ACCOUNTABILTY, TRANSPARENCY & PROBITY IN THE CORPORATE WORLD

1. ACCOUNTABILTY, TRANSPARENCY & PROBITY IN THE CORPORATE WORLD Presentation By CA. Anil Sharma

2. Nature of corporate form • Company- a legal person. • Company is a distinct legal persona existing independent of its members. • Company capable to sue or be sued in its own name. • Board of Directors- manages the affairs of the company. • Board of Directors- may also be the promoters.

3. Stakeholders • Shareholders vs. stakeholders • Different stakeholders with different expectations: • Shareholders- dividend/wealth creation • Tax authorities- taxes • Customers- good product/services • Employees- better pay packages • Public at large – social corporate responsibilities

4. Board of Directors • In a company the board performs, planning, policy formation and implementation. • Three key aspects: • Accountability • Transparency • Equal treatment to all the stakeholders. • Composition of the Board is key to success.

5. CORPORATE GOVERNANCE • Good governance- expectation of stakeholders • Enhancing business performance and accountability • Governance code for corporate • A structure within specific legal, regulatory and institutional environment through which • Objectives are set • Means of attaining those objectives are determined • performance monitoring is established • Disclosure of timely and accurate information is ensured.

6. CORPORATE GOVERNANCE Historical perspective: International • Foreign Corrupt Practices Act,1977 to Combined Code of LSE • OECD Task Force • Sarbanes Oxley Act National • Amendments in the Companies Act • Accounting Standards by ICAI • Regulatory bodies • SEBI initiatives

7. OECD Principles of Corporate Governance • The rights of shareholders • The equitable treatment of shareholders • The role of stakeholders in corporate governance • Disclosure and transparency • The role of the board

8. OECD Principles of Corporate Governance • The role of stakeholders in corporate governance • The rights of all stakeholders should be protected by law are respected. • All stakeholders should have the opportunity to seek effective redress for violation of their rights. • Governance frame work should permit mechanism for stakeholders participation. • Stakeholders should have access to relevant information.

9. OECD Principles of Corporate Governance • Disclosure and transparency • Timely and accurate information is disclosed. • Disclosures are to be made on all material matters including: • Financial situation • Performance • Ownership • Governance of the company. • Information to be prepared audited and disclosed in accordance with high quality standards of financial and non-financial disclosures. • Channels for disseminating information should be fair, timely and cost effective.

10. Transparency in corporate world • “Men and women who are required to undress in public tend to pay closer attention to their figures.” Christopher Cox, Chairman SEC, US on pay disclosure rules.

11. Corporate Disclosures under the Companies Act,1956 • Section 209- books of accounts to be kept • Section 211- form & content of financial statements – Schedule VI to the Act. • Section 211(3A)- Compliance of accounting standards.

12. Accounting Standards • Issued by ICAI, • Companies (Accounting standards) Rules, 2006 • Accounting principles. • Procedure to apply accounting principles. • Disclosure of accounting policy and related information.

13. Accounting Standards AS-1 Disclosure of Accounting Policies AS-3 Cash Flow Statement AS-17 Segment Reporting AS-18 Related Party Disclosures AS-20 Earning Per share AS-21 Consolidated Financial Statements AS-25 Interim Financial Reporting

14. Corporate Disclosures and the Companies Act,1956 Auditors’ Report • Section 227(1A) • Section 227(2), (3) • Section 227(4A)

15. Initiatives by Regulatory Bodies • Department of Public enterprises • RBI • IRDA • SEBI

16. Initiatives by DPE Guidelines on Corporate governance for Central Public Sector enterprises (June 2007) • To satisfy the need for public accountability of the public sector management. • Evolving their own code of corporate ethics and conduct. • Limiting administrative ministries’ role in the day-to-day management of public enterprise. • Enhancing professionalism in the board of directors • For listed and non listed CPSEs.

17. Initiatives by RBI • Relating to commercial banks • Relating to non-banking financial institutions

18. Initiatives by IRDA • IRDA(PREPARATION OF FINANCIAL STATEMENTS AND AUDITOR’S REPORT OF INSURANCE COMPANIES) REGULATIONS, 2002 • For life insurance business • For non-life insurance business

19. Initiatives by SEBI • SEBI Act, 1992 • SEBI (Disclosure and Investor Protection) Guidelines,2000. • SEBI (Prohibition of Insider Trading) Regulations, 1992. • SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations 2003. • Listing Agreement

20. 1. Board of Directors • Composition- Executive & non-executive • Number of independent directors • Pre-requisite to be an independent director.

21. NON-EXECUTIVE DIRECTORS-TERMS & COMPENSATIONS • Term shall not exceed nine years comprising of three terms of three years each running continuously. • Shall not be member of more than 10 committees or act as chairman of more than 5 committees across all companies in which he is a director. • Compensation/ stock options to independent directors to be approved by the Board and prior approval of the shareholders is required

22. NON-EXECUTIVE DIRECTOR- DISCLOSURES. • A compensation philosophy and statement of entitled compensation in respect of independent directors shall be published in annual report/ web site. • Disclosure on annual basis regarding the shares held by non-executive directors • non-executive directors to disclose their stock holding prior to their appointment

23. 4. DISCLOSURES: ACCOUNTING TREATMENT • management shall disclose justifying the different accounting treatment than the accounting standards as a foot note of financial statement.

24. DISCLOSURES:CONTIGENT LIABILITY • The management to provide clear description of each material contingent liability and its risk alongwith auditors comments on managements views. • To be highlighted in significant accounting policy/ notes and accounts / auditor’s report.

