5/14/2015 CS Mahesh A. Athavale KANJ & Associates Partner 25 TH March 2012 ONE DAY NATIONAL CONFERENCE BY INDSEARCH

04/18/23www.kanjcs.com

CS Mahesh A. AthavaleKANJ & Associates

Partner 25TH March 2012

ONE DAY NATIONAL CONFERENCE BY INDSEARCH

CORPORATE GOVERNANCE

Blend of law, regulation and appropriate voluntary practices.

To attract financial and human capital to perform efficiently

To generate long term economic value for the stakeholders in the interest of the society as a whole.


Set of systems, processes and principles to ensure that the company is governed in the best interest of all stakeholders

Realization of long term goals of promoters, but at the same time consideration for all stakeholders adhering to business ethics to ensure enhancement of value of employees, stakeholders and company as a whole.


Adoption and adherence of best corporate practices

Accountability of the top management to the stakeholders

Complete transparency in the management of the corporate body,

Disclosure of all relevant information to shareholders etc


What's on our mind, is reflected in our speech. Our acts depend upon our speech. Mind,

Speech and Acts are balanced in case of wise men.


INDEPENDENT DIRECTORS PLAY CRITICAL ROLE IN CG

WHO ARE THEY & WHY HAVE THEM?

Various committees have studied the role of non-executive independent directors and have explained the kind of independence required.

To bring an independent judgment on issues of strategy, performance and resources, including key appointments and standards of conduct. 04/18/23www.kanjcs.com

To bring objectivity in making decisions that determine the survival and prosperity of the organization.

To ensure well-being of the stakeholders i.e. shareholders, workers , suppliers, customers , society at large and the company itself.

To help company to outperform competitors and dominate.

www.kanjcs.com 04/18/23

Can a person who does not have stake in the company take decisions in the interest of the company? An ID can do so, perhaps YES, because he is………

Self Governed , autonomous and free from obligations & influence.Not affiliated ,aligned or integrated with PDsNot prejudiced or conditionedNot looking to others for opinion or guidance of one's conduct.Not biased by others.Not bound by or committed to one of the parties.


Possible reasons for mandatory provision that at least 50% of the Board should be Independent Directors.

Need for multidisciplinary inputs Numerous shareholders with geographical stretchHolistic approach in decision making Advantage of talent and high performersIndependent performance analysisControl and coordination in the organizationDiscipline of process and clarity in valuesWide latitude for innovationAbility to see the big picture while knowing when to drill down on specifics


Related Issues

Role of IDs has come under intense scrutiny in the wake of various collapses- the notorious Enron , Worldcom, Xerox debacle and many more.

In India SATYAM has provoked the discussions.


Directors’ Role

“The directors are not servants to obey directions given by the shareholders as individuals; they are not agents appointed by and bound to serve the shareholders as their principals. They are persons who may by the regulations be entrusted with the control of the business, and if so entrusted they can be dispossessed from that control only by statutory majority which make the articles.” – Lord Justice Buckley (1908)


IDs’ ContributionFunctions of the Board are two-fold;

1. To lead company into the future by determining strategy, finalizing vision and policies. 2. Monitoring and controlling its performance in the present.

IDs should contribute in both areas.

To choose IDs just to monitor on behalf of the shareholders is a waste of an opportunity to use their talents and experience and can be a divisive factor, polarizing the board into “executive” and “non-executive” groups. It is not healthy.


IDs contribute significantly in

AUDIT

REMUNERATION AND

NOMINATION COMMITTEES


Qualities of Independent Director

Integrity.Business acumen.Adequately trained.Willingness to actively participate Unafraid of performance reviews.Updated about happenings around.Commanding position in his peer groupCourage and ability to act and say “ NO” .


Capable of assessing the company’s problem and identify opportunities. Should have clarity, decisiveness and confidence. Be Devoid of any vested interest.Should have sufficient financial sources so that the sittings fees do not become substantial percentage of the ID’s income.Trustworthy .Law abiding by nature


A director cannot be treated as an independent director if he has any material pecuniary relationships or transactions with:- (a) the company; (b) its promoters; (c) its senior management; (d) its holding company; (e) its subsidiaries; or (f) its associated companies.


