCHEDULE VII
(See Section 135)
Activities which may be included by companies in their Corporate Social Responsibility Policies Activities
relating to:—
(i) Eradicating hunger, poverty and malnutrition, promoting health care including preventinve health care
and sanitation including contribution to the Swach Bharat Kosh set-up by the Central Government for the
promotion of sanitation and making available safe drinking water.
(ii) promoting education, including special education and employment enhancing vocation skills especially
among children, women, elderly and the differently abled and livelihood enhancement projects.
(iii) promoting gender equality, empowering women, setting up homes and hostels for women and orphans;
setting up old age homes, day care centres and such other facilities for senior citizens and measures for
reducing inequalities faced by socially and economically backward groups.
(iv) ensuring environmental sustainability, ecological balance, protection of flora and fauna, animal
welfare, agroforestry, conservation of natural resources and maintaining quality of soil, air and water
including contribution to the Clean Ganga Fund set-up by the Central Government for rejuvenation of
river Ganga.
(v) protection of national heritage, art and culture including restoration of buildings and sites of historical
importance and works of art; setting up public libraries; promotion and development of traditional art and
handicrafts;
(vi) measures for the benefit of armed forces veterans, war widows and their dependents, Central Armed
Police Forces (CAPF) and Central Para Military Forces (CPMF) veterans, and their dependents including
widows;
(vii) training to promote rural sports, nationally recognised sports, paralympic sports and olympic sports
(viii) contribution to the prime minister’s national relief fund or Prime Minister’s Citizen Assistance and Relief
in Emergency Situations Fund (PM CARES Fund)] or any other fund set up by the central govt. for socio
economic development and relief and welfare of the schedule caste, tribes, other backward classes,
minorities and women;
(ix) (a) Contribution to incubators or research and development projects in the field of science, technology,
engineering and medicine, funded by the Central Government or State Government or Public Sector
Undertaking or any agency of the Central Government or State Government; and
(b) Contributions to public funded Universities; Indian Institute of Technology (IITs); National
Laboratories and autonomous bodies established under Department of Atomic Energy (DAE);
Department of Biotechnology (DBT); Department of Science and Technology (DST); Department
of Pharmaceuticals; Ministry of Ayurveda, Yoga and Naturopathy, Unani, Siddha and Homoeopathy
(AYUSH); Ministry of Electronics and Information Technology and other bodies, namely Defense
Research and Development Organisation (DRDO); Indian Council of Agricultural Research (ICAR);
Indian Council of Medical Research (ICMR) and Council of Scientific and Industrial Research (CSIR),
engaged in conducting research in science, technology, engineering and medicine aimed at promoting
Sustainable Development Goals (SDGs).
(x) rural development projects
(xi) slum area development.
Explanation - For the purposes of this item, the term `slum area’ shall mean any area declared as such by
the Central Government or any State Government or any other competent authority under any law for the
time being in force.
(xii) disaster management, including relief, rehabilitation and reconstruction activities.
 Lesson 16 • CSR and Sustainability 457

SEBI (LODR) Regulations, 2015

In line with the National Voluntary Guidelines on Social, Environmental and Economic Responsibilities of
Business and considering the larger interest of public disclosure regarding steps taken by listed entities, SEBI had
mandated the requirement of submission of Business Responsibility Report (‘BRR’) for top 1000 listed entities
under Regulation 34(2)(f) of SEBI (Listing Obligations and Disclosure Requirements) Regulations 2015 (“SEBI
LODR”). Regulation 34(2)(f) of the SEBI(LODR) Regulations, 2015, provides that the annual report shall contain
the top one thousand listed entities based on market capitalization (calculated as on March 31 of every financial
year), business responsibility report describing the initiatives taken by them from an environmental, social and
governance perspective, in the format as specified by the Board from time to time:
Provided that listed entities other than top one thousand listed companies based on market capitalization and listed
entities which have listed their specified securities on SME Exchange, may include these business responsibility
reports on a voluntary basis in the format as specified.
Business Responsibility and Sustainability Report (BRSR)
The Securities and Exchange Board of India (SEBI) has now introduced new requirements for sustainability
reporting by listed entities. The new reporting called the Business Responsibility and Sustainability Report (BRSR)
will replace the existing Business Responsibility Report (BRR). SEBI was one of the early adopters of sustainability
reporting for listed entities amongst its global peers. The filing of the BRR containing ESG (Environment, Social
and Governance) disclosures was first introduced for listed entities in 2012. Since then, a number of developments
have taken place. With the adoption of the Paris Agreement on Climate Change and UN Sustainable Development
Goals, adapting to and mitigating climate change impact and transitioning to sustainable economies have emerged
as major issues globally. The COVID pandemic has also accelerated the relevance of ESG considerations to investors
resulting in increased awareness of investors and a shift towards sustainable investing. The same is reflected in the
spurt in new launches of ESG themed mutual funds and growth in assets of such schemes, including in India. As ESG
investing becomes more mainstream, disclosure requirements need to keep pace with this change and the BRSR is
a significant step towards this direction.
The BRSR is a notable departure from the existing Business Responsibility Report (“BRR”) and a significant step
towards bringing sustainability reporting at par with financial reporting. The reporting requirements were
finalized based on feedback received from public consultation and extensive deliberations with stakeholders
including corporates, institutional investors. Further, a benchmarking exercise with internationally accepted
disclosure frameworks was also undertaken. A few of the key disclosures sought in the BRSR are highlighted
below:
a. An overview of the entity’s material ESG risks and opportunities, approach to mitigate or adapt to the risks
along-with financial implications of the same
b. Sustainability related goals & targets and performance against the same
c. Environment related disclosures covering aspects such as resource usage (energy and water), air pollutant
emissions, green-house (GHG) emissions, transitioning to circular economy, waste generated and waste
management practices, bio-diversity etc.
d. Social related disclosures covering the workforce, value chain, communities and consumers, as given below:
i. Employees / workers: Gender and social diversity including measures for differently abled employees
and workers, turnover rates, median wages, welfare benefits to permanent and contractual employees /
workers, occupational health and safety, trainings etc.
ii. Communities: disclosures on Social Impact Assessments (SIA), Rehabilitation and Resettlement,
Corporate Social Responsibility etc.
iii. Consumers: disclosures on product labelling, product recall, consumer complaints in respect of data
privacy, cyber security etc.
Listed entities already preparing and disclosing sustainability reports based on internationally accepted reporting
frameworks (such as GRI, SASB, TCFD or Integrated Reporting) may cross-reference the disclosures made under
such framework to the disclosures sought under the BRSR.
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The BRSR is an initiative towards ensuring that investors

Applicability of BRSR
have access to standardized disclosures on ESG parameters.
Access to relevant and comparable information, will enable The BRSR shall be applicable to the top 1000
investors to identify and assess sustainability-related listed entities (by market capitalization). In order
risks and opportunities of companies and make better to give time to companies to adapt to the new
investment decisions. At the same time, companies will be requirements, the reporting of BRSR shall be
able to better demonstrate their sustainability objectives, voluntary for FY 2021 –22 and mandatory from
position and performance resulting into long term value FY 2022 –23. However, companies are encouraged
creation. Overall, higher standards of ESG disclosures to be early adopters of the BRSR, thus being at the
and transparency, will help in attracting more capital and forefront of sustainability reporting.
investment.

SUSTAINABLE DEVELOPMENT
Sustainable development is a broad concept that balances the need for economic growth with environmental protection
and social equity. It is a process of change in which the exploitation of resources, the direction of investments, the
orientation of technological development, and institutional change are all in harmony and enhance both current and
future potential to meet human needs and aspirations. Sustainable development is a broad concept and it combines
economics, social justice, environmental science and management, business management, politics and law.
The goal of sustainable development is to maintain economic growth without environment destruction. Exactly what
is being sustained (economic growth or the global ecosystem, or both) is currently at the root of several debates,
although many scholars argue that the apparent reconciliation of economic growth and the environment is simply a
green sleight of hand that fails to address genuine environmental problems.
In 1987, a report of the World Commission on Environment and Development (WCED) of the United Nations (popularly
known as Brundtland Report) first introduced the concept. The Commission describes Sustainable Development as a
process of change in which the exploitation of resources, the direction of investments, the orientation of technological
development and instrumental change are made consistent with future as well as present needs.
In an attempt to address criticism of the vagueness in the definition of sustainable development, Karl-Henrik Robert,
founder of the environment organization The Natural Step, along with a group of 50 scientists sought to obtain a
consensus on sustainability and developed four ‘basic, non-negotiable system conditions for global sustainability’.
These include:
1. No systematic increase of substances from the earth’s crust in the ecosphere. This condition implies a drastic
reduction in the use of minerals, fossils fuels and non-renewable resources.
2. No systematic increase of substances produced by society in the ecosphere. This condition means that
substances cannot be produced faster that they are broken down and degraded biologically. Therefore, the
uses of non-biodegradable materials must be minimized.
3. No systematic diminishing of the physical basis for productivity and diversity of nature. This condition
requires preservation of biodiversity, non-environmentally damaging land use practices and use of renewable
resources.
4. Fair and efficient use of resources and social justice. This implies equitable access to an just distribution of
resources.
While the above four conditions may provide a more precise definition that Brundtland’s, problems of operationalizing
remain; there is still considerable disagreement among the scientific community on evaluation of environmental
impact of products and processes.
There are also other practical issue:
• What is the base line from which we can measure ‘systematic increase?
• Are goals of zero emissions as stated in the environmental policy statements of several transnational firms
mere feel good statements or are they achievable?
In an analysis of the impact of globalization on environmental sustainability using the Natural Step framework,
Osland et al. (2002) found the evidence to be ‘mixed’. They were being quite charitable in their overall assessment
Lesson 16 • CSR and Sustainability 459

because while there were some positive examples of environmentally sustainable practices like energy efficiency,
recycling and cleaner technologies there were more negative environmental effects like species and biodiversity
depletion, soil erosion, deforestation and salinity, to name a few.
Sustainable Development indicates development that meets the needs of the present generation without
compromising with the ability of the future generations to meet their needs. The principle behind it is to foster such
development through technological and social activities which meets the needs of the current generations, but at the
same time ensures that the needs of the future generation are not impaired. For example, natural energy resources,
like Coal and Petroleum etc., should be prudently used avoiding wastage so that the future generation can inherit
these energy resources for their survival also.
The contribution of sustainable development to corporate sustainability is twofold. First, it helps set out the
areas that companies should focus on: environmental, social, and economic performance. Secondly, it provides
a common societal goal for corporations, governments, and civil society to work towards ecological, social, and
economic sustainability. However, sustainable development by itself does not provide the necessary arguments for
why companies should care about these issues. Those arguments come from corporate social responsibility and
stakeholder theory.
Corporate sustainability encompasses strategies and practices that aim at meeting the needs of the stakeholders
today while seeking to protect, support and enhance the human and natural resources that will be needed in the
future.
Four fundamental Principle of Sustainable Development agreed by the world community are:

1. Principle of Intergenerational equity: need to preserve natural resources for the future generations.
2. Principle of sustainable use: use of natural resources in a prudent manner without or with minimum
tolerable impact on nature.
3. Principle of equitable use or intra-generational equity: Use of natural resources by any state/country
must take into account its impact on other states.
4. Principle of integration: Environmental aspects and impacts of socio-economic activities should be
integrated so that prudent use of natural resources is ensured.

This was reinforced at the United Nations Conference on Environment and Development (UNCED) held in Rio de
Janeiro in 1992. It is now universally acknowledged that the present generation has to ensure that the coming
generations have a world no worse than ours, rather hopefully better.
The generations have been following these fundamental natural laws for thousands of years. However, scenario
started changing rapidly during industrial revolution in Europe, and later on they have started growing side by side
with awakening of modern society worldwide. The environmental protection issues came in to the lime light when
the in the 1960s to 1970s the environmental legislations were passed in the US / Europe. During that era it was seen
this as the corporate responsibility to protect the environment, since the companies were taking the advantages and
exploitation of the natural resources by producing the carbon and polluting the environment and water resources
through the chemical base, which leads to further fertility of the soil. The Bhopal Gas tragedy which happened in
1984 is the burning example before us, how the corporate have exploited the soil and put the life in danger for
generations to come.
Environmentalists claim that living things other than humans, and the natural environment as a whole, deserve
consideration in reasoning about the morality of political, economic, and social policies. The movement seeks to
improve and protect the quality of the natural environment through bringing about changes in environmentally
harmful human activities; adoption of forms of political, economic, and social organization that are thought to be
necessary for, or at least conducive to, the benign treatment of the environment by humans; and a reassessment of
humanity’s relationship with nature.
The U.S. Environmental Protection Agency defines Sustainable development as: “Sustainable development marries
two important themes: that environmental protection does not preclude economic development and that economic
development must be ecologically viable now and in the long run.” Hence sustainability encompasses ideas and values
that inspire people to become custodian of the environment without compromising with the economic growth.
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Some of the major treaties on environmental and social aspects are discussed below-

1. United Nations Conference on Human Environment

The United Nations Conference on the Human Environment (also known as the Stockholm Conference) was an
international conference convened under United Nations auspices held in Stockholm, Sweden from June
5-16,1972. It was the UN’s first major conference on international environmental issues, and marked a turning point
in the development of international environmental politics. One of the key issues addressed was the use of CFCs
(chlorofluorocarbons) which were thought to be responsible for the depletion of the ozone layer. The Stockholm
Conference laid a framework for future environmental cooperation; led to the creation of global and regional
environmental monitoring networks and the creation of the United Nations Environment Programme.

2. United Nations Environment Programme

United Nations Environment Programme (UNEP), established in 1972, is the voice for the environment within
the United Nations system. UNEP acts as a catalyst, advocate, educator and facilitator to promote the wise use
and sustainable development of the global environment. To accomplish this, UNEP works with a wide range of
partners, including United Nations agencies, international organizations, national governments, non- governmental
organizations, the private sector and civil society. The Mission of the United Nation’s Environment Programme is -
“To provide leadership and encourage partnership in caring for the environment by inspiring, informing, and
enabling nations and peoples to improve their quality of life without compromising that of future generations.”
The major Milestones of the UNEP include:
• 1973 - Convention on International Trade in Endangered Species (CITES)
• 1985 - Vienna Convention for the Protection of the Ozone Layer
• 1987 - Montreal Protocol on Substances that Deplete the Ozone Layer
• 1988 - Intergovernmental Panel on Climate Change (IPCC)
• 1989 - Basel Convention on the Transboundary Movement of Hazardous Wastes
• 1992 - UN Conference on Environment and Development (Earth Summit) publishes Agenda 21, a blueprint for
sustainable development
• 1992 - Convention on Biological Diversity
• 2000 - Malmö Declaration - first Global Ministerial Forum on the Environment calls for strengthened
international environmental governance
• 2000 - Millennium Declaration - environmental sustainability was included as one of eight Millennium
Development Goals
• 2002 - World Summit on Sustainable Development
• 2004 - Bali Strategic Plan for Technology Support and Capacity Building
• 2005 - World Summit outcome document highlights key role of environment in sustainable development
• 2012 - The United Nations Conference on Sustainable Development (Rio +20)
• 2013-15 – High level Political Forum on Sustainable Development
• 2015 – United Nations Sustainable Development Summit, 2015 (New York).
In India, the Water (Prevention and Control of Pollution) Act, 1974 and the Air (Prevention and Control of Pollution)
Act, 1981 have been enacted, essentially to give effect to the decisions taken at the International Conference on
Human Environment at Stockholm in 1972 declaring man’s fundamental right to live in a pollution-free atmosphere
and his responsibility to protect and improve the environment.
The United Nations Environment Programme (UNEP) is the leading global environmental authority that sets the
global environmental agenda, promotes the coherent implementation of the environmental dimension of sustainable
development within the United Nations system, and serves as an authoritative advocate for the global environment.
 Lesson 16 • CSR and Sustainability 461

United Nations categorize this work into seven broad thematic areas, which are:
(i) Climate change,
(ii) Disasters and conflicts,
(iii) Ecosystem management,
(iv) Environmental governance,
(v) Chemicals and waste,
(vi) Resource efficiency, and
(vii) Environment under review.
Millennium Development Goals (MDGs)
The United Nations Millennium Development Goals are eight goals that all 191 UN member states have agreed to try
to achieve by the year 2015. The United Nations Millennium Declaration, signed in September
2000 commits world leaders to combat poverty, hunger, disease, illiteracy, environmental degradation, and
discrimination against women. The MDGs are derived from this Declaration, and all have specific targets and indicators.
The Eight Millennium Development Goals are:
i. to eradicate extreme poverty and hunger;
ii. to achieve universal primary education;
iii. to promote gender equality and empower women;
iv. to reduce child mortality;
v. to improve maternal health;
vi. to combat HIV/AIDS, malaria, and other diseases;
vii. to ensure environmental sustainability; and
viii. to develop a global partnership for development.
The MDGs are inter-dependent; all the MDG influence health, and health influences all the MDGs. For example, better
health enables children to learn and adults to earn. Gender equality is essential to the achievement of better health.
Reducing poverty, hunger and environmental degradation positively influences, but also depends on, better health.

3. Brundtland Commission
The Brundtland Commission, formally the World Commission on Environment and Development (WCED), known
by the name of its Chairman Gro Harlem Brundtland, was convened by the United Nations in 1983. The Commission
was created to address growing concern “about the accelerating deterioration of the human environment
and natural resources and the consequences of that deterioration for economic and social development.” In
establishing the Commission, the UN General Assembly recognized that environmental problems were global
in nature and determined that it was in the common interest of all nations to establish policies for sustainable
development.
The Report of the Brundtland Commission, Our Common Future, published in 1987, deals with sustainable
development and the change of policies needed for achieving that. The definition of this term in the report is quite
well known and often cited:
“Sustainable development is development that meets the needs of the present without compromising the ability of
future generations to meet their own needs.”

4. United Nations Conference on Environment and Development (UNCED)

United Nations Conference on Environment and Development (UNCED), byname Earth Summit, conference
held at Rio de Janeiro, Brazil (June 3–14, 1992), to reconcile worldwide economic development with protection
of the environment. The Earth Summit was the largest gathering of world leaders as of 1992, with 117 heads of
462 Lesson 16 • PP-GRMCE

state and representatives of 178 nations in all attending. By means of treaties and other documents signed at the
conference, most of the world’s nations nominally committed themselves to the pursuit of economic development in
ways that would protect the Earth’s environment and non-renewable resources.
Five major agreements on global environmental issues were signed.
Two of these,
(i) The Framework Convention on Climate Change and
(ii) The Convention on Biological Diversity, were formal treaties whose provisions are binding on the parties.
The other three UNCED agreements were non-binding statements on the relationship between sustainable
environmental practices and the pursuit of social and socioeconomic development.
(i) Agenda 21 is a wide-ranging assessment of social and economic sectors with goals for improving environmental
and developmental impact of each.
(ii) The Rio Declaration summarizes consensus principles of sustainable development, and
(iii) The Statement on Forest Principles pledges parties to more sustainable use of forest resources.

5. Kyoto Protocol
The Kyoto Protocol was adopted on 11 December 1997. Owing to a complex ratification process, it entered into force
on 16 February 2005. Currently, there are 192 Parties to the Kyoto Protocol.
In short, the Kyoto Protocol operationalizes the United Nations Framework Convention on Climate Change by
committing industrialized countries to limit and reduce greenhouse gases (GHG) emissions in accordance with
agreed individual targets. The Convention itself only asks those countries to adopt policies and measures on
mitigation and to report periodically.
The Kyoto Protocol is based on the principles and provisions of the Convention and follows its annex-based
structure. It only binds developed countries, and places a heavier burden on them under the principle of “common
but differentiated responsibility and respective capabilities”, because it recognizes that they are largely responsible
for the current high levels of GHG emissions in the atmosphere.
The Kyoto Protocol sets binding emission reduction targets for 36 industrialized countries and the European Union.
Overall, these targets add up to an average 5 per cent emission reduction compared to 1990 levels over the five year
period 2008–2012 (the first commitment period).
In Doha, Qatar, on 8 December 2012, the Doha Amendment to the Kyoto Protocol was adopted for a second
commitment period, starting in 2013 and lasting until 2020. However, the Doha Amendment has not yet entered
into force; a total of 144 instruments of acceptance are required for entry into force of the amendment.
The amendment includes:
• New commitments for Annex I Parties to the Kyoto Protocol who agreed to take on commitments in a second
commitment period from 1 January 2013 to 31 December 2020;
• A revised list of GHG to be reported on by Parties in the second commitment period; and
• Amendments to several articles of the Kyoto Protocol which specifically referenced issues pertaining to the
first commitment period and which needed to be updated for the second commitment period.
On 21 December 2012, the amendment was circulated by the Secretary-General of the United Nations, acting in his
capacity as Depositary, to all Parties to the Kyoto Protocol in accordance with Articles 20 and 21 of the Protocol.
During the first commitment period, 37 industrialized countries and the European Community committed
to reduce GHG emissions to an average of five percent against 1990 levels. During the second commitment
period, Parties committed to reduce GHG emissions by at least 18 percent below 1990 levels in the eight-year
period from 2013 to 2020; however, the composition of Parties in the second commitment period is different
from the first.
 Lesson 16 • CSR and Sustainability 463

One important element of the Kyoto Protocol was the establishment of flexible market mechanisms, which are based
on the trade of emissions permits. Under the Protocol, countries must meet their targets primarily through national
measures. However, the Protocol also offers them an additional means to meet their targets by way of three market-
based mechanisms:
• International Emissions Trading
• Clean Development Mechanism (CDM)
• Joint implementation (JI)
These mechanisms ideally encourage GHG abatement to start where it is most cost-effective, for example, in the
developing world. It does not matter where emissions are reduced, as long as they are removed from the atmosphere.
This has the parallel benefits of stimulating green investment in developing countries and including the private
sector in this endeavour to cut and hold steady GHG emissions at a safe level. It also makes leap- frogging—that is,
the possibility of skipping the use of older, dirtier technology for newer, cleaner infrastructure and systems, with
obvious longer-term benefits—more economical.
Monitoring emission targets
The Kyoto Protocol also established a rigorous monitoring, review and verification system, as well as a compliance
system to ensure transparency and hold Parties to account. Under the Protocol, countries’ actual emissions have to
be monitored and precise records have to be kept of the trades carried out.
Registry systems track and record transactions by Parties under the mechanisms. The UN Climate Change Secretariat,
based in Bonn, Germany, keeps an international transaction log to verify that transactions are consistent with the
rules of the Protocol.
Reporting is done by Parties by submitting annual emission inventories and national reports under the Protocol at
regular intervals.
A compliance system ensures that Parties are meeting their commitments and helps them to meet their commitments
if they have problems doing so.
Adaptation
The Kyoto Protocol, like the Convention, is also designed to assist countries in adapting to the adverse effects of
climate change. It facilitates the development and deployment of technologies that can help increase resilience to
the impacts of climate change.
The Adaptation Fund was established to finance adaptation projects and programmes in developing countries that
are Parties to the Kyoto Protocol. In the first commitment period, the Fund was financed mainly with a share of
proceeds from CDM project activities. In Doha, in 2012, it was decided that for the second commitment period,
international emissions trading and joint implementation would also provide the Adaptation Fund with a 2 percent
share of proceeds.

6. Bali Roadmap
At the 2007 United Nations Climate Change Conference in Bali, Indonesia in December, 2007, the participating
nations adopted the Bali Roadmap as a two-year process for finalizing a bindinig agreement in 2009 in
Denmark.
The Bali Road Map consists of a number of forward-looking decisions that represent the various tracks essential
to reaching a secure climate future. The Bali Road Map includes the Bali Action Plan, which charts the course for a
new negotiating process designed to tackle climate change, with the aim of completing this by 2009. To conduct the
process, a subsidiary body under the Convention called the Ad Hoc Working Group on Long-term Cooperative Action
under the Convention (AWG-LCA) was set up.
To discuss future commitments for industrialized countries under the Kyoto Protocol, the Conference of the Parties
serving as the Meeting of the Parties to the Kyoto Protocol established a working group in December 2005, called the
Ad Hoc Working Group on further Commitments for Annex I Parties under the Kyoto Protocol (AWG-KP).
464 Lesson 16 • PP-GRMCE

7. United Nations Conference on Sustainable Development, Rio+20

The United Nations Conference on Sustainable Development - or Rio+20 - took place in Rio de Janeiro, Brazil
on 20-22 June 2012. It resulted in a focused political outcome document which contains clear and practical
measures for implementing sustainable development.
In Rio, Member States decided to launch a process to develop a set of Sustainable Development Goals (SDGs),
which will build upon the Millennium Development Goals and converge with the post 2015 development
agenda.
The Conference also adopted ground-breaking guidelines on green economy policies. Governments also decided to
establish an intergovernmental process under the General Assembly to prepare options on a strategy for sustainable
development financing. The Rio+20 outcome document “The Future We Want” resolved to establish an inclusive
and transparent intergovernmental process on SDGs that is open to all stakeholders with a view to develop global
sustainable development goals agreed by the UN General Assembly.
Following are some commitments adopted under Rio+20 outcome document:
1. Poverty Eradication: poverty eradication should be given highest priority within UN agenda;
2. Food Security and Nutrition and Sustainable Agriculture: commitment of the right of everyone to have
access to safe, sufficient and nutritious food, importance of sustainable agriculture and recognition to the
importance of addressing the access of rural communities to credit, financial services, markets, land tenure,
health care and social services;
3. Energy: critical role of energy in sustainable development – access to sustainable modern energy
contributes to poverty eradication, saves lives and improves health, essential to social inclusion and
gender equality.
4. Sustainable transport: importance of environmentally sound, safe and affordable transportation as a means
to improve social equity and health. Support development of sustainable transport systems, notably public
mass transportation systems. Acknowledge that developing countries need assistance.
5. Sustainable cities: well planned and integrated cities can be economically, socially and environmentally
sustainable - including housing, safe and healthy living environment for all, particularly the vulnerable;
affordable and sustainable transport and energy, promotion and protection of safe and green urban spaces,
water and sanitation, air quality, decent jobs and improved urban planning and slum upgrading. Recognize
importance of mixed-use planning and non-motorized mobility - including by promoting pedestrian and
cycling infrastructures.
6. Health and population: Health is a precondition for an outcome of and an indicator of all three dimensions
of sustainable development. Sustainable development cannot be achieved in the presence of high burden on
communicable/non communicable diseases.
7. Commit to strengthen health systems toward the provision of equitable, universal coverage and promote
affordable access to prevention, treatment, care and support related to NCDs, especially cancer,
cardiovascular diseases, chronic respiratory diseases and diabetes.
8. Commit to establish or strengthen multi-sectoral national policies for the prevention and control of non-
communicable diseases.
9. Reaffirm the full right to use TRIPS provisions and Doha Declaration on TRIPs to promote access to medicines
for all and encourage development assistance in this regard.
10. Call to strengthen health systems through increased financing and the recruitment/training/retention of
health workers, improved distribution and access to medicines and improving health infrastructure.
11. Commit and consider population trends in development policy, emphasize need for universal access to
reproductive health, including family planning and protection of human rights in this context
 Lesson 16 • CSR and Sustainability 465

12. Commit to reducing maternal and child mortality, gender equality and protection of human rights on matters
related to sexuality, and work to ensure health systems, address sexual and reproductive health.
13. Promoting full and productive employment, decent work for all, and social protections: need to provide
productive employment and decent work for all. Recognize importance of job creation. Workers should have
access to education, skills and healthcare, including occupational health and safety.

8. Paris Agreement on Climate Change, 2015

At the 21st Conference of the Parties in Paris, Parties to the United Nations Framework Convention on Climate
Change (UNFCCC) reached a landmark agreement to combat climate change and to accelerate and intensify the
actions and investments needed for a sustainable low carbon future. The Paris Agreement brings all nations into a
common cause to undertake take ambitious efforts to combat climate change and adapt to its effects, with enhanced
support to assist developing countries to do so.
The Paris Agreement’s central aim is to strengthen the global response to the threat of climate change by keeping the
global temperature rise this century well below 2 degrees Celsius above pre-industrial levels and to pursue efforts
to limit the temperature increase even further to 1.5 degrees Celsius.
On Earth Day, 22 April 2016, 175 world leaders signed the Paris Agreement at United Nations Headquarters in New
York. This was by far the largest number of countries ever to sign an international agreement on a single day.

