Kaleidoscope-Issue Sep Oct 2014

Message by Secretary, Department of Public Enterprises ..................... 05

Chairmans Desk ........................................................................... 06

Articles

Role of PSEs in Developing Women Leaders ..................... 08 by Dr. U. D. Choubey

Enhanced Duties, Responsibilities and Liabilities of ....... 11 Directors - Companies Act 2013 by Ms. Alka Kapoor

Corporate Social Responsibility: Saviour of ....................... 20 Socio-Economic, Environmental & Governance Issues by Dr. B. B. Goel

One Person Company (OPC) - ................................................. 24 A modified Corporate form to boost entrepreneurship by Prof. Pankaj Varshney

The New Companies Act.: ......................................................... 27 Step towards better Governance by A. K. Rastogi

Appointment of Directors under the ................................... 30 Companies Act, 2013 Issues for CPSEs by Inderpal Singh

Companies Act 2013: Boosts Corporate Governance ..... 35 by H. L. Chaudhary

Related Party Transaction (RPT) under ................................ 39 Companies Act 2013 and Revised Clause 49 of the Equity Listing Agreement by Ms. Kumudani Sharma

Corporate Social Responsibility ............................................. 47 as Provisioned in Companies Act 2013 by Rakesh Sinha

Vol. 34 No. 5 October, 2014

Co

nte

nts

Vol.

34

N

o. 5

Oct

ob

er, 2

014

ADVISORY BOARDDr. U.D. Choubey, Director GeneralS. A. Khan, GM (HR & CA)U.K. Dikshit, Adviser (Programmes)K. N. Dhawan, Adviser (CC) & Consulting EditorEDITORNisha Sharma

PUBLISHERA. S. Khan

Total Pages : 96 Annual Subscription: Rs. 500/- Price per copy : Rs. 50/-(Payment may be sent by

DD/Cheque drawn in favour of Standing Conference of Public Enterprises)

Material published in KALEIDOSCOPE may be reproduced with prior permission of the Editor and with acknowledgment in the accepted style. The views expressed in various articles are that of the authors and not necessarily of SCOPE Management. - Editor

Published and printed at New Delhi by A. S. Khan on behalf of Standing Conference of Public Enterprises, Core 8,1st Floor, SCOPE Compex, 7 Lodhi Road, New Delhi-110003 Tel.: 24361495, 24360101 Ext.: 2028, 2029 Fax: 24361371 E-mail: [email protected] at Rave Scan (P) Limited, A-27, Naraina Industrial Area, Phase-II, New Delhi - 110028

Designed by Akar Advertising & Marketing (P) Ltd. Tel: 011-43700100, 41551297, 41551298

Companies Act 2013 - ..................................................................................... 48 A fillip to Corporate Governance by Pankaj Tewari

Companies Act 2013: Raising the bar on governance ........................ 50 by Sai Venkateshwaran

daiuh dkuwu vkSj lkoZtfud mie fufru iz/kku }kjk ............................................................................................................53

SCOPE News

Vice President Releases Book Untold Story of ....................................... 07 Indian Public Sector by DG, SCOPE

SCOPE Launches Cleanliness Drive under ............................................... 56 Swachh Bharat Mission

Interactive Meeting of the CEOs of PSEs with the ................................ 58 Central Vigilance Commissioner

PSE News

PSEs News ...................................................................................................60 - 93

Indias business.

With respect to the PSEs too, there are several challenges being wit-nessed w.r.t. implementation of the new Act. In Companies Act 1956, there were certain exemp-tions/ relaxations applicable to Government Companies, which were provided taking into account the special framework applicable to them. We are well aware that the method of selection and ap-pointment of a Chairman and full time Functional Directors of PSEs are being done through a process established by the Government. The terms of appointment and the remuneration is also laid down by Government. These are some of the issues for which adequate provisions will have to be made so that mandatory provisions for the PSEs are followed.

Today, public sector enterprises have emerged as global giants and their contribution to the national economy has been well acknowl-edged. In the context of Companies Act 2013, when the rules of the game for Government companies and other than Government com-panies differ in many aspects, I am sure, concerns of PSEs in align-ing the various guidelines which are applicable to them would be looked into on priority.

I am happy that SCOPE has very appropriately brought out a spe-cial issue of KALEIDOSCOPE devoted to this important subject. This will certainly provide valu-able insight into various aspects of the new Act and their potential implications.

The Enactment of the Companies Act 2013 has ushered in a new era for Corporate India. The landmark legislation has introduced several new concepts and seeks to encour-age transparency, accountability and high standards of corporate governance.

The earlier Act was in need of a substantial revamp for quite some time, to make it more contempo-rary and relevant to corporates, regulators and other stakehold-ers in India. When the same was enacted, that is nearly six decades earlier in 1956, there were only around 30,000 companies. This number is more than nine lakhs now. The Indian economy has since then, experienced substan-tial expansion and growth. The change in regulatory structure for corporate sector had become nec-essary to address issues relating to regulatory harmony, recogni-tion of good corporate practices and technological improvements. To meet the challenges posed by the changed national and interna-tional business environment and

to accelerate the expansion and growth of our economy, enact-ment of new legislation had be-come a sine-quo-non.

Starting with a concept paper put on the ministrys website on 4th August 2004, the journey of the new legislation ended on 29th August 2013, with assent of the Honble President, striving to make Indian corporate environ-ment more transparent, simple and globally acceptable.

The 2013 Act promises to substan-tively raise the bar on governance and in a comprehensive form pur-ports to deal with relevant themes such as investor protection and fraud mitigation, inclusive agen-da (CSR), auditor accountability, reporting framework, director re-sponsibility and efficient restruc-turing. The thrust of the new Act is on self-regulation and share-holders democracy with strin-gent penalties being imposed for violations. In appropriate cases, it enables the authorities to make rules through subordinate legisla-tion, thus ensuring that the law re-mains relevant in future too, in the changing economic environment.

The new Act is certainly a great achievement but is not free from implementation challenges that are causing anxiety to the pro-moters, professional managers and auditors. These include, short preparation time to Indian compa-nies for implementation of the Act and also, aligning the same with other rules/provisions/ regulatory norms applicable to organizations. However, I am sure MCA and the concerned regulatory bodies will soon address such challenges to truly make the new Companies Act, an exemplary reformative step forward in empowering

C.S.VermaChairman, SCOPE

Chairman's Desk

7Kaleidoscope october 2014

Vice President Releases Book Untold Story of Indian Public Sector by DG, SCOPE

The Vice President of India Shri M. Hamid Ansari released a book entitled Untold Story of the Indian Public Sector authored by Dr. U.D. Choubey, the Director General of Standing Conference of Public Enterprises (SCOPE) during a function held on 14th October, 2014 at the Vice Presidents House in New Delhi. Dr. U. D. Choubey, Director General, SCOPE delivered the Welcome Address. Dr. M. B. Athreya, Management Guru also addressed the function and focused on reforms in public sector enterprises. Mr. S. K. Ghai, Managing Director, Sterling Publishers Pvt. Ltd. proposed vote of thanks.

Addressing on the occasion, the Vice President said that in our country, people in high positions remain shy in sharing their experiences. Dr Choubey has done a commendable job in penning down his vast ex-perience in Public Sector. The book throws light on various aspects of working in Public Sector Enterprises . He congratulated the author for bringing out such a useful book for enlightenment of people.

The book provides a clear pre-sentation of the overall envi-ronment and workings of the Public Sector that the author experienced. It is up-to-date, often forthright, and futuris-tic. Millions of young men and women today aspire to join the esteemed ranks in Indian Public Sector to contribute to the creation of a new nation. Unfortunately, over the years the Public Sector has seen tre-mendous denigration.

Vice President Shri M. Hamid Ansari (centre) releasing the book Untold Story of the Indian Public Sector. Standing on his left are Dr. M. B. Athreya, Management Guru and Dr. U. D. Choubey, DG, SCOPE. Standing on his right are Mr. C. S. Verma, Chairman SCOPE & Chairman, SAIL and Mr. S. K. Ghai, MD, Sterling Publishers Pvt. Ltd.

of Companies Act 2013 and SEBI regulations, 966 board level posi-tions for women would be avail-able and as per the Institute of Directors, with the enactment of the new Companies Act, direc-torship positions for atleast 2,500 women would be open in both listed and unlisted companies. Contrary to above, when we look at the supply side the position ap-pears to be extremely grim. This can be seen from the fact that a single woman holds directorship positions for as many as 9 com-panies at a time (both listed and unlisted). Also, 60 percent of BSE companies alone would require 300 women directors whereas the available pool is only 100 women.