25. Governance issue- disclosure requirements “Financial Situation” • Section 211 of the Companies Act read with Schedule VI- Part –I • AS-1 Disclosure of Accounting Policies • AS-17 Segment Reporting • AS- 18 Related Party Disclosures

26. Governance issue- disclosure requirements “Performance” • Section 211- read with schedule VI, Part II • Section 219- Abridged financial statements • AS-3- Cash flow Statement • Section 212- Accounts of subsidiary company • AS-21- Consolidated financial statement • As-20- Earning per share • AS-25 -Interim Financial Reporting

27. Governance issue- disclosure requirements “Ownership” • Not addressed directly, • Refer Note under Part I of the Schedule VI- in the case of subsidiary, the number of shares held by the holding company, ultimate holding co or its other subsidiaries to be stated.

28. Governance issue- disclosure requirements “Governance” • Section217- Directors Report • Sub-section (2AA) of Section 217- Directors’ Responsibility Statement • Section 383A- Secretarial Compliance Certificate

29. Governance issue- disclosure requirements “Quality of financial disclosures” • Section 211(3A)- application of accounting standards in preparation and presentations of financial statements • Accounting principles and their application • Disclosure requirements of specific accounting standards

30. Governance issue- disclosure requirements “Audit” • Section 227- auditors’ report • Section 227(4A)- CARO,2003 • Independence of auditors

31. Governance issue- disclosure requirements “Channels for disseminating information” Section 210- BOD to lay before the AGM- Balance sheet and profit & Loss Account Section 219- Rights of members to have copies of balance sheet, P& L Account and auditor’s report

32. Quality of Disclosures • Can an investor read and understand these disclosures? • Quantitative Vs Qualitative disclosures • Disclosure in letter and spirit

33. MORE DISCLOSURES ? Are there sufficient disclosures? Are so much disclosures justified? “Excessive Governance is organised exploitation.”

34. OECD Principles of Corporate Governance • The equitable treatment of shareholders • All shareholders of one class should be treated equally. • Self dealing and insider trading should be prohibited. • Members of the Board and managers should be required to disclose their material interest in transactions or matters affecting the company. • All shareholders should have the opportunity to obtain effective redress for violation of their rights.

35. OECD Principles of Corporate Governance • The role of the board • Board members to act with due diligence and care in the best interest of the company. • Board to ensure compliance with applicable laws and take into account the interest of stakeholders. • Board to carry out all key functions: • Reviewing corporate strategy, risk policy, budgets, business plans and monitor performance. • Selecting, compensating key executives. • Monitor and manage potential conflict of interest of management including misuse of corporate assets and abuse of related party transactions

36. Provisions in the Companies Act,1956 • Managerial remuneration • Office or place of profit • Loans to directors • Disclosure of interest by directors

37. Provisions in the Companies Act,1956 • Whole time Director & Managing director • Appointment • Qualification • Disqualification • Restriction on number of directorship • Vacation of office • Removal

38. Provisions in the Companies Act,1956 • Duties and Restriction on powers of the Board of Directors • Section 292 • Section 293

39. DISCLOSURES:RELATED PARTY TRANSACTIONS • Summary of related party transactions, their basis bifurcating transactions into normal course of business and not in normal course of business and • Details and management’s justification for any material transaction not on arms length basis.

40. DISCLOSURES:BY MANAGEMENT • By senior management of all material financial and commercial transactions, where they have personal interest. • As part of Directors’ Report, a Management Discussion and Analysis Report to be form part of annual Report to the shareholders

41. Provisions of the Companies Act,1956 • Section 217- Board’s Report • Sub- section (2AA)- directors’ Responsibility Statement

42. Provisions in the Companies Act,1956 • Section 292A- Audit Committee • Composition • Terms of reference • Meetings • Rights • Duties • Reporting

43. ROLE OF AUDIT COMMITTEE • oversight of the company’s financial reporting processes and the disclosure of its financial information. • reviewing the company’s financial and risk management policies.

44. AUDIT COMMITTEE & AUDITORS • discussion with external auditors- pre and post audit • Discussion with internal auditors any significant finding and follow up thereon • recommending the appointment and removal of external and internal auditors, fixation of audit fee and payment for any other services.

45. AUDIT COMMITTEE : MANDATORY REVIEWS • financial statement / audit report / quarterly / half- yearly financial information. • The statement of uses/application of funds raised through an issue. • MDA and results of operation. • legal compliance observations of statutory / internal auditors • record of significant related party transactions

46. WHISTLE BLOWER POLICY • company to have an internal policy on access to audit committee by employees on unethical and improper practice. • the policy to be communicated to employees and included in the HR manual. • company to affirm that it has not denied any personal access to audit committee and has provided protection to whistle blowers from unfair termination • the affirmation shall form part of the board report on corporate governance.

47. 3. SUBSIDIARY COMPANIES • one independent director of holding company to be on the board of material non-listed Indian subsidiary company. • audit committee of the holding company to review financial statements / investments of subsidiary . • board minutes of subsidiary company shall be placed for review by the board of holding company. • directors report of the holding company to confirm review of the affairs of the subsidiary companies

48. DISCLOSURES:RISK MANAGEMENT • Risk management ( risk assessment and minimisation procedures) to be laid down for the members of the Board and to be reviewed periodically.

49. DISCLOSURES:proceeds from public issues etc. • The uses/application of funds by major category to be disclosed to Audit Committee on quarterly basis • A statement of funds utilised for purposes other than stated in the offer document and the report of the monitoring agency to be placed before the Audit Committee.

50. 5. CERTIFICATION BY CEO/CFO TO THE BOARD That they have reviewed the financial statements and cash low statement for the year and: • These do not contain any materially untrue statement or omit any material fact • There were no fraudulent, illegal transactions violative of the co’s Code of Conduct • They accept responsibility for establishing and maintaining internal controls and have evaluated their effectiveness.