THE 2030 AGENDA FOR SUSTAINABLE DEVELOPMENT

The 2030 Agenda for Sustainable Development” including its 17 Sustainable Development Goals (SDGs) and 169
targets was adopted on 25 September 2015 by Heads of State and Government at a special UN summit.
The Agenda is a commitment to eradicate poverty and achieve sustainable development by 2030 world-wide,
ensuring that no one is left behind. The adoption of the 2030 Agenda was a landmark achievement, providing for a
shared global vision towards sustainable development for all.
• It issued a first Communication “A decent life for all: ending poverty and giving the world a sustainable future” in
February 2013. It was followed by Council Conclusions on “An overarching post-2015 framework” in June 2013.
• A second Communication “A decent life for all: from vision to collective action” was issued in June 2014 and
was followed by Council Conclusions on “A transformative post-2015 agenda” in December 2014.
• On 5 February 2015 the Commission issued its third Communication “A Global Partnership for Poverty
Eradication and Sustainable Development after 2015” which puts forward ideas on the appropriate enabling
policy environment; on financing – public and private, national and international; and on monitoring and
accountability.
• This was followed by Council Conclusions on “a global partnership for Poverty Eradication and Sustainable
Development after 2015” on 26 May 2015.
The 2030 Agenda itself consists of 4 sections:
(i) A political Declaration
(ii) A set of 17 sustainable Development Goals and 169 targets (based on the report of the OWG, with some small
modifications)
(iii) Means of Implementation
(iv) A framework for follow up and review of the Agenda.
In addition, the 2030 Agenda integrates in a balanced manner the three dimensions of sustainable development -
economic, social and environmental. The 2030 Agenda is also indivisible, in a sense that it must be implemented
as a whole, in an integrated rather than a fragmented manner, recognizing that the different goals and targets are
closely interlinked.
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Sustainable Development Goals

Goal 1. End poverty in all its forms everywhere

Goal 2. End hunger, achieve food security and improved nutrition and promote sustainable agriculture
Goal 3. Ensure healthy lives and promote well-being for all at all ages
Goal 4. Ensure inclusive and equitable quality education and promote lifelong learning opportunities for all
Goal 5. Achieve gender equality and empower all women and girls
Goal 6. Ensure availability and sustainable management of water and sanitation for all
Goal 7. Ensure access to affordable, reliable, sustainable and modern energy for all
Goal 8. Promote sustained, inclusive and sustainable economic growth, full and productive employment and
decent work for all
Goal 9. Build resilient infrastructure, promote inclusive and sustainable industrialization and foster innovation
Goal 10. Reduce inequality within and among countries
Goal 11. Make cities and human settlements inclusive, safe, resilient and sustainable
Goal 12. Ensure sustainable consumption and production patterns
Goal 13. Take urgent action to combat climate change and its impacts
Goal 14. Conserve and sustainably use the oceans, seas and marine resources for sustainable development
Goal 15. Protect, restore and promote sustainable use of terrestrial ecosystems, sustainably manage forests,
combat desertification, and halt and reverse land degradation and halt biodiversity loss
Goal 16. Promote peaceful and inclusive societies for sustainable development, provide access to justice for all
and build effective, accountable and inclusive institutions at all levels
Goal 17. Strengthen the means of implementation and revitalize the global partnership for sustainable
development.
Lesson 16 • CSR and Sustainability 467

SUSTAINABILITY INDICES
(a) DOW-JONES SUSTAINABILITY INDEX
The Dow Jones Sustainability Indices are the first global indices tracking the financial performance of the
leading sustainability-driven companies worldwide, it was launched in 1999.
The Dow Jones Sustainability World Index (DJSI World) comprises more than 300 companies that represent the
top 10% of the leading sustainability companies out of the biggest 2500 companies in the Dow Jones World Index.
In addition to the composite DJSI World, there are six specialized subset indexes excluding alcohol, ex gambling,
ex tobacco, ex armaments & firearms, ex alcohol, tobacco, gambling, armaments & firearms indexes, and ex
alcohol, tobacco, gambling armaments & firearms, and adult entertainment.
(b) ENVIRONMENT, SOCIAL, GOVERNANCE (ESG) INDEX
ESG describes the environmental, social and corporate governance issues that investors are considering in
the context of corporate behaviour. Integration of ESG refers to the active investment management processes
that include an analysis of environmental, social, and corporate governance risks and opportunities and
sustainability aspects of company performance evaluation.
The ESG index employs a unique and innovative methodology that quantifies a company’s ESG practices and
translates them into a scoring system which is then used to rank each company against its peers in the market.
Its quantitative scoring system offers investors complete transparency on Environmental, Social & governance
issues of a company.

Key Performance Indicators:

• Environment - Energy use and efficiency, Greenhouse gas emissions, Water use, Use of ecosystem
• services – impact & dependence and Innovation in environment friendly products and services.
• Social - Employees, Poverty and community impact and Supply chain management
• Governance - Codes of conduct and business principles, accountability, transparency and disclosure
and Implementation – quality and consistency.

(c) STANDARD & POOR’S ESG INDIA INDEX

Standard & Poor’s ESG India index provides investors with exposure to a liquid and tradable index of 50
of the best performing stocks in the Indian market as measured by environmental, social, and governance
parameters. The index employs a unique and innovative methodology that quantifies a company’s ESG
practices and translates them into a scoring system which is then used to rank each company against their
peers in the Indian market. Its quantitative scoring system offers investors complete transparency.
The creation of the index involves a two step process, the first of which uses a multi-layered approach to
determine an ‘ESG’ score for each company. The second step determines the weighting of the index by score.
Index constituents are derived from the top 500 Indian companies by total market capitalizations that are
listed on National Stock Exchange of India Ltd. (NSE). These stocks are then subjected to a screening process
which yields a score based on a company’s ESG disclosure practices in the public domain.
(d) SDG INDEX & MONITORING
Agenda 2030 and the Sustainable Development Goals (SDGs), adopted by all member states of the United
Nations in 2015, describe a universal agenda that applies to and must be implemented by all countries. Sound
metrics and data are critical for turning the SDGs into practical tools for problem solving.
The UN Sustainable Development Solutions Network (SDSN) partners with a variety of organizations to assess
progress towards SDG achievement at the national level and the local level. Both official and unofficial metrics
are used to measure distance to targets for each of the SDGs to identify priorities for action, understand key
implementation challenges, track progress, ensure accountability, and identify gaps that must be closed in
order to achieve the SDGs by 2030.
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SDG INDIA INDEX 2020-21: NITI AAYOG

The SDG India Index 2020–21 is developed in collaboration with the United Nations in India. The NITI Aayog
launched its index in 2018 to monitor the country’s progress on the goals through data-driven assessment,
and foster a competitive spirit among the States and Union Territories in achieving them. NITI Aayog has
the twin mandate to oversee the adoption and monitoring of the SDGs in the country, and also promote
competitive and cooperative federalism among States and UTs. The index represents the articulation of
the comprehensive nature of the Global Goals under the 2030 Agenda while being attuned to the national
priorities.
In 2015, the UNs General Assembly adopted the 2030 Agenda for Sustainable Development. The 17 SDGs are a
bold commitment to finish what the Millennium Development Goals (MDGs) started, and tackle some of the more
pressing challenges.
The SDG India Index 2020–21 is also live on an online dashboard, which has cross-sectoral relevance across
policy, civil society, business, and academia.
• Methodology:
o The SDG India Index computes goal-wise scores on the 16 SDGs for each State and Union Territory.
o These scores range between 0–100, and if a State/UT achieves a score of 100, it signifies it has
achieved the 2030 targets.
o The higher the score of a State/UT, the greater the distance to target achieved.
o States and Union Territories are classified in four categories based on their SDG India Index score:
Aspirant (0–49), Performer (50–64), Front-Runner (65–99), Achiever (100).
• Comparison with Previous Editions:
o The SDG India Index 2020–21 is more robust than the previous editions on account of wider coverage
of targets and indicators with greater alignment with the National Indicator Framework (NIF).
o The 115 indicators incorporate 16 out of 17 SDGs, with a qualitative assessment on Goal 17, and cover
70 SDG targets.
o This is an improvement over the 2018–19 and 2019–20 editions of the index, which had utilised
62 indicators across 39 targets and 13 Goals, and 100 indicators across 54 targets and 16 Goals,
respectively.
• National Analysis:
o The country’s overall SDG score improved by 6 points - from 60 in 2019 to 66 in 2020–21.
o Currently, there are no states in the aspirant and achiever category; 15 states/UTs are in the performer
category and 22 states/UTs in the front runner category.
o India saw significant improvement in the SDGs related to clean energy, urban development and
health in 2020. However, there has been a major decline in the areas of industry, innovation and
infrastructure as well as decent work and economic growth.
• State Wise Performance:
o Kerala retained its position at the top of the rankings in the third edition of the index, with a score of
75, followed by Tamil Nadu and Himachal Pradesh, both scoring 72.
o At the other end of the scale, Bihar, Jharkhand and Assam were the worst performing States. However,
all States showed some improvement from last year’s scores, with Mizoram and Haryana seeing the
biggest gains.
Lesson 16 • CSR and Sustainability 469

MEASURING BUSINESS SUSTAINABILITY

Some approaches to measure business sustainability are discussed below.

Altman Z-score
The Altman Z Score model is a financial model to predict the likelihood of bankruptcy in a company. It was created by
Edward I. Altman, a professor at the Leonard N. Stern School of Business of New York University. His aim at predicting
bankruptcy began around the time of the great depression, in response to a sharp rise in the incidence of default. The
formula helps to predict the probability of a firm to go into bankruptcy within next two years. In 1960s, an idea of
trying to predict which companies would be unsuccessful in the near future was far from new at that time. Altman
added a statistical technique called multivariate analysis to the mix of traditional ratio-analysis techniques. Adding
multivariate analysis allowed him to consider the effects of several ratios on the ‘predictiveness’ of his bankruptcy
model. In addition to this it allowed to consider how those ratios affected each other’s usefulness in the model.
Z-scores are used to predict corporate defaults and an easy-to-calculate control measure for the financial distress
status of companies. The purpose of the Z Score Model is to measure a company’s financial health and to predict
the probability that a company will collapse within 2 years. It is proven to be very accurate to forecast bankruptcy
in a wide variety of contexts and markets. Studies show that the model has 72% – 80% reliability of predicting
bankruptcy. However, the Z-Score does not apply to every situation. It can only be used for forecasting if a company
being analyzed can be compared to the database.
The Z-score uses multiple corporate income and balance sheet values to measure the financial health of a company.
The Z-score is a linear combination of five common business ratios, weighted by coefficients.
Formula

Z-Score = 1.2A + 1.4B + 3.3C + 0.6D + 1.0E

Where:
• A = Working capital / total assets: -This ratio measures liquid assets. The companies in trouble will usually
experience shrinking liquidity.
• B = Retained earnings / total assets: -This ratio calculates the overall profitability of the company. Dwindling
profitability is a warning sign.
• C = Earnings Before Interest and Tax (EBIT)/ total assets: -This ratio shows how productive a company is in
generating earnings, relative to its size.
• D = Market value of equity / total liabilities: - This ratio suggests how far the company’s assets can decline
before it becomes technically insolvent (i.e., its liabilities become higher than its assets).
• E = Sales / total assets:-This is the asset turnover ratio and is a measure of how effectively the firm uses its
assets to generate sales.
A Z score of greater than 2.99 means that the entity being measured is safe from bankruptcy. A score of less than 1.81
means that a business is at considerable risk of going into bankruptcy, while scores in between should be considered
a red flag for possible problems. The model has proven to be reasonably accurate in predicting the future bankruptcy
of entities under analysis.

Risk-Adjusted Return on Capital - RAROC

Risk-adjusted return on capital (RAROC) is a profitability metric that can be used to analyse return in relation to the
level of risk taken on. It can be used to compare the performance of several investments with differing levels of risk
exposure. It should not be confused with RORAC (return on risk-adjusted capital) which adjusts the capital invested
based on the risks being taken. RAROC instead adjusts the return itself. RAROC was developed by Bankers Trust in
the late 1970s and early 1980s in response to regulatory interest in the capital ratios of financial institutions and the
implementation of capital adequacy regulations. RAROC is often used by banks to determine the amount of capital
required to support the bank’s activities.
RAROC is a modified return on investment (ROI) figure that takes elements of risk into account. In financial analysis,
project and investments with greater risk levels must be evaluated differently; RAROC thus account for changes in
an investment’s profile by discounting risk cash flows against less-risk cash flows.
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RAROC is also referred to as a profitability-measurement framework, based on risk that allows analysts to
examine a company’s financial performance and establish a steady view of profitability across business sectors
and industries.
RAROC system allocates capital for two basic reasons:
1. Risk management
2. Performance evaluation
For risk management purposes, the main goal of allocating capital to individual business units is to determine the
bank’s optimal capital structure—that is economic capital allocation is closely correlated with individual business
risk. As a performance evaluation tool, it allows banks to assign capital to business units based on the economic
value added of each unit.
Risk-adjusted return on capital (RAROC) is a modified return on investment (ROI) figure that takes elements
of risk into account. The formula used to calculate RAROC is:

revenue – expenses – expected loss + income from capital

RAROC =
capital

Where:
• Income from capital = (capital charges) × (risk-free rate)
• Expected Loss = Average loss expected over specified period of time.
• This is calculated by multiplying capital charges by the risk-free rate. This is because, since capital is set aside
to support a risky transaction, it should theoretically be invested in something ‘risk free’.
• Expected loss is the average anticipated loss over the period being measured. It will include the cost of doing
business as well as any loss incurred from default or operational risk.
• Capital means economic capital is the amount of capital that a financial institution needs to ensure that the
company remains solvent. It should be sufficient to support any risks that the company takes on.
In financial analysis, projects and investments with greater risk levels must be evaluated differently; RAROC accounts
for changes in an investment’s profile by discounting risky cash flows against less-risky cash flows. Risk-adjusted
return on capital is a useful tool in assessing potential acquisitions. The general underlying assumption of RAROC is
investments or projects with higher levels of risk offer substantially higher returns. Companies that need to compare
two or more different projects or investments must keep this in mind.

Economic Value Added (EVA)

EVA is promoted by a consulting firm Stern Steward & Co., which was established in 1982 and pioneered the EVA
concept in 1989. EVA is a performance measure that captures the true economic profit of an enterprise. EVA is
used by over 300 successful companies. EVA is a value based financial performance measure. It is an investment
decision tool and it is also a performance measure reflecting the absolute amount of shareholder value created. It is
computed as the product of the “excess return” made on an investment or investments and the capital invested in
that investment or investments.
“Economic Value Added (EVA) is the net operating profit minus an appropriate charge for the opportunity cost of all
capital invested in an enterprise or project. It is an estimate of true economic profit, or amount by which earnings exceed
or fall short of the required minimum rate of return investors could get by investing in other securities of comparable
risk (Stewart, 1990).”
EVA is net operating profit after tax less capital charge.

Or, EVA = NOPAT- (Invested Capital × WACC).

 Lesson 16 • CSR and Sustainability 471

Components of EVA
The equation for EVA shows that there are three key components to a company’s EVA: i.e. NOPAT, Capital invested,
and the WACC:
• NOPAT can be calculated manually but is normally listed in a public company’s financials.
• Invested Capital is the amount of money used to fund a specific project.
• WACC is the average rate of return a company expects to pay its investors; the weights are derived as a fraction
of each financial source in a company’s capital structure. WACC can also be calculated but is normally provided
as public record.
An equation for invested capital often used to calculate EVA is = Total Assets - Current Liabilities, two figures easily found
on a firm’s balance sheet. In this case, the formula for EVA is: NOPAT - (Total Assets - Current Liabilities) * WACC.
The cost of capital is a weighted average that reflects the cost of both debt and equity capital. Thus, EVA measures
the excess of a firm’s operating income over the cost of the capital employed in generating those earnings. It relates
operating income to capital employed in an additive operation. This is in contrast to return on assets (ROA =
operating income / capital), which compares operating income to capital employed in a multiplicative operation.
EVA assesses the performance of a company and its management through the idea that a business is only profitable
when it creates wealth and returns for shareholders, thus requiring performance above a company’s cost of capital.
EVA as a performance indicator is very useful. The calculation shows how and where a company created wealth,
through the inclusion of balance sheet items. This forces managers to be aware of assets and expenses when making
managerial decisions. However, the EVA calculation relies heavily on the amount of invested capital, and is best used
for asset-rich companies that are stable or mature. Companies with intangible assets, such as technology businesses,
may not be good for an EVA evaluation.

Market Value Added (MVA)

Market Value Added (MVA) is a tool to measure shareholder’s value at a particular moment; this was introduced by
Stewart in 1991. Market Value Added (MVA) is the additional market capitalization over and above the book value
of equity (Gupta & Kundu, 2008). From an investor’s point of view, MVA is the best final measure of a Company’s
performance. Stewart states that MVA is a cumulative measure of corporate performance and that it represents the
stock market’s assessment from a particular time onwards of the net present value of all a Company’s past and projected
capital projects. MVA is calculated at a given moment, but in order to assess performance over time, the difference or
change in MVA from one date to the next can be determined to see whether value has been created or destroyed.
It is typically used for companies that are larger and publicly-traded. MVA is not a performance metric like EVA, but
instead is a wealth metric, measuring the level of value a company has accumulated over time.
In another words Market Value Added (MVA) is the difference between the current market value of a firm (V) and
the capital contributed by its investors (K):

Total Market Value (TMV) = Market Value Added (MVA) + Initial Invested Capital (IIC)
Hence MVA = TMV- IIC
In another words Market Value Added (MVA) is the difference between the total market value of a firm (TMV) and
the initial capital contributed by its investors (IIC): Market Value Added (MVA) = TMV – IIC
If the MVA is positive, the Company has created wealth for its shareholders.
If it is MVA is negative, then the firm has destroyed value.
The capital is the amount that is put in the Company by the shareholders.
Company creates value when MVA > 0 that is when the market value of capital exceeds the capital invested.
A negative value for MVA proves that the provisions concerning the ability of management to use efficiently the
capital are unfavourable. The link between EVA and MVA is that MVA is the present value of all the future EVAs a
Company is expected to generate, discounted at the WACC.
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Market Value Added (MVA) = V – K

If the Market Value Added (MVA) is positive, the Company has created wealth for its shareholders. If it is negative,
then the firm has destroyed value. The capital is the amount that is put in the Company by the shareholders. Company
creates value when MVA > 0 that is when the market value of capital exceeds the capital invested. A negative value for
MVA proves that the provisions concerning the ability of management to use efficiently the capital are unfavourable.
The link between EVA and MVA is that MVA is the present value of all the future EVAs a Company is expected to
generate, discounted at the WACC.
Market Value Added (MVA) = PV (EVA)
Theoretically, MVA is equal to the present value of all future EVAs.
Stewart (1991) states that Market Value Added (MVA) is an cumulative measure of corporate performance and
that it represents the stock markets assessments from a particular time onwards of the net present value of all of
a Company’s past and projected capital projects. The disadvantage of the method is that like EVA there can be a
number of value based adjustments made in order to arrive at the economic book value and that it is affected by the
volatility from the market values, since it tends to move in tandem with the market.
From an investor’s point of view, MVA is the best final measure of a Company’s performance. Stewart (1991) states
that MVA is a cumulative measure of corporate performance and that it represents the stock market’s assessment
from a particular time onwards of the net present value of all a Company’s past and projected capital projects. MVA
is calculated at a given moment, but in order to assess performance over time, the difference or change in MVA from
one date to the next can be determined to see whether value has been created or destroyed.

Sustainable Value Added (SVA)

Traditionally, an enterprise focuses on value maximization. The conventional management takes into account just
one dimension – economic – when creating value in an enterprise. All resources including environmental and social
resources are neglected. This point of view is not acceptable when speaking about sustainable development. Over
the last decades, theorists emphasize wider scope of entrepreneurial objectives besides obtaining the greatest
value possible. Sustainable development is a normative concept laid out as the combination of economic prosperity,
environmental integrity and social equity.Value is created whenever benefits exceed costs.
There are two approaches to measure corporate contribution to sustainability i.e. Absolute Measures and Relative
Measures.
Absolute Measures:
The absolute measure of assessing corporate contributions to sustainability is to subtract the costs form the benefits
created by a company. For this purpose both internal and external costs need to be considered. The underlying idea
is, that a company contributes to sustainability, if the benefits exceed the sum of internal and external costs. The
result is ‘Green Value Added’. (GVA).
Relative Measures:
The relative measures express corporate contributions to sustainability as benefits per unit of environmental or
social impact. The best known example of a relative measure is eco-efficiency. There are two different uses of the
term eco-efficiency. As a maxim eco-efficiency refer to the reduction or even minimization impacts. The second
notion uses the term eco-efficiency to describe the ratio of created value per environmental impact added.
Sustainable Value Added takes into account both, the efficiency and the absolute level (effectiveness) of resource
use. It has never been more important for businesses to use their economic, environmental and social resources
efficiently. Conceptually, SVA stresses the complementary disposition of economic, environmental and social
resources. Sustainable Value Added is the extra value created when the overall level of environmental and social
impacts is kept constant.
Current approaches to measure corporate sustainable performance take into account external costs caused by
environmental and social damage or focus on the ratio between value creation and resource consumption.
As Sustainable Value Added is inspired by strong sustainability, it measures whether a company creates extra value
 Lesson 16 • CSR and Sustainability 473

while ensuring that every environmental and social impact is in total constant. Therefore, it takes into account both,
corporate eco and social efficiency as well as the absolute level of environmental and social resource consumption (eco
and social effectiveness). As a result, Sustainable Value Added considers simultaneously economic, environmental
and social aspects. The overall result can be expressed in any of the three dimensions of sustainability.
Sustainable Value Added allows assessing the sustainable performance of enterprises similar to financial
performance in monetary terms and this, in turn, enhances creative leadership and better formulation of a resource
efficient business strategy.

ENVIRONMENTAL, SOCIAL AND GOVERNANCE (ESG)

Forms of sustainable finance have grown rapidly in recent years, as a growing number of institutional investors
and funds incorporate various Environmental, Social and Governance (ESG) investing approaches. While the
mainstreaming of forms of sustainable finance is a welcome development, the terminology and practices associated
with ESG investing vary considerably. One reason for this is that ESG investing has evolved from socially responsible
investment philosophies into a distinct form of responsible investing. While earlier approaches used exclusionary
screening and value judgments to shape their investment decisions, ESG investing has been spurred by shifts in
demand from across the finance ecosystem, driven by both the search for better long-term financial value, and a
pursuit of better alignment with values.
As ESG investing accelerates in demand, several key trends are emerging – from climate change to social unrest.
The coronavirus pandemic, in particular, has intensified discussions about the interconnectedness of sustainability
and the financial system. CFA Institute is leading the financial industry by producing valuable research, convening
experts and practitioners for discussion, and setting standards to enable the mainstreaming of ESG investing.
Following are the elements covered under the ESG framework-
1) Environmental – Conservation of the natural world.
• Climate change and carbon emissions
• Air and water pollution
• Biodiversity
• Deforestation
• Energy efficiency
• Waste management
• Water scarcity
2) Social- Consideration of people & relationships
• Customer satisfaction
• Data protection and privacy
• Gender and diversity
• Employee engagement
• Community relations
• Human rights
• Labour standards
3) Governance- Standards for running a company
• Board composition
• Audit committee structure
• Bribery and corruption
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• Executive compensation
• Lobbying
• Political contributions
• Whistleblower schemes

Focus on ESG issues- The Global Trend

The COVID-19 pandemic and social justice movements have had far-reaching impacts on business and society around
the world. Corporate governance trends vary somewhat across regions, but corporations globally are experiencing
a reckoning around their role in society. The expectations of the independent directors who oversee corporations
have never been higher.
Following are the Global trends for CG predicted for 2021:
1. Climate Change Risk
2. Diversity, Equity & Inclusion (DE&I)
3. Convergence of Sustainability Reporting Standards
4. Human Capital Management
5. Return of Activism and Increased Capital Markets Activity
6. Virtual Board & Shareholder Meetings: Here to Stay.
ESG issues continue to rise up the agenda for corporates, regulators and investors, with the sustained focus on
climate change and other environment (E) issues continuing but with an increasing focus on social (S) factors driven
in part by the impact of the COVID-19 pandemic.
Most boards are far more focused on their purpose and stakeholders, from delivering great products or services, to
wanting to be great places to work, than public perception would believe. For years, business leaders have focused
on building long-term success as well as developing skills, strong cultures, being respected in their communities and
their environmental impact. While such issues may have historically been viewed as dilutive to financial value, there
is a growing acknowledgement that sustainable business practices are not only essential from a risk management
perspective, they are also often accretive.

Net Carbon-Zero Goal– One step toward Sustainable development

Some of India’s largest firms have announced net-zero goals as companies globally switch to sustainable
investments and seek suppliers with similar commitments to curb greenhouse emissions.
Reliance Industries Ltd. plans to transform each of the units under its refining-to-retail conglomerate to create a
sustainable business and chases a net carbon-zero goal by 2035. Private lender HDFC Bank Ltd. has set 2031-32
target for being carbon neutral, while Tata Consultancy Services Ltd. seeks to be there by 2030. Wipro Ltd., Infosys
Ltd., Mahindra & Mahindra Ltd., JSW Energy Ltd. and even Indian Railways have also announced similar plans.
What Is Net-Zero?
Net-zero is a climate outcome where any greenhouse emissions through man-made sources are countered by
removing such gases in equal amount. The ‘net’ effect is that the global temperature remains unchanged. There
are two ways to achieve this: drastically reduce emissions and simultaneously use methods to neutralise or
remove greenhouse gases.
Why’s it relevant?
Foremost is to avoid an impending climate catastrophe. Consider carbon budget—the maximum limit of
emissions that the Earth can handle before heating up. If we continue to release emissions on a net basis, that
budget is breached and temperature continues to rise. For example, a water tank that is filled three-fourths. And
a stream is connected to the tank that constantly keeps filling it. The idea of net zero is that we reduce the flow of
the stream so that the water doesn’t start to overflow.
Lesson 16 • CSR and Sustainability 475

Source: Bloomberg
Policymakers across the globe have a consensus that setting net-zero goals is a plausible way to contain further
damage and, hopefully, reverse some of it. Under the landmark 2016 Paris climate agreement, countries including
India agreed to limit global warming to well below 2 degrees Celsius, ideally 1.5 degrees C. A special report by
nearly 100 scientists found that to achieve the goal, the world would have to hit net-zero emissions by 2050. That’s
not likely given the current progress.
Developed nations such as the U.K., France and Denmark, with higher emissions, have already codified in law their
commitment to net-zero by 2050, according to the Energy and Climate Intelligence Unit. The European Union, South
Korea and Canada have also proposed similar legislation. The U.S., Japan and Germany are considering making it a law.
India, a developing nation with relatively lower per capita emissions, doesn’t have a net-zero target. But authorities
are said to be considering pledging to net-zero by 2050.
Why Should Companies Care?
Bulk of the emission comes from industries—particularly in the energy, metals and transportation sectors. Any climate
action will have to start by reducing or offsetting emissions that come from the industrial and commercial activity.
There is also the need to negate potential business losses. According to the Carbon Disclosure Project, Indian
companies stand to collectively lose over Rs 7.14 lakh crore if they do nothing to mitigate climate risks in the next
five years. These risks come from physical phenomena like floods, emerging regulations, emission caps, changing
customer behaviour and preferences, and even potential legal issues. But if done right, opportunities worth Rs 2.9
lakh crore could emerge.
Indian suppliers of multinational firms also risk losing $274 billion worth of exports every year if they fail to curb
carbon emissions, according to Standard Chartered.
476 Lesson 16 • PP-GRMCE

LESSON ROUND UP
• Corporate Social Responsibility (CSR) is a concept whereby companies not only consider their profitability
and growth, but also the interests of society and the environment by taking responsibility for the impact of
their activities on stakeholders, environment, consumers, employees, communities, and all other members
of the public sphere.
• Corporate sustainability is imperative for the long-term sustainable development of the economy and society.
• The term sustainability accounting is used to describe the new information management and accounting
methods that aim to create and provide high quality information to support a corporation in its movement
towards sustainability.
• Sustainability (corporate sustainability) is derived from the concept of sustainable development which
is defined by the Brundt land Commission as “development that meets the needs of the present without
compromising the ability of future generations to meet their own needs”.
• Corporate citizenship is a commitment to improve community well-being through voluntary business
practices and contribution of corporate resources leading to sustainable growth.
• ISO 26000 is the international standard giving guidance on social responsibility and is intended for use by
organizations of all types both public and private sectors, in developed and developing countries.
• The Global Compact Self Assessment Tool is an easy-to-use guide designed for use by companies of all sizes
and across sectors committed to upholding the social and environmental standards within their respective
operations.
• The UN Global Compact is a strategic policy initiative for businesses that are committed to aligning their
operations and strategies with ten universally accepted principles in the areas of human rights, labour,
environment and anti-corruption.
• In line with the National Voluntary Guidelines on Social, Environmental and Economic Responsibilities of
Business and considering the larger interest of public disclosure regarding steps taken by listed entities, SEBI
has mandated the requirement of submission of Business Responsibility Report (‘BRR’) for top 500 listed
entities under Regulation 34(2)(f) of SEBI (Listing Obligations and Disclosure Requirements) Regulations
2015 (“SEBI LODR”).
• In March 2019, the Ministry of Corporate Affairs has revised the National Voluntary Guidelines on Social,
Environmental and Economic Responsibilities of Business, 2011 (NVGs) and has released the National
Guidelines on Responsible Business Conduct (NGRBC), 2019.
• Risk-adjusted return on capital (RAROC) is a profitability metric that can be used to analyse return in relation
to the level of risk taken on.