Besides the problem of num-bers, the situation is further com-pounded by the degree of ease of availability of limited pool of woman directors. To elaborate, the available woman directors have to take up their directorship positions in light of the prevalent SEBI guidelines whereby a single director cannot occupy director-ship position in more than 7 list-ed companies making the avail-able pool very restrictive. Also, the available pool is further lim-ited by the fact that women from certain sectors such as banking, financial services and insurance

and a new perspective to ump-teen discussions that take place in the Board Room. Many studies and researches have suggested that there is correlation between financial bottomline and the proportion of women on Boards or top level. From good gov-ernance perspective including more individuals with different background and expertise could improve the Boards functions. However, the question now aris-es as to how many vacancies are likely to be created due to this legislation and how the corporate sector aim to fulfill the require-ment. The fact remains that there is dearth of sufficient/requisite number of women employees to occupy the Board level position.

The gap created In a recent survey by the Forbes Magazine, there are approxi-mately 11,596 directorship posi-tions in NSE listed companies out of which only 9,009 are occupied in India. Further, out of the 9,009 positions, only 597 positions are occupied by women making a mere 5 percent of the total avail-able positions. Also out of the to-tal 1,456 NSE listed entities, 966 companies (i.e. two thirds) do not have women directors. This implies that with the enactment

Gender diversity has eme-rged as an essential ele-ment for growth and co-mpetitiveness of the economies. Globally, the call for gender di-versity in board rooms has been growing momentum. There is increasing sensitivity on the issue around the world and according-ly, various policy measures and legislations have been enacted. Some countries have introduced quotas to increase womens par-ticipation in decision making process while others have taken voluntary measures to integrate womens professional insight and expertise into board room discussions.

In India, a welcome step has come in the form of the Companies Act, 2013. The act provides for atleast one women director on the board of every listed company within a period of one year from the date of enactment of the new legisla-tion or 3 years for other com-panies with prescribed share capital/ turnover. Further, SEBI has aligned its regulations with Companies Act, 2013.

Indian corporate sector has actu-ally welcomed the legislation as they are of the view that this would bring the much needed gender diversity in the board room and would certainly provide a fresh

Dr. U. D. ChoubeyDirector General, SCOPE

Role of PSEs inDeveloping

Women Leaders

ARTICLE

8 KaleiDoSCOPE October 2014

are unable to take up directorship in various companies due to con-flict of interest.

Realizing the same, the Indian corporate sector is making all ef-forts to scout the most talented and suitable woman in order to absorb her in their company. However, with the limited/ re-strictive pool of skill specific women, HR agencies and Indian companies in general are finding it very difficult to find the right mix of qualification and experi-ence and hence are looking at bringing woman directors from a wide gamut of industrial base in-cluding government agencies, au-dit firms, consultancy firm, non-profit organizations, academic and research institutions.

Need for a long term initiativeThe empowerment initiative pro-vided in the Companies Act and SEBI regulations indicates at a two-fold agenda i.e. socio eco-nomic development of women. At one end the intention of pro-moting and strengthening the women is to provide greater au-thority to them in running the businesses thereby providing them with greater economic inde-pendence which will ultimately translate into better business per-formance and better stakeholder value. At the other end providing greater autonomy and author-ity to women in decision making aims at changing the mindset of society towards rights of women.

As mentioned earlier, compa-nies have welcomed this initia-tive of the government and are making every possible effort at fulfilling the legal requirement.However, the aim should not be only to fulfill the legal require-ment but efforts should be to

develop and mentor women em-ployees to higher and board level positions. Women have achieved much progress in education and at work and talent pool should be utilized for improving the board dynamics and benefit of the organization.

Role of PSEs It has been time and again seen that public sector enterprises (PSEs) in the country have been fulfilling dual objective of so-cio economic development of the country as a whole. One of its most important social objec-tives was to provide and gener-ate employment to both men and women.

This can be seen from data pub-lished by Ministry of Labour and Employment1 (the Ministry) wherein, though the percentage of people seeking employment in public sector (including central government, state government, quasi (central) government, qua-si (state) government and local bodies) declined by 1.8 percent in 2011 in comparison to 2010 as against employment in private

sector which registered a positive growth of 5.6 percent in 2011 over 2010, in absolute numbers pub-lic sector employed 175.48 lakhs people in 2011 in comparison to 114.52 lakhs people employed by private sector in the same year.

A similar pattern has been ob-served in employment of wom-en. As per the Ministry, though percentage of women seeking employment in public sector (including central government, state government, quasi (central) government, quasi (state) govern-ment and local bodies) declined by 0.79 percent in 2011 (over 2010) as against a positive growth of 4.54 percent in private sector, in absolute numbers public sector employed 31.71 lakhs women as against 27.83 lakhs women in the private sector.

From the above it can be seen that public sector enjoys a great-er women patronage and hence should be more accountable and responsible for their develop-ment. And as a matter of fact the public sector has been very vigi-lant towards this responsibility. This can be seen from a study

ARTICLE

9KaleiDoSCOPE October 2014

1Employment Review, Government of India, Ministry of Labour & Employment, Directorate General of Employment & Training, published in 2013

Instituting awards recognizing companies best practices in gen-der diversity women would en-courage and motivate them to do better and emerge as role model for other companies to follow suit.

Long Road AheadA step ahead has been taken to-wards women empowerment by changing the regulatory en-vironment. The change is likely to bring about a more gender diverse board thereby improv-ing representation of women in the decision making circle and in future probability of shift of focus from gender to objective parameters such as effectiveness and efficiency. However, the em-powerment is only possible if the endeavor is a continuous process rather than a one-time activity.

At this stage public sector in India plays a major role. With a huge women participation in its work-force it is imperative that PSEs are more aggressive yet sensitive towards the needs of our women employees.

Time and again the public sec-tor has come out with women friendly policies so as to make the working environment condu-cive to work with not only good working conditions but also an appropriate work life balance. However, we need to move a step further and incorporate aggres-sion in our attitude so as to focus on career development of our women employees by not only providing them opportunities but also guidance so that the pub-lic sector companies and boards not only reflect a great gender diversity but also equal women participation thereby becoming a role model for the corporate world at large.

periodic workshops/ discus-sion forums/women centric pro-grammes can be held by each company wherein board level women employees are invited to share their experiences with other women employees of the com-pany thereby motivating them to make a progressive career. To exemplify, customized training and discussion programs can be formulated to cater to entry level, middle level and top level wom-en employees separately.

But all of the above may not be possible if our women are not motivated and not aware of their career graphs. Hence, efforts should be made by organizations to induct counselors (can be from human resource department of the company or a specialized or-ganization) wherein each wom-en employee is provided with a career graph (after mutual dis-cussions) at the time of her en-try into the organization and the same should be reviewed peri-odically. Moving a step further, adherence or deviation from the career graph may be considered as one of the performance evalua-tion parameters.

conducted by The Times Insight Group in 2012 (the study) of 30 BSE companies. In the study it was found that out of 30 com-panies, 17 companies had atleast one women director, of which four companies were public sec-tor companies (i.e. 23 percent of the total sample size). Also, there was only one company which had 4 women directors and that com-pany was a public sector com-pany. Further, out of three com-panies having 2 women directors, one was a public sector company. In addition, the gender-diversity ratio (i.e. number of women di-rectors vis-a-vis companys total board size) was the highest at 23.5 percent that too of a public sector company. It may also be further noted in 2013, the highest position in a PSE i.e. Chairman and Managing Director (CMD) position of two ratna enter-prises were also filled by women employees.

Besides providing women with leadership roles, public sector has also been active in promoting forums for common discussions for women. For this purpose Women in Public Sector (WIPS) has been formed under aegis of Standing Conference of Public Enterprises (SCOPE) to ensure holistic development of women at large in PSEs.

From the above it is apparent that PSEs have been strongly commit-ted to women empowerment not only in words but also in action. However, much more needs to be done especially in light of devel-oping women leaders.

For this purpose it is important that beyond their technical and professional expertise, they need to be trained in strategic and inter-national business management. Also mentoring programmes/

ARTICLE


Besides providing women with leadership roles, public sector has also been active in promoting forums for common dis-cussions for women. For this purpose Women in Public Sector (WIPS) has been formed under aegis of Standing Conference of Public Enterprises (SCOPE) to ensure holis-tic development of wom-en at large in PSEs.