Promoters Vs Independent Directors

Some possible situations :

Preferential allotment of securities to Promoter group.Granting advances/ loans to the relatives of Partners. Entering into Immovable property related transactions– These are claimed to have been kept outside the scope of section 297.- DCA’s view. 04/18/23www.kanjcs.com

Promoters Vs Independent Directors…..Contd

Need to borrow fund , its utilization and management.Taking Car/ property of PD / his relative on rent by the company and giving it back to the same person as a perquisite.- Tax Planning? Is it Fair ?



Creating Public Charitable Trusts, where relatives of Directors are Trustees and giving huge donations to such trusts. At times even beneficiary is a selected person.

Transaction of Purchase / sale of goods – services with a private company in which relative of Director is interested .

Perhaps Legal but unfair.



Obtaining 297 approval by keeping on record ‘created’ tenders.

Buy back of shares to increase promoter group stake in the company.

Appointment of relative ( wife's brother ) on a disproportionate salary. Perhaps legal – but unfair.


Instances of Conflict

Mr. D an ID raises an objection in the meeting on the growing expenses on staff welfare. He wants to make his presence felt in the meeting. After the meeting he wants the company to book Air ticket , a car and five star accommodation for his personal tour.

Case of double standards?


Instances of Conflict…. Contd

Mr. Q, a Director wants that company should purchase cement from X & co where Mrs. Q is 90% Partner . CS of the company draws attention to section 297.The Board asks Mr. Q to resign as Director. Contract is entered into for supply of cement for next 10 years. Later on after 10 days of execution of the contract Mr. Q re-enters the board as an Additional Director.

Legal but unfair( ?)


Instances of Conflict….Contd

X ltd a pharmaceutical company is selling a medicine which is very effective on certain decease.But that medicine has few serious side effects.Company has been selling the medicine since last ten years and turnover is Rs. 100 Million p.a.However for all these years there has been outcry from certain sections of society about serious side effects and that medicine being hazardous. X Ltd never bothered for these allegations .


Admittedly there were certain bad side effects but there was no ban on the medicine .Recently, as public outcry increased , Government conducted the laboratory tests, which proved about ill effects of the medicine Now company has received secret information that Government will ban the medicine from 1st April 2011. Stock of Rs. 50 Crores is with the company.PDs are insisting for disposal of the stock at what ever price . While one ID suggests for destruction of stockWhich is a better option heavy discount or destruction of the stock?



Mr. Y is a trustee of an Educational Institute which has employed Mr. X as per Government rules, as a teacher in a school at a salary of Rs. 3,500 p.m. for 3 years who is called as “Shikshan Sevak” . Govt. does not give any grant beyond this amount. As per government rules, if Mr X. is confirmed, he will get a salary scale of Rs 12,000 per month and that increased salary would be reimbursed by Govt. by way of a grant .


Mr. Z is working as a gardener in the same institute at a salary of Rs. 6000 p.m. as per the Minimum Wages Act for unskilled workers.Mr. X feels humiliated and has demanded rise in his salary at least above a gardener. Some of the trustees think that anything beyond Rs 3,500/- p.m. should not be paid to Mr. X since it will have to be paid from the own sources of the Trust. How should Mr. Y decide?



Mr. R is Chairman of section 25 Company.Mr. R is a genuine , honest social worker who has been doing yeoman's work for the blind persons .One fine morning Mr. R receives a proposal for a donation of Rs. 50 crore ( in cash ) from a donor who believes in the integrity of Mr. R and therefore wants to help a noble cause being done by that company but the donor does not want to reveal his identity and the source of his income.Should Mr. R accept the donation?04/18/23www.kanjcs.com

Instances of Conflict…. ContdXYZ Ltd. was incorporated in 2005 . Never earned any profits . Return on capital was ZERO. The company does not have accumulated reserves/ surplus.XYZ Ltd. for the first time has earned distributable profits .Promoters intend to transfer 10 percent to the reserves, as is statutorily required and distribute rest of it by way of dividend.One of the IDs believes that it is more prudent to transfer 50 percent to reserves and declare less % of dividend.



What Arya Shri Chanakya has told us?

THANK THANK YOUYOU


Documents

5/14/2015 CS Mahesh A. Athavale KANJ & Associates Partner 25 TH March 2012 ONE DAY NATIONAL CONFERENCE BY INDSEARCH