GLOSSARY
Sustainable Sustainable development is development that meets the needs of the present without
Development compromising the ability of future generations to meet their own needs
Corporate Corporate sustainability is an approach that creates long-term stakeholder value by
Sustainability implementing a business strategy that considers every dimension of how a business
operates in the ethical, social, environmental, cultural, and economic spheres.
Triple Bottom Line The triple bottom line is an accounting framework with three parts: social, environmental
(or ecological) and financial. Some organizations have adopted the TBL framework to
evaluate their performance in a broader perspective to create greater business value.
The Altman Z Score The Altman Z Score model is a financial model to predict the likelihood of bankruptcy in
model a company.
Lesson 16 • CSR and Sustainability 477

TEST YOURSELF
(These are meant for recapitulation only. Answers to these questions are not to be submitted for evaluation)
1. As a company secretary, can you explain what does the Corporate Social Responsibility (CSR) means?. Why
is CSR important ?
2. Can you briefly explain the term Sustainability Reporting?
3. Write a short note on the principles of UN Global Compact.
4. How many principles are there under National Guidelines on Responsible Business Conduct (NGRBC), 2019,
briefly explain those principles.
5. Explain sustainable development and goals of sustainable development.
6. Whether Business Sustainability can be measured? If so, how?
478 Lesson 16 • PP-GRMCE
 Anti-Corruption and Anti-Bribery
Lesson 17
Laws in India

Key Concepts One Learning Objectives Regulatory Framework

Should Know
To understand the: • Delhi Police Establishment Act,
• Bribery
• Legal framework in India with 1946
• Facilitation regard to the prevailing Anti-
Payment • Unlawful Activities (Prevention)
Corruption and Anti-Bribery Act, 1967
• Foreign Public Laws.
Official • Foreign Corrupt Practices Act,
1977
• Prevention of
Corruption • Prevention of Corruption Act,
1988
• Central Vigilance
Commission • Central Vigilance Commission
Act, 2003
• Lokpal and Lokayukta Act 2013
• Fugitive Economic Offender Act,
2018
• ICSI Anti Bribery Code

Lesson Outline
• Introduction
• Regulatory Framework
• Bribery and Corruption - Global Scenarios
• Brief Information on the Laws and Enforcement Regime in India
• Delhi Special Police Establishment Act, 1946
• Unlawful Activities (Prevention) Act, 1967
• Foreign Corrupt Practices Act, 1977
• Prevention of Corruption Act, 1988
• Central Vigilance Commission Act, 2003
• Lokpal and Lokayukta Act, 2013
• Fugitive Economic Offender Act, 2018
• ICSI Anti Bribery Code
• LESSON ROUND-UP
• GLOSSARY
• TEST YOURSELF
480 Lesson 17 • PP-GRMCE

INTRODUCTION

Forceful and Regulatory Ethics

Ethical practices can be voluntary or compulsory. Again compulsory practices can be categorized into following:-
(i) Semi compulsory: customary which has become ritual i.e. family customs, organizational customs, religious
customs etc.
(ii) Quasi statutory: This would include rules, regulations, code of conduct, discipline rules, office orders, circulars etc.
(iii) Statutory: common law which applies to all.
(iv) In case of any legal dispute, the Court may also take cognizance of the quasi statutory ethical practices which
are codified. Semi compulsory ethical practices are not codified.
In this lesson, we will discuss the statutory or regulatory ethical practices, which if violated, would amount to legal
action in the form of punishment or/and fine. It can be said that most of the laws in India are against corruption and
in India we link corruption with bribery. There may be non bribery corruption also like favoritism, not deciding on
merit, willful negligence of use of resources etc.
The Indian economy is characterized by the presence of a big government – the Indian political structure encompasses
central and state governments, as well as various local self-governance structures. Apart from performing functions
such as regulation and licensing, the government also operates large commercial enterprises in several sectors,
including education, defence, aviation, railways (a near monopoly), infrastructure and healthcare – accordingly,
interactions with the government (in its various forms) and government owned enterprises are unavoidable
for entities looking to do business in India. It is also important to bear in mind that Indian laws and regulations
often provide for considerable discretion in the hands of government agencies and personnel, and this can make
interacting with government a subjective and time-consuming exercise.
While Indian anti-corruption laws are fairly stringent, corruption is not uncommon in India, and until recently the
enforcement of anti-corruption laws left much to be desired. This has led to unfortunate notion (particularly outside
India) that corruption is an accepted practice in India – however, this notion is misplaced, and recent years have been
marked with growing public dissatisfaction over corruption and its cost to the Indian economy. Over the past five to
six years, there has been a strong public sentiment against corruption, and high-profile instances of corruption have
become key political and election issues – for example, the incumbent Indian government has also taken a hard line
stance on corruption issues.
These factors has prompted the introduction of several legislative measures aimed at tackling corruption in India,
including the creation of an independent ombudsman (the Lokpal) to investigate and prosecute cases of corruption
to the public officials (including ministers), expansion of existing laws governing money laundering and ‘bemani’
(i.e. proxy) transactions, and new laws to target undisclosed income and assets (whether in India or aboard). Most
importantly, the past few years have seen a change in attitude of enforcement agencies, which have started enforcing
anti-corruption laws aggressively in India, and have been supported in their efforts by the judiciary (which has taken
up an active role in monitoring corruption cases).

Bribery and Corruption - Global Scenarios

US: The deterrence of bribery and corruption is one of the primary issues for governments worldwide. The US
Foreign Corrupt Practices Act, 1977 (FCPA), which prohibits businesses from bribing foreign officials and political
figures, remains the most robustly enforced anti-bribery and anti-corruption (ABAC) legislation globally. The US
Department of Justice and the Securities and Exchange Commission take the lead in its enforcement. The core aim
of the Foreign Corrupt Practices Act (FCPA) is to prohibit companies and their individual officers from influencing
foreign officials with any personal payments or rewards. The FCPA applies to any person who has a certain degree
of connection to the United States and engages in corrupt practices abroad, as well as to U.S. businesses, foreign
corporations trading securities in the U.S., American nationals, citizens, and residents acting in furtherance of a
foreign corrupt practice, whether or not they are physically present in the U.S. This is considered the nationality
principle of the Act. Any individuals involved in these activities may face prison time. In the case of foreign natural and
legal persons, the Act covers their deeds if they are in the U.S. at the time of the corrupt conduct. This is considered
the protective principle of the Act.
Lesson 17 • Anti-Corruption and Anti-Bribery Laws in India 481

UK: The Bribery Act 2010 is an Act of the Parliament of the United Kingdom that covers the criminal law relating to
bribery. Introduced to Parliament in the Queen’s Speech in 2009 after several decades of reports and draft bills, the
Act received the Royal Assenton 8 April 2010 following cross-party support. Initially scheduled to enter into force
in April 2010, this was changed to 1 July 2011. The Act repeals all previous statutory and common law provisions
in relation to bribery, instead replacing them with the crimes of bribery, being bribed, the bribery of foreign public
officials, and the failure of a commercial organisation to prevent bribery on its behalf.
The penalties for committing a crime under the Act are a maximum of 10 years’ imprisonment, along with an
unlimited fine, and the potential for the confiscation of property under the Proceeds of Crime Act 2002, as well as the
disqualification of directors under the Company Directors Disqualification Act 1986. The Act has a near-universal
jurisdiction, allowing for the prosecution of an individual or company with links to the United Kingdom, regardless
of where the crime occurred. Described as “the toughest anti-corruption legislation in the world”, concerns have
been raised that the Act’s provisions criminalize behaviour that is acceptable in the global market, and puts British
business at a competitive disadvantage.

BRIEF INFORMATION ON THE LAWS AND ENFORCEMENT REGIME IN INDIA

(A) DELHI SPECIAL POLICE ESTABLISHMENT ACT, 1946

The Central Bureau of Investigation traces its origin to the Special Police Establishment (SPE) which was set up
in 1941 by the Government of India. The preamble of the Act provides that it is an Act to make provision for the
constitution of a special police force in Delhi for the investigation of certain offences in the Union territories for
the superintendence and administration of the said force and for the extension to other areas of the powers and
jurisdiction of members of the said force in regard to the investigation of the said offences.
The functions of the SPE then were to investigate cases of bribery and corruption in transactions with the War
& Supply Deptt. of India during World War II. Even after the end of the War, the need for a Central Government
agency to investigate cases of bribery and corruption by Central Government employees was felt. The Delhi
Special Police Establishment Act was therefore brought into force in 1946. The CBI’s power to investigate case
is derived from this Act.
As amended by the Central Vigilance Commission Act, 2003. This is an Act to make provision for the constitution of a
special police force in Delhi for the investigation of certain offences in the Union Territories, for the superintendence
and administration of the said force and for the extension to other of the powers and jurisdiction of members of the
said force in regard to the investigation of the said offences.
The Act consists of total six sections only. The Act extends to the whole of India.
Constitution and powers of special police establishment (Section 2):
(1) Notwithstanding anything in the Police Act, 1861 (5 of 1861), the Central Government may constitute a special
police force to be called the Delhi Special Police Establishment for the investigation in any Union territory of
offences notified under section 3.
(2) Subject to any orders which the Central Government may make in this behalf, members of the said police
establishment shall have throughout any Union territory, in relation to the investigation of such offences
and arrest of persons concerned in such offences, all the powers, duties, privileges and liabilities which
police officers of that Union territory have in connection with the investigation of offences committed
therein.
(3) Any member of the said police establishment of or above the rank of Sub-Inspector may, subject to any orders
which the Central Government may make in this behalf, exercise in any Union territory any of the powers of
the officer in charge of a police station in the area in which he is for the time being and when so exercising such
powers shall, subject to any such orders as aforesaid, be deemed to be an officer in charge of a police station
discharging functions of such an officer within the limits of his station.
Offences to be investigated by special police establishment (Section 3):
The Central Government may, by notification in the Official Gazette, specify the offences or classes of offences which
are to be investigated by the Delhi Special Police Establishment.
482 Lesson 17 • PP-GRMCE

Superintendence and administration of Special Police Establishment (Section 4):

(1) The superintendence of the Delhi Special Police Establishment in so far as it relates to investigation of offences
alleged to have been committed under the Prevention of Corruption Act, 1988 (49 of 1988), shall vest in the
Commission.
(2) Save as otherwise provided in sub-section (1), the superintendence of the said police establishment in all other
matters shall vest in the Central Government.
(3) The administration of the said police establishment shall vest in an officer appointed in this behalf by the
Central Government (hereinafter referred to as the Director) who shall exercise in respect of that police
establishment such of the powers exercisable by an Inspector-General of Police in respect of the police force in
a State as the Central Government may specify in this behalf.
Committee for appointment of Director (Section 4A)
(1) The Central Government shall appoint the Director on the recommendation of the Committee consisting of—
(a) the Prime Minister — Chairperson;
(b) the Leader of Opposition recognised — Member;
(c) as such in the House of the People or where there is no such Leader of Opposition, then the Leader of the
single largest Opposition Party in that House;
(d) the Chief Justice of India or Judge of the Supreme — Member. Court nominated by him.
(2) No appointment of a Director shall be invalid merely by reason of any vacancy or absence of a Member in the
Committee.
(3) The Committee shall recommend a panel of officers—
(a) on the basis of seniority, integrity and experience in the investigation of anti-corruption cases; and
(b) chosen from amongst officers belonging to the Indian Police Service constituted under the All-India
Services Act, 1951 (61 of 1951), for being considered for appointment as the Director.
Terms and conditions of service of Director (Section 4B)
(1) The Director shall, notwithstanding anything to the contrary contained in the rules relating to his conditions of
service, continue to hold office for a period of not less than two years from the date on which he assumes office.
(2) The Director shall not be transferred except with the previous consent of the Committee referred to in sub-
section (1) of section 4A.
Director of Prosecution (Section 4BA)
(1) There shall be a Directorate of Prosecution headed by a Director who shall be an officer not below the rank of
Joint Secretary to the Government of India, for conducting prosecution of cases under this Act.
(2) The Director of Prosecution shall function under the overall supervision and control of the Director.
(3) The Central Government shall appoint the Director of Prosecution on the recommendation of the Central
Vigilance Commission.
(4) The Director of Prosecution shall nothwithstanding anything to the contrary contained in the rules relating to
hi conditions of service, continue to hold office for a period of not less than two years from the date on which
he assumes office.
Appointment for posts of Superintendent of Police and above, extension and curtailment of their tenure, etc.
(Section 4C)
(1) The Central Government shall appoint officers to the posts of the level of Superintendent of Police and above
except Director, and also recommend the extension or curtailment of the tenure of such officers in the Delhi
Special Police Establishment, on the recommendation of a committee consisting of : —
(a) the Central Vigilance Commissioner —Chairperson;
(b) Vigilance Commissioners —Members;
Lesson 17 • Anti-Corruption and Anti-Bribery Laws in India 483

(c) Secretary to the Government of India in Charge of the Ministry of Home —Members;
(d) Secretary to the Government of India in charge of the —Members:
Department of Personnel Provided that the Committee shall consult the Director before submitting its
recommendation to the Central Government.
(2) On receipt of the recommendation under sub-section (1), the Central Government shall pass such orders as it
thinks fit to give effect to the said recommendation.
Extension of powers and jurisdiction of special police establishment to other areas (Section 5):
(1) The Central Government may by order extend to any area (including Railway areas) in a State, not being a
Union territory the powers and jurisdiction of members of the Delhi Special Police Establishment for the
investigation of any offences or classes of offences specified in a notification under section 3.
(2) When by an order under sub-section (1) the powers and jurisdiction of members of the said police establishment
are extended to any such area, a member thereof may, subject to any orders which the Central Government
may make in this behalf, discharge the functions of a police officer in that area and shall, while so discharging
such functions, be deemed to be a member of the police force of that area and be vested with the powers,
functions and privileges and be subject to the liabilities of a police officer belonging to that police force.
(3) Where any such order under sub-section (1) is made relation to any area, then, without prejudice to the provisions
of sub-section (2), any member of the Delhi Special Police Establishment of or above the rank of Sub-Inspector
may, subject to any orders which the Central Government may make in this behalf, exercise the powers of the
officer in charge of a police station in that area and when so exercising such powers, shall be deemed to be an
officer in charge of a police station discharging the functions of such an officer within the limits of his station.
Consent of State Government to exercise of powers and jurisdiction (Section 6):
Nothing contained in section 5 shall be deemed to enable any member of the Delhi Special Police Establishment
to exercise powers and jurisdiction in any area in a State, not being a Union territory or railway area, without the
consent of the Government of that State.
Approval of Central Government to conduct, inquiry or investigation (Section 6A):
(1) The Delhi Special Police Establishment shall not conduct any inquiry or investigation into any offence alleged
to have been committed under the Prevention of Corruption Act, 1988 (49 of 1988) except with the previous
approval of the Central Government where such allegation relates to—
(a) the employees of the Central Government of the level of Joint Secretary and above; and
(b) such officers as are appointed by the Central Government in corporations established by or under any
Central Act, Government companies, societies and local authorities owned or controlled by that Government.
(2) Notwithstanding anything contained in sub-section (1), no such approval shall be necessary for cases involving
arrest of a person on the spot on the charge of accepting or attempting to accept any gratification other than
legal remuneration referred to in clause (c) of the Explanation to section 7 of the Prevention of Corruption Act,
1988 (49 of 1988)].

(B) UNLAWFUL ACTIVITIES (PREVENTION) ACT, 1967

The Act was enacted to make provisions as to more effective prevention of certain unlawful activities of Individual’s
and associations’ and for dealing with terrorist activities, and for matters connected therewith.
The Act was amended by the Unlawful Activities (Prevention) Amendment Act, 2004 and also the Amending Act
of 2008 for adding in its long title, the object of dealing with the Terrorist Activities. The said amendments were
made in pursuance with the Resolutions of the Security Council of the United Nations requiring all the States to take
measures and actions against terrorism.
Preliminary (Chapter I):
The provisions of the Act extended to the whole of India.
Every person shall be liable to punishment under this Act for every act or omission contrary to the provisions
thereof, of which he is held guilty in India.
484 Lesson 17 • PP-GRMCE

Any person, who commits an offence beyond India, which is punishable under this Act, shall be dealty with according
to the provisions of this Act in the same manner as if such act had been committed in India.
The provisions of this Act also apply to-
(a) Citizens of India outside India;
(b) Persons in the service of the Government, wherever they may be; and
(c) Persons on ships and aircrafts, registered in India, whereever they may be.
The Act consists of total 53 sections divided into seven chapters and four schedules.

Chapter Subject Sections

I Preliminary 1 to 2
II Unlawful Assocations 3 to 9
III Offences and Penalties 10 to 14
IV Punishment for Terrorist Activities 15 to 23
V Forfeiture of Proceeds of Terrorism or any property intended to be used for Terrorism 24 to 34
VI Terrosit Organisations and Individuals 35 to 40
VII Miscellaneous 41 to 53

Schedule Particulars
I Name of Terrorist Organisations
II Terrorist Act
III High quality counterfeit Indian currency
IV Name of Terrorist (Individual)

Some Important Definitions

Court [Section 2(1)(d)]
It means a criminal court having jurisdiction, under the Code, to try offences under this Act [and includes a Special
Court constituted under section 11 or under 2 [section 22 of the National Investigation Agency Act, 2008.
Designated Authority [Secton 2(1)(e)]
It means such officer of the Central Government not below the rank of Joint Secretary to that Government, or such
officer of the State Government not below the rank of Secretary to that Government, as the case may be, as may be
specified by the Central Government or the State Government, by notification published in the Official Gazette.
Economic security [Section 2(1)(ea)]
It includes financial, monetary and fiscal stability, security of means of production and distribution, food security,
livelihood security, energy security, ecological and environmental security.
Proceeds of terrorism [Section 2(1)(g)]
It means,— (i) all kinds of properties which have been derived or obtained from commission of any terrorist act or
have been acquired through funds traceable to a terrorist act, irrespective of person in whose name such proceeds
are standing or in whose possession they are found; or
(ii) any property which is being used, or is intended to be used, for a terrorist act or for the purpose of an individual
terrorist or a terrorist gang or a terrorist organisation.
Explanation.—For the purposes of this Act, it is hereby declared that the expression “proceeds of terrorism” includes
any property intended to be used for terrorism;
 Lesson 17 • Anti-Corruption and Anti-Bribery Laws in India 485

Property [Section 2(1)(h)]

It means property and assets of every description whether corporeal or incorporeal, movable or immovable, tangible
or intangible and legal documents, deeds and instruments in any form including but not limited to] electronic or
digital, evidencing title to, or interest in, such property or assets by means of bank credits, travellers’ cheques, bank
cheques, money orders, shares, securities, bonds, drafts, letters of credit, cash and bank account including fund,
however acquired.
Unlawful activity [Section 2(1)(o)]
In relation to an individual or association, means any action taken by such individual or association (whether by
committing an act or by words, either spoken or written, or by signs or by visible representation or otherwise),—
(i) which is intended, or supports any claim, to bring about, on any ground whatsoever, the cession of a part of
the territory of India or the secession of a part of the territory of India from the Union, or which incites any
individual or group of individuals to bring about such cession or secession; or
(ii) which disclaims, questions, disrupts or is intended to disrupt the sovereignty and territorial integrity of India; or
(iii) which causes or is intended to cause disaffection against India;
Unlawful association [Section 2(1)(p)]
It means any association,—
(i) which has for its object any unlawful activity, or which encourages or aids persons to undertake any unlawful
activity, or of which the members undertake such activity; or
(ii) which has for its object any activity which is punishable under section 153A (45 of 1860) or section 153B of
the Indian Penal Code, or which encourages or aids persons to undertake any such activity, or of which the
members undertake any such activity.
Unlawful Associations (Chapter II)
Chapter II deals with the matters relating to the unlawful associations and consists of section 3 to 9.
Section 3 empowers the Central Govt to declare any association as an unlawful association by notification in the Official
Gazette which shall specify the grounds on which it is issued. Such declaration by the Central Govt shall not have
effect until the Tribunal has by an order made under section 4 confirmed the declaration. if the Central Government
is of opinion that circumstances exist which render it necessary for that Government to declare an association to be
unlawful with immediate effect, it may, for reasons to be stated in writing, direct that the notification shall, subject to
any order that may be made under section 4, have effect from the date of its publication in the Official Gazette.
Section 4 provides that where any associon has been declared unlawful by a notification issued under section 3, the
Central Government shall, within 30 days from the date of the publication of the notification refer the notification
to the Tribunal for the purpose of adjudicating whether or not there is sufficient cause for declaring the association
unlawful. The Tribunal will hear both the parties i.e. the association and the Central Govt and the order of the
Tribunal shall be published in the official Gazette.Section 5 gives the power to the Central Govt to constitute Tribunal
to be known as ‘Unlawful Activities (Prevention) Tribunal.
Section 7 gives the power to the Central Gove to prohibit the use of funds of an unlawful association and section 8
gives the power to notify places used for the purpose of an unlawful association. Section 9 deals with the matters
relating to the procedure to be followes in the disposal of applications under this Act.
Offences and Penalties (Chapter III)
10. Penalty for being member of an unlawful association, etc (secton 10)
Where an association is declared unlawful by a notification issued under section 3 which has become effective under
sub-section (3) of that section,—
(a) a person, who—
(i) is and continues to be a member of such association; or
(ii) takes part in meetings of such association; or
486 Lesson 17 • PP-GRMCE

(iii) contributes to, or receives or solicits any contribution for the purpose of, such association; or
(iv) in any way assists the operations of such association, shall be punishable with imprisonment for a term
which may extend to two years, and shall also be liable to fine; and
(b) a person, who is or continues to be a member of such association, or voluntarily does an act aiding or promoting
in any manner the objects of such association and in either case is in possession of any unlicensed firearms,
ammunition, explosive or other instrument or substance capable of causing mass destruction and commits
any act resulting in loss of human life or grievous injury to any person or causes significant damage to any
property,—
(i) and if such act has resulted in the death of any person, shall be punishable with death or imprisonment
for life, and shall also be liable to fine;
(ii) in any other case, shall be punishable with imprisonment for a term which shall not be less than five
years but which may extend to imprisonment for life, and shall also be liable to fine.
Penalty for dealing with funds of an unlawful association (Section 11)
If any person on whom a prohibitory order has been served under sub-section (1) of section 7 in respect of any
moneys, securities or credits pays, delivers, transfers or otherwise deals in any manner whatsoever with the same
in contravention of the prohibitory order, he shall be punishable with imprisonment for a term which may extend
to three years, or with fine, or with both, and notwithstanding anything contained in the Code, the court trying
such contravention may also impose on the person convicted an additional fine to recover from him the amount
of the moneys or credits or the market value of the securities in respect of which the prohibitory order has been
contravened or such part thereof as the court may deem fit.
Penalty for contravention of an order made in respect of a notified place (Section 12)
(1) Whoever uses any article in contravention of a prohibitory order in respect thereof made under sub-section
(3) of section 8 shall be punishable with imprisonment for a term which may extend to one year, and shall also
be liable to fine.
(2) Whoever knowingly and wilfully is in, or effects or attempts to effect entry into, a notified place in contravention
of an order made under sub-section (4) of section 8 shall be punishable with imprisonment for a term which
may extend to one year, and shall also be liable to fine.
Punishment for unlawful activities (Section 13)
(1) Whoever—
(a) takes part in or commits, or
(b) advocates, abets, advises or incites the commission of, any unlawful activity, shall be punishable with
imprisonment for a term which may extend to seven years and shall also be liable to fine.
(2) Whoever, in any way, assists any unlawful activity of any association, declared unlawful under section 3, after
the notification by which it has been so declared has become effective under sub-section (3) of that section,
shall be punishable with imprisonment for a term which may extend to five years, or with fine, or with both.
(3) Nothing in this section shall apply to any treaty, agreement or convention entered into between the Government
of India and the Government of any other country or to any negotiations there for carried on by any person
authorised in this behalf by the Government of India.
Offences to be cognizable (section 14)
Notwithstanding anything contained in the 1 [Code], an offence punishable under this Act shall be cognizable.
Punishment for Terrorist Activities (Chapter IV):
Terrorist act (Section 15):
(1) Whoever does any act with intent to threaten or likely to threaten the unity, integrity, security 5 [, economic
security,] or sovereignty of India or with intent to strike terror or likely to strike terror in the people or any
section of the people in India or in any foreign country,—
 Lesson 17 • Anti-Corruption and Anti-Bribery Laws in India 487

(a) by using bombs, dynamite or other explosive substances or inflammable substances or firearms or other
lethal weapons or poisonous or noxious gases or other chemicals or by any other substances (whether
biological radioactive, nuclear or otherwise) of a hazardous nature or by any other means of whatever
nature to cause or likely to cause—
(i) death of, or injuries to, any person or persons; or
(ii) loss of, or damage to, or destruction of, property; or
(iii) disruption of any supplies or services essential to the life of the community in India or in any
foreign country; or
(iiia) damage to, the monetary stability of India by way of production or smuggling or circulation of high
quality counterfeit Indian paper currency, coin or of any other material; or
(iv) damage or destruction of any property in India or in a foreign country used or intended to be used
for the defence of India or in connection with any other purposes of the Government of India, any
State Government or any of their agencies; or
(b) overawes by means of criminal force or the show of criminal force or attempts to do so or causes death
of any public functionary or attempts to cause death of any public functionary; or
(c) detains, kidnaps or abducts any person and threatens to kill or injure such person or does any other
act in order to compel the Government of India, any State Government or the Government of a foreign
country or an international or inter-governmental organisation or any other person to do or abstain
from doing any act; or commits a terrorist act.
Explanation.—For the purpose of this sub-section,—
(a) “public functionary” means the constitutional authorities or any other functionary notified in the Official
Gazette by the Central Government as public functionary;
(b) “high quality counterfeit Indian currency” means the counterfeit currency as may be declared after
examination by an authorised or notified forensic authority that such currency imitates or compromises
with the key security features as specified in the Third Schedule.
(2) The terrorist act includes an act which constitutes an offence within the scope of, and as defined in any of the
treaties specified in the Second Schedule.
Punishment for terrorist act (Section 16)
(1) Whoever commits a terrorist act shall,—
(a) if such act has resulted in the death of any person, be punishable with death or imprisonment for life, and
shall also be liable to fine;
(b) in any other case, be punishable with imprisonment for a term which shall not be less than five years but
which may extend to imprisonment for life, and shall also be liable to fine.
16A. Punishment for making demands of radioactive substances, nuclear devices, etc. [Omitted]
Punishment for raising funds for terrorist act ( Section 17)
Whoever, in India or in a foreign country, directly or indirectly, raises or provides funds or collects funds, whether from
a legitimate or illegitimate source, from any person or persons or attempts to provide to, or raises or collects funds for
any person or persons, knowing that such funds are likely to be used, in full or in part by such person or persons or by
a terrorist organisation or by a terrorist gang or by an individual terrorist to commit a terrorist act, notwithstanding
whether such funds were actually used or not for commission of such act, shall be punishable with imprisonment for a
term which shall not be less than five years but which may extend to imprisonment for life, and shall also be liable to fine.
Explanation.—For the purpose of this section,—
(a) participating, organising or directing in any of the acts stated therein shall constitute an offence;
(b) raising funds shall include raising or collecting or providing funds through production or smuggling or
circulation of high quality counterfeit Indian currency; and
488 Lesson 17 • PP-GRMCE

(c) raising or collecting or providing funds, in any manner for the benefit of, or, to an individual terrorist, terrorist
gang or terrorist organisation for the purpose not specifically covered under section 15 shall also be construed
as an offence.
Punishment for conspiracy, etc (Section 18)
Whoever conspires or attempts to commit, or advocates, abets, advises or 3 [incites, directly or knowingly facilitates]
the commission of, a terrorist act or any act preparatory to the commission of a terrorist act, shall be punishable
with imprisonment for a term which shall not be less than five years but which may extend to imprisonment for life,
and shall also be liable to fine.
Punishment for organising of terrorist camps (Section 18A)
Whoever organises or causes to be organised any camp or camps for imparting training in terrorism shall be punishable
with imprisonment for a term which shall not be less than five years but which may extend to imprisonment for life,
and shall also be liable to fine.
Punishment for recruiting of any person or persons for terrorist act (Section 18B)
Whoever recruits or causes to be recruited any person or persons for commission of a terrorist act shall be punishable
with imprisonment for a term which shall not be less than five years but which may extend to imprisonment for life,
and shall also be liable to fine.
Punishment for harbouring, etc. (Section 19)
Whoever voluntarily harbours or conceals, or attempts to harbour or conceal any person knowing that such person
is a terrorist shall be punishable with imprisonment for a term which shall not be less than three years but which
may extend to imprisonment for life, and shall also be liable to fine:
Provided that this section shall not apply to any case in which the harbour or concealment is by the spouse of the
offender.
Punishment for being member of terrorist gang or organisation (Section 20)
Any person who is a member of a terrorist gang or a terrorist organisation, which is involved in terrorist act, shall be
punishable with imprisonment for a term which may extend to imprisonment for life, and shall also be liable to fine.
Punishment for holding proceeds of terrorism (Section 21)
Whoever knowingly holds any property derived or obtained from commission of any terrorist act or acquired
through the terrorist fund shall be punishable with imprisonment for a term which may extend to imprisonment for
life, and shall also be liable to fine.
Punishment for threatening witness (Section 22)
Whoever threatens any person who is a witness or any other person in whom such witness may be interested, with
violence, or wrongfully restrains or confines the witness, or any other person in whom the witness may be interested,
or does any other unlawful act with intent to cause any of the said acts, shall be punishable with imprisonment
which may extend to three years, and shall also be liable to fine.
22A. Offences by companies (Section 22A)
(1) Where an offence under this Act has been committed by a company, every person (including promoters of the
company) who, at the time the offence was committed, was in charge of, and was responsible to, the company
for the conduct of the business of the company, as well as the company, shall be deemed to be guilty of the
offence and shall be liable to be proceeded against and punished accordingly: Provided that nothing contained
in this sub-section shall render any such person (including promoters) liable to any punishment provided in
this Act, if he proves that the offence was committed without his knowledge or that he had exercised reasonable
care to prevent the commission of such offence.
(2) Notwithstanding anything contained in sub-section (1), where an offence under this Act has been committed
by a company and it is proved that the offence has been committed with the consent or connivance of, or is
attributable to, any neglect on the part of, any promoter, director, manager, secretary or other officer of the
company, such promoter, director, manager, secretary or other officer shall also be deemed to be guilty of that
offence and shall be liable to be proceeded against and punished accordingly.
Lesson 17 • Anti-Corruption and Anti-Bribery Laws in India 489