On one hand, they are the agents of the shareholders. Their pri-mary responsibility has been and still is to act in the best interest of the shareholders and the main goal is to maximise shareholder wealth. This is to ensure a re-turn on shareholder investments greater than the cost of capital. On the other hand, directors are the trustees of the company. Their principal duty is to act in the best interest of the company itself. Companies Act, 2013 has now ex-tended the role of directors to in-clude duties towards other stake-holders, creditors, employees, society and environment.

Companies Act 1956 did not specifically provide for the du-ties of the directors towards the shareholders, company and other stakeholders. They were an outcome of the practices ad-opted and the court verdicts. The Companies Act, 2013 (CA, 2013 or Act) has for the first time pro-mulgated the duties of the direc-tors which essentially includes that a director of a company shall act in good faith in order to pro-mote the objects of the company for the benefit of its members as a whole, and in the best interests of the company, its employees,

Boards Responsibility as the board of a company provides leadership and strategic guid-ance, objective judgement inde-pendent of management to the company and exercises control over the company, while remain-ing at all times accountable to the shareholders. The measure of the board is not simply whether it fulfils its legal requirements but more importantly, the boards atti-tude and the manner it translates its awareness and understanding of its responsibilities.

The Board at the top is enjoined to steer and activate the entire corporate governance system. The Companies Act, 2013, finely crafted, with sharpened edges to impact the functioning of any company and the economy, cre-ates a good governance domain by incorporating several provi-sions relating to board duties, board performance, role of inde-pendent directors, stakeholder protection, better auditing tools, institutionalizing corporate social responsibility and the like.

Duties of DirectorsDirectors have so far played two roles in a business environment.

The accountability of the board of directors has al-ways been an issue for strengthening corporate gover-nance. The Financial Aspects of Corporate Governance (Cadbury Report), 1992 states that The formal relationship between the shareholders and the board of directors is that the shareholders select the directors, the directors report on their stewardship to the shareholders and the share-holders appoint the auditors to provide an external check on the directors financial statements. Thus the shareholders as owners of the company elect the directors to run the business on their behalf and hold them accountable for its progress.

Article VI of OECD Principles of Corporate Governance begins with injunction that the Board members should act on a fully informed basis, in good faith, with due diligence and care, and in the best interests of the com-pany and the shareholders. The board should apply high ethical standards.

Kumar Mangalam Birla Comm-ittee Report on Corporate Gove-rnance (2000) highlighted the

Enhanced Duties, Responsibilities and

Liabilities of Directors-

Companies Act 2013Ms. alka KapoorJt. Secretary, ICSI

ARTICLE

12 Kaleidoscope october 2014

directors hardly attended any board meetings of certain compa-nies in last 4 years. Their absence from the board meetings meant that only 40% of the board mem-bers were independent in the board meetings over last 4 years. This shows the negligence on the part of the directors whether in-dependent or otherwise.

Independent Directors play a piv-otal role in building a strong foot-hold of Corporate Governance is an organization. They bring ac-countability and credibility to the Board process and also strength-en sound practices. While they need not take part in the com-panys day-to-day affairs or deci-sion making, they should ask the right questions at the right time regarding the boards decisions. Raising the appropriate red flags at the right time would help them in avoiding the occurrence of un-wanted situations and their con-sequences to a great extent.

Duty of Disclosure of Interest: Section 184 of CA Act, 2013 re-quires a director to give a notice of disclosure at the first meeting of the Board in which he partici-pates as a director and thereafter at the first meeting of the Board in every financial year or when-ever there is any change in the disclosures already made, then at the first Board meeting held after such change. This disclosure is the disclosure of the directors in-terest by virtue of his connection.

Duties implicit from provi-sions of Section 134Section 134 sets out the contents of the report of Board of direc-tors. One of the important con-tents of the Boards Report under section 134(5) is the Directors Responsibility Statement (DRS)

associates.

A director shall not assign his office and any assignment so made, shall be void.

The efficacy of any regulation de-pends on measures to put a curb on violation of the provisions of the said regulation. With hefty penalty, the profound duties embedded in the Act itself is the picture of what is expected from the directors. This provision is aimed at infusing a new sense of understanding, commitment and responsibility in the direc-tors who constitute the boards of Indian companies. This will keep them on their feet and they shall perform a more active role in the best interest of the companies and all the stakeholders.

Duty to Attend Board Meetings: It is the duty of directors to de-vote sufficient time to a company. Directors should always evaluate the demands on their time before allowing themselves to be consid-ered for an appointment.

In a recent analysis by Proxy Advisory Services in India of re-nowned listed companies it was found that two Independent

the shareholders, the community and for the protection of environ-ment. The new Act enshrines the duties in a written format in the Act with the penal provisions. Section 166 of the CA, 2013 lays down specific duties of the direc-tors as under:

A director shall act in ac-cordance with the articles of the company.

A director shall act in good faith in order to promote the ob-jects of the company for the bene-fit of its members as a whole, and in the best interest of the compa-ny, its employees, the sharehold-ers, the community and for the protection of environment.

A director shall exercise his duties with due and reasonable care, skill and diligence and shall exercise independent judgment.

A director 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.

A director shall not achieve or attempt to achieve any undue gain or advantage either to him-self or to his relatives, partners, or

The Board at the top is enjoined to steer and activate the entire corporate governance system. The Companies Act, 2013, finely crafted, with sharpened edges to impact the functioning of any company and the economy, creates a good governance domain by incorporating several provisions relating to board duties, board performance, role of independent directors, stakeholder protection, better auditing tools, institutionalizing corporate social responsibility and the like.

ARTICLE


Corporate Social ResponsibilityIn our country, while many cor-porate houses have been tradi-tionally engaged in doing CSR ac-tivities voluntarily, the new CSR provisions of the CA Act 2013, put formal and greater respon-sibility on companies to set out clear framework and processes to ensure strict compliance.

Sec 135 of the new Act provides that every company having net worth of Rs 500 crore or more, or turnover of Rs 1000 crore or more or a net profit of Rs 5 crore or more during any financial year shall constitute a Corporate Social Responsibility Committee, which is to be a Committee of the Board. The Board is responsible to en-sure that the company spends the mandatory CSR on specified CSR activities in accordance with the CSR policy of the company and disclose the CSR policy and CSR activities of the company as spec-ified in the provisions.

Prohibitions and restric-tions for directorsWhile the 1956 Act was silent on the provisions relating to insider trading, the 2013 Act on the other hand, lays down pro-visions relating to prohibition of insider trading and forward deal-ing with respect to all companies. This is a step towards harmoni-zation between the 2013 Act and the SEBI Act; more specifically for listed companies. Any person who violates the clause will be punished with a fine or imprison-ment or both.

New section 195 has been intro-duced with respect to prohibi-tion of insider trading of secu-rities under the 2013 Act. No person including any director or

that board had laid internal financial controls to be followed by the company;

that such internal financial controls are adequate; and

that such internal finan-cial controls were operating effectively.

Compliance with applicable laws

A report whether the Board had devised proper systems to en-sure compliance with all appli-cable laws, and that such systems were adequate and operating ef-fectively. [Section 134(5)(f) of the Companies Act, 2013]

Responsibility of Enhanced DisclosureThe Act requires enhanced dis-closures with respect to Boards Report, Prospectus, AGM notice, Annual return, directors respon-sibility statement, audit commit-tee constitution, vigil mechanism. It is the responsibility of the direc-tors to ensure that all disclosures mandatorily required under the Act are given appropriately.

Responsibility to establish Vigil MechanismThe Act provides that every listed company or prescribed class or classes of companies shall establish a vigil mechanism for directors and employees to report genuine concerns. This mecha-nism shall provide for adequate safeguards against victimisation of persons who use such mecha-nism and make provision for direct access to the chairperson of the Audit Committee in appro-priate or exceptional cases. The details of such mechanism are to be disclosed by the company on its website, if any, and in the Boards report.

which is a joint statement by all directors and includes:

Adherence to accounting standards

Affirmation by the Board that in preparation of annual accounts, the applicable accounting stan-dards had been followed, and where there were departures, proper explanation had been given.

Accounting policies and reliance on Judgments and estimates

Statement that the directors had selected accounting policies, and applied them consistently, and made judgements and estimates, and the same are reasonable and prudent. The end result of the above is that the statements give a true and fair view of the state of affairs, and the profit or loss for the period. [Section 134(5)(b) of the Companies Act, 2013]

Maintenance of adequate ac-counting records for safeguard-ing of the companys assets and prevention of fraud and error

Statement that proper account-ing records, so as to safeguard the assets of the company and to prevent fraud and error. [Section 134(5)(c) of the Companies Act, 2013]

Going concern accounting

Statement that the annual ac-counts of the company had been prepared on a going concern basis. [Section 134(5)(d) of the Companies Act, 2013]

Adequacy of internal financial controls

Section 134(5)(e) is applicable only in case of listed companies. This requires the board to certify:

ARTICLE


exercise objective independent judgement on corporate affairs.

Boards should consider as-signing a sufficient number of nonexecutive Board members ca-pable of exercising in-dependent judgement to tasks where there is a potential for conflict of interest.

The Board should ensure that, while rightly encouraging positive thinking, these do not re-sult in over-optimism that either leads to significant risks not being recognised or exposes the compa-ny to excessive risk.

The Board should have abil-ity to step back to assist execu-tive management by challeng-ing the assumptions underlying: strategy, strategic initiatives (such as acquisitions), risk appetite, ex-posures and the key areas of the companys focus.

When committees of the board are established, their man-date, composition and working procedures should be well de-fined and disclosed by the board.

Board members should be able to commit themselves effec-tively to their responsibilities.

In order to fulfil their respon-sibilities, board members should have access to accurate, relevant and timely information.

The Board and senior man-agement should facilitate the Independent Directors to per-form their role effectively as a Board member and also a mem-ber of a committee.

Revised Clause 49 II D(3) of Listing Agreement provides that the Board of Directors shall peri-odically review legal compliance reports of all laws applicable to the company prepared by the

companys accounting and finan-cial reporting systems, including the independent audit, and that appropriate systems of control are in place, in particular, sys-tems for risk management, finan-cial and operational control, and compliance with the law and rel-evant standards.

Overseeing the process of disclosure and communications.

Monitoring and reviewing Board Evaluation framework.

Clause 49 I.D.3 of the revised Listing Agreement sets out the other responsibilities of the board, which is a mixed list of duties as well as powers. This list has the following items:

The Board should provide the strategic guidance to the com-pany, ensure effective monitoring of the management and should be accountable to the company and the shareholders.

The Board should set a cor-porate culture and the values by which executives throughout a group will behave.

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.

The Board should encourage continuing directors training to ensure that the Board members are kept up to date.

Where Board decisions may affect different shareholder groups differently, the Board should treat all shareholders fairly.

The Board should apply high ethical standards. It should take into account the interests of stakeholders.

The Board should be able to

Key Managerial Personnel of a company shall enter into insider trading except any communi-cation required in the ordinary course of business or profession or employment or under any law. Section 194 relates to prohibition of forward dealing in shares and debentures of the company.

Key functions of the Board as per Listing AgreementThe following are the key func-tions of the Board as per Clause 49 I.D.2 of Listing Agreement:

Reviewing and guiding cor-porate strategy, major plans of ac-tion, risk policy, annual budgets and business plans; setting per-formance objectives; monitoring implementation and corporate performance; and overseeing ma-jor capital expenditures, acquisi-tions and divestments.

Monitoring the effectiveness of the companys governance practices and making changes as needed.

Selecting, compensating, monitoring and, when necessary, replacing key executives and overseeing succession planning.

Aligning key executive and board remuneration with the lon-ger term interests of the company and its shareholders.

Ensuring a transparent board nomination process with diversi-ty of thought, experience, knowl-edge, perspective and gender in the Board.

Monitoring and managing potential conflicts of interest of management, board members and shareholders, including mis-use of corporate assets and abuse in related party transactions.

Ensuring the integrity of the

ARTICLE


multiple countries, the risk of non-compliance increases sig-nificantly as such organizations need to also comply with global legislations.

Every director including inde-pendent director is therefore ad-vised to ask following questions to ensure compliance with good governance:

Are the systems so well set that the right tone at the top is communicated at all levels?

What effective mechanism do we have to assess risk?

Are the systems/procedures /policies and process to address risk adequate?

What steps are taken to promote compliance and pe-nalize noncompliance in the organization?

How adequately is compa-nys compliance cell resourced?

What monitoring tools do we have to detect fraud and misconduct?

When the red flags are raised, how are they dealt with?

Are we effectively trained in various policies and processes?

Immunity to Independent Directors under the Companies Act, 2013Sub-section (5) of Section 149 of Companies Act, 2013 provides that an independent director, can be held liable only in respect of such acts of omission or commis-sion by a company:

which had occurred with his knowledge attributable through Board processes, and

with his consent or conniv-ance; or

and impartially about any un-ethical behavior, violation of the code of conduct, or any suspected fraud in the company.

Responsibility of Independent Directors for the Prevention and Detection of FraudGlobally, with the evolving regu-latory landscape, which makes the board responsible for the pre-vention and detection of fraud, directors have begun exercising adequate oversight on the man-agement of the risk of fraud. Non-compliance of regulations / guidelines can have serious re-percussions for directors, includ-ing their reputational loss and personal liabilities.

For directors of organizations with operations spread across

company as well as steps taken by the company to cure instances of non-compliances.

Duties and Liabilities of Independent DirectorsThe primary task of independent directors is to adopt an oversight role and to ensure that the cor-porate assets are used in the best interest of the company while balancing the interests of all stakeholders. The independent director must ask for information about the company s operations and finances. If he does not get it, he must take steps to pursue the matter.

Code for Independent directors in Schedule IV of the Companies Act, 2013 specifically lays down the Guidelines for professional conduct, role, functions and du-ties of independent directors, sig-nificant amongst which are -

helping in bringing an in-dependent judgment to bear on the Boards deliberations espe-cially on issues of strategy, per-formance, risk management, re-sources, key appointments and standards of conduct

acting within authority, as-sisting in protecting the legiti-mate interests of the company, shareholders and its employees

ascertaining and ensuring that the company has an adequate and functional vigil mechanism

attending actively and con-structively most of the board and committee meetings

paying sufficient attention and ensure that adequate deliber-ations are held before approving related party transactions and as-suring themselves that the same are in the interest of the company;

reporting concerns honestly

The Companies Act, 2013 is a

landmark piece of legislation,

it besides laying down the

duties, responsibilities of the

directors provides Guidance

in the form of Code for

Independent Directors. The

Act also provides for progres-

sive reforms like directors

training, performance evalu-

ation of directors. Corporates

and corporate directors need

to ensure that these provi-

sions are not to be seen as a

compliance exercise. By intro-

ducing such provisions, the

expectation of the regulators

is that that Indian corporates

meet up to the global stan-

dards in terms of governance.

ARTICLE


the Boards and shall not act as Chairman of more than 5 com-mittees/sub-committees of the Boards across Boards of CPSEs companies in which he/she is a director. Furthermore, each non-official director should inform the company about the commit-tee/ sub-commit-tee positions he/she occupies in other companies and notify change(s) as and when they take place.

Liability relating to fraudFraud has been comprehensively defined under Sec 447 of the new Act, thus fraud in relation to af-fairs of a company or any body corporate, includes any act, omis-sion, concealment of any fact or abuse of position committed by any person or any other person with the connivance in any man-ner, with intent to deceive, to gain undue advantage from, or to in-jure 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. Few actions treat-ed as fraud under the provisions of Act are as thus:

Incorporation of a company: furnishing any false or incorrect information or suppression of any material information.

Mis-statements in Prosp-ectus: Where a prospectus, is-sued, circulated or distributed 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.

fraudulently inducing per-sons to invest money: Any per-son who, either knowingly or recklessly makes any statement, promise or forecast which is false, deceptive or misleading, or

model enlists duties of non-offi-cial directors. These duties are in consonance with the duties cast under the Companies Act, 2013, however with some additions as specifically stated hereunder:

not to use confidential infor-mation acquired in the course of their service as non-official direc-tor for their personal advantage or for the advantage of any other entity;

keep the Board informed in an appropriate and timely manner any information in the knowledge of the member which is related to the decision mak-ing or is otherwise critical for the company;

furnish a report to the Board about his role and contribution during the year.

be acquainted with the appli-cable laws and understand that the liability that may arise, where a company violates any law and for the purpose should get a list of applicable laws to the compa-ny and understand the penal pro-visions for contraventions under those laws.

not be a member on more than 10 committees/sub committees of

where he had not acted diligently.