Explanation.—For the purposes of this section,—

(a) “company” means any body corporate and includes a firm or other association of individuals; and (b)
“director”, in relation to a firm, means a partner in the firm.
Offences by societies or trusts (Section 22B)
(1) Where an offence under this Act has been committed by a society or trust, every person (including the
promoter of society or settlor of the trust) who at the time the offence was committed was in charge of, and
was responsible to, the society or trust for the conduct of the business of the society or the trust, as well as
the society or trust, shall be deemed to be guilty of the offence and shall be liable to be proceeded against and
punished accordingly: Provided that nothing contained in this sub-section shall render any such person liable
to any punishment provided in this Act, if he proves that the offence was committed without his knowledge or
that he exercised reasonable care to prevent the commission of such offence.
(2) Notwithstanding anything contained in sub-section (1), where any offence under this Act has been committed
by a society or trust and it is proved that the offence has been committed with the consent or connivance of, or
is attributable to, any neglect on the part of any promoter, director, manager, secretary, trustee or other officer
of the society or trust, such promoter, director, manager, secretary, trustee or other officer shall also be deemed
to be guilty of that offence and shall be liable to be proceeded against and punished accordingly.
Explanation.—For the purpose of this section,—
(a) “society” means any body corporate registered under the Societies Registration Act, 1860 (21 of 1860)
or any other State Act governing the registration of societies;
(b) “trust” means any body registered under the Indian Trusts Act, 1882 (2 of 1882) or any other State Act
governing the registration of trusts;
(c) “director”, in relation to a society or trust, means a member of its governing board other than an ex officio
member representing the interests of the Central or State Government or the appropriate statutory
authority.
Punishment for offences by companies, societies or trusts (section 22C)
Where any offence under the Act has been committed by a company or a society or a trust, as the case may be, every
person (including promoter of company or trust or settlor of the trust) who at the time of the offence was either in
charge or responsible for the conduct of the business shall be punishable with imprisonment for a term which shall
not be less than seven years but which may extend to imprisonment for life and shall also be liable with fine which
shall not be less than five crore rupees and which may extend to ten crore rupees.
Enhanced penalties (Section 23)
(1) If any person with intent to aid any terrorist or terrorist organisation or a terrorist gang contravenes] any
provision of, or any rule made under the Explosives Act, 1884(4 of 1884) or the Explosive Substances Act,
1908(6 of 1908) or the Inflammable Substances Act, 1952(20 of 1952) or the Arms Act, 1959(54 of 1959),
or is in unauthorised possession of any bomb, dynamite or hazardous explosive substance or other lethal
weapon or substance capable of mass destruction or biological or chemical substance of warfare or high
quality counterfeit Indian currency, he shall, notwithstanding anything contained in any of the aforesaid Acts
or the rules made thereunder, be punishable with imprisonment for a term which shall not be less than five
years but which may extend to imprisonment for life, and shall also be liable to fine.
(2) Any person who with the intent to aid any terrorist, or a terrorist organisation or a terrorist gang], attempts
to contravene or abets, or does any act preparatory to contravention of any provision of any law or rule
specified in sub-section (1), shall be deemed to have contravened that provision under sub-section (1) and
the provisions of that sub-section in relation to such person, have effect subject to the modification that the
reference to “imprisonment for life” therein shall be construed as a reference to “imprisonment for ten years”.
Forfeiture of Proceeds of Terrorism or Any Property Intended to be used for Terrorism (Chapter V):
Reference to proceeds of terrorism to include any property intended to be used for terrorism (Section 24)
In this Chapter, unless the context otherwise requires, all references to “proceeds of terrorism” shall include any
property intended to be used for terrorism.
490 Lesson 17 • PP-GRMCE

Forfeiture of proceeds of terrorism (Section 24A)

(1) No person shall hold or be in possession of any proceeds of terrorism.
(2) Proceeds of terrorism, whether held by a terrorist organisation or terrorist gang or by any other person and
whether or not such terrorist or other person is prosecuted or convicted for any offence under Chapter IV or
Chapter VI, shall be liable to be forfeited to the Central Government or the State Government, as the case may
be, in the manner provided under this Chapter.
(3) Where proceedings have been commenced under this section, the court may pass an order directing attachment
or forfeiture, as the case may be, of property equivalent to, or, the value of the proceeds of terrorism involved
in the offence.
Powers of investigating officer and Designated Authority and appeal against order of Designated Authority
(Section 25)
(1) If an officer investigating an offence committed under Chapter IV or Chapter VI, has reason to believe that any
property in relation to which an investigation is being conducted, represents proceeds of terrorism, he shall,
with the prior approval in writing of the Director General of the Police of the State in which such property is
situated, or where the investigation is conducted by an officer of the National Investigation Agency, with the
prior approval of the Director General of National Investigation Agency, make an order seizing such property
and where it is not practicable to seize such property, make an order of attachment directing that such property
shall not be transferred or otherwise dealt with except with the prior permission of the officer making such
order, or of the Designated Authority before whom the property seized or attached is produced and a copy of
such order shall be served on the person concerned.
(2) The investigating officer shall duly inform the Designated Authority within forty-eight hours of the seizure or
attachment of such property.
(3) The Designated Authority before whom the seized or attached property is produced shall either confirm
or revoke the order of seizure or attachment so issued within a period of sixty days from the date of such
production: Provided that an opportunity of making a representation by the person whose property is being
seized or attached shall be given.
(4) In the case of immovable property attached by the investigating officer, it shall be deemed to have been
produced before the Designated Authority, when the investigating officer notifies his report and places it at
the disposal of the Designated Authority.
(5) The investigating officer may seize and detain any cash to which this Chapter applies if he has reasonable
grounds for suspecting that—
(a) it is intended to be used for the purposes of terrorism; or
(b) it forms the whole or part of the resources of a terrorist organisation.
Provided that the cash seized under this sub-section by the investigating officer shall be released within a
period of forty-eight hours beginning with the time when it is seized unless the matter involving the cash
is before the Designated Authority and such Authority passes an order allowing its retention beyond forty-
eight hours.
Explanation.—For the purposes of this sub-section, “cash” means—
(a) coins or notes in any currency;
(b) postal orders; (c) traveller’ scheques;
(c) (ca) credit or debit cards or cards that serve a similar purpose;
(d) banker’s drafts; and
(e) such other monetary instruments as the Central Government or, as the case may be, the State Government
may specify by an order made in writing.
Lesson 17 • Anti-Corruption and Anti-Bribery Laws in India 491

(6) Any person aggrieved by an order made by the Designated Authority may prefer an appeal to the court within
a period of thirty days from the date of receipt of the order, and the court may either confirm the order of
attachment of property or seizure so made or revoke such order and release the property.
Court to order forfeiture of proceeds of terrorism (Section 26)
Where any property is seized or attached on the ground that it constitutes proceeds of terrorism and the court
confirms the order in this regard under sub-section (6) of section 25, it may order forfeiture of such property,
whether or not the person from whose possession it is seized or attached, is prosecuted in a court for an offence
under Chapter IV or Chapter VI.
Issue of show cause notice before forfeiture of proceeds of terrorism (Section 27)
(1) No order forfeiting any proceeds of terrorism shall be made under section 26 unless the person holding or in
possession of such proceeds is given a notice in writing informing him of the grounds on which it is proposed
to forfeit the proceeds of terrorism and such person is given an opportunity of making a representation in
writing within such reasonable time as may be specified in the notice against the grounds of forfeiture and is
also given a reasonable opportunity of being heard in the matter.
(2) No order of forfeiture shall be made under sub-section (1), if such person establishes that he is a bona fide
transferee of such proceeds for value without knowing that they represent proceeds of terrorism.
(3) It shall be competent for the court to make an order in respect of property seized or attached,— (a) directing
it to be sold if it is a perishable property and the provisions of section 459 of the Code shall, as nearly as may
be practicable, apply to the net proceeds of such sale; (b) nominating any officer of the Central Government or
the State Government, in the case of any other property, to perform the function of the Administrator of such
property subject to such conditions as may be specified by the court.

Appeal (Section 28)

(1) Any person aggrieved by an order of forfeiture under section 26 may, within one month from the date of the
receipt of such order, appeal to the High Court within whose jurisdiction, the court, which passed the order
appealed against, is situated.
(2) Where an order under section 26 is modified or annulled by the High Court or where in a prosecution instituted
for any offence under Chapter IV or Chapter VI, the person against whom an order of forfeiture has been made
under section 26 is acquitted, such property shall be returned to him and in either case if it is not possible
for any reason to return the forfeited property, such person shall be paid the price therefor as if the property
had been sold to the Central Government with reasonable interest calculated from the day of seizure of the
property and such price shall be determined in the manner prescribed.

Order of forfeiture not to Interfere with other punishments (Section 29)

The order of forfeiture made under this Chapter by the court, shall not prevent the infliction of any other punishment
to which the person affected thereby is liable under Chapter IV or Chapter VI.
Claims by third party (Section 30)
(1) Where any claim is preferred or any objection is made to the seizure or attachment of any property under
section 25 on the ground that such property is not liable to seizure or attachment, the Designated Authority
before whom such property is produced, shall proceed to investigate the claim or objection: Provided that
no such investigation shall be made where the Designated Authority considers that the claim or objection is
designed to cause unnecessary delay.
(2) Where an appeal has been preferred under sub-section (6) of section 25 and any claimant or objector
establishes that the property specified in the notice issued under section 27 is not liable to be forfeited under
this Chapter, the said notice shall be withdrawn or modified accordingly.

Powers of Designated Authority (Section 31)

The Designated Authority, acting under the provisions of this Chapter, shall have all the powers of a civil court
required for making a full and fair inquiry into the matter before it.
492 Lesson 17 • PP-GRMCE

Certain transfers to be null and void (Section 32)

Where, after the issue of an order under section 25 or issue of a notice under section 27, any property referred to in
the said order or notice is transferred by any mode whatsoever, such transfer shall, for the purpose of the proceedings
under this Chapter, be ignored and if such property is subsequently forfeited, the transfer of such property shall be
deemed to be null and void.
Forfeiture of property of certain persons (Section 33)
(1) Where any person is accused of an offence under Chapter IV or Chapter VI, it shall be open to the court to pass
an order that all or any of the properties, movable or immovable or both, belonging to him, shall, during the
period of such trial, be attached, if not already attached under this Chapter.
(2) Where a person has been convicted of any offence punishable under Chapter IV or Chapter VI, the court may,
in addition to awarding any punishment, by order in writing, declare that any property, movable or immovable
or both, belonging to the accused and specified in the order, shall stand forfeited to the Central Government or
the State Government, as the case may be, free from all encumbrances.
(3) Where any person is accused of an offence concerning high quality counterfeit Indian currency, the court may
pass an order directing attachment or forfeiture, as the case may be, of property equivalent to the value of such
high quality counterfeit Indian currency involved in the offence including the face value of such currency which
are not defined to be of high quality, but are part of the common seizure along with the high quality counterfeit
Indian currency.
(4) Where a person is accused of an offence punishable under Chapter IV or Chapter VI, the court may pass an
order directing attachment or forfeiture, as the case may be, of property equivalent to or the value of the
proceeds of terrorism involved in the offence. (5) Where any person is accused of an offence under Chapter
IV or Chapter VI, it shall be open to the court to pass an order that all or any of the property, movable or
immovable or both, belonging to him shall, where the trial under the Act cannot be concluded on account of
the death of the accused or being declared a proclaimed offender or for any other reason, be confiscated on the
basis of material evidence produced before the court.
Company to transfer shares to Government (Section 34)
Where any share in a company stand forfeited to the Central Government or the State Government, as the case
may be, under this Chapter, then, the company shall, on receipt of the order of the court, notwithstanding anything
contained in the Companies Act, 1956 (1 of 1956), or the articles of association of the company, forthwith register
the Central Government or the State Government, as the case may be, as the transferee of such share.
Terrorist Organisations (Chapter VI):
The chapter VI of the Act makes provisions as to terrorist organization, where the Organisations which are identified
as a terrorist one, in the Resolution adopted by the Security Council of UN, should be added to the Schedule of this
Act by the Central Government. Similarly, removal of any organisation can also be made by the Central Government
under this Act. Also the Act makes association with the Terrorist organisation, taking part in their activities, etc. and
even supporting or funding it as the offence under the Act.
Miscellaneous (Chapter VII):
At the end portion of the Act i.e. the Chapter VII thereof, the Act makes miscellaneous provisions, wherein the Central
Government is empowered to direct delegation of powers to the State Government and such State Government can
also with the prior approval from the Centre, direct the delegation of those powers to any person subordinate to it.
Further, provisions as to investigation, search, seizure, arrest, etc. have been provided under subsequent provisions
to the Act. And finally, the Act also makes other relevant provisions which are also being important so far as the
purpose of this Act is concerned.
Lesson 17 • Anti-Corruption and Anti-Bribery Laws in India 493

List of Terrorist Organisations as per Schedule I of the Act

1. BABBAR KHALSA INTERNATIONAL.
2. KHALISTAN COMMANDO FORCE.
3. KHALISTAN ZINDABAD FORCE.
4. INTERNATIONAL SIKH YOUTH FEDERATION.
5. LASHKAR-E-TAIBA/PASBAN-E-AHLE HADIS.
6. JAISH-E-MOHAMMED/TAHRIK-E-FURQAN.
7. HARKAT-UL-MUJAHIDEEN/HARKAT-UL-ANSAR/HARKAT-UL-JEHAD-E-ISLAMI.
8. HIZB-UL-MUJAHIDEEN/HIZB-UL-MUJAHIDEEN PIR PANJAL REGIMENT.
9. AL-UMAR-MUJAHIDEEN.
10. JAMMU AND KASHMIR ISLAMIC FRONT.
11. UNITED LIBERATION FRONT OF ASSAM (ULFA).
12. NATIONAL DEMOCRATIC FRONT OF BODOLAND (NDFB).
13. PEOPLE’S LIBERATION ARMY (PLA).
14. UNITED NATIONAL LIBERATION FRONT (UNLF).
15. PEOPLE’S REVOLUTIONARY PARTY OF KANGLEIPAK (PREPAK).
16. KANGLEIPAK COMMUNIST PARTY (KCP).
17. KANGLEI YAOL KANBA LUP (KYKL).
18. MANIPUR PEOPLE’S LIBERATION FRONT (MPLF).
19. ALL TRIPURA TIGER FORCE.
20. NATIONAL LIBERATION FRONT OF TRIPURA.
21. LIBERATION TIGERS OF TAMIL EELAM (LTTE).
22. STUDENTS ISLAMIC MOVEMENT OF INDIA.
23. DEENDAR ANJUMAN.
24. COMMUNIST PARTY OF INDIA (MARXIST-LENINIST)—PEOPLE’S WAR, ALLITS FORMATIONS AND FRONT
ORGANISATIONS.
25. MAOIST COMMUNIST CENTRE (MCC), ALL ITS FORMATIONS AND FRONT ORGANISATIONS.
26. AL BADR.
27. JAMIAT-UL-MUJAHIDDEN.
28. AL-QAIDA.
29. DUKHTARAN-E-MILLAT (DEM)
30. TAMIL NADU LIBERATION ARMY (TNLA).
31. TAMIL NATIONAL RETRIEVAL TROOPS (TNRT).
32. AKHIL BHARAT NEPALI EKTA SAMAJ (ABNES).
33. Organisations listed in the Schedule to the U.N. Prevention and Suppression of Terrorism (Implementation
of Security Council Resolutions) Order, 2007 made under section 2 of the United Nations (Security Council)
Act, 1947(43 of 1947) and amended from time to time.
494 Lesson 17 • PP-GRMCE

Terrorist Act as per Schedule II

(i) Convention for the Suppression of Unlawful Seizure of Aircraft (1970);
(ii) Convention for the Suppression of Unlawful Acts against the Safety of Civil Aviation (1971);
(iii) Convention on the Prevention and Punishment of Crimes against Internationally Protected Persons, including
Diplomatic Agents (1973);
(iv) International Convention against the Taking of Hostages (1979);
(v) Convention on the Physical Protection of Nuclear Material (1980) as amended from time to time;
(vi) Protocol for the Suppression of Unlawful Acts of Violence at Airports Serving International Civil Aviation,
supplementary to the Convention for the Suppression of Unlawful Acts against the Safety of Civil Aviation (1988);
(vii) Convention for the Suppression of Unlawful Acts against the safety of Maritime Navigation (1988);
(viii) Protocol for the Suppression of Unlawful Acts against the Safety of Fixed Platforms located on the Continental
Shelf (1988); and
(ix) International Convention for the Suppression of Terrorist Bombings (1997).
(x) International Convention for Suppression of Acts of Nuclear Terrorism (2005).

(C) FOREIGN CORRUPT PRACTICES ACT, 1977 (THE FCPA)

The Foreign Corrupt Practices Act of 1977 was enacted for the purpose of making it unlawful for certain classes of
persons and entities to make payments to foreign government officials to assist in obtaining or retaining business.
The idea of Foreign Corrupt Practices Act (FCPA) is to make it illegal for companies and their supervisors to influence
foreign officials with any personal payments or rewards. The FCPA applies to any person who has a certain degree
of connection to the United States and engages in foreign corrupt practices. The Act also applies to any act by U.S.
businesses, foreign corporations trading securities in the U.S., American nationals, citizens, and residents acting in
furtherance of a foreign corrupt practice whether or not they are physically present in the U.S. This is considered the
nationality principle of the act. Any individuals that are involved in those activities may face prison time.
The FCPA can apply to prohibited conduct anywhere in the world and extends to publicly traded companies and
their officers, directors, employees, stockholders, and agents. Agents can include third party agents, consultants,
distributors, joint-venture partners, and others.
The FCPA also requires issuers to maintain accurate books and records and have a system of internal controls
sufficient to, among other things, provide reasonable assurances that transactions are executed and assets are
accessed and accounted for in accordance with management’s authorization.
This act was passed to make it unlawful for certain classes of persons and entities to make payments to foreign
government officials to assist in obtaining or retaining business. In the case of foreign natural and legal persons, the Act
covers their deeds if they are in the U.S. at the time of the corrupt conduct. This is considered the protective principle of
the act. Further, the Act governs not only payments to foreign officials, candidates, and parties, but any other recipient
if part of the bribe is ultimately attributable to a foreign official, candidate, or party. These payments are not restricted
to monetary forms and may include anything of value. This is considered the territoriality principle of the act.
In simple words, The Foreign Corrupt Practices Act (FCPA), enacted in 1977, generally prohibits the payment of bribes
to foreign officials to assist in obtaining or retaining business. The FCPA can apply to prohibited conduct anywhere
in the world and extends to publicly traded companies and their officers, directors, employees, stockholders, and
agents. Agents can include third party agents, consultants, distributors, joint-venture partners, and others.
Since 1977, the anti-bribery provisions of the FCPA have applied to all U.S. persons and certain foreign issuers of
securities. With the enactment of certain amendments in 1998, the anti-bribery provisions of the FCPA now also
apply to foreign firms and persons who cause, directly or through agents, an act in furtherance of such a corrupt
payment to take place within the territory of the United States.
The Act concerns the intent of the bribery rather than the amount, there is no requirement of materiality. Offering
anything of value as a bribe, whether cash or non-cash items, is prohibited.
 Lesson 17 • Anti-Corruption and Anti-Bribery Laws in India 495

The FCPA also requires companies whose securities are listed in the U.S. to meet its accounting provisions. These
accounting provisions operate in tandem with the anti-bribery provisions of the FCPA, and require respective
corporations to make and keep books and records that accurately and fairly reflect the transactions of the
corporation and to devise and maintain an adequate system of internal accounting controls. An increasing number
of corporations are taking additional steps to protect their reputation and reduce their exposure by employing the
services of due diligence companies tasked with vetting third party intermediaries and identifying easily overlooked
government officials embedded in otherwise privately held foreign firms. This strategy is one element of an effective
FCPA Compliance Program, as it shows a sincere attempt to avoid business situations where high risk (prior history
or proximity to unethical behavior) individuals are concerned.

(D) PREVENTION OF CORRUPTION ACT, 1988 (THE PCA)

The PCA criminalises the acceptance of gratification (pecuniary or otherwise) other than the acceptance of legal
remuneration by public servants which is paid by their employers in connection with the performance of their
duties. Aiding and abetting the commission of bribery is also an offence, such that any person, who bribes or
attempts to bribe a public servant or acts as a middleman for such bribing may also be held liable. Further, the PCA
creates an adverse presumption if a public servant’s assets are disproportionate in value to his or her income and
cannot be satisfactorily accounted for. The provisions of the PCA apply regardless of the location or jurisdiction of
the commission of an offence, as long as the same is committed by a ‘public servant’ as defined under it. Judicial
decisions have also interpreted the term ‘public servant’ in the PCA to include a wide variety of persons, such as
bank employees in both private and government owned banks.
The Prevention of Corruption Act, 1988 (No. 49 of 1988) is an Act of the Parliament of India enacted to combat
corruption in government agencies and public sector businesses in India. This law defines who a public servant
is and punishes public servants involved in corruption or bribery. It also punishes anyone who helps him or her
commit the crime corruption or bribery. It extends to the whole of India except the State of Jammu and Kashmir and
it applies also to all citizens of India outside India.
The Act is divided into five chapters:
 Chapter I (Sections 1 and 2): Preliminary
 Chapter II (Sections 3 to 6): Appointment of Special Judges
 Chapter III (Sections 7 to 16): Offences and Penalties:
 Chapter IV (Section 17 to 18): Investigation into cases under the Act
 Chapter IVA (Section 18 A): Attachment and Forfeiture of Property
 Chapter V (Sections 19 to 30): Sanction for Prosecution and Other Miscellaneous Provisions
The PCA deals only with bribery of public servants. It does not extend to bribery or corruption in the private sector,
i.e. where a public servant is not involved. That said, a private person/entity will be liable for inducing a public
servant to commit an act that is prohibited by the PCA, by corrupt or illegal means or by exercising personal influence.
Who is Public Servant [Section 2(c)]:
“Public servant” means –
(i) any person in the service or pay of the Government or remunerated by the Government by fees or commission
for the performance of any public duty;
(ii) Public Duty has been defined by Section 2(b) of the Act, which means a duty in the discharge of which the State,
the public or the community at large has an interest.
(iii) any person in the service or pay of a local authority;
(iv) any person in the service or pay of a corporation established by or under a Central, Provincial or State Act, or
an authority or a body owned or controlled or aided by the Government or a Government company as defined
in section 617 of the Companies Act, 1956 (1 of 1956);
(v) any Judge, including any person empowered by law to discharge, whether by himself or as a member of any
body of persons, any adjudicatory functions;
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(vi) any person authorised by a court of justice to perform any duty, in connection with the administration of
justice, including a liquidator, receiver or commissioner appointed by such court;
(vii) any arbitrator or other person to whom any cause or matter has been referred for decision or report by a court
of justice or by a competent public authority;
(viii) any person who holds an office by virtue of which he is empowered to prepare, publish, maintain or revise an
electoral roll or to conduct an election or part of an election;
(ix) any person who holds an office by virtue of which he is authorised or required to perform any public duty;
(x) any person who is the president, secretary or other office-bearer of a registered co-operative society engaged
in agriculture, industry, trade or banking, receiving or having received any financial aid from the Central
Government or a State Government or from any corporation established by or under a Central, Provincial or
State Act, or any authority or body owned or controlled or aided by the Government or a Government company
as defined in section 617 of the Companies Act, 1956 (1 of 1956);
(xi) any person who is a chairman, member or employee of any Service Commission or Board, by whatever name
called, or a member of any selection committee appointed by such Commission or Board for the conduct of any
examination or making any selection on behalf of such Commission or Board;
(xi) any person who is a Vice-Chancellor or member of any governing body, professor, reader, lecturer or any
other teacher or employee, by whatever designation called, of any University and any person whose services
have been availed of by a University or any other public authority in connection with holding or conducting
examinations;
(xii) any person who is an office-bearer or an employee of an educational, scientific, social, cultural or other
institution, in whatever manner established, receiving or having received any financial assistance from the
Central Government or any State Government, or local or other public authority.
Undue advantage – Section 2(1)(d)
It means any gratification whatever, other legal remuneration.
Explanation: For the purposes of this clause-
(a) the word ‘gratification’ is not limited to pecuniary gratifications or to gratifications estimable in money.
(b) the word ‘ legal remuneration is not restricted to remuneration paid to a public servant, but includes all
remuneration which he is permitted by the Government or the organisation, which he serves, to receive.
Explanation 1: Persons falling under any of the above sub-clauses are public servants, whether appointed by the
Government or nor.
Explanation 2: Wherever the words’ public servant’ occur, they shall be understood of every person who is in actual
possession of the situation of a public servant, whatever legal defect there may be in his right to hold that situation.

Offence relating to Public Servant being bribed [Section 7]

Any public servant who, –
(a) obtains or accepts or attempts to obtain from any person, an undue advantage, with the intention to perform
or cause performance of public duty improperly or dishonestly or to forbear or cause forbearance to perform
such duty either by himself or by another public servant; or
(b) obtains or accepts or attempts to obtain, an undue advantage from any person as a reward for the improper
or dishonest performance of a public duty or for forbearing to perform such duty either by himself or another
public servant; or
(c) performs or induces another public servant to perform improperly or dishonestly a public duty or to forbear
performance of such duty in anticipation of or in consequence of accepting an undue advantage from any
person, shall be punishable with imprisonment for a term which shall not be less than three years but which
may extend to seven years and shall also be liable to fine.
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Explanation 1. – For the purpose of this section, the obtaining, accepting, or the attempting to obtain an undue
advantage shall itself constitute an offence even if the performance of a public duty by public servant, is not or
has not been improper.
Illustration. – A public servant, ‘S’ asks a person, ‘P’ to give him an amount of five thousand rupees to process his
routine ration card application on time. ‘S’ is guilty of an offence under this section.
Explanation 2. – For the purpose of this section, –
(i) the expressions “obtains” or “accepts” or “attempts to obtain” shall cover cases where a person being a
public servant, obtains or “accepts” or attempts to obtain, any undue advantage for himself or for another
person, by abusing his position as a public servant or by using his personal influence over another public
servant; or by any other corrupt or illegal means;
(ii) it shall be immaterial whether such person being a public servant obtains or accepts, or attempts to obtain
the undue advantage directly or through a third party.

Taking undue advantage to influence public servant by corrupt or illegal means or any exercise of personal
influence [Section7A]:
7A. Whoever accepts or obtains or attempts to obtain from another person for himself or for any other person any
undue advantage as a motive or reward to induce a public servant, by corrupt or illegal means or by exercise of his
personal influence to perform or to cause performance of a public duty improperly or dishonestly or to forbear or
to cause to forbear such public duty by such public servant or by another public servant, shall be punishable with
imprisonment for a term which shall not be less than three years but which may extend to seven years and shall also
be liable to fine.

Offence relating to bribing of a Public Servant [Section 8]

(1) Any person who gives or promises to give an undue advantage to another person or persons, with intention –
(i) to induce a public servant to perform improperly a public duty; or
(ii) to reward such public servant for the improper performance of public duty; shall be punishable with
imprisonment for a term which may extend to seven years or with fine or with both:
Provided that the provisions of this section shall not apply where a person is compelled to give such undue
advantage:
Provided further that the person so compelled shall report the matter to the law enforcement authority or
investigating agency within a period of seven days from the date of giving such undue advantage:
Provided also that when the offence under this section has been committed by commercial organisation, such
commercial organisation shall be punishable with fine.

Illustration. – A person, ‘P’ gives a public servant, ‘S’ an amount of ten thousand rupees to ensure that he
is granted a license, over all the other bidders. ‘P’ is guilty of an offence under this sub-section.
Explanation. – It shall be immaterial whether the person to whom an undue advantage is given or promised
to be given is the same person as the person who is to perform, or has performed, the public duty concerned,
and, it shall also be immaterial whether such undue advantage is given or promised to be given by the
person directly or through a third party.