Act of omission implies failure to act where the law requires him to act. Act of commission implies an act conducted so as to cause harm. Connivance means indirect consent to the commis-sion of offence. Here, the knowl-edge should arise through Board processes i.e. from any proceed-ings of the Board or through participation in Board meetings or meetings of any committee of the Board and any information which the director is authorized to receive as director of the Board as per the decision of the Board. Knowledge coming from exter-nal sources has not been referred here. Acted diligently means that the director should have tak-en steps to avoid the act of contra-vention, as much as possible.

Duties of Non-Official Directors in CPSEsThe Ministry of Heavy Industries and Public Enterprises came up with draft Model Role and Responsibilities for Non-Official Directors on the Board of CPSEs on 28th December, 2012 later modified on 20th June, 2013. The

ARTICLE


Comparative Analysis of Penal Provisions under Companies Act 1956 & Companies Act, 2013

Section Particulars Companies Act 1956 (Penalty and Persons Liable)

Penalty under Companies Act, 2013

Persons Liable under Companies Act, 2013

7 Incorporation of Company: untrue and incorrect information is submitted and material informa-tion suppressed at the time of incorporation of company

No Provision a) Imprisonment - six months to ten years and b) Fine 100% to 300% of the amount involved in the fraud

First directors, promoters, persons connected with incorporation

34 Criminal liability for mis-state-ments in prospectus: Untrue or Misleading statement in form or context in the prospectus

every person who authorised the issue of the prospectus Imprisonment upto two years, or fine which upto five thou-sand rupees, or with both.

a) Imprisonment - six months to ten years andb) Fine 100% to 300% of the amount involved in the fraud

Every person who au-thorizes the issue of such prospectus

36 Fraudulently inducing persons to invest money: knowingly or recklessly makes any statement, promise or forecast which is false, deceptive or misleading, or deliberately conceals any material facts, to induce another person to invest money

Any person who, is associated with inducing persons to invest money. Imprisonment upto five years, or fine upto ten thousand rupees, or with both.

a) Imprisonment - six months to ten years andb) Fine 100% to 300% of the amount involved in the fraud

Any person who, is as-sociated with inducing persons to invest money

42 Contravention of provisions of pri-vate placement: where the com-pany makes an offer or accepts monies being non- compliant of the provisions of the section

No Provision w.r.t private placement

Amount involved in the offer or invitation or two crore rupees, whichever is higher.

Company, its promoters and directors

75 Damages for deposit fraud: Deposits had been accepted with intent to defraud the depositors or for any fraudulent purpose.

No Provision a) Imprisonment - six months to ten years andb) Fine 100% to 300% of the amount involved in the fraud

every officer of the com-pany who was respon-sible for the acceptance of such deposit

100 Conduct of extraordinary general meeting: Non-Compliance with provisions of conducting EGM on the request of the members

Directors who were in default in calling the meeting shall reimburse reasonable expenses incurred by the requisitionists in calling the meeting

Reimbursement of reason-able expenses incurred by the requisitionists in calling the meeting

Directors who were in default in calling the meeting

six months but which may extend to ten years

fine not less than the amount involved in the fraud, but which may extend to three times the amount involved in the fraud:

Further it provides that where the fraud in question involves public interest, the term of imprison-ment shall not be less than three years.

Therefore, directors need to be extremely cautious that no false, incorrect or misleading informa-tion is given, which can make them liable for fraud.

statement or other document re-quired by, or for, the purposes of this Act or rules thereunder, any person makes a statement,--

Which is false in any material particulars, knowing it to be false; or

Which omits any material fact, knowing it to be material, he shall be liable under clause 447.

Fraud is punishable under the Act. The section provides that any person who is found to be guilty of fraud, shall be punish-able as under:

imprisonment not less than

deliberately conceals any materi-al facts, to induce another person to invest money

Deposits had been accepted with intent to defraud the de-positors or for any fraudulent purpose.

Where business of a com-pany has been or is being carried on for a fraudulent or unlawful purpose, every officer of the com-pany who is in default shall be punishable for fraud

Furnishing of False Statement (Section 448): If in any return, report, certificate, fi-nancial statement, prospectus,

ARTICLE


102 Statement to be annexed to notice of general meeting: appro-priate disclosure in the statement annexed to notice of annual general meeting.

No penal provision In case any benefit accrues on account of non-disclosure or insufficient disclosure, compensate the company to the extent of benefit re-ceived. Fine for non- com-pliance of provisions- fifty thousand rupees or five times the amount of benefit derived whichever is more

Promoter, director, manager or other key managerial personnel

127 Distribution of dividends: Failure to pay dividend/warrant post declaration of dividend within 30 days from the date of declaration

Every director of the company if he is knowingly a party to default. Simple imprisonment upto seven days and shall also be liable to fine of one thou-sand rupees for continuation of default

Director: Imprisonment- upto two years and with Fine upto one thousand per rupees per day of continua-tion of default.

Every director of the com-pany if he is knowingly a party to default.

128 Books of accounts: Non- compli-ance with maintaining the books of accounts and other relevant books, papers and financial state-ment, for every financial year for the company and keeping at its registered office

MD or Manager and all officers and other employees of the company and in absence of MD or manager every director of the company. Imprisonment upto six months, or with fine upto one thousand rupees, or with both.

Imprisonment - upto one year; or Fine - fifty thousand rupees to five lakh rupees; or with both imprisonment and fine

MD, the WTD in charge of finance, the CFO or any other person charged to comply with provisions of section

129 Financial statement: non- Compliance of provisions while preparation of financial statement.

Director of the company or person held responsible for the same. Imprisonment upto six months, or with fine upto one thousand rupees, or with both.

Imprisonment - upto one year; or Fine - fifty thousand rupees to five lakh rupees; or with both imprisonment and fine

MD, the WTD in charge of finance, the CFO or any other person charged to comply with provisions of section and in absence of any of the above all directors

137 Copies of financials statements to be filed with the registrar: Failure of filing financial statements along with the relevant attachments with the registrar within the time specified under section 403

every officer of the company who is in default. Fine upto fifty rupees for every day during which the default continues.

Imprisonment - upto six months; or

Fine - one lakh rupees to five lakh rupees; or with both imprisonment and fine

Company, MD and CFO, if any and if not, then any director responsible and in the absence of any such director, all such directors

159 Appointment of directors: Contravention of section 152, 155, 156 relating to appointment of director and furnishing DIN

Every such individual or direc-tor or the company, as the case may be, who or which, is in default. Fine upto five thousand rupees and with a further fine which up to five hundred rupees for continuing default for every day

Imprisonment - upto six months; or

Fine upto fifty thousand rupees and fine of five hun-dred rupees for every day of continuing default

Such individual or direc-tor of the company

165 Number of directorships: Acceptance of appointment as a director in contravention of the provisions of this section i.e. 10 in case of public companies and maximum 20 companies

Director: Fine upto fifty thou-sand rupees in respect of each of those companies after the first fifteen.

Fine - five thousand rupees to twenty-five thousand rupees for every day of con-tinuing default

The person proposed to be appointed as director

166 Duties of directors: Failure to act in accordance with the articles of association and according to pro-visions mentioned in section 166

No provision Fine - one lakh rupees to five lakh rupees

Director

ARTICLE


The Companies Act, 2013 is a landmark piece of legislation, it besides laying down the duties, responsibilities of the directors provides Guidance in the form of Code for Independent Directors. The Act also provides for pro-gressive reforms like directors training, performance evaluation of directors. Corporates and cor-porate directors need to ensure that these provisions are not to be seen as a compliance exercise. By introducing such provisions, the expectation of the regulators is that that Indian corporates meet up to the global standards in terms of governance.

functions on the principle of majority or unanimity. A single director can not take decisions, at the same time, the voice of each director is sacred. Each director is expected to keep the big picture in mind and simultaneously bring in his unique contribution. Therefore it is important that each director understands his role and respon-sibilities. A director should be able to give his opinion without fear or favour in the best inter-est of the company. He should facilitate the smooth board func-tioning but not at the cost of any wrong decisions.

The profound penal provisions embedded in the Act itself high-lights the importance of ethi-cal expectations from directors. This provisions strengthens the corporate governance and infuse a new sense of understanding, commitment and responsibility on the directors who consti-tute the Boards of Indian com-panies. This will keep them on their feet invigorating perform a more active role in the best in-terest of the companies and the stakeholders.

ConclusionThe duties of directors are part-ly statutory, partly regulatory and partly fiduciary and their responsibilities are quite oner-ous and multifarious. The Board

It is easy to dodge our responsibilities, but we cannot dodge the conse-quences of dodging our responsibilities.

- Josiah Charles

167 Vacation of office of the director: Continuation of functioning as a director even after knowing that the office of director held by him has become vacant on account of any of the disqualifications

Director: Fine which may extend to five thousand rupees for each day on which he so functions as a director.

Imprisonment - upto one year or Fine - one lakh rupees to five lakh rupees, or with both imprisonment and fine

Director

184 Disclosure of directors interest: Failure to make disclosures of directors interest in accordance with the provisions of the Act

Director: fine upto fifty thou-sand rupees.

Imprisonment upto one year; or Fine - fifty thousand rupees to one lakh rupees; or with both imprisonment and fine

Director

194 Prohibition on forward dealings in securities: Contravention of provi-sions of the section

No provision imprisonment for a term which may extend to two years or with fine which shall not be less than one lakh rupees but which may extend to five lakh rupees, or with both.

Director or KMP

195 Prohibition on insider trading of securities: contravenes the provi-sions of this section If any person, he shall be punishable with

No provision Imprisonment for a term which may extend to five years or with fine which shall not be less than five lakh ru-pees but which may extend to twenty-five crore rupees or three times the amount of profits made out of insider trading, whichever is higher, or with both.

Director or KMP

ARTICLE


CORPORATE SOCIAL RESPONSIBILITY:

rather than distinct entities. The emerging partnership between corporate sector and society is popularly known as CSR. To some, CSR is a missing link be-tween corporate governance and firm performance. It not only enhances image and credibility of an enterprise, but also signifi-cantly improves employee per-formance and job satisfaction.

CSR is a universal phenomenon, voluntary and hardly costs to the enterprise. It is neither a charity nor donation. Corporates move faster towards CSR in view of stakeholders expectations; main-taining transparency; address-ing environmental concerns; and competing for wealth creation for society.

Adam Smith and Friedman plead that a Business enterprise con-cerns profit maximization and societal function is responsibil-ity of Government. To them,. The business of Business is busi-ness the social responsibility of

Gates, Warren Buffett, Tony Blair, Azim Premji etc., have selflessly raised banner of philanthropic policy. They call upon corporate heads to stop profit maximiza-tion, contribute for social cause, and commit giving back to com-munities. These activities how-ever, remain discretionary and standalone. The crux of conclave of wealthiest recently gathered at Bangalore to take philanthropy rightly concluded How to give to maximize social impact instead of How much to give. Advocates for Responsibilities of Business favour extending CSR scope to multi-stakeholders. It implies that Business has to engage itself in extra market activities to keep Social good in mind.

Corporate Social ResponsibilityThere is no unanimity on CSR definition. World over, it aims at integration of business and social needs on the premise that busi-ness and society are interwoven

Viewed with different con-notations like Citizens Social Responsibility, Collective Social Responsibility, Individual Social Responsibility, Responsibilities of Business, Cor-porate Accountability, Corporate citizenship, Responsible entre-preneurship, let us clarify them before explaining CSR rationale.

Citizens Social Responsibility constituting a part of Charter/Constitution having certain rights has to be diligently discharged within family/ group/ society. Collective Social Responsibility enjoins upon leadership to main-tain internal/ external security, foreign relations, integrity and sovereignty of nation. Under Individual Social Responsibility, business tycoons are doling bil-lions of money for welfare of Poor or for building their own parallel empire out of compa-nys wealth which legally and rightfully belongs to sharehold-ers. Conversely, instances ga-lore where personalities like Bill

Saviour of Socio- Economic, Environmental &

Governance IssuesDr. B. B. GoelProf. of Public Administration (Retd.)Punjab University.

With enactment of Companies Act (Section 135) and Rules notified on 27.2.2014, India has become the only country in world with legislated, self regulated & self compliant CSR.

ARTICLE


ARTICLE

CSR regime, being an on-going process, is a pioneering effort and is gaining popularity inter-nationally. Its widening ambit in accessing capital and markets, improved productivity, brand im-age, customer royalty etc., is indeed laudable.

highlighting physical/ financial progress of projects.

CSR Policy Rules 2014 under 2013 Act With enactment of Companies Act (Section 135) and Rules no-tified on 27.2.2014, India has be-come the only country in world with legislated, self regulated & self compliant CSR. According to Ernst & Young, India hav-ing 16245 registered companies would spend Rs.22000 crores during 2014-15(Economic Times 5.6.14). As a result, SEBI has al-ready amended corporate gover-nance norms from 1.10.14 while DPE is revisiting CPSEs CSR Guidelines and may bring them out by year end.

Any company having net worth of Rs.500 crore or turnover of Rs.1000 crore or net profit of Rs.5 crore in a fiscal year has to spend 2% average net profits of preced-ing three financial years. The net profit threshold limits constitutes a lions share under CSR net. Section 135 however, is not appli-cable to a company which ceases to meet the aforesaid criteria for three consecutive years. Net prof-its before tax do not include divi-dend income received from other

companies or having negative net worth are exempted. CSR budget though not lapsable, an enter-prise has to disclose reasons for not spending. If funds remain unspent for two years, these are transferable to Sustainability Fund. 5% of annual CSR budget (extendable by another 5%) can be earmarked for emergency needs. As a policy, employees cannot be direct CSR beneficiaries. CSR monitoring is exercised by Board. The real evaluation is performed by DPEs Task Force on MOU. Eight marks (out of 100) are allo-cated to evaluate performance. A CPSE is also required to include a paragraph in Annual Report

business is to increase its profits. However, Robert Dahl counter-ing these views observes Today, it is absurd to regard the corpo-ration simply as an enterprise established for sole purpose of allowing profit making. We, the citizens, give them special rights, powers and privileges, on the understanding that their ac-tivities will fulfill our purposes. Corporations exist because one allows them to do so. And we allow them to exist only as they continue to benefit us. In short, an enterprise owes a debt to be given back to society from which it has amassed huge profits.

DPE Guidelines on CSR & Sustainability Department of Public Enterprises has been evincing interest in formulation, implementation and monitoring of Corporate Governance Guidelines includ-ing CSR. These are mandatory for listed CPSEs/unlisted subsidiaries (March 2010). The latest CSR and Sustainability Guidelines (from April 2013) have main thrust on capacity building, empower-ment of communities, inclusive growth, environment protection, backward regions etc. A CPSE has to select one project in each category: (i) inclusive growth of society and backward districts of the country; and (ii) environ-ment sustainability. However, a Maharatna company has to take up an additional project. A Board Level Committee and designated nodal officers team constitute two tier structure to steer CSR agenda.

Board resolution is required to allocate yearly budget (1-5% de-pending on profit) as a percent-age of net profit. Sick/loss making


ARTICLE

Donations to political parties are prohibited.

Social business projects are not a part of Schedule VII.

Surplus CSR funds are not CSR profits.

Projects undertaken in India alone count CSR.

Salary paid to regular staff in proportion to companys time spent specifically on CSR is CSR cost. Besides, provision up to 5% of CSR budget can be factored for training and capacity building of employees and CSR implement-ing partners.

Expenditure by foreign hold-ing companies qualifies for CSR spend only if routed through Indian subsidiary.

Contribution to corpus of trust/society/section 8 company qualifies CSR if (a) created ex-clusively for undertaking CSR or (b) where corpus is created exclu-sively for related subjects cov-ered in Schedule VII.

Efficacy of CSRCSR has made great inroads in SBI, LIC, IOC, SAIL, NTPC, ONGC, BHEL, CIL and other public enterprises.

website has to display CSR policy. Companies have three options to implement CSR policy: (a) direct-ly through employees; (b) third party arrangement (registered society/ trust/Section 8 company) having track record of three years in line; and (c) collaboration with others (provided these report separately as per Act).

Clarifications on CSR Policy Rules 2014In light of varying views ex-pressed by industry, profes-sionals and academia, Ministry of Corporate Affairs has clari-fied provisions under Section 135 as also amended/substituted Schedule VII (notification dated 18.6.2014):

Schedule VII entries are broad based and illustratively mentioned in Annexure.

One of the events, like mara-thon/awards/contribution/adver-tisement/TV sponsorship are not CSR expenditure.

Expenses for fulfillment of any act/ statue ( labour law, land acquisition) or expenditure in normal course of business or any program exclusively for benefit of employees/families are not CSR.