(2) Nothing in section 8(1) shall apply to a person, if that person, after informing a law enforcement authority
or investigating agency, gives or promises to give any undue advantage to another person in order to assist
such law enforcement authority or investigating agency in it’s investigation of the offence alleged against
the latter.
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Offence relating to bribing a public servant by a commercial organisation [Section 9]

(1) Where an offence under this Act has been committed by a commercial organisation, such organisation shall be
punishable with fine, if any person associated with such commercial organisation gives or promises to give any
undue advantage to a public servant intending –
(a) to obtain or retain business for such commercial organisation; or
(b) to obtain or retain an advantage in the conduct of business for such commercial organisation.
Provided that it shall be a defence for the commercial organisation to prove that it had in place adequate
procedures in compliance of such guidelines as may be prescribed to prevent persons associated with it from
undertaking such conduct.
(2) For the purposes of this section, a person is said to give or promise to give any undue advantage to a public
servant, if he is alleged to have committed the offence under section 8, whether or not such person has been
prosecuted for such offence.
(3) For the purposes of section 8 and this section, –
(a) “commercial organisation” means –
(i) a body which is incorporated in India and which carries on a business, whether in India or outside
India;
(ii) any other body which is incorporated outside India and which carries on a business, or part of a
business, in any part of India;
(iii) a partnership firm or any association of persons formed in India and which carries on a business
whether in India or outside India; or
(iv) any other partnership or association of persons which is formed outside India and which carries on
a business, or part of a business, in any part of India;
(b) “business” includes a trade or profession or providing service;
(c) a person is said to be associated with the commercial organisation, if such person performs services for
or on behalf of the commercial organisation irrespective of any promise to give or giving of any undue
advantage which constitutes an offence under sub-section (1).

Explanation 1. – The capacity in which the person performs services for or on behalf of the commercial
organisation shall not matter irrespective of whether such person is employee or agent or subsidiary of
such commercial organisation.
Explanation 2. – Whether or not the person is a person who performs services for or on behalf of the
commercial organisation is to be determined by reference to all the relevant circumstances and not merely
by reference to the nature of the relationship between such person and the commercial organisation.
Explanation 3. – If the person is an employee of the commercial organisation, it shall be presumed unless
the contrary is proved that such person is a person who has performed services for or on behalf of the
commercial organisation.

(4) Notwithstanding anything contained in the Code of Criminal Procedure, 1973, the offence under sections 7A,
8 and this section shall be cognizable.
(5) The Central Government shall, in consultation with the concerned stakeholders including departments and
with a view to preventing persons associated with commercial organisations from bribing any person, being
a public servant, prescribe such guidelines as may be considered necessary which can be put in place for
compliance by such organisations.

Person in charge of commercial organization to be guilty of offence [Section 10]

Where an offence under section 9 is committed by a commercial organisation, and such offence is proved in the court
to have been committed with the consent or connivance of any director, manager, secretary or other officer shall be
 Lesson 17 • Anti-Corruption and Anti-Bribery Laws in India 499

of the commercial organisation, such director, manager, secretary or other officer shall be guilty of the offence and
shall be liable to be proceeded against and shall be punishable with imprisonment for a term which shall not be less
than three years but which may extend to seven years and shall also be liable to fine.
Explanation. – For the purposes of this section, ‘‘director’’, in relation to a firm means a partner in the firm.’’.

Public servant obtaining undue Advantage without consideration from person concerned in
proceeding or business transacted by such public servant [ Section 11]
Whoever, being a public servant, accepts or obtains or attempts for himself, or for any other person, any undue
Advantage without consideration, or for a consideration which he knows to be inadequate, from any person whom
he knows to have been, or to be, or to be likely to be concerned in any proceeding or business transacted or about to
be transacted by such public servant, or having any connection with the official functions or public duty of himself or
of any public servant to whom he is subordinate, or from any person whom he knows to be interested in or related to
the person so concerned, shall be punishable with imprisonment for a term which shall be not less than six months
but which may extend to five years and shall also be liable to fine.

Punishment for abetment of offences [ Section 12]

Whoever abets any offence punishable under this Act, whether or not that offence is committed in consequence of
that abetment, shall be punishable with imprisonment for a term which shall be not less than three years but which
may extend to seven years and shall also be liable to fine.

Criminal Misconduct by a Public Servant [Section 13]

(1) A public servant is said to commit the offence of criminal misconduct –

(a) if he dishonestly or fraudulently misappropriates or otherwise converts for his own use any property
entrusted to him or any property under his control as a public servant or allows any other person so to do; or
(b) if he intentionally enriches himself illicitly during the period of his office.
Explanation 1. – A person shall be presumed to have intentionally enriched himself illicitly if he or any person
on his behalf, is in possession of or has, at any time during the period of his office, been in possession of
pecuniary resources or property disproportionate to his known sources of income which the public servant
cannot satisfactorily account for.
Explanation 2. – The expression ‘‘known sources of income’’ means income received from any lawful sources.
(2) Any public servant who commits criminal misconduct shall be punishable with imprisonment for a terms
which shall be not less than four years but which may extend to ten years and shall also be liable to fine.

Punishment for habitual Offender [Section 14]

Whoever convicted of an offence under this Act subsequently commits an offence punishable under this Act, shall be
punishable with imprisonment for a term which shall be not less than five years but which may extend to ten years
and shall also be liable to fine.

Punishment for attempt [Section 15]

Whoever attempts to commit an offence referred to in clause (a) of sub-section (1) of section 13 shall be
punishable with imprisonment for a term which shall not be less than two years but which may extend to five
years and with fine.

Matters to be taken into consideration for fixing fine [Section 16]

Where a sentence of fine is imposed under section 7 or section 8 or section 9 or section 10 or section 11 or sub-section
(2) of section 13 or section 14 or section 15, the court in fixing the amount of the fine shall take into consideration
the amount or the value of the property, if any, which the accused person has obtained by committing the offence
or where the conviction is for an offence referred to in clause (b) of sub-section (1) of section 13, the pecuniary
resources or property referred to in that clause for which the accused person is unable to account satisfactorily.
500 Lesson 17 • PP-GRMCE

CHAPTER IV INVESTIGATION INTO CASES UNDER THE ACT

Persons authorised to investigate [Section 17]

Notwithstanding anything contained in the Code of Criminal Procedure, 1973 (2 of 1974), no police officer
below the rank,–
(a) in the case of the Delhi Special Police Establishment, of an Inspector of Police;
(b) in the metropolitan areas of Bombay, Calcutta, Madras and Ahmedabad and in any other metropolitan area
notified as such under sub-section (1) of section 8 of the Code of Criminal Procedure, 1973 (2 of 1974), of an
Assistant Commissioner of Police;
(c) elsewhere, of a Deputy Superintendent of Police or a police officer of equivalent rank, shall investigate any
offence punishable under this Act without the order of a Metropolitan Magistrate or a Magistrate of the first
class, as the case may be, or make any arrest therefor without a warrant:
Provided that if a police officer not below the rank of an Inspector of Police is authorised by the State Government in
this behalf by general or special order, he may also investigate any such offence without the order of a Metropolitan
Magistrate or a Magistrate of the first class, as the case may be, or make arrest therefor without a warrant:
Provided further that an offence referred to in clause (b) of sub-section (1) of section 13 shall not be
investigated without the order of a police officer not below the rank of a Superintendent of Police.

Enquiry or Inquiry or investigation of offences relatable to recommendations made or decision

taken by public servant in discharge of official functions or duties [Section 17A]
No police officer shall conduct any enquiry or inquiry or investigation into any offence alleged to have been committed
by a public servant under this Act, where the alleged offence is relatable to any recommendation made or decision
taken by such public servant in discharge of his official functions or duties, without the previous approval –
(a) in the case of a person who is or was employed, at the time when the offence was alleged to have been
committed, in connection with the affairs of the Union, of that Government;
(b) in the case of a person who is or was employed, at the time when the offence was alleged to have been
committed, in connection with the affairs of a State, of that Government;
(c) in the case of any other person, of the authority competent to remove him from his office, at the time when the
offence was alleged to have been committed:
Provided that no such approval shall be necessary for cases involving arrest of a person on the spot on the charge of
accepting or attempting to accept any undue advantage for himself or for any other person.
Provided further that the concerned authority shall convey its decision under this section within a period of three months,
which may, for reasons to be recorded in writing by such authority, be extended by a further period of one month.

Power to inspect bankers’ books [Section 18]

If from information received or otherwise, a police officer has reason to suspect the commission of an offence which
he is empowered to investigate under section 17 and considers that for the purpose of investigation or inquiry into
such offence, it is necessary to inspect any bankers’ books, then, notwithstanding anything contained in any law for
the time being in force, he may inspect any bankers’ books in so far as they relate to the accounts of the persons
suspected to have committed that offence or of any other person suspected to be holding money on behalf of such
person, and take or cause to be taken certified copies of the relevant entries therefrom, and the bank concerned shall
be bound to assist the police officer in the exercise of his powers under this section:
Provided that no power under this section in relation to the accounts of any person shall be exercised by a police
officer below the rank of a Superintendent of Police, unless he is specially authorised in this behalf by a police officer
of or above the rank of a Superintendent of Police.
Explanation. – In this section, the expressions “bank” and “bankers’ books” shall have the meanings respectively
assigned to them in the Bankers’ Books Evidence Act, 1891 (18 of 1891).
Lesson 17 • Anti-Corruption and Anti-Bribery Laws in India 501

CHAPTER IVA ATTACHMENT AND FORFEITURE OF PROPERTY

Provisions of Criminal Law Amendment Ordinance, 1944 to apply to attachment under this Act. (Section 18A):
(1) Save as otherwise provided under the Prevention of Money Laundering Act, 2002 (15 of 2003), the provisions
of the Criminal Law Amendment Ordinance, 1944 (Ord. 38 of 1944) shall, as far as may be, apply to the
attachment, administration of attached property and execution of order of attachment or confiscation of
money or property procured by means of an offence under this Act.
(2) For the purposes of this Act, the provisions of the Criminal Law Amendment Ordinance, 1944 (Ord. 38 of
1944) shall have effect, subject to the modification that the references to “District Judge” shall be construed as
references to “Special Judge”.

CHAPTER V SANCTION FOR PROSECUTION AND OTHER MISCELLANEOUS PROVISIONS

Previous sanction necessary for prosecution [Section 19]

(1) No court shall take cognizance of an offence punishable under 2 [sections 7, 11, 13 and 15] alleged to have
been committed by a public servant, except with the previous sanction 3 [save as otherwise provided in the
Lokpal and Lokayuktas Act, 2013 (1 of 2014)] –
(a) in the case of a person [who is employed, or as the case may be, was at the time of commission of the
alleged offence employed] in connection with the affairs of the Union and is not removable from his office
save by or with the sanction of the Central Government, of that Government;
(b) in the case of a person [who is employed, or as the case may be, was at the time of commission of the
alleged offence employed] in connection with the affairs of a State and is not removable from his office
save by or with the sanction of the State Government, of that Government;
(c) in the case of any other person, of the authority competent to remove him from his office:
Provided that no request can be made, by a person other than a police officer or an officer of an investigation
agency or other law enforcement authority, to the appropriate Government or competent authority, as the case
may be, for the previous sanction of such Government or authority for taking cognizance by the court of any of
the offences specified in this sub-section, unless –
(i) such person has filed a complaint in a competent court about the alleged offences for which the public
servant is sought to be prosecuted; and
(ii) the court has not dismissed the complaint under section 203 of the Code of Criminal Procedure, 1973 (2
of 1974) and directed the complainant to obtain the sanction for prosecution against the public servant
for further proceeding:
Provided further that in the case of request from the person other than a police officer or an officer of an
investigation agency or other law enforcement authority, the appropriate Government or competent authority
shall not accord sanction to prosecute a public servant without providing an opportunity of being heard to the
concerned public servant:
Provided also that the appropriate Government or any competent authority shall, after the receipt of the
proposal requiring sanction for prosecution of a public servant under this sub-section, endeavour to convey
the decision on such proposal within a period of three months from the date of its receipt:
Provided also that in case where, for the purpose of grant of sanction for prosecution, legal consultation is required,
such period may, for the reasons to be recorded in writing, be extended by a further period of one month:
Provided also that the Central Government may, for the purpose of sanction for prosecution of a public servant,
prescribe such guidelines as it considers necessary.
Explanation. – For the purposes of sub-section (1), the expression “public servant” includes such person –
(a) who has ceased to hold the office during which the offence is alleged to have been committed; or
(b) who has ceased to hold the office during which the offence is alleged to have been committed and is
holding an office other than the office during which the offence is alleged to have been committed.
502 Lesson 17 • PP-GRMCE

(2) Where for any reason whatsoever any doubt arises as to whether the previous sanction as required under
sub-section (1) should be given by the Central Government or the State Government or any other authority,
such sanction shall be given by that Government or authority which would have been competent to remove the
public servant from his office at the time when the offence was alleged to have been committed.
(3) Notwithstanding anything contained in the Code of Criminal Procedure, 1973 (2 of 1974),—
(a) no finding, sentence or order passed by a special Judge shall be reversed or altered by a Court in appeal,
confirmation or revision on the ground of the absence of, or any error, omission or irregularity in, the
sanction required under sub-section (1), unless in the opinion of that court, a failure of justice has in fact
been occasioned thereby;
(b) no court shall stay the proceedings under this Act on the ground of any error, omission or irregularity in
the sanction granted by the authority, unless it is satisfied that such error, omission or irregularity has
resulted in a failure of justice;
(c) no court shall stay the proceedings under this Act on any other ground and no court shall exercise the
powers of revision in relation to any interlocutory order passed in any inquiry, trial, appeal or other
proceedings.
(4) In determining under sub-section (3) whether the absence of, or any error, omission or irregularity in, such
sanction has occasioned or resulted in a failure of justice the court shall have regard to the fact whether the
objection could and should have been raised at any earlier stage in the proceedings.
Explanation. – For the purposes of this section,–
(a) error includes competency of the authority to grant sanction;
(b) a sanction required for prosecution includes reference to any requirement that the prosecution shall be
at the instance of a specified authority or with the sanction of a specified person or any requirement of a
similar nature.

Presumption where public servant accepts any undue advantage [Section 20]
Where, in any trial of an offence punishable under section 7 or under section 11, it is proved that a public servant
accused of an offence has accepted or obtained or attempted to obtain for himself, or for any other person, any
undue advantage from any person, it shall be presumed, unless the contrary is proved, that he accepted or obtained
or attempted to obtain that undue advantage, as a motive or reward under section 7 for performing or to cause
performance of a public duty improperly or dishonestly either by himself or by another public servant or, as the case
may be, any undue advantage without consideration or for a consideration which he knows to be inadequate under
section 11.

Accused person to be a competent witness [Section 21]

Any person charged with an offence punishable under this Act, shall be a competent witness for the defence and
may give evidence on oath in disproof of the charges made against him or any person charged together with him at
the same trial:
Provided that –
(a) he shall not be called as a witness except at his own request;
(b) his failure to give evidence shall not be made the subject of any comment by the prosecution or give rise to any
presumption against himself or any person charged together with him at the same trial;
(c) he shall not be asked, and if asked shall not be required to answer, any question tending to show that he has
committed or been convicted of any offence other than the offence with which he is charged, or is of bad
character, unless –
(i) the proof that he has committed or been convicted of such offence is admissible evidence to show that he
is guilty of the offence with which he is charged, or
(ii) he has personally or by his pleader asked any question of any witness for the prosecution with a view to
establish his own good character, or has given evidence of his good character, or the nature or conduct of
 Lesson 17 • Anti-Corruption and Anti-Bribery Laws in India 503

the defence is such as to involve imputations on the character of the prosecutor or of any witness for the
prosecution, or
(iii) he has given evidence against any other person charged with the same offence.

The Code of Criminal Procedure, 1973 to apply subject to certain modifications [Section 22]
The provisions of the Code of Criminal Procedure, 1973 (2 of 1974), shall in their application to any proceeding in
relation to an offence punishable under this Act have effect as if, –
(a) in sub-section (1) of section 243, for the words “The accused shall then be called upon”, the words “The accused
shall then be required to give in writing at once or within such time as the Court may allow, a list of the persons
(if any) whom he proposes to examine as his witnesses and of the documents (if any) on which he proposes to
rely and he shall then be called upon” had been substituted;
(b) in sub-section (2) of section 309, after the third proviso, the following proviso had been inserted, namely:–
“Provided also that the proceeding shall not be adjourned or postponed merely on the ground that an
application under section 397 has been made by a party to the proceeding.”;
(c) after sub-section (2) of section 317, the following sub-section had been inserted, namely:– “(3) Notwithstanding
anything contained in sub-section (1) or sub-section (2), the Judge may, if he thinks fit and for reasons to be
recorded by him, proceed with inquiry or trial in the absence of the accused or his pleader and record the
evidence of any witness subject to the right of the accused to recall the witness for cross-examination.”;
(d) in sub-section (1) of section 397, before the Explanation, the following proviso had been inserted, namely :–
“Provided that where the powers under this section are exercised by a Court on an application made by a party
to such proceedings, the Court shall not ordinarily call for the record of the proceedings:–
(a) without giving the other party an opportunity of showing cause why the record should not be called for;
or
(b) if it is satisfied that an examination of the record of the proceedings may be made from the certified copies.”.

Particulars in a charge in relation to an offence under section 13(1)(a) – [Section 23]

Notwithstanding anything contained in the Code of Criminal Procedure, 1973 (2 of 1974), when an accused is
charged with an offence under clause (a) of sub-section (1) of section 13, it shall be sufficient to describe in the
charge the property in respect of which the offence is alleged to have been committed and the dates between which
the offence is alleged to have been committed, without specifying particular items or exact dates, and the charge so
framed shall be deemed to be a charge of one offence within the meaning of section 219 of the said Code:
Provided that the time included between the first and last of such dates shall not exceed one year.
Section 24[Omitted]

Military, Naval and Air Force or other law not to be affected [Section 25]

(1) Nothing in this Act shall affect the jurisdiction exercisable by, or the procedure applicable to, any court or other
authority under the Army Act, 1950 (45 of 1950), the Air Force Act, 1950 (46 of 1950), the Navy Act, 1957 (62
of 1957), the Border Security Force Act, 1968 (47 of 1968), the Coast Guard Act, 1978 (30 of 1978) and the
National Security Guard Act, 1986 (47 of 1986).
(2) For the removal of doubts, it is hereby declared that for the purposes of any such law as is referred to in sub-
section (1), the court of a special Judge shall be deemed to be a court of ordinary criminal justice.

Special Judges appointed under Act 46 of 1952 to be special Judges appointed under this Act
[Section 26]
Every special Judge appointed under the Criminal Law Amendment Act, 1952, for any area or areas and is holding
office on the commencement of this Act shall be deemed to be a special Judge appointed under section 3 of this Act
for that area or areas and, accordingly, on and from such commencement, every such Judge shall continue to deal
with all the proceedings pending before him on such commencement in accordance with the provisions of this Act.
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Appeal and Revision [Section 27]

Subject to the provisions of this Act, the High Court may exercise, so far as they may be applicable, all the powers of
appeal and revision conferred by the Code of Criminal Procedure, 1973 (2 of 1974) on a High Court as if the court of
the special Judge were a court of Session trying cases within the local limits of the High Court.

Act to be in addition to any other law [Section 28]

The provisions of this Act shall be in addition to, and not in derogation of, any other law for the time being in force,
and nothing contained herein shall exempt any public servant from any proceeding which might, apart from this Act,
be instituted against him.

Amendment of the Ordinance 38 of 1944 [Section 29]

In the Criminal Law Amendment Ordinance, 1944,–
(a) in sub-section (1) of section 3, sub-section (1) of section 9, clause (a) of section 10, sub-section (1) of section
11 and sub-section (1) of section 13, for the words “State Government”, wherever they occur, the words “State
Government or, as the case may be, the Central Government” shall be substituted;
(b) in section 10, in clause (a), for the words “three months”, the words “one year” shall be substituted;
(c) in the Schedule,–
(i) paragraph 1 shall be omitted;
(ii) in paragraphs 2 and 4, –
(a) after the words “a local authority”, the words and figures “or a corporation established by or under a
Central, Provincial or State Act, or an authority or a body owned or controlled or aided by Government
or a Government company as defined in section 617 of the Companies Act, 1956 (1 of 1956) or a
society aided by such corporation, authority, body or Government company” shall be inserted;
(b) after the words “or authority”, the words “or corporation or body or Government company or
society” shall be inserted;
(iii) for paragraph 4A, the following paragraph shall be substituted, namely:– “4A.An offence punishable
under the Prevention of Corruption Act, 1988.”;
(iv) in paragraph 5, for the words and figures “items 2, 3 and 4”, the words, figures and letter “items 2, 3, 4 and
4A” shall be substituted.

(E) CENTRAL VIGILANCE COMMISSION ACT, 2003

The preamble of the Act states that it is an Act to provide for the constitution of a Central Vigilance Commission to
inquire or cause inquiries to be conducted into offences alleged to have been committed under the Prevention of
Corruption Act, 1988 by certain categories of public servants of the Central Government, corporations established
by or under any Central Act, Government companies, societies and local authorities owned or controlled by the
Central Government and for matters connected therewith or incidental thereto.
The Central Vigilance Commission (CVC) is the body constituted by the Government in the year 1964 on the proposal
of the Santharam Committee on the Prevention of Corruption. The body was established with an intention to check
corruption in the Government departments. The Commission is an independent statutory body exempted from the
authority of the executive. The CVC attained statutory recognition by an ordinance of 1998 and in September 12,
2003 the ordinance was replaced by The Central Vigilance Commission Act enacted by the Legislative Department
under the Ministry of Law and Justice. The main purpose of the Act was to establish the Central Vigilance Commission
to investigate the offences punishable under the Prevention of Corruption Act, 1988 by the public servants working
under the Central Government, Corporations constituted under the Act of Parliament, Government companies, and
local bodies owned and managed by the Centre.
The Act is divided in to 5 Chapters, details of which are as under:
Chapter I (Section 1 and 2): Preliminary
Chapter II (Sections 3 to 7): The Central Vigilance Commission
Chapter III (Sections 8 to 12): Functions and Powers of the Central Vigilance Commission
Lesson 17 • Anti-Corruption and Anti-Bribery Laws in India 505

Chapter IV (Sections 13 and 14): Expenses and Annual Report

Chapter V (Section 15 to 27): Miscellaneous.
The important sections of the Act are being discussed hereunder:

The Central Vigilance Commission - Chapter II

Constitution of Central Vigilance Commission (Section 3):
(1) There shall be constituted a body to be known as the Central Vigilance Commission to exercise the powers
conferred upon, and to perform the functions assigned to it under this Act and the Central Vigilance Commission
constituted under sub-section (1) of section 3 of the Central Vigilance Commission Ordinance, 1999 (Ord. 4
of 1999) which ceased to operate, and continued under the Government of India in the Ministry of Personnel,
Public Grievances and Pensions (Department of Personnel and Training) Resolution No. 371/20/99-AVD. III,
dated the 4th April, 1999 as amended vide Resolution of even number, dated the 13th August, 2002 shall be
deemed to be the Commission constituted under this Act.
(2) The Commission shall consist of–
(a) a Central Vigilance Commissioner –Chairperson;
(b) not more than two Vigilance Commissioners –Members.
(3) The Central Vigilance Commissioner and the Vigilance Commissioners shall be appointed from amongst persons–
(a) who have been or are in an All-India Service or in any civil service of the Union or in a civil post under
the Union having knowledge and experience in the matters relating to vigilance, policy making and
administration including police administration; or
(b) who have held office or are holding office in a corporation established by or under any Central Act or a
Government company owned or controlled by the Central Government and persons who have expertise
and experience in finance including insurance and banking, law, vigilance and investigations:
Provided that, from amongst the Central Vigilance Commissioner and the Vigilance Commissioners, not more
than two persons shall belong to the category of persons referred to either in clause (a) or clause (b).
(4) The Central Government shall appoint a Secretary to the Commission on such terms and conditions as it deems fit
to exercise such powers and discharge such duties as the Commission may by regulations specify in this behalf.
(5) The Central Vigilance Commissioner, the other Vigilance Commissioners and the Secretary to the Commission
appointed under the Central Vigilance Commission Ordinance, 1999 (Ord. 4 of 1999) or the Resolution of the
Government of India in the Ministry of Personnel, Public Grievances and Pensions (Department of Personnel
and Training) Resolution No. 371/20/99-AVD. III, dated the 4th April, 1999 as amended vide Resolution of
even number, dated the 13th August, 2002 shall be deemed to have been appointed under this Act on the
same terms and conditions including the term of office subject to which they were so appointed under the said
Ordinance or the Resolution, as the case may be.
Explanation: For the purposes of this sub-section, the expression “term of office” shall be construed as the
term of office with effect from the date the Central Vigilance Commissioner or any Vigilance Commissioner has
entered upon his office and continued as such under this Act.
(6) The headquarters of the Commission shall be at New Delhi.
Appointment of Central Vigilance Commissioner and Vigilance Commissioners (Section 4):
(1) The Central Vigilance Commissioner and the Vigilance Commissioners shall be appointed by the President by
warrant under his hand and seal:
Provided that every appointment under this sub-section shall be made after obtaining the recommendation of
a Committee consisting of–
(a) the Prime Minister –Chairperson;
(b) the Minister of Home Affairs –Member;
(c) the Leader of the Opposition in the House of the People –Member.
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Explanation: For the purposes of this sub-section, “the Leader of the Opposition in the House of the People”
shall, when no such Leader has been so recognised, include the Leader of the single largest group in opposition
of the Government in the House of the People.
(2) No appointment of a Central Vigilance Commissioner or a Vigilance Commissioner shall be invalid merely by
reason of any vacancy in the Committee.
Terms and other conditions of service of Central Vigilance Commissioner (Section 5):
(1) Subject to the provisions of sub-sections (3) and (4), the Central Vigilance Commissioner shall hold office
for a term of four years from the date on which he enters upon his office or till he attains the age of sixty-
five years, whichever is earlier. The Central Vigilance Commissioner, on ceasing to hold the office, shall
be ineligible for reappointment in the Commission.
(2) Subject to the provisions of sub-sections (3) and (4), every Vigilance Commissioner shall hold office for a
term of four years from the date on which he enters upon his office or till he attains the age of sixty-five
years, whichever is earlier:
Provided that every Vigilance Commissioner, on ceasing to hold the office, shall be eligible for appointment as
the Central Vigilance Commissioner in the manner specified in sub-section (1) of section 4:
Provided further that the term of the Vigilance Commissioner, if appointed as the Central Vigilance Commissioner,
shall not be more than four years in aggregate as the Vigilance Commissioner and the Central Vigilance Commissioner.
(3) The Central Vigilance Commissioner or a Vigilance Commissioner shall, before he enter upon his office,
make and subscribe before the President, or some other person appointed in that behalf by him, an oath or
affirmation according to the form set out for the purpose in Schedule to this Act.
(4) The Central Vigilance Commissioner or a Vigilance Commissioner may, by writing under his hand addressed to
the President, resign his office.
(5) The Central Vigilance Commissioner or a Vigilance Commissioner may be removed from his office in the
manner provided in section 6.
(6) On ceasing to hold office, the Central Vigilance Commissioner and every other Vigilance Commissioner shall be
ineligible for–
(a) any diplomatic assignment, appointment as administrator of a Union territory and such other assignment
or appointment which is required by law to be made by the President by warrant under his hand and seal;
(b) further employment to any office of profit under the Government of India or the Government of a State.
(7) The salary and allowances payable to and the other conditions of service of–
(a) the Central Vigilance Commissioner shall be the same as those of the Chairman of the Union Public
Service Commission;
(b) the Vigilance Commissioner shall be the same as those of a Member of the Union Public Service Commission:
Provided that if the Central Vigilance Commissioner or any Vigilance Commissioner is, at the time of his
appointment, in receipt of a pension (other than a disability or wound pension) in respect of any previous
service under the Government of India or under the Government of a State, his salary in respect of the service
as the Central Vigilance Commissioner or any Vigilance Commissioner shall be reduced by the amount of that
pension including any portion of pension which was commuted and pension equivalent of other forms of
retirement benefits excluding pension equivalent of retirement gratuity:
Provided further that if the Central Vigilance Commissioner or any Vigilance Commissioner is, at the time of
his appointment, in receipt of retirement benefits in respect of any previous service rendered in a corporation
established by or under any Central Act or a Government company owned or controlled by the Central
Government, his salary in respect of the service as the Central Vigilance Commissioner or, as the case may be,
the Vigilance Commissioner shall be reduced by the amount of pension equivalent to the retirement benefits:
Provided also that the salary, allowances and pension payable to, and the other conditions of service of, the
Central Vigilance Commissioner or any Vigilance Commissioner shall not be varied to his disadvantage after
his appointment.
Lesson 17 • Anti-Corruption and Anti-Bribery Laws in India 507

Removal of Central Vigilance Commissioner and Vigilance Commissioner (Section 6):

(1) Subject to the provisions of sub-section (3), the Central Vigilance Commissioner or any Vigilance Commissioner
shall be removed from his office only by order of the President on the ground of proved misbehaviour or incapacity
after the Supreme Court, on a reference made to it by the President, has, on inquiry, reported that the Central
Vigilance Commissioner or any Vigilance Commissioner, as the case may be, ought on such ground be removed.
(2) The President may suspend from office, and if deem necessary prohibit also from attending the office during
inquiry, the Central Vigilance Commissioner or any Vigilance Commissioner in respect of whom a reference
has been made to the Supreme Court under sub-section (1) until the President has passed orders on receipt of
the report of the Supreme Court on such reference.
(3) Notwithstanding anything contained in sub-section (1), the President may by order remove from office the
Central Vigilance Commissioner or any Vigilance Commissioner if the Central Vigilance Commissioner or such
Vigilance Commissioner, as the case may be,–
(a) is adjudged an insolvent; or
(b) has been convicted of an offence which, in the opinion of the Central Government, involves moral
turpitude; or
(c) engages during his term of office in any paid employment outside the duties of his office; or
(d) is, in the opinion of the President, unfit to continue in office by reason of infirmity of mind or body; or
(e) has acquired such financial or other interest as is likely to affect prejudicially his functions as a Central
Vigilance Commissioner or a Vigilance Commissioner.
(4) If the Central Vigilance Commissioner or any Vigilance Commissioner is or becomes in any way, concerned or
interested in any contract or agreement made by or on behalf of the Government of India or participates in any
way in the profit thereof or in any benefit or emolument arising therefrom otherwise than as a member and in
common with the other members of an incorporated company, he shall, for the purposes of sub-section (1), be
deemed to be guilty of misbehaviour.
Power to make rules by Central Government for staff (Section 7):
The Central Government may, in consultation with the Commission, make rules with respect to the number of
members of the staff of the Commission and their conditions of service.