Indian companies or profit aris-ing from branches outside India.While the Act used CSR merely as nomenclature, Rules provide clear cut definition, scope and ap-plication. It allows companies to engage in activities in Schedule VII or projects/programs under-taken by Board of a company in pursuance of recommendations of CSR Committee as per declared CSR policy. It implies flexibility to choose preferred engagements that are in conformity with CSR policy (Finance Ministers budget speech incorporating slum re-development in CSR). Similarly, although contributions towards disaster management are not covered in list of CSR activities, companies spending on relief meant for flood hit J&K facing a humanitarian disaster of enor-mous proportion, have been per-mitted to do so. Besides, Ministry of Corporate Affairs has rightly rejected Finance Ministrys pro-posal under the same Cabinet Minister to exempt banks from 2% mandatory CSR norms ow-ing to their capital constraints. Otherwise, this would have opened a pandora box for other entities to come up with such lame excuses.

The Board has to constitute three members CSR Committee includ-ing one independent director (ex-ception private/unlisted compa-nies having two directors). The Committee forms a core team, formulates CSR policy, recom-mends amount of CSR spend and develops operating structure and monitoring mechanism for im-plementation. A comprehensive report on CSR containing speci-fied particulars based on comply or explain framework has to be annexed with annual report of Company. Besides, companys


ARTICLE

industrys apprehensions on im-pact of CSR contribution from tax deductions deserve merit.

Residual clause under the Act providing unbridled powers to Government virtually defeats purpose of bringing Schedule VII.

Absence of any penal provi-sions for not undertaking CSR activities especially in Indian set-ting, dilutes CSR mandate.

Exclusion of Social Business Projects from original Schedule VII of the Act through CSR Rules notification seems to be repealing/modifying powers of Legislature.

Companies under cover of overseas companies or branches can indulge in fake transactions and project lower net profits for reduced quantum of CSR spend-ing in India.

These misgivings need to be ad-dressed expeditiously. Then only, CSR as a part of financial inclusion can meet acid test of sustainability, transparency and accountability. MCA is likely to come out with FAQs on CSR shortly for speedy implementation of CSR policy. Finally, incentive schemes should be devised to inject competition within an enterprise for imple-menting CSR. No laxity should be afforded to defer execution of proj-ects on flimsy grounds. Besides, community may be awakened to contribute a fraction of matching funds to arouse their interest in CSR ventures. Then only, Indian CSR can counter global bench-marks and evolve best practices. To conclude, CSR regime, being an on-going process, is a pioneer-ing effort and is gaining popular-ity internationally. Its widening ambit in accessing capital and markets, improved productivity, brand image, customer royalty etc., is indeed laudable.

Unlike Section 135, CSR rules broaden the term company to the one incorporated in India in-cluding a foreign company hav-ing branch or project office there-by inviting judicial scrutiny.

The Act prefers CSR spend-ing in local area. If a company has more than one operational office (factory, corporate office), there is ambiguity as to which location has to be target. Besides, rural poor may not be benefitted.

The Act prescribes identified set of activities in Schedule VII while CSR activities in Rules are illustrative and not exhaustive.

The State under CSR garb passes the buck towards social development to private sector.

Rules exceed Delegated legislation as companies issue cheques (PM Relief Fund) instead of carrying out activities on the ground.

Section 37(1) of Income Tax Act explicitly allows business ex-penditure if it is wholly or exclu-sively for business. Accordingly,

In order to oversee companies CSR initiatives, Coal India Board recently cleared a proposal to raise new cadre of 120 officers. It would however, be a novel idea if all CPSEs form an independent entity under DPEs umbrella hav-ing scale and resources to plan and execute CSR activities and free themselves from this respon-sibility. Pooling of funds has a multiplier impact than an indi-vidual CPSE can achieve.

CSR has become a buzz word in job market. Companies have to attract brightest talent to achieve CSR activities. Accordingly, CSR course as a part of MBA can be introduced to build a think tank of CSR professionals, consultants and specialists. While New Delhi Institute of Management has made a debut in sensitizing stu-dents, move of Indian Institute of Corporate Affairs to launch nine months CSR program is laudable.

Grey Areas of ConcernDiscussions with captains of in-dustry/professionals reveal that 2013 Act/CSR Rules 2014 have in-herent limitations:

No clarity whether company failing to meet 2% obligation is violating law and liable to pen-alty. Similarly, no definite clue whether company shall have to make good past shortfall in fu-ture year.

Foreign companies term CSR mandate as an additional tax over and above corporate taxes.

Mandatory CSR is viewed as a back door entry to increase tax without following transparent political system.

No clarity whether any CSR surplus shall count as CSR fund for next year.

The Board has to consti-

tute three members CSR

Committee including one

independent director (ex-

ception private/unlisted

companies having two

directors). The Committee

forms a core team, for-

mulates CSR policy,

recommends amount of

CSR spend and develops

operating structure and

monitoring mechanism for

implementation.

organization i.e. One Person Company. The Companies Act, 2013 has introduced the concept of One Person Company, which is considered to be one of the ma-jor highlights of the new legisla-tion. Although prevalent in many countries such as the US, UK, Singapore, Australia, and China, the idea of One Person Company (OPC) was first suggested in India by the J.J.Irani Committee, with the view to give an outlet to the entrepreneurial capabili-ties for participation in economic activity.

One Person Company - DefinedOne Person Company (OPC) has

of all these efforts has been quite encouraging not only existing businesses but many young en-gineers and management gradu-ates have voluntarily opted to be entrepreneurs. However, they are often constrained by the fact that their personal solvency and well-being remains vulnerable to the fortunes and risk of their business enterprises. Establishing a joint stock company is a time consuming and tedious process while partnership and sole-pro-prietary business involve unlim-ited liability. It is to overcome these constrains of unlimited li-ability that the new Companies Act has incorporated for the first time a simpler form of business

India is on a threshold of en-tering into a new era of rapid economic growth and de-velopment. It is going to be the manufacturing hub with foreign direct investment being invited on a large scale. While large scale businesses will be established with domestic and foreign invest-ments, micro, small and medium enterprises have also to play an important role often a com-plimentary to large enterprises. After the enactment of Micro, Small, and Medium Enterprises Development Act in 2006, the gov-ernment has paid special atten-tion to their development. A sepa-rate ministry for such enterprises has been created at the Centre. Commercial banks are providing financial assistance to such enter-prises on an enlarged scale with liberal support from the Small Industries Development Bank of India (SIDBI). Banks are encour-aged to provide collateral free loans to such enterprises upto ` One crore. A credit guarantee scheme protects the interest of the banks. Venture Capital funds also provide resources for innovative projects. Several Entrepreneurial Development Institutes have been set up to explore and develop en-trepreneurial talent. The outcome

A modified corporate form to boost entrepreneurship

One PersonCompany (OPC)

Prof. Pankaj VarshneyAssociate Professor (Finance)Lal Bahadur Shastri Institute of Management


ARTICLE


ARTICLE

been defined by the Companies Act, 2013 as a company which has only one member (or share-holder). Any natural person who is resident of India for more than 182 days in the preceding calendar year may subscribe to the Memorandum and Articles of Association of an OPC. The Memorandum should also name another person a nominee, who shall, in the event of the death of the subscriber or his incapacity to contract, would become the member of the company. Such nominee is required to give his consent in writing. The nominee can however, withdraw his writ-ten consent at any time he wishes to. Similarly, the member share-holder may also change nominee at any time, and replace him/her with another nominee. The Act provides for the liability of mem-ber to be limited by shares, or guarantee or it may be an unlim-ited liability company. The mini-mum paid-up capital of an OPC is required to be Rs. 1 Lac. Further, the company would have to men-tion One Person Company in brackets below its name in all its communications and signages. As per Section 149 (1)(a), the min-imum number of directors in an OPC is one, although there is no bar on appointment of more than one director.

Only natural Indian residents are allowed to become shareholders of an OPC, which means that body corporates or foreigners cannot set-up an OPC. No person is al-lowed to incorporate or become a nominee of more than one OPC. A minor is also not allowed to be-come a member or a nominee in an OPC or hold shares with bene-ficial interests.The law lays down certain restrictions that have been imposed on the type of activities

which an OPC may undertake, for example an OPC cannot carry on the business of investments in securities of body corporates. It cannot be incorporated as or be converted into a Not-for-profit company. Further, an OPC can-not be converted into any other type of company private limited or public limited company with more than one shareholder, un-less 2 years have lapsed from the date of incorporation of the OPC.