Functions and Powers of the Central Vigilance Commission (Chapter III)

Functions and powers of Central Vigilance Commission (Section 8):
(1) The functions and powers of the Commission shall be to–
(a) exercise superintendence over the functioning of the Delhi Special Police Establishment in so far as it
relates to the investigation of offences alleged to have been committed under the Prevention of Corruption
Act, 1988 (49 of 1988) or an offence with which a public servant specified in sub-section (2) may, under
the Code of Criminal Procedure, 1973 (2 of 1974), be charged at the same trial;
(b) give directions to the Delhi Special Police Establishment for the purpose of discharging the responsibility
entrusted to it under sub-section (1) of section 4 of the Delhi Special Police Establishment Act, 1946 (25
of 1946):
Provided that while exercising the powers of superintendence under clause (a) or giving directions
under this clause, the Commissions shall not exercise powers in such a manner so as to require the Delhi
Special Police Establishment to investigate or dispose of any case in a particular manner;
(c) inquire or cause an inquiry or investigation to be made on a reference made by the Central Government
wherein it is alleged that a public servant being an employee of the Central Government or a corporation
established by or under any Central Act, Government company, society and any local authority owned or
controlled by that Government, has committed an offence under the Prevention of Corruption Act, 1988
(49 of 1988) or an offence with which a public servant may, under the Code of Criminal Procedure, 1973
(2 of 1974), be charged at the same trial;
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(d) inquire or cause an inquiry or investigation to be made into any complaint against any official belonging to
such category of officials specified in sub-section (2) wherein it is alleged that he has committed an offence
under the Prevention of Corruption Act, 1988 (49 of 1988) and an offence with which a public servant
specified in sub-section (2) may, under the Code of Criminal Procedure, 1973 (2 of 1974), be charged at the
same trial;
(e) review the progress of investigations conducted by the Delhi Special Police Establishment into offences
alleged to have been committed under the Prevention of Corruption Act, 1988 (49 of 1988) or the public
servant may, under the Code of Criminal Procedure, 1973 (2 of 1974), be charged at the same trial;
(f) review the progress of applications pending with the competent authorities for sanction of prosecution
under the Prevention of Corruption Act, 1988 (49 of 1988);
(g) render advice to the Central Government, corporations established by or under any Central Act,
Government companies, societies and local authorities owned or controlled by the Central Government
on such matters as may be referred to it by that Government, said Government companies, societies and
local authorities owned or controlled by the Central Government or otherwise;
(h) exercise superintendence over the vigilance administration of the various Ministries of the Central
Government or corporations established by or under any Central Act, Government companies, societies
and local authorities owned or controlled by that Government:
Provided that nothing contained in this clause shall be deemed to authorise the Commission to exercise
superintendence over the Vigilance administration in a manner not consistent with the directions
relating to vigilance matters issued by the Government and to confer power upon the Commission to
issue directions relating to any policy matters;
(2) The persons referred to in clause (d) of sub-section (1) are as follows:–
(a) members of All-India Services serving in connection with the affairs of the Union and Group ‘A’ officers of
the Central Government;
(b) such level of officers of the corporations established by or under any Central Act, Government companies,
societies and other local authorities, owned or controlled by the Central Government, as that Government
may, by notification in the Official Gazette, specify in this behalf:
Provided that till such time a notification is issued under this clause, all officers of the said corporations,
companies, societies and local authorities shall be deemed to be the persons referred to in clause (d) of
sub-section (1).
(c) on a reference made by the Lokpal under the proviso to sub-section (1) of section 20 of the Lokpal and
Lokayuktas Act, 2013 (1 of 2014), the persons referred to in clause (d) of sub-section (1) shall also include–
(i) members of Group B, Group C and Group D services of the Central Government;
(ii) such level of officials or staff of the corporations established by or under any Central Act, Government
companies, societies and other local authorities, owned or controlled by the Central Government,
as that Government may, by notification in the Official Gazette, specify in this behalf:
Provided that till such time a notification is issued under this clause, all officials or staff of the said
corporations, companies, societies and local authorities shall be deemed to be the persons referred in
clause (d) of sub-section (1).
Action on preliminary inquiry in relation to public servants (Section 8A):
(1) Where, after the conclusion of the preliminary inquiry relating to corruption of public servants belonging
to Group C and Group D officials of the Central Government, the findings of the Commission disclose, after
giving an opportunity of being heard to the public servant, a prima facie violation of conduct rules relating to
corruption under the Prevention of Corruption Act, 1988 (49 of 1988) by such public servant, the Commission
shall proceed with one or more of the following actions, namely:–
(a) cause an investigation by any agency or the Delhi Special Police Establishment, as the case may be;
(b) initiation of the disciplinary proceedings or any other appropriate action against the concerned public
servant by the competent authority;
Lesson 17 • Anti-Corruption and Anti-Bribery Laws in India 509

(c) closure of the proceedings against the public servant and to proceed against the complainant under
section 46 of the Lokpal and Lokayuktas Act, 2013 (1 of 2014).
(2) Every preliminary inquiry referred to in sub-section (1) shall ordinarily be completed within a period of ninety
days and for reasons to be recorded in writing, within a further period of ninety days from the date of receipt
of the complaint.
Action on investigation in relation to public servants (Section 8B):
(1) In case the Commission decides to proceed to investigate into the complaint under clause (a) of sub-section
(1) of section 8A, it shall direct any agency (including the Delhi Special Police Establishment) to carry out the
investigation as expeditiously as possible and complete the investigation within a period of six months from
the date of its order and submit the investigation report containing its findings to the Commission:
Provided that the Commission may extend the said period by a further period of six months for the reasons to
be recorded in writing.
(2) Notwithstanding anything contained in section 173 of the Code of Criminal Procedure, 1973 (2 of 1974),
any agency (including the Delhi Special Police Establishment) shall, in respect of cases referred to it by the
Commission, submit the investigation report to the Commission.
(3) The Commission shall consider every report received by it under sub-section (2) from any agency (including
the Delhi Special Police Establishment) and may decide as to–
(a) file charge-sheet or closure report before the Special Court against the public servant;
(b) initiate the departmental proceedings or any other appropriate action against the concerned public
servant by the competent authority.
Proceedings of Commission (Section 9):
(1) The proceedings of the Commission shall be conducted at its headquarters.
(2) The Commission may, by unanimous decision, regulate the procedure for transaction of its business as also
allocation of its business amongst the Central Vigilance Commissioner and other Vigilance Commissioners.
(3) Save as provided in sub-section (2), all business of the Commission shall, as far as possible, be transacted
unanimously.
(4) Subject to the provisions of sub-section (3), if the Central Vigilance Commissioner and other Vigilance
Commissioners differ in opinion on any matter, such matter shall be decided according to the opinion of the
majority.
(5) The Central Vigilance Commissioner, or, if for any reason he is unable to attend any meeting of the Commission,
the senior-most Vigilance Commissioner present at the meeting, shall preside at the meeting.
(6) No act or proceeding of the Commission shall be invalid merely by reason of–
(a) any vacancy in, or any defect in the constitution of, the Commission; or
(b) any defect in the appointment of a person acting as the Central Vigilance Commissioner or as a Vigilance
Commissioner; or
(c) any irregularity in the procedure of the Commission not affecting the merits of the case.
Vigilance Commissioner to act as Central Vigilance Commissioner in certain circumstances (Section 10):
(1) In the event of the occurrence of any vacancy in the office of the Central Vigilance Commissioner by reason
of his death, resignation or otherwise, the President may, by notification, authorise one of the Vigilance
Commissioners to act as the Central Vigilance Commissioner until the appointment of a new Central Vigilance
Commissioner to fill such vacancy.
(2) When the Central Vigilance Commissioner is unable to discharge his functions owing to absence on leave or
otherwise, such one of the Vigilance Commissioners as the President may, by notification, authorise in this
behalf, shall discharge the functions of the Central Vigilance Commissioner until the date on which the Central
Vigilance Commissioner resumes his duties.
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Power relating to inquiries (Section 11):

The Commission shall, while conducting any inquiry referred to in clauses (b) and (c) of sub-section (1) of section 8,
have all the powers of a civil court trying a suit under the Code of Civil Procedure, 1908 (5 of 1908) and in particular,
in respect of the following matters, namely:–
(a) summoning and enforcing the attendance of any person from any part of India and examining him on oath;
(b) requiring the discovery and production of any document;
(c) receiving evidence on affidavits;
(d) requisitioning any public record or copy thereof from any court or office;
(e) issuing commissions for the examination of witnesses or other documents; and
(f) any other matter which may be prescribed.
Director of Inquiry for making preliminary inquiry (Section 11A):
(1) There shall be a Director of Inquiry, not below the rank of Joint Secretary to the Government of India, who shall
be appointed by the Central Government for conducting preliminary inquiries referred to the Commission by
the Lokpal.
(2) The Central Government shall provide the Director of Inquiry such officers and employees as may be required
for the discharge of his functions under this Act.
Proceedings before Commission to be judicial proceedings (Section 12):
The Commission shall be deemed to be a civil court for the purposes of section 195 and Chapter XXVI of the Code of
Criminal Procedure, 1973 (2 of 1974) and every proceeding before the Commission shall be deemed to be a judicial
proceeding within the meaning of sections 193 and 228 and for the purposes of section 196 of the Indian Penal Code
(45 of 1860).

Expenses and Annual Report (Chapter IV)

Expenses of Commission to be charged on the Consolidated Fund of India (Section 13):
The expenses of the Commission, including any salaries, allowances and pensions payable to or in respect of the
Central Vigilance Commissioner, the Vigilance Commissioners, Secretary and the staff of the Commission, shall be
charged on the Consolidated Fund of India.
Annual Report (Section 14):
(1) It shall be the duty of the Commission to present annually to the President a report as to the work done by the
Commission within six months of the close of the year under report.
(2) The report referred to in sub-section (1) shall contain a separate part on the functioning of the Delhi Special
Police Establishment in so far as it relates to sub-section (1) of section 4 of the Delhi Special Police Establishment
Act, 1946 (25 of 1946).
(3) On receipt of such report, the President shall cause the same to be laid before each House of Parliament.

Miscellaneous (Chapter V)
Protection of action taken in good faith (Section 15):
No suit, prosecution or other legal proceeding shall lie against the Commission, the Central Vigilance Commissioner,
any Vigilance Commissioner, the Secretary or against any staff of the Commission in respect of anything which is in
good faith done or intended to be done under this Act.
Central Vigilance Commissioner, Vigilance Commissioner and staff to be public servants (Section 16):
The Central Vigilance Commissioner, every Vigilance Commissioner, the Secretary and every staff of the Commission
shall be deemed to be a public servant within the meaning of section 21 of the Indian Penal Code (45 of 1860).
Lesson 17 • Anti-Corruption and Anti-Bribery Laws in India 511

Report of any inquiry made on reference by Commission to be forwarded to that Commission (Section 17):
(1) The report of the inquiry undertaken by any agency on a reference made by the Commission shall be forwarded
to the Commission.
(2) The Commission shall, on receipt of such report and after taking into consideration any other factors relevant
thereto, advise the Central Government and corporations established by or under any Central Act, Government
companies, societies and local authorities owned or controlled by that Government, as the case may be, as to
the further course of action.
(3) The Central Government and the corporations established by or under any Central Act, Government companies,
societies and other local authorities owned or controlled by that Government, as the case may be, shall consider
the advice of the Commission and take appropriate action:
Provided that where the Central Government, any corporation established by or under any Central Act,
Government company, society or local authority owned or controlled by the Central Government, as the case
may be, does not agree with the advice of the Commission, it shall, for reasons to be recorded in writing,
communicate the same to the Commission.
Power to call for information (Section 18):
The Commission may call for reports, returns and statements from the Central Government or corporations
established by or under any Central Act, Government companies, societies and other local authorities owned or
controlled by that Government so as to enable it to exercise general supervision over the vigilance and anti-corruption
work in that Government and in the said corporations, Government companies, societies and local authorities.
Consultation with Commission in certain matters (section 19):
The Central Government shall, in making any rules or regulations governing the vigilance or disciplinary matters
relating to persons appointed to public services and posts in connection with the affairs of the Union or to members
of the All-India Services, consult the Commission.
Power to make rules (section 20):
(1) The Central Government may, by notification in the Official Gazette, make rules for the purpose of carrying out
the provisions of this Act.
(2) In particular, and without prejudice to the generality of the foregoing power, such rules may provide for all or
any of the following matters, namely:–
(a) the number of members of the staff and their conditions of service under section 7;
(b) any other power of the civil court to be prescribed under clause (f) of section 11; and
(c) any other matter which is required to be, or may be, prescribed.
Power to make regulations (Section 21):
(1) The Commission may, with the previous approval of the Central Government, by notification in the Official
Gazette, make regulations not inconsistent with this Act and the rules made thereunder to provide for all
matters for which provision is expedient for the purposes of giving effect to the provisions of this Act.
(2) In particular, and without prejudice to the generality of the foregoing power, such regulations may provide for
all or any of the following matters, namely:–
(a) the duties and the powers of the Secretary under sub-section (4) of section 3; and
(b) the procedure to be followed by the Commission under sub-section (2) of section 9.
Notification, rule, etc., to be laid before Parliament (Section 22):
Every notification issued under clause (b) of sub-section (2) of section 8 and every rule made by the Central
Government and every regulation made by the Commission under this Act shall be laid, as soon as may be after it is
issued or made, before each House of Parliament, while it is in session, for a total period of thirty days which may be
comprised in one session or in two or more successive sessions, and if, before the expiry of the session immediately
following the session or the successive sessions aforesaid, both Houses agree in making any modification in the
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notification or the rule or the regulation, or both Houses agree that the notification or the rule or the regulation
should not be made, the notification or the rule or the regulation shall thereafter have effect only in such modified
form or be of no effect, as the case may be; so, however, that any such modification or annulment shall be without
prejudice to the validity of anything previously done under that notification or rule or regulation.
Power to remove difficulties (Section 23):
(1) If any difficulty arises in giving effect to the provisions of this Act, the Central Government may, by order, not
inconsistent with the provisions of this Act, remove the difficulty:
Provided that no such order shall be made after the expiry of a period of two years from the date of
commencement of this Act.
(2) Every order made under this section shall, as soon as may be after it is made, be laid before each House of
Parliament.
Provisions relating to existing Vigilance Commission (Section 24):
With effect from the constitution of the Commission under sub-section (1) of section 3, the Central Vigilance
Commission set up by the Resolution of the Government of India in the Ministry of Home Affairs No. 24/7/64-
AVD, dated the 11th February, 1964 (hereafter referred to in this section as the existing Vigilance Commission)
shall, insofar as its functions are not inconsistent with the provisions of this Act, continue to discharge the said
functions and–
(a) all actions and decisions taken by the Vigilance Commission insofar as such actions and decisions are
relatable to the functions of the Commission constituted under this Act shall be deemed to have been
taken by the Commission;
(b) all proceedings pending before the Vigilance Commission, insofar as such proceedings relate to the
functions of the Commission, shall be deemed to be transferred to the Commission and shall be dealt
with in accordance with the provisions of this Act;
(c) the employees of the Vigilance Commission shall be deemed to have become the employees of the
Commission on the same terms and conditions;
(d) all the assets and liabilities of the Vigilance Commission shall be transferred to the Commission.
Appointments, etc., of officers of Directorate of Enforcement (Section 25):
Notwithstanding anything contained in the Foreign Exchange Management Act, 1999 (42 of 1999) or any other law
for the time being in force,–
(a) the Central Government shall appoint a Director of Enforcement in the Directorate of Enforcement in the
Ministry of Finance on the recommendation of the Committee consisting of–
(i) the Central Vigilance Commissioner –Chairperson;
(ii) Vigilance Commissioners –Members;
(iii) Secretary to the Government of India in-charge of the Ministry of Home Affairs in the Central Government
–Member;
(iv) Secretary to the Government of India in-charge of the Ministry of Personnel in the Central Government
–Member;
(v) Secretary to the Government of India in-charge of the Department of Revenue, Ministry of Finance in the
Central Government –Member;
(b) while making a recommendation, the Committee shall take into consideration the integrity and experience of
the officers eligible for appointment;
(c) no person below the rank of Additional Secretary to the Government of India shall be eligible for appointment
as a Director of Enforcement;
(d) a Director of Enforcement shall continue to hold office for a period of not less than two years from the date on
which he assumes office;
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(e) a Director of Enforcement shall not be transferred except with the previous consent of the Committee referred
to in clause (a);
(f) the Committee referred to in clause (a) shall, in consultation with the Director of Enforcement, recommend
officers for appointment to the posts above the level of the Deputy Director of Enforcement and also recommend
the extension or curtailment of the tenure of such officers in the Directorate of Enforcement;
(g) on receipt of the recommendation under clause (f), the Central Government shall pass such orders as it thinks
fit to give effect to the said recommendation.
Amendment of Act 25 of 1946 (Section 26):
In the Delhi Special Police Establishment Act, 1946,–
(a) after section 1, the following section shall be inserted, namely:–
“1A. Interpretation section.–Words and expressions used herein and not defined but defined in the Central
Vigilance Commission Act, 2003 (45 of 2003), shall have the meanings, respectively, assigned to them in
that Act.”;
(b) for section 4, the following sections shall be substituted, namely:–
“4. Superintendence and administration of Special Police Establishment.–
(1) The superintendence of the Delhi Special Police Establishment in so far as it relates to investigation of
offences alleged to have been committed under the Prevention of Corruption Act, 1988 (49 of 1988),
shall vest in the Commission.
(2) Save as otherwise provided in sub-section (1), the superintendence of the said police establishment in all
other matters shall vest in the Central Government.
(3) The administration of the said police establishment shall vest in an officer appointed in this behalf by the
Central Government (hereinafter referred to as the Director) who shall exercise in respect of that police
establishment such of the powers exercisable by an Inspector-General of Police in respect of the police
force in a State as the Central Government may specify in this behalf.
4A. Committee for appointment of Director.–
(1) The Central Government shall appoint the Director on the recommendation of the Committee consisting of–
(a) the Central Vigilance Commissioner –Chairperson;
(b) Vigilance Commissioners –Members;
(c) Secretary to the Government of India incharge of the Ministry of Home Affairs in the Central
Government –Member;
(d) Secretary (Coordination and Public Grievances) in the Cabinet Secretariat –Member.
(2) While making any recommendation under sub-section (1), the Committee shall take into consideration
the views of the outgoing Director.
(3) The Committee shall recommend a panel of officers–
(a) on the basis of seniority, integrity and experience in the investigation of anticorruption cases;
and
(b) chosen from amongst officers belonging to the Indian Police Service constituted under the All-India
Services Act, 1951 (61 of 1951), for being considered for appointment as the Director.
4B. Terms and conditions of service of Director
(1) The Director shall, notwithstanding anything to the contrary contained in the rules relating to his
conditions of service, continue to hold office for a period of not less than two years from the date on
which he assumes office.
(2) The Director shall not be transferred except with the previous consent of the Committee referred to in
sub-section (1) of section 4A.
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4C. Appointment for posts of Superintendent of Police and above, extension and curtailment of their
tenure, etc.
(1) The Committee referred to in section 4A shall, after consulting the Director, recommend officers for
appointment to the posts of the level of Superintendent of Police and above and also recommend the
extension or curtailment of the tenure of such officers in the Delhi Special Police Establishment.
(2) On receipt of the recommendation under sub-section (1), the Central Government shall pass such orders
as it thinks fit to give effect to the said recommendation.”;
(c) after section 6, the following section shall be inserted, namely:–
“6A. Approval of Central Government to conduct inquiry or investigation.
(1) The Delhi Special Police Establishment shall not conduct any inquiry or investigation into any offence
alleged to have been committed under the Prevention of Corruption Act, 1988 (49 of 1988) except with
the previous approval of the Central Government where such allegation relates to–
(a) the employees of the Central Government of the level of Joint Secretary and above; and
(b) such officers as are appointed by the Central Government in corporations established by or under
any Central Act, Government companies, societies and local authorities owned or controlled by that
Government.
(2) Notwithstanding anything contained in sub-section (1), no such approval shall be necessary for cases
involving arrest of a person on the spot on the charge of accepting or attempting to accept any gratification
other than legal remuneration referred to in clause (c) of the Explanation to section 7 of the Prevention
of Corruption Act, 1988 (49 of 1988).”.
Repeal and saving (Section 27):
(1) The Government of India in the Ministry of Personnel, Public Grievances and Pensions (Department of
Personnel and Training) Resolution No. 371/20/99-AVD. III, dated the 4th April, 1999 as amended vide
Resolution of even number, dated the 13th August, 2002 is hereby repealed.
(2) Notwithstanding such repeal and the cesser of operation of the Central Vigilance Commission Ordinance,
1999 (Ord. 4 of 1999), anything done or any action taken under the said Resolution and the said Ordinance
including the appointments made and other actions taken or anything done or any action taken or any
appointment made under the Delhi Special Police Establishment Act, 1946 (25 of 1946) and the Foreign
Exchange Regulation Act, 1973 (46 of 1973) as amended by the said Ordinance shall be deemed to have
been made or done or taken under this Act or the Delhi Special Police Establishment Act, 1946 and the
Foreign Exchange Regulation Act, 1973 as if the amendments made in those Acts by this Act were in force
at all material times.

(F) LOKPAL AND LOKAYUKTA ACT, 2013 (LLA)

The preamble of the Act states that it is an Act for the establishment of a body of Lokpal for the Union and Lokayukta
for States to inquire into allegations of corruption against certain public functionaries and for matters connected
therewith or incidental thereto.
The preamble further provides that whereas the Constitution of India established a Democratic Republic to ensure
justice for all; and whereas India has ratified the United Nations Convention Against Corruption; and whereas the
Government’s commitment to clean and responsive governance has to be reflected in effective bodies to contain and
punish acts of corruption; it is expedient to enact a law, for more effective implementation of the said Convention
and to provide for prompt and fair investigation and prosecution in cases of Corruption.
The LLA requires each State to establish a Lokayukta by law under the state legislature. The Lokpal has the jurisdiction
to inquire into all complaints arising from the Prevention of Corruption Act against certain public functionaries,
including an incumbent or past Prime Minister, an incumbent or past Union Minister and any person who is or has been
a member of Parliament. The LLA provides that after the completion of investigation with respect to a complaint under
the PCA, the Lokpal can itself initiate prosecution against the accused and/or impose penalties via its prosecution wing
or initiate prosecution in the special court proposed to be established to try offences under the PCA.
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The Act consists of 15 Chapters, details of which are as under:

Part Chapter Section Particulars

I 1 Preliminary
II I 2 Definitions
II 3 to 10 Establishment of Lokpal
III 11 Inquiry Wing
IV 12 Prosecution Wing
V 13 Expenses of Lokpal to be charged on Consolidated Fund of India
VI 14 to 19 Jurisdiction in respect of Inquiry
VII 20 to 24 Procedure in respect of Preliminary Inquiry and Investigation
VIII 25 to 34 Power of Lokpal
IX 35 & 36 Special Courts
X 37 & 38 Complaints against Chairperson, Members and Official of Lokpal
XI 39 Assessment of Loss and Recovery thereof by Special Court
XII 40 to 43 Finance, Account and Audit
XIII 44 to 45 Declaration of Assets
XIV 46 & 47 Offences and Penalties
XV 48 to 62 Miscellaneous
Part III 63 Establishment of the Lokayukta
Here, we shall discuss the important provisions of the LLA:
Establishment of Lokpal (Section 3):
(1) On and from the commencement of this Act, there shall be established, for the purpose of this Act, a body to be
called the “Lokpal”.
(2) The Lokpal shall consist of–
(a) a Chairperson, who is or has been a Chief Justice of India or is or has been a Judge of the Supreme Court
or an eminent person who fulfills the eligibility specified in clause (b) of sub-section (3); and
(b) such number of Members, not exceeding eight out of whom fifty per cent. shall be Judicial Members:
Provided that not less than fifty per cent. of the Members of the Lokpal shall be from amongst the
persons belonging to the Scheduled Castes, the Scheduled Tribes, Other Backward Classes, Minorities
and women.
(3) A person shall be eligible to be appointed,–
(a) as a Judicial Member if he is or has been a Judge of the Supreme Court or is or has been a Chief Justice of
a High Court;
(b) as a Member other than a Judicial Member, if he is a person of impeccable integrity and outstanding
ability having special knowledge and expertise of not less than twenty-five years in the matters relating
to anti-corruption policy, public administration, vigilance, finance including insurance and banking, law
and management.
(4) The Chairperson or a Member shall not be–
(i) a member of Parliament or a member of the Legislature of any State or Union territory;
(ii) a person convicted of any offence involving moral turptitude;
(iii) a person of less than forty-five years of age, on the date of assuming office as the Chairperson or Member,
as the case may be;
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(iv) a member of any Panchayat or Municipality;

(v) a person who has been removed or dismissed from the service of the Union or a State, and shall not hold
any office of trust or profit (other than his office as the Chairperson or a Member) or be affiliated with
any political party or carry on any business or practise any profession and, accordingly, before he enters
upon his office, a person appointed as the Chairperson or a Member, as the case may be, shall, if–
a. he holds any office of trust or profit, resign from such office; or
b. he is carrying on any business, sever his connection with the conduct and management of such
business; or
c. he is practising any profession, cease to practise such profession.
Appointment of Chairperson and Members on recommendations of Selection Committee (Section 4):
(1) The Chairperson and Members shall be appointed by the President after obtaining the recommendations of a
Selection Committee consisting of–
(a) the Prime Minister–Chairperson;
(b) the Speaker of the House of the People–Member;
(c) the Leader of Opposition in the House of the People–Member; 7
(d) the Chief Justice of India or a Judge of the Supreme Court nominated by him–Member;
(e) one eminent jurist, as recommended by the Chairperson and Members referred to in clauses (a) to (d)
above, to be nominated by the President–Member.
(2) No appointment of a Chairperson or a Member shall be invalid merely by reason of any vacancy in the
Selection Committee.
(3) The Selection Committee shall for the purposes of selecting the Chairperson and Members of the Lokpal and
for preparing a panel of persons to be considered for appointment as such, constitute a Search Committee
consisting of at least seven persons of standing and having special knowledge and expertise in the matters
relating to anti-corruption policy, public administration, vigilance, policy making, finance including insurance
and banking, law and management or in any other matter which, in the opinion of the Selection Committee,
may be useful in making the selection of the Chairperson and Members of the Lokpal:
Provided that not less than fifty per cent. of the members of the Search Committee shall be from amongst the
persons belonging to the Scheduled Castes, the Scheduled Tribes, Other Backward Classes, Minorities and women:
Provided further that the Selection Committee may also consider any person other than the persons
recommended by the Search Committee.
(4) The Selection Committee shall regulate its own procedure in a transparent manner for selecting the Chairperson
and Members of the Lokpal.
(5) The term of the Search Committee referred to in sub-section (3), the fees and allowances payable to its
members and the manner of selection of panel of names shall be such as may be prescribed.
Inquiry Wing (Section 11):
(1) Notwithstanding anything contained in any law for the time being in force, the Lokpal shall constitute an
Inquiry Wing headed by the Director of Inquiry for the purpose of conducting preliminary inquiry into any
offence alleged to have been committed by a public servant punishable under the Prevention of Corruption
Act, 1988 (49 of 1988):
Provided that till such time the Inquiry Wing is constituted by the Lokpal, the Central Government shall make
available such number of officers and other staff from its Ministries or Departments, as may be required by the
Lokpal, for conducting preliminary inquiries under this Act.
(2) For the purposes of assisting the Lokpal in conducting a preliminary inquiry under this Act, the officers of
the Inquiry Wing not below the rank of the Under Secretary to the Government of India, shall have the same
powers as are conferred upon the Inquiry Wing of the Lokpal under section 27.
Lesson 17 • Anti-Corruption and Anti-Bribery Laws in India 517

Prosecution Wing (Section 12):

(1) The Lokpal shall, by notification, constitute a Prosecution Wing headed by the Director of Prosecution for the
purpose of prosecution of public servants in relation to any complaint by the Lokpal under this Act:
Provided that till such time the Prosecution Wing is constituted by the Lokpal, the Central Government shall
make available such number of officers and other staff from its Ministries or Departments, as may be required
by the Lokpal, for conducting prosecution under this Act.
(2) The Director of Prosecution shall, after having been so directed by the Lokpal, file a case in accordance with
the findings of investigation report, before the Special Court and take all necessary steps in respect of the
prosecution of public servants in relation to any offence punishable under the Prevention of Corruption Act,
1988 (49 of 1988).
(3) The case under sub-section (2), shall be deemed to be a report, filed on completion of investigation, referred
to in section 173 of the Code of Criminal Procedure, 1973 (2 of 1974).
Jurisdiction of Lokpal to include Prime Minister, Ministers, members of Parliament, Groups A, B, C and D
officers and officials of Central Government (section 14):
(1) Subject to the other provisions of this Act, the Lokpal shall inquire or cause an inquiry to be conducted into
any matter involved in, or arising from, or connected with, any allegation of corruption made in a complaint in
respect of the following, namely:–
(a) any person who is or has been a Prime Minister: Provided that the Lokpal shall not inquire into any
matter involved in, or arising from, or connected with, any such allegation of corruption against the
Prime Minister,–
(i) in so far as it relates to international relations, external and internal security, public order, atomic
energy and space;
(ii) unless a full bench of the Lokpal consisting of its Chairperson and all Members considers the
initiation of inquiry and at least two-thirds of its Members approves of such inquiry:
Provided further that any such inquiry shall be held in camera and if the Lokpal comes to the conclusion
that the complaint deserves to be dismissed, the records of the inquiry shall not be published or made
available to anyone;
(b) any person who is or has been a Minister of the Union;
(c) any person who is or has been a member of either House of Parliament;
(d) any Group ‘A’ or Group ‘B’ officer or equivalent or above, from amongst the public servants defined in sub-
clauses (i) and (ii) of clause (c) of section 2 of the Prevention of Corruption Act, 1988 (49 of 1988) when
serving or who has served, in connection with the affairs of the Union;
(e) any Group ‘C’ or Group ‘D’ official or equivalent, from amongst the public servants defined in sub-clauses
(i) and (ii) of clause (c) of section 2 of the Prevention of Corruption Act, 1988 (49 of 1988) when serving
or who has served in connection with the affairs of the Union subject to the provision of sub-section (1)
of section 20;
(f) any person who is or has been a chairperson or member or officer or employee in any body or Board or
corporation or authority or company or society or trust or autonomous body (by whatever name called)
established by an Act of Parliament or wholly or partly financed by the Central Government or controlled by it:
Provided that in respect of such officers referred to in clause (d) who have served in connection with the
affairs of the Union or in any body or Board or corporation or authority or company or society or trust
or autonomous body referred to in clause (e) but are working in connection with the affairs of the State
or in any body or Board or corporation or authority or company or society or trust or autonomous body
(by whatever name called) established by an Act of the State Legislature or wholly or partly financed by
the State Government or controlled by it, the Lokpal and the officers of its Inquiry Wing or Prosecution
Wing shall have jurisdiction under this Act in respect of such officers only after obtaining the consent of
the concerned State Government;
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(g) any person who is or has been a director, manager, secretary or other officer of every other society or
association of persons or trust (whether registered under any law for the time being in force or not), by
whatever name called, wholly or partly financed by the Government and the annual income of which
exceeds such amount as the Central Government may, by notification, specify;
(h) any person who is or has been a director, manager, secretary or other officer of every other society or
association of persons or trust (whether registered under any law for the time being in force or not) in
receipt of any donation from any foreign source under the Foreign Contribution (Regulation) Act, 2010
(42 of 2010) in excess of ten lakh rupees in a year or such higher amount as the Central Government may,
by notification, specify.
Explanation: For the purpose of clauses (f) and (g), it is hereby clarified that any entity or institution, by
whatever name called, corporate, society, trust, association of persons, partnership, sole proprietorship,
limited liability partnership (whether registered under any law for the time being in force or not), shall
be the entities covered in those clauses:
Provided that any person referred to in this clause shall be deemed to be a public servant under clause
(c) of section 2 of the Prevention of Corruption Act, 1988 (49 of 1988) and the provisions of that Act shall
apply accordingly.
(2) Notwithstanding anything contained in sub-section (1), the Lokpal shall not inquire into any matter involved
in, or arising from, or connected with, any such allegation of corruption against any member of either House of
Parliament in respect of anything said or a vote given by him in Parliament or any committee thereof covered
under the provisions contained in clause (2) of article 105 of the Constitution.
(3) The Lokpal may inquire into any act or conduct of any person other than those referred to in sub-section
(1), if such person is involved in the act of abetting, bribe giving or bribe taking or conspiracy relating to any
allegation of corruption under the Prevention of Corruption Act, 1988 (49 of 1988) against a person referred
to in sub-section (1):
Provided that no action under this section shall be taken in case of a person serving in connection with the
affairs of a State, without the consent of the State Government.
(4) No matter in respect of which a complaint has been made to the Lokpal under this Act, shall be referred for
inquiry under the Commissions of Inquiry Act, 1952 (60 of 1952).
Explanation: For the removal of doubts, it is hereby declared that a complaint under this Act shall only relate
to a period during which the public servant was holding or serving in that capacity.
Matters pending before any court or committee or authority for inquiry not to be affected (Section 15):
In case any matter or proceeding related to allegation of corruption under the Prevention of Corruptions Act,
1988 has been pending before any court or committee of either House of Parliament or before any other
authority prior to commencement of this Act or prior to commencement of any inquiry after the commencement
of this Act, such matter or proceeding shall be continued before such court, committee or authority.
Constitution of benches of Lokpal (Section 16):
(1) Subject to the provisions of this Act,–
(a) the jurisdiction of the Lokpal may be exercised by benches thereof;
(b) a bench may be constituted by the Chairperson with two or more Members as the Chairperson may deem fit;
(c) every bench shall ordinarily consist of at least one Judicial Member;
(d) where a bench consists of the Chairperson, such bench shall be presided over by the Chairperson;
(e) where a bench consists of a Judicial Member, and a non-Judicial Member, not being the Chairperson, such
bench shall be presided over by the Judicial Member;
(f) the benches of the Lokpal shall ordinarily sit at New Delhi and at such other places as the Lokpal may, by
regulations, specify.
(2) The Lokpal shall notify the areas in relation to which each bench of the Lokpal may exercise jurisdiction.
Lesson 17 • Anti-Corruption and Anti-Bribery Laws in India 519

(3) Notwithstanding anything contained in sub-section (2), the Chairperson shall have the power to constitute or
reconstitute benches from time to time.
(4) If at any stage of the hearing of any case or matter it appears to the Chairperson or a Member that the case or
matter is of such nature that it ought to be heard by a bench consisting of three or more Members, the case or
matter may be transferred by the Chairperson or, as the case may be, referred to him for transfer, to such bench
as the Chairperson may deem fit.
Distribution of business amongst benches (Section 17)
Where benches are constituted, the Chairperson may, from time to time, by notification, make provisions as to the
distribution of the business of the Lokpal amongst the benches and also provide for the matters which may be dealt
with by each bench.
Power of Chairperson to transfer cases (Section 18)
On an application for transfer made by the complainant or the public servant, the Chairperson, after giving an
opportunity of being heard to the complainant or the public servant, as the case may be, may transfer any case
pending before one bench for disposal to any other bench.
Decision to be by majority (Section 19)
If the Members of a bench consisting of an even number of Members differ in opinion on any point, they shall state
the point or points on which they differ, and make a reference to the Chairperson who shall either hear the point
or points himself or refer the case for hearing on such point or points by one or more of the other Members of the
Lokpal and such point or points shall be decided according to the opinion of the majority of the Members of the
Lokpal who have heard the case, including those who first heard it.
Provisions relating to complaints and preliminary inquiry and investigation (Section 20):
(1) The Lokpal on receipt of a complaint, if it decides to proceed further, may order–
(a) preliminary inquiry against any public servant by its Inquiry Wing or any agency (including the Delhi
Special Police Establishment) to ascertain whether there exists a prima facie case for proceeding in the
matter; or
(b) investigation by any agency (including the Delhi Special Police Establishment) when there exists a prima
facie case:
Provided that the Lokpal shall if it has decided to proceed with the preliminary inquiry, by a general or special
order, refer the complaints or a category of complaints or a complaint received by it in respect of public servants
belonging to Group A or Group B or Group C or Group D to the Central Vigilance Commission constituted under
sub-section (1) of section 3 of the Central Vigilance Commission Act, 2003 (45 of 2003):
Provided further that the Central Vigilance Commission in respect of complaints referred to it under the first
proviso, after making preliminary inquiry in respect of public servants belonging to Group A and Group B, shall
submit its report to the Lokpal in accordance with the provisions contained in sub-sections (2) and (4) and in
case of public servants belonging to Group C and Group D, the Commission shall proceed in accordance with
the provisions of the Central Vigilance Commission Act, 2003 (45 of 2003):
Provided also that before ordering an investigation under clause (b), the Lokpal shall call for the explanation of
the public servant so as to determine whether there exists a prima facie case for investigation:
Provided also that the seeking of explanation from the public servant before an investigation shall not interfere
with the search and seizure, if any, required to be undertaken by any agency (including the Delhi Special Police
Establishment) under this Act.
(2) During the preliminary inquiry referred to in sub-section (1), the Inquiry Wing or any agency (including
the Delhi Special Police Establishment) shall conduct a preliminary inquiry and on the basis of material,
information and documents collected seek the comments on the allegations made in the complaint from
the public servant and the competent authority and after obtaining the comments of the concerned public
servant and the competent authority, submit, within sixty days from the date of receipt of the reference, a
report to the Lokpal.
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(3) A bench consisting of not less than three Members of the Lokpal shall consider every report received under
sub-section (2) from the Inquiry Wing or any agency (including the Delhi Special Police Establishment), and
after giving an opportunity of being heard to the public servant, decide whether there exists a prima facie case,
and proceed with one or more of the following actions, namely:–
(a) investigation by any agency or the Delhi Special Police Establishment, as the case may be;
(b) initiation of the departmental proceedings or any other appropriate action against the concerned public
servants by the competent authority;
(c) closure of the proceedings against the public servant and to proceed against the complainant under
section 46.
(4) Every preliminary inquiry referred to in sub-section (1) shall ordinarily be completed within a period of ninety
days and for reasons to be recorded in writing, within a further period of ninety days from the date of receipt
of the complaint.
(5) In case the Lokpal decides to proceed to investigate into the complaint, it shall direct any agency (including the
Delhi Special Police Establishment) to carry out the investigation as expeditiously as possible and complete
the investigation within a period of six months from the date of its order:
Provided that the Lokpal may extend the said period by a further period not exceeding of six months at a time
for the reasons to be recorded in writing.
(6) Notwithstanding anything contained in section 173 of the Code of Criminal Procedure, 1973 (2 of 1974), any
agency (including the Delhi Special Police Establishment) shall, in respect of cases referred to it by the Lokpal,
submit the investigation report under that section to the court having jurisdiction and forward a copy thereof
to the Lokpal.
(7) A bench consisting of not less than three Members of the Lokpal shall consider every report received by it
under sub-section (6) from any agency (including the Delhi Special Police Establishment) and after obtaining
the comments of the competent authority and the public servant may–
(a) grant sanction to its Prosecution Wing or investigating agency to file charge-sheet or direct the closure
of report before the Special Court against the public servant;
(b) direct the competent authority to initiate the departmental proceedings or any other appropriate action
against the concerned public servant.
(8) The Lokpal may, after taking a decision under sub-section (7) on the filing of the charge-sheet, direct its
Prosecution Wing or any investigating agency (including the Delhi Special Police Establishment) to initiate
prosecution in the Special Court in respect of the cases investigated by the agency.
(9) The Lokpal may, during the preliminary inquiry or the investigation, as the case may be, pass appropriate orders
for the safe custody of the documents relevant to the preliminary inquiry or, as the case may be, investigation
as it deems fit.
(10) The website of the Lokpal shall, from time to time and in such manner as may be specified by regulations,
display to the public, the status of number of complaints pending before it or disposed of by it.
(11) The Lokpal may retain the original records and evidences which are likely to be required in the process of
preliminary inquiry or investigation or conduct of a case by it or by the Special Court.
(12) Save as otherwise provided, the manner and procedure of conducting a preliminary inquiry or investigation
(including such material and documents to be made available to the public servant) under this Act, shall be
such as may be specified by regulations.
Persons likely to be prejudicially affected to be heard (Section 21):
If, at any stage of the proceeding, the Lokpal–
(a) considers it necessary to inquire into the conduct of any person other than the accused; or
(b) is of opinion that the reputation of any person other than an accused is likely to be prejudicially affected by
the preliminary inquiry, the Lokpal shall give to that person a reasonable opportunity of being heard in the
preliminary inquiry and to produce evidence in his defence, consistent with the principles of natural justice.
 Lesson 17 • Anti-Corruption and Anti-Bribery Laws in India 521

Lokpal may require any public servant or any other person to furnish information, etc (section 22):
Subject to the provisions of this Act, for the purpose of any preliminary inquiry or investigation, the Lokpal or the
investigating agency, as the case may be, may require any public servant or any other person who, in its opinion, is
able to furnish information or produce documents relevant to such preliminary inquiry or investigation, to furnish
any such information or produce any such document.
Power of Lokpal to grant sanction for initiating prosecution (Section 23);
(1) Notwithstanding anything contained in section 197 of the Code of Criminal Procedure, 1973 (2 of 1974) or
section 6A of the Delhi Special Police Establishment Act, 1946 (25 of 1946) or section 19 of the Prevention of
Corruption Act, 1988 (49 of 1988), the Lokpal shall have the power to grant sanction for prosecution under
clause (a) of sub-section (7) of section 20.
(2) No prosecution under sub-section (1) shall be initiated against any public servant accused of any offence
alleged to have been committed by him while acting or purporting to act in the discharge of his official duty,
and no court shall take cognizance of such offence except with the previous sanction of the Lokpal.
(3) Nothing contained in sub-sections (1) and (2) shall apply in respect of the persons holding office in pursuance
of the provisions of the Constitution and in respect of which a procedure for removal of such person has been
specified therein.
(4) The provisions contained in sub-sections (1), (2) and (3) shall be without prejudice to the generality of the
provisions contained in article 311 and sub-clause (c) of clause (3) of article 320 of the Constitution.
Action on investigation against public servant being Prime Minister, Ministers or members of Parliament
(Section 24):
Where, after the conclusion of the investigation, the findings of the Lokpal disclose the commission of an offence
under the Prevention of Corruption Act, 1988 (49 of 1988) by a public servant referred to in clause (a) or clause (b)
or clause (c) of sub-section (1) of section 14, the Lokpal may file a case in the Special Court and shall send a copy of
the report together with its findings to the competent authority.

Powers of Lokpal (Chapter VIII)

Supervisory powers of Lokpal (Section 25):
(1) The Lokpal shall, notwithstanding anything contained in section 4 of the Delhi Special Police Establishment
Act, 1946 (25 of 1946) and section 8 of the Central Vigilance Commission Act, 2003 (45 of 2003), have the
powers of superintendence over, and to give direction to the Delhi Special Police Establishment in respect
of the matters referred by the Lokpal for preliminary inquiry or investigation to the Delhi Special Police
Establishment under this Act:
Provided that while exercising powers of superintendence or giving direction under this sub-section, the
Lokpal shall not exercise powers in such a manner so as to require any agency (including the Delhi Special
Police Establishment) to whom the investigation has been given, to investigate and dispose of any case in a
particular manner.
(2) The Central Vigilance Commission shall send a statement, at such interval as the Lokpal may direct, to the
Lokpal in respect of action taken on complaints referred to it under the second proviso to sub-section (1) of
section 20 and on receipt of such statement, the Lokpal may issue guidelines for effective and expeditious
disposal of such cases.
(3) Any officer of the Delhi Special Police Establishment investigating a case referred to it by the Lokpal, shall not
be transferred without the approval of the Lokpal.
(4) The Delhi Special Police Establishment may, with the consent of the Lokpal, appoint a panel of Advocates, other
than the Government Advocates, for conducting the cases referred to it by the Lokpal.
(5) The Central Government may from time to time make available such funds as may be required by the
Director of the Delhi Special Police Establishment for conducting effective investigation into the matters
referred to it by the Lokpal and the Director shall be responsible for the expenditure incurred in conducting
such investigation.
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Search and seizure (Section 26):

(1) If the Lokpal has reason to believe that any document which, in its opinion, shall be useful for, or relevant
to, any investigation under this Act, are secreted in any place, it may authorise any agency (including the
Delhi Special Police Establishment) to whom the investigation has been given to search for and to seize
such documents.
(2) If the Lokpal is satisfied that any document seized under sub-section (1) may be used as evidence for the
purpose of any investigation under this Act and that it shall be necessary to retain the document in its custody
or in the custody of such officer as may be authorised, it may so retain or direct such authorised officer to
retain such document till the completion of such investigation:
Provided that where any document is required to be returned, the Lokpal or the authorised officer may return
the same after retaining copies of such document duly authenticated.
Lokpal to have powers of civil court in certain cases (Section 27):
(1) Subject to the provisions of this section, for the purpose of any preliminary inquiry, the Inquiry Wing of the
Lokpal shall have all the powers of a civil court, under the Code of Civil Procedure, 1908 (5 of 1908), while
trying a suit in respect of the following matters, namely:–
(i) summoning and enforcing the attendance of any person and examining him on oath;
(ii) requiring the discovery and production of any document;
(iii) receiving evidence on affidavits;
(iv) requisitioning any public record or copy thereof from any court or office;
(v) issuing commissions for the examination of witnesses or documents: Provided that such commission, in
case of a witness, shall be issued only where the witness, in the opinion of the Lokpal, is not in a position
to attend the proceeding before the Lokpal; and
(vi) such other matters as may be prescribed.
(2) Any proceeding before the Lokpal shall be deemed to be a judicial proceeding within the meaning of section
193 of the Indian Penal Code (45 of 1860).
Power of Lokpal to utilise services of officers of Central or State Government (Section 28):
(1) The Lokpal may, for the purpose of conducting any preliminary inquiry or investigation, utilise the services of
any officer or organisation or investigating agency of the Central Government or any State Government, as the
case may be.
(2) For the purpose of preliminary inquiry or investigating into any matter pertaining to such inquiry or
investigation, any officer or organisation or agency whose services are utilised under sub-section (1) may,
subject to the superintendence and direction of the Lokpal,–
(a) summon and enforce the attendance of any person and examine him;
(b) require the discovery and production of any document; and
(c) requisition any public record or copy thereof from any office.
(3) The officer or organisation or agency whose services are utilised under sub-section (2) shall inquire or, as the
case may be, investigate into any matter pertaining to the preliminary inquiry or investigation and submit a
report thereon to the Lokpal within such period as may be specified by it in this behalf
Provisional attachment of assets (Section 29):
(1) Where the Lokpal or any officer authorised by it in this behalf, has reason to believe, the reason for such belief
to be recorded in writing, on the basis of material in his possession, that–
(a) any person is in possession of any proceeds of corruption;
(b) such person is accused of having committed an offence relating to corruption; and
Lesson 17 • Anti-Corruption and Anti-Bribery Laws in India 523

(c) such proceeds of offence are likely to be concealed, transferred or dealt with in any manner which may
result in frustrating any proceedings relating to confiscation of such proceeds of offence, the Lokpal
or the authorised officer may, by order in writing, provisionally attach such property for a period not
exceeding ninety days from the date of the order, in the manner provided in the Second Schedule to the
Income-tax Act, 1961 (43 of 1961) and the Lokpal and the officer shall be deemed to be an officer under
sub-rule (e) of rule 1 of that Schedule.
(2) The Lokpal or the officer authorised in this behalf shall, immediately after attachment under sub-section (1),
forward a copy of the order, along with the material in his possession, referred to in that sub-section, to the
Special Court, in a sealed envelope, in the manner as may be prescribed and such Court may extend the order
of attachment and keep such material for such period as the Court may deem fit.
(3) Every order of attachment made under sub-section (1) shall cease to have effect after the expiry of the period
specified in that sub-section or after the expiry of the period as directed by the Special Court under sub-section
(2).
(4) Nothing in this section shall prevent the person interested in the enjoyment of the immovable property
attached under sub-section (1) or sub-section (2), from such enjoyment.
Explanation:–For the purposes of this sub-section, “person interested”, in relation to any immovable property,
includes all persons claiming or entitled to claim any interest in the property.
Confirmation of attachment of assets (Section 30):
(1) The Lokpal, when it provisionally attaches any property under sub-section (1) of section 29 shall, within a
period of thirty days of such attachment, direct its Prosecution Wing to file an application stating the facts of
such attachment before the Special Court and make a prayer for confirmation of attachment of the property till
completion of the proceedings against the public servant in the Special Court.
(2) The Special Court may, if it is of the opinion that the property provisionally attached had been acquired
through corrupt means, make an order for confirmation of attachment of such property till the completion of
the proceedings against the public servant in the Special Court.
(3) If the public servant is subsequently acquitted of the charges framed against him, the property, subject to the
orders of the Special Court, shall be restored to the concerned public servant along with benefits from such
property as might have accrued during the period of attachment.
(4) If the public servant is subsequently convicted of the charges of corruption, the proceeds relatable to the
offence under the Prevention of Corruption Act, 1988 (49 of 1988) shall be confiscated and vest in the Central
Government free from any encumbrance or leasehold interest excluding any debt due to any bank or financial
institution.
Explanation: For the purposes of this sub-section, the expressions “bank”, “debt” and “financial institution”
shall have the meanings respectively assigned to them in clauses (d), (g) and (h) of section 2 of the Recovery of
Debts Due to Banks and Financial Institutions Act, 1993 (51 of 1993).
Confiscation of assets, proceeds, receipts and benefits arisen or procured by means of corruption in special
circumstances (Section 31):
(1) Without prejudice to the provisions of sections 29 and 30, where the Special Court, on the basis of prima facie
evidence, has reason to believe or is satisfied that the assets, proceeds, receipts and benefits, by whatever name
called, have arisen or procured by means of corruption by the public servant, it may authorise the confiscation
of such assets, proceeds, receipts and benefits till his acquittal.
(2) Where an order of confiscation made under sub-section (1) is modified or annulled by the High Court or where
the public servant is acquitted by the Special Court, the assets, proceeds, receipts and benefits, confiscated
under sub-section (1) shall be returned to such public servant, and in case it is not possible for any reason to
return the assets, proceeds, receipts and benefits, such public servant shall be paid the price thereof including
the money so confiscated with interest at the rate of five per cent. per annum thereon calculated from the date
of confiscation.
524 Lesson 17 • PP-GRMCE

Power of Lokpal to recommend transfer or suspension of public servant connected with allegation of
corruption (Section 32):
(1) Where the Lokpal, while making a preliminary inquiry into allegations of corruption, is prima facie satisfied,
on the basis of evidence available,–
(i) that the continuance of the public servant referred to in clause (d) or clause (e) or clause (f) of sub-
section (1) of section 14 in his post while conducting the preliminary inquiry is likely to affect such
preliminary inquiry adversely; or
(ii) such public servant is likely to destroy or in any way tamper with the evidence or influence witnesses,
then, the Lokpal may recommend to the Central Government for transfer or suspension of such public
servant from the post held by him till such period as may be specified in the order.
(2) The Central Government shall ordinarily accept the recommendation of the Lokpal made under sub-section
(1), except for the reasons to be recorded in writing in a case where it is not feasible to do so for administrative
reasons.
Power of Lokpal to give directions to prevent destruction of records during preliminary inquiry
(Section 33):
The Lokpal may, in the discharge of its functions under this Act, issue appropriate directions to a public servant
entrusted with the preparation or custody of any document or record–
(a) to protect such document or record from destruction or damage; or
(b) to prevent the public servant from altering or secreting such document or record; or (c) to prevent the public
servant from transferring or alienating any assets allegedly acquired by him through corrupt means.
Power to delegate (Section 34):
The Lokpal may, by general or special order in writing, and subject to such conditions and limitations as may
be specified therein, direct that any administrative or financial power conferred on it may also be exercised or
discharged by such of its Members or officers or employees as may be specified in the order.

Complaints against Chairperson, Members and Officials of Lokpal (Chapter X)

Removal and suspension of Chairperson and Members of Lokpal (Section 37):
(1) The Lokpal shall not inquire into any complaint made against the Chairperson or any Member.
(2) Subject to the provisions of sub-section (4), the Chairperson or any Member shall be removed from his office
by order of the President on grounds of misbehaviour after the Supreme Court, on a reference being made to
it by the President on a petition signed by at least one hundred Members of Parliament has, on an inquiry held
in accordance with the procedure prescribed in that behalf, reported that the Chairperson or such Member, as
the case may be, ought to be removed on such ground.
(3) The President may suspend from office the Chairperson or any Member in respect of whom a reference has
been made to the Supreme Court under sub-section (2), on receipt of the recommendation or interim order
made by the Supreme Court in this regard until the President has passed orders on receipt of the final report
of the Supreme Court on such reference.
(4) Notwithstanding anything contained in sub-section (2), the President may, by order, remove from the office,
the Chairperson or any Member if the Chairperson or such Member, as the case may be,–
(a) is adjudged an insolvent; or
(b) engages, during his term of office, in any paid employment outside the duties of his office; or
(c) is, in the opinion of the President, unfit to continue in office by reason of infirmity of mind or body.
(5) If the Chairperson or any Member is, or becomes, in any way concerned or interested in any contract or
agreement made by or on behalf of the Government of India or the Government of a State or participates in any
Lesson 17 • Anti-Corruption and Anti-Bribery Laws in India 525

way in the profit thereof or in any benefit or emolument arising therefrom otherwise than as a member and in
common with the other members of an incorporated company, he shall, for the purposes of sub-section (2), be
deemed to be guilty of misbehaviour.
Complaints against officials of Lokpal (Section 38):
(1) Every complaint of allegation or wrongdoing made against any officer or employee or agency (including the
Delhi Special Police Establishment), under or associated with the Lokpal for an offence punishable under the
Prevention of Corruption Act, 1988 (49 of 1988) shall be dealt with in accordance with the provisions of this
section.
(2) The Lokpal shall complete the inquiry into the complaint or allegation made within a period of thirty days from
the date of its receipt.
(3) While making an inquiry into the complaint against any officer or employee of the Lokpal or agency engaged
or associated with the Lokpal, if it is prima facie satisfied on the basis of evidence available, that–
(a) continuance of such officer or employee of the Lokpal or agency engaged or associated in his post while
conducting the inquiry is likely to affect such inquiry adversely; or
(b) an officer or employee of the Lokpal or agency engaged or associated is likely to destroy or in any way
tamper with the evidence or influence witnesses, then, the Lokpal may, by order, suspend such officer or
employee of the Lokpal or divest such agency engaged or associated with the Lokpal of all powers and
responsibilities hereto before exercised by it.
(4) On the completion of the inquiry, if the Lokpal is satisfied that there is prima facie evidence of the commission
of an offence under the Prevention of Corruption Act, 1988 (49 of 1988) or of any wrongdoing, it shall, within
a period of fifteen days of the completion of such inquiry, order to prosecute such officer or employee of the
Lokpal or such officer, employee, agency engaged or associated with the Lokpal and initiate disciplinary
proceedings against the official concerned:
Provided that no such order shall be passed without giving such officer or employee of the Lokpal, such officer,
employee, agency engaged or associated, a reasonable opportunity of being heard.

Assessment of Loss and Recovery thereof by Special Court ( Chapter XI)

Assessment of loss and recovery thereof by Special Court(Section 39):
If any public servant is convicted of an offence under the Prevention of Corruption Act, 1988 (49 of 1988) by the special
Court, notwithstanding and without prejudice to any law for the time being in force, it may make an assessment of
loss, if any, caused to the public exchequer on account of the actions or decisions of such public servant not taken in
good faith and for which he stands convicted, and may order recovery of such loss, if possible or quantifiable, from
such public servant so convicted: Provided that if the Special Court, for reasons to be recorded in writing, comes to
the conclusion that the loss caused was pursuant to a conspiracy with the beneficiary or beneficiaries of actions or
decisions of the public servant so convicted, then such loss may, if assessed and quantifiable under this section, also
be recovered from such beneficiary or beneficiaries proportionately.

Offences and Penalties (Chapter XIV)

Prosecution for false complaint and payment of compensation, etc., to public servant (section 46):
(1) Notwithstanding anything contained in this Act, whoever makes any false and frivolous or vexatious complaint
under this Act shall, on conviction, be punished with imprisonment for a term which may extend to one year
and with fine which may extend to one lakh rupees.
(2) No Court, except a Special Court, shall take cognizance of an offence under sub-section (1).
(3) No Special Court shall take cognizance of an offence under sub-section (1) except on a complaint made by a
person against whom the false, frivolous or vexatious complaint was made or by an officer authorised by the
Lokpal.
526 Lesson 17 • PP-GRMCE

(4) The prosecution in relation to an offence under sub-section (1) shall be conducted by the public prosecutor
and all expenses connected with such prosecution shall be borne by the Central Government.
(5) In case of conviction of a person being an individual or society or association of persons or trust (whether
registered or not), for having made a false complaint under this Act, such person shall be liable to pay
compensation to the public servant against whom he made the false complaint in addition to the legal expenses
for contesting the case by such public servant, as the Special Court may determine.
(6) Nothing contained in this section shall apply in case of complaints made in good faith.
Explanation: For the purpose of this sub-section, the expression “good faith” means any act believed or done by
a person in good faith with due care, caution and sense of responsibility or by mistake of fact believing himself
justified by law under section 79 of the Indian Penal Code (45 of 1860).
False complaint made by society or association of persons or trust (Section 47):
(1) Where any offence under sub-section (1) of section 46 has been committed by any society or association of
persons or trust (whether registered or not), every person who, at the time the offence was committed, was
directly in charge of, and was responsible to, the society or association of persons or trust, for the conduct of
the business or affairs or activities of the society or association of persons or trust as well as such society or
association of persons or trust shall be deemed to be guilty of the offence and shall be liable to be proceeded
against and punished accordingly:
Provided that nothing contained in this sub-section shall render any such person liable to any punishment
provided in this Act, if he proves that the offence was committed without his knowledge or that he had exercised
all due diligence to prevent the commission of such offence.
(2) Notwithstanding anything contained in sub-section (1), where an offence under this Act has been committed
by a society or association of persons or trust (whether registered or not) and it is proved that the offence has
been committed with the consent or connivance of, or is attributable to any neglect on the part of, any director
manager, secretary or other officer of such society or association of persons or trust, such director, manager,
secretary or other officer shall also be deemed to be guilty of that offence and shall be liable to be proceeded
against and punished accordingly.

CHAPTER XV MISCELLANEOUS
Reports of Lokpal (Section 48)
It shall be the duty of the Lokpal to present annually to the President a report on the work done by the Lokpal and on
receipt of such report the President shall cause a copy thereof together with a memorandum explaining, in respect
of the cases, if any, where the advice of the Lokpal was not accepted, the reason for such non-acceptance to be laid
before each House of Parliament.
Lokpal to function as appellate authority for appeals arising out of any other law for the time being in force
(Section 49)
The Lokpal shall function as the final appellate authority in respect of appeals arising out of any other law for
the time being in force providing for delivery of public services and redressal of public grievances by any public
authority in cases where the decision contains findings of corruption under the Prevention of Corruption Act, 1988
(49 of 1988).
Protection of action taken in good faith by any public servant (Section 50)
No suit, prosecution or other legal proceedings under this Act shall lie against any public servant, in respect of
anything which is done in good faith or intended to be done in the discharge of his official functions or in exercise
of his powers.
Protection of action taken in good faith by others (Section 51)
No suit, prosecution or other legal proceedings shall lie against the Lokpal or against any officer, employee, agency
or any person, in respect of anything which is done in good faith or intended to be done under this Act or the rules
or the regulations made thereunder.
Lesson 17 • Anti-Corruption and Anti-Bribery Laws in India 527

Members, officers and employees of Lokpal to be public servants (Section 52)

The Chairperson, Members, officers and other employees of the Lokpal shall be deemed, when acting or purporting
to act in pursuance of any of the provisions of this Act, to be public servants within the meaning of section 21 of the
Indian Penal Code (45 of 1860).
Limitation to apply in certain cases (Section 53)
The Lokpal shall not inquire or investigate into any complaint, if the complaint is made after the expiry of a
period of seven years from the date on which the offence mentioned in such complaint is alleged to have been
committed.
Bar of jurisdiction (Section 54)
No civil court shall have jurisdiction in respect of any matter which the Lokpal is empowered by or under this Act
to determine.
Legal assistance (Section 55)
The Lokpal shall provide to every person against whom a complaint has been made, before it, under this Act, legal
assistance to defend his case before the Lokpal, if such assistance is requested for.
Act to have overriding effect (Section 56)
The provisions of this Act shall have effect notwithstanding anything inconsistent therewith contained in any
enactment other than this Act or in any instrument having effect by virtue of any enactment other than this
Act.
Provisions of this Act to be in addition of other laws (Section 57)
The provisions of this Act shall be in addition to, and not in derogation of, any other law for the time being in force.
Amendment of certain enactments (Section 58)
The enactments specified in the Schedule shall be amended in the manner specified therein.
Power to make rules (Section 59)
(1) The Central Government may, by notification in the Official Gazette, make rules to carry out the provisions of
this Act.
(2) In particular, and without prejudice to the generality of the foregoing power, such rules may provide for all or
any of the following matters, namely:—
(a) the form of complaint referred to in clause (e) of sub-section (1) of section 2;
(b) the term of the Search Committee, the fee and allowances payable to its members and the manner of
selection of panel of names under sub-section (5) of section 4;
(c) the post or posts in respect of which the appointment shall be made after consultation with the Union
Public Service Commission under the proviso to sub-section (3) of section 10;
(d) other matters for which the Lokpal shall have the powers of a civil court under clause (vi) of sub-section
(1) of section 27;
(e) the manner of sending the order of attachment along with the material to the Special Court under sub-
section (2) of section 29;
(f) the manner of transmitting the letter of request under sub-section (2) of section 36;
(g) the form and the time for preparing in each financial year the budget for the next financial year, showing
the estimated receipts and expenditure of the Lokpal under section 40;
(h) the form for maintaining the accounts and other relevant records and the form of annual statement of
accounts under sub-section (1) of section 42;
528 Lesson 17 • PP-GRMCE

(i) the form and manner and the time for preparing the returns and statements along with particulars under
section 43;
(j) the form and the time for preparing an annual return giving a summary of its activities during the
previous year under sub-section (5) of section 44;
(k) the form and manner of declaration of assets and liabilities by public servants under section 44: Provided
that the rules may be made under this clause retrospectively from the date on which that provisions of
this Act came into force;
(l) the minimum value for which the competent authority may condone or exempt a public servant from
furnishing information in respect of assets under the proviso to section 45;
(m) any other matter which is to be or may be prescribed.
Power of Lokpal to make regulations (Section 60)
(1) Subject to the provisions of this Act and the rules made thereunder, the Lokpal may, by notification in the
Official Gazette, make regulations to carry out the provisions of this Act.
(2) In particular, and without prejudice to the generality of the foregoing power, such regulations may provide for
all or any of the following matters, namely:—
(a) the conditions of service of the secretary and other officers and staff of the Lokpal and the matters which
in so far as they relate to salaries, allowances, leave or pensions, require the approval of the President
under sub-section (4) of section 10;
(b) the place of sittings of benches of the Lokpal under clause (f) of sub-section (1) of section 16;
(c) the manner for displaying on the website of the Lokpal, the status of all complaints pending or
disposed of along with records and evidence with reference thereto under sub-section (10) of
section 20;
(d) the manner and procedure of conducting preliminary inquiry or investigation under sub-section (11) of
section 20;
(e) any other matter which is required to be, or may be, specified under this Act.
Laying of rules and regulations (Section 61)
Every rule and regulation made under this Act shall be laid, as soon as may be after it is made, before each House of
Parliament, while it is in session, for a total period of thirty days which may be comprised in one session or in two or
more successive sessions, and if, before the expiry of the session immediately following the session or the successive
sessions aforesaid, both Houses agree in making any modification in the rule or regulation, or both Houses agree that
the rule or regulation should not be made, the rule or regulation shall thereafter have effect only in such modified
form or be of no effect, as the case may be; so, however, that any such modification or annulment shall be without
prejudice to the validity of anything previously done under that rule or regulation.
Power to remove difficulties (Section 62)
(1) If any difficulty arises in giving effect to the provisions of this Act, the Central Government may, by order,
published in the Official Gazette, make such provisions not inconsistent with the provisions of this Act, as
appear to be necessary for removing the difficulty: Provided that no such order shall be made under this
section after the expiry of a period of two years from the commencement of this Act.
(2) Every order made under this section shall be laid, as soon as may be after it is made, before each House of
Parliament.

Establishment of the Lokayukta (Part III)

Establishment of Lokayukta (Section 63):
Every State shall establish a body to be known as the Lokayukta for the State, if not so established, constituted or
appointed, by a law made by the State Legislature, to deal with complaints relating to corruption again.
 Lesson 17 • Anti-Corruption and Anti-Bribery Laws in India 529

(G) FUGITIVE ECONOMIC OFFENDER ACT, 2018

There have been several instances of economic offenders fleeing the jurisdiction of Indian courts anticipating the
commencement of criminal proceedings or sometimes during the pendency of such proceedings. The absence of such
offenders from Indian courts has several deleterious consequences, such as, it obstructs investigation in criminal cases,
it wastes precious time of courts and it undermines the rule of law in India. Further, most of such cases of economic
offences involve non-repayment of bank loans thereby worsening the financial health of the banking sector in India.
The existing civil and criminal provisions in law are inadequate to deal with the severity of the problem. 
In order to address the said problem and lay down measures to deter economic offenders from evading the process
of Indian law by remaining outside the jurisdiction of Indian courts, Parliament enacted a legislation, namely, the
Fugitive Economic Offenders Act, 2018 to ensure that fugitive economic offenders return to India to face the action
in accordance with law.  
The Fugitive Economic Offenders Act, 2018, inter -alia, provides for: 
1. Measures to deter fugitive economic offenders from evading the process of law in India by staying outside
the jurisdiction of Indian courts, to preserve the sanctity of the rule of law in India and for matters connected
therewith or incidental thereto. 
2. Key Definitions
• Fugitive Economic Offender {Section 2(f)} :
“fugitive economic offender” means any individual against whom a warrant for arrest in relation to a
Scheduled Offence has been issued by any Court in India, who—
(i) has left India so as to avoid criminal prosecution; or
(ii) being abroad, refuses to return to India to face criminal prosecution;
• Scheduled Offense {Section 2(m)} :
“Scheduled Offence” means an offence specified in the Schedule, if the total value involved in such offence
or offences is one hundred crore rupees or more;
3. Attachment of the property of a fugitive economic offender and proceeds of crime (Section 5)
(1) The Director or any other officer authorised by the Director, not below the rank of Deputy Director, may,
with the permission of the Special Court, attach any property mentioned in the application under section
4 by an order in writing in such manner as may be prescribed.
(2) Notwithstanding anything contained in sub-section (1) or section 4, the Director or any other officer, not
below the rank of Deputy Director, authorised by the Director, may, by an order in writing, at any time
prior to the filing of the application under section 4, attach any property—
(a) for which there is a reason to believe that the property is proceeds of crime, or is a property or
benami property owned by an individual who is a fugitive economic offender; and
(b) which is being or is likely to be dealt within a manner which may result in the property being
unavailable for confiscation:
Provided that the Director or any other officer who provisionally attaches any property under this sub-
section shall, within a period of thirty days from the date of such attachment, file an application under
section 4 before the Special Court.
(3) The attachment of any property under this section shall continue for a period of one hundred and eighty
days from the date of order of attachment or such other period as may be extended by the Special Court
before the expiry of such period.
(4) Nothing in this section shall prevent the person interested in the enjoyment of the immovable property
attached under sub-section (1) from such enjoyment.
Explanation.—For the purposes of this sub-section, the expression “person interested”, in relation to any
immovable property includes all persons claiming or entitled to claim any interest in the property.
530 Lesson 17 • PP-GRMCE

4. The powers of Director & other officers relating to survey, search and seizure of person (Section 6) 
According to section 6, The Director or any other officer shall, for the purposes of section 4, have the same
powers as are vested in a civil court under the Code of Civil Procedure, 1908 (5 of 1908) while trying a suit in
respect of the following matters, namely:—
(a) discovery and inspection;
(b) enforcing the attendance of any person, including any officer of a reporting entity and examining him on oath;
(c) compelling the production of records;
(d) receiving evidence on affidavits;
(e) issuing commissions for examination of witnesses and documents; and
(f) any other matter which may be prescribed.
5. Confiscation of the property of a fugitive economic offender and proceeds of crime; 
6. Disentitlement of the fugitive economic offender from putting forward or defending any civil claim;  
7. Appointment of an Administrator for the purposes of the proposed legislation; 
8. Appeal to the High Court against the orders issued by the Special Court; and  
9. Placing the burden of proof for establishing that an individual is a fugitive economic offender on the Director
or the person authorised by the Director. 
10. Notwithstanding anything contained in any other law for the time being in force,— (a) on a declaration of an
individual as a fugitive economic offender, any Court or tribunal in India, in any civil proceeding before it, may,
disallow such individual from putting forward or defending any civil claim; and (b) any Court or tribunal in
India in any civil proceeding before it, may, disallow any company or limited liability partnership from putting
forward or defending any civil claim, if an individual filing the claim on behalf of the company or the limited
liability partnership, or any promoter or key managerial personnel or majority shareholder of the company or
an individual having a controlling interest in the limited liability partnership has been declared as a fugitive
economic offender. 
Process to Declare a Person as a Fugutive Economic Offender
APPLICATION The process of declaring a person as a fugitive economic offender starts with an
Section 4 application that is to be filled by the director or any other person who is not below the
position of deputy director. The application needs to contain the following:
1. Reason behind believing that such a person is an economic offender.
2. Any information about his whereabouts.
3. List of all the properties which are believed to be proceeds of crime or Benami
property. 
4. List of people an having interest in the said property.
ATTACHMENT The Authorities may attach any property which is mentioned in the above application
Section 5 with the prior approval of the special court. Such an attachment will be valid for 180
days, which may be extended to the discretion of the court.
NOTICE The individual against whom the proceedings have been initiated will be served a notice
Section 10 by the special court. Such a notice will require the said individual to be present at the
specified date on the specified date, failure to report on that date will result in declaring
that person as a fugitive economic offender. It must be noted that the court will give a
minimum time of six weeks to the alleged offender to be present before the court.
 Lesson 17 • Anti-Corruption and Anti-Bribery Laws in India 531

PROCEEDINGS AND If the alleged offender appears before the court within the prescribed time then the
DECLERATION proceedings will be terminated, and if he is represented by his council then the court
Section 11 & 12 will grant them a period of one week to file a reply after which if the court doesn’t find
him as an fugitive economic offender then all his properties will be released. If that
individual fails to appear in the stipulated date then he will be declared as a fugitive
economic offender.
CONFISCATION If the alleged person is found to be a fugitive economic offender then the special court
Section 12 may confiscate all the properties which are acquired from the proceeds of crime, Benami
property. All the rights of this confiscated property shall solely vest with the central
government. The central government has all the right to dispose of these properties
after 90 days of confiscation.
APPEAL The offender, if unsatisfied with the order, may appeal to the High Court within 30 of
Section 17 the order

(H) ICSI ANTI BRIBERY CODE

Objective
To ensure that neither the company nor any of its employees, directors or authorised representatives indulge
in bribery in any of their actions taken for and on behalf of the company in the course of economic, financial or
commercial activities of any kind.
Scope
The Code shall be applicable to the company and its
(i) Board of Directors,
(ii) Employees (full time or part-time or employed through any third party contract),
(iii) Agents, Associates, Consultants, Advisors, Representatives and Intermediaries, and
(iv) Contractors, Sub-contractors and Suppliers of goods and/or services.
Definitions
For the purpose of The Code, unless the context otherwise requires,
‘Bribery’ includes giving or receiving bribe and third party gratification. The act of giving bribe is when committed
intentionally in the course of economic, financial or commercial activities and when it is established that there is
a promise, offering or giving, directly or indirectly, of an undue advantage to any person who directs or works, in
any capacity, for a commercial entity, for the person himself or for another person, in order that he in breach of his
duties, act or refrain from acting.
‘Facilitation payment’ means a payment made to government or private official that acts as an incentive for the
official to complete some action or process expeditiously to the benefit of the party making the payment.
‘Foreign public official’ means any person holding a legislative, executive, administrative or judicial office of a foreign
country, whether appointed or elected, whether permanent or temporary, whether paid or unpaid and includes a
person who performs a public function or provides service for a foreign country.
Words and expressions used and not defined in this Code shall have the meaning assigned to them in their respective
Acts.
Clause 1: Adherence to Anti-Corruption Laws
The company shall follow all anti-corruption laws applicable in India.
Clause 2: Bribery in Private Sector
The company or its employees, directors, agents, associates, consultants, advisors, representatives or intermediaries
shall not involve in bribery.
532 Lesson 17 • PP-GRMCE

Clause 3: Facilitation Payments

No facilitation payment shall be made by the company either directly or through its employees, directors, agents,
associates, consultants, advisors, representatives or intermediaries.
Clause 4: Bribery to Foreign Public Officials
The company, either directly or through its employees, directors, agents, associates, consultants, advisors,
representatives or intermediaries in the conduct of international business shall not offer, promise or give any undue
pecuniary or other advantage, to a foreign public official, for that official or for a third party, in order that the official
acts or refrains from acting in relation to the performance of official duties, in order to obtain or retain business or
other improper advantage.
Clause 5: Policy for Gifts, Hospitality & Expenses
The company shall follow a policy for gifts, hospitality and expenses as approved by its Board.
Clause 6: Whistle Blower Mechanism
The company shall set up a Whistle Blower Mechanism as approved by its Board to enable its employees or others
to raise concerns and report violation(s) of the Code.
Clause 7: Anti- Bribery Training and Awareness Programmes
The company shall put in place an annual Corporate Anti-Bribery Code awareness-cum-training program as
approved by its Board for all its employees, agent, associates, advisors, representatives, intermediaries, consultants,
contractors, sub-contractors and suppliers.
Clause 8: Monitoring Mechanism for Anti-Bribery Code
The company shall set up mechanism as approved by its Board for regular monitoring of its Anti- Bribery Code.
Clause 9: Sanctions for Non-compliance
Any non-compliance of the Code is subject to disciplinary mechanism. The company shall set up disciplinary
mechanism as approved by its Board, for non-compliance of any part of t he Corporate Anti- Bribery Code.
The disciplinary mechanism shall include:
 Nature of offence
 Penalty of the office
 Competent Authority
Guiding Instructions for Implementation of the Code:
1. Corporate Anti-Bribery Code is to be adopted voluntarily.
2. The Code shall be approved by the Board of Directors of the company. Any change in the Code shall be made
with the approval of the Board of the Company.
3. The Code shall be communicated to all existing employees, management and Board members.
4. All the existing employees, management and Board members shall confirm in writing that they shall
unconditionally follow the Code in its entirely throughout their employment/association with the company.
5. All the new appointees shall be required to confirm in writing, at the time of their induction in the company
that they shall be bound by the Code.
6. All agents, associates, consultants, advisors, all the contractors, sub-contracts and suppliers of goods and/or
services, representatives and intermediaries engaged by the company shall also be required to follow the Code
while carrying on their assignments for and on behalf of the company at any time during their association with
the company. It shall also be made a mandatory condition while confirming their appointment.
7. Anti-Bribery Code of the company shall be put on company’s website. Any change in the Code shall be
immediately updated.
8. The Annual Report of the Board shall contain an assertion that the company has an Anti-Bribery Code and
the same is being followed by all employees, agents, associates, consultants, advisors, all the contractors,
 Lesson 17 • Anti-Corruption and Anti-Bribery Laws in India 533

sub-contracts and suppliers of goods and/or services, representatives and intermediaries as well as members
of the Board of the company. Any incident of bribery noticed or reported and action taken by the Board shall
also be reported.
9. With a view to facilitate the companies, the following model suggested policies which may be adopted by the
Board of Directors of the company are annexed to the Code:
a. Model Policy on Gifts, Hospitality & Expenses
b. Model Policy on Purchase through Supplier and other Service Provider
c. Guidelines for Whistle Blower Policy
10. Disclaimer: Due care and diligence is taken in developing the Corporate Anti-Bribery Code. This Code does not
substitute or supplant any existing laws. If any of the parameter of this Code are or become inconsistent with
the applicable laws, provisions of the related laws shall prevail.
[for more details the students may refer to the ICSI publication on the Corporate Anti-Bribery Code ]

LESSON ROUND UP
• A change in attitude of enforcement agencies, which have started enforcing anti-corruption laws aggressively
in India, and have been supported in their efforts by the judiciary (which has taken up an active role in
monitoring corruption cases).
• Corruption has been seen as an immoral and unethical practice since biblical times.
• The cost of implementing an enhanced and extensive anti-corruption compliance program should be
weighed against that of defending a claim due to violation of anticorruption legislation.
• The PCA criminalizes the acceptance of gratification (pecuniary or otherwise) other than the acceptance of
legal remuneration by public servants which is paid by their employers in connection with the performance
of their duties.
• Due care and diligence is taken in developing the Corporate Anti-Bribery Code. This Code does not substitute
or supplant any existing laws. If any of the parameter of this Code are or become inconsistent with the
applicable laws, provisions of the related laws shall prevail.
• The LLA requires each State to establish a Lokayukta by law under the state legislature.
• The functions of the SPE then were to investigate cases of bribery and corruption in transactions with the
War & Supply Deptt. of India during World War II.
• ‘Facilitation payment’ means a payment made to government or private official that acts as an incentive
for the official to complete some action or process expeditiously to the benefit of the party making the
payment.
• The Unlawful Activities (Prevention) Act, 1967’ (Act no. 37 of 1967) was enacted to make provisions as to
more effective prevention of Individual’s and associations’ certain unlawful activities.

GLOSSARY
Bribery ‘Bribery’ includes giving or receiving bribe and third party gratification. The act of
giving bribe is when committed intentionally in the course of economic, financial or
commercial activities and when it is established that there is a promise, offering or
giving, directly or indirectly, of an undue advantage to any person who directs or works,
in any capacity, for a commercial entity, for the person himself or for another person, in
order that he in breach of his duties, act or refrain from acting.
Facilitaion payment ‘Facilitation payment’ means a payment made to government or private official that
acts as an incentive for the official to complete some action or process expeditiously to
the benefit of the party making the payment.
534 Lesson 17 • PP-GRMCE

Foreign Public Official ‘Foreign public official’ means any person holding a legislative, executive,
administrative or judicial office of a foreign country, whether appointed or elected,
whether permanent or temporary, whether paid or unpaid and includes a person
who performs a public function or provides service for a foreign country.
PCA The Prevention of Corruption Act, 1988 is an Act of the Parliament of India enacted to
combat corruption in government agencies and public sector businesses in India.
CVC Central Vigilance Commission is an apex Indian governmental body created in 1964
to address governmental corruption. Recently, in 2003, the Parliament enacted a
law conferring statutory status on the CVC.

TEST YOURSELF
(These are meant for recapitulation only. Answers to these questions are not to be submitted for evaluation)
1. Enumerate the laws and enforcement regimes behind Anti-Corruption and Anti-Bribery Laws in India.
2. Brief description of the Prevention of Corruption, 1988.
3. What is the composition of the Lokpal?
4. What are the grounds basis which the President can remove the Chairman and members on the board under
Central Vigilance Commission Act, 2003?
5. What is the scope of Anti Bribery code as applicable by the ICSI?
6. Liability of individual directors and officers under Prevention of Corruption Act, 1988.
7. Define the following terms;
(a) Bribery
(b) Facilitation payment
(c) Foreign public official
 Test Paper 535

PROFESSIONAL PROGRAMME

GOVERNANCE, RISK MANAGEMENT, COMPLIANCES AND ETHICS

PP-GRMCE

WARNING
It is brought to the notice of all students that use of any malpractice in Examination is misconduct as provided
in the explanation to Regulation 27 and accordingly the registration of such students is liable to be cancelled or
terminated. The text of regulation 27 is reproduced below for information:
“27. Suspension and cancellation of examination results or registration.
In the event of any misconduct by a registered student or a candidate enrolled for any examination conducted
by the Institute, the Council or any Committee formed by the Council in this regard, may suo motu or on receipt
of a complaint, if it is satisfied that, the misconduct is proved after such investigation as it may deem necessary
and after giving such student or candidate an opportunity of being heard, suspend or debar him from appearing
in any one or more examinations, cancel his examination result, or registration as student, or debar him from
re-registration as a student, or take such action as may be deemed fit.
536 PP-GRMCE

PROFESSIONAL PROGRAMME
GOVERNANCE, RISK MANAGEMENT, COMPLIANCES AND ETHICS
TEST PAPER
[This Test Paper is for recapitulate and practice for the student.
Student need not submit responses/answers to this Test Paper]

Time Allowed: 3 hours  Maximum Mark: 100

PART I
1. (a) “Good corporates are not born, but are made by the combined efforts of all stakeholders, board
of directors, government and the society at large.” In the light of this statement discuss the OECD
Principles have each played a major role in the development of corporate governance codes around
the world.  (10 marks)
(b) During a Board meeting of ABC Ltd., some of the directors who were dissatisfied with the Chairman on
various issues, proposes his removal, which was acceded to by majority of directors at the meeting. Being
a Company Secretary you were requested to give your views on such removal of chairman. (5 marks)
(c) Enumerate various committees of the Board of directors which are required to be mandatorily constituted
under the Companies Act, 2013 and state their functions?  (5 marks)
(d) Discuss why it is considered a good practice to separate the role of Chairman and CEO in a
company.  (5 marks)

Attempt all parts of either Question No. 2 or Question No. 2A

2. (a) “Independent directors are known to bring an objective view in Board deliberations. They act as
guardians of the interest of all stakeholders, especially in the areas of potential conflicts.” In the light of
this statement discuss the role and functions of independent directors in a company.
(b) The Board of ABC Ltd. wishes to establish a vigil mechanism in the company. As a Company Secretary,
guide company on the legal framework under the Companies Act, 2013.
(c) “The institutional investors use different tools to assess the health of a company before investing
resources in it.” Elaborate.  (5 marks each)

Or (Alternate Question to Question No. 2)

2A. Discuss in brief the following:
(a) CSR Policy
(b) Rotation of Auditors
(c) Website Disclosures under SEBI (LODR) Regulations, 2015
(d) Class Action Suit
(e) The Clarkson Principles of Stakeholder Management
 (3 marks each)
3. (a) You are company secretary of an Insurance company. The Board of Directors of your company requires
you to draw up a policy based on the principles spelt out in the Stewardship Code for Insurers in India.
(b) In order to ensure good governance, Companies (Meetings of Board and its Powers) Rules, 2014 specifies
certain matters not to be dealt with in a meeting through Video Conferencing or other Audio Visual
Means. What are these matters?
 (5 marks each)
 Test Paper 537

PART II

Attempt all parts of either Question No. 4 or Question No. 4A

4. (a) “Risk is inherent in every business, whether it is of financial nature or non-financial nature.” Explain in
brief the risk management process for a company.
(b) What do you understand by Fraud Risk Management? Discuss the role of Company Secretary in Risk
Management.
(c) Explain risk mitigation strategies.
(d) Elaborate on the classification of risk.
 (5 marks each)

Or (Alternate question to Question No. 4)

4A. Discuss in brief the following:
(a) Enterprise Risk Management
(b) Risk Governance
(c) Reputation Risk Management
(d) ISO 31000
 (5 marks each)

PART III

Attempt all parts of either Question No. 5 or Question No. 5A

5. (a) Discuss the significance of compliance and the essentials of an effective compliance program.
(b) Discuss the Internal Compliance Reporting Mechanism (ICRM).
(c) Write a brief note on COSO’s Internal Control Framework
(d) Discuss the scope and limitations of financial reporting
 (5 marks each)
OR (Alternate Question to Question No. 5)
5A. (a) Discuss the role of Company Secretaries in Compliance Management.
(b) Write a note on the roles and responsibilities of Internal Control System.
(c) Your Company is planning to bring out the sustainability report. As a Company Secretary prepare a note
for the Board of Directors highlighting the importance of Sustainability Reporting and the available
framework.
(d) You are Company Secretary of XYZ Limited. You are required by the Chairman of your company to prepare
a note for the Board of directors highlighting the benefits of integrated reporting.
 (5 marks each)

PART IV

Attempt all parts of either Question No.6 or Question No. 6A

6. (a) Explain the concept of CSR and why companies should adopt CSR in its strategy of growth?
(b) Write a note on context and relevance of business ethics.
 (5 marks each)
538 PP-GRMCE

OR (Alternate Question to Question No. 6)

6A. Discuss in brief the following:
(a) Code of Ethics
(b) Global Compact Self Assessment Tool
(c) Dow-Jones Sustainability Index
(d) Altman Z-Score
(e) Powers of Lokpal
 (2 marks each)