Conversion of a Private Limited company into an OPC and vice versaA private limited company (other than a company registered under Section 8 of the Companies Act, 2013 i.e. a Not-for-profit com-pany) with a paid-up capital of ` 50 Lacs or less or an average turn-over of ` 2 crore or less, may con-vert itself into an OPC by passing a Special resolution at its AGM. Before passing such a resolution,

the company needs to obtain a No objection certificate from its members and creditors which has to be filed with the Registrar with prescribed fees and documents. On the other hand, if the paid-up capital of an OPC exceeds ` 50 Lac or the average annual turn-over during the preceding three years exceeds ` 2 crores, the OPC will not be treated as an OPC. Within 6 months of crossing these threshold limits, the OPC would have to amend its Memorandum and Articles of Association by passing relevant resolution under section 122 of the Act. The OPC would also be required to inform the Registrar of the fact that it is no longer an OPC, by filing Form INC 5.

Privileges & Exemptions of an OPCOne of the main advantages of an OPC is that being a private lim-ited company, it enjoys the status of a separate legal entity with the liability of its sole member being limited to the unpaid amount of share capital. Besides the lim-ited liability of an OPC, they have been provided with certain privileges and exemptions so that small businesses may adopt this corporate form of organization and at the same time remain free from compliances of various re-strictions for the corporate form.

As a one person company, its board would have just one di-rector (Sec 149 (1)(A)), although there is no bar on appointment of more than one director, as against the requirement of a minimum of two directors in a private limited company and three directors in case of a public limited company. An OPC is exempt from holding the Annual General Meeting un-der Section 96(1) of Companies

The Companies Act, 2013 has introduced the concept of One Person Company, which is con-sidered to be one of the major highlights of the new legislation. Although prevalent in many coun-tries such as the US, UK, Singapore, Australia, and China, the idea of One Person Company (OPC) was first suggested in India by the J.J.Irani Committee, with the view to give an outlet to the entrepreneurial capa-bilities for participation in economic activity.


ARTICLE

dividends, it will have to pay Dividend Distribution Tax which is presently levied @ 16.95% (base rate of 15% plus surcharge @ 10% plus cess @ 3%). This is in addition to the income tax @ 30.9% while individuals have to pay only the income tax on slab basis. Another disadvantage of an OPC is that if an owner withdraws any amount from the business, it is not treated as deemed dividends, but if the sole shareholder in an OPC takes loan from the OPC and the com-pany has distributable profits, the loan is treated as deemed divi-dend to the extent of distribut-able profits under Section 2(22)(e) of the Income Tax Act, 1961.

Limited Liability Partnerships (LLPs) also offer the benefit of limited liability without the bag-gage of compliance and disclo-sures as required for private lim-ited or public limited companies. Hence, OPCs would have to com-pete with LLPs, which however, require more than one person to incorporate. In conclusion, the Indian entrepreneur now has one more very useful form of business organization available to him for exploring his entrepreneurial ability. OPCs are expected to as-sist small entrepreneurs whose scale of operations is limited and want to take advantage of the lim-ited liability status of the OPC and concentrate on their businesses. Since April 1, 2014, when the new Companies Act became effective, there has been enthusiastic re-sponse to OPCs as evident from the number of OPC getting regis-tered - 68 companies in June, 183 in July and 218 in August, 2014. It is expected that OPC will become popular amongst the budding en-trepreneurs in days to come.

limited company which would enable an entrepreneur to focus on his business rather than over burdened with compliances of various regulatory processes.

Higher Tax burden - a disadvantageOnly a natural person who is an Indian resident can be the mem-ber of an OPC. Hence investment by foreign companies/ funds in the equity of such companies would not be allowed, which will restrict the size of the business un-dertaken by such companies. The concept of OPC may not appeal to small proprietorship firms to con-vert themselves into an OPC as at present corporate income tax is levied at a flat rate of 30.9% which is quite high as compared to the slab rate prescribed for individu-als. Similarly, if an OPC declares

Act, 2013. It is also exempt from preparing and presenting the Cash Flow Statement as part of its Financial Statements under Sec. 2(40), while it is mandatory for other types of companies. As per Section 92(1), an OPC may get the Annual Return to be signed by the Company Secretary or in his absence, by the Director of the company. Similarly, the Financial Statements need to be signed by only the Director and submitted to the auditors.

As a one person company with only one director, requirement of holding quarterly board meetings is not necessary. It is sufficient enough to record the resolutions in the minutes book and signed by the Director. It would be suf-ficient if at least one board meet-ing is conducted in each half of a calendar year and the gap be-tween the two meetings should not be less than 90 days. Also, the requirement of quorum for Board meetings will not apply in case of OPCs. The Directors report of an OPC needs to include only ex-planation of qualifications or ad-verse remarks of the auditors and not all the other information as required by Section 3 needs to be included.The provisions relating to sending of notice atleast 7 days prior to Board meeting, partici-pation through video conferenc-ing or other audio video means also do not apply, if the OPC has only one Director on its Board. The provision relating to the ap-pointment of an individual as an auditor for more than one term of five consecutive years and an audit firm as an auditor for more than two terms of five consecu-tive years shall not apply to OPC.

Thus, the process of incorpo-rating and running an OPC is relatively simpler than a private

OPCs are expected to assist small entrepreneurs whose scale of operations is limit-ed and want to take advan-tage of the limited liabil-ity status of the OPC and concentrate on their busi-nesses. Since April 1, 2014, when the new Companies Act became effective, there has been enthusiastic re-sponse to OPCs as evident from the number of OPC getting registered - 68 com-panies in June, 183 in July and 218 in August, 2014. It is expected that OPC will become popular amongst the budding entrepreneurs in days to come.

ARTICLE


by passing special resolution. The Board may consist of several categories of directors including whole-time directors, managing directors, independent directors, nominee directors and women directors.

Independent Directors

For the first time, the require-ment of Independent Directors has been introduced under the Companies Act, 2013. Under the Act and rules made thereunder, the Board of listed companies are required to have at least one-third of total number of directors as in-dependent directors and every public companies with a paid-up capital of ` 10 Crore or more or turnover of ` 100 or more or

2013 which have implications on the Governance structure of the Company:

Composition of The Board of Directors

Number of Directors

The 1956 Act prescribes mini-mum 2 directors for private and 3 directors for a public com-pany. This criterion is retained in the Act, but the maximum di-rectors on the Board have been raised from 12 to 15 and the Act has also dispensed with the ap-proval from Central Government for raising the number of direc-tors above the prescribed limit. The Company may increase the number of directors beyond 15

On receiving the assent of the Honble President of India on August 29, 2013, Companies Act, 2013 (referred as Act or New Act) was notified on August 30, 2013 (Act 18 of 2013). It consists of 470 Sections and 7 Schedules and it aimed to im-prove corporate governance, sim-plify regulations, enhance the in-terests of minority investors. The new Act is more a rule-based leg-islation and the substantial part of the legislation is in the form of rules. The new act is being implemented in a phased man-ner. Till now 282 sections of the Companies Act has been notified.

The Companies Act 2013 envis-ages radical changes in the area of Corporate Governance and is set to have far-reaching implica-tions. The new regime is expected to significantly change the man-ner in which corporates oper-ate in India. The New Act has made several significant changes, which seek to redefine the board governance. Overall, the new Act aims to raise the governance profile of Indian companies and their boards, at par with the roles and responsibilities assumed by boards globally. In this article, an attempt has been made to touch upon some of key changes in-troduced by the Companies Act,

Mr. a. K. RastogiExecutive Director & Company Secretary, NTPC

Step towards better Governance

The New Companies Act:


outstanding loans, debentures and deposits, exceeding Rs. 50 Crore are required to have at least two independent directors. The new act also prescribes a time limit of one year for compliance.

Section 149 (6) of the Companies Act, 2013 defines Independent Directors and criterion of inde-pendence are more stringent than the criterion envisaged ear-lier under the Listing Agreement. Now independent directors must, among other things, be person of integrity, possess ex-pertise and experience, not be a promoter of the company or the holding or associate company, not be related to the promoter or directors of the company, or the holding or subsidiary or associ-ate company, whose relatives not have any pecuniary relationship or transaction with the company or the holding or associate com-pany and neither he nor any of his relatives hold any key mana-gerial position in the company or the holding or associate company. Thus, Independent Directors are expected to be completely unre-lated to the company or its share-holders. Nominee Director are kept outside from definition of Independent Director.

Further, Schedule IV of the new Act contains the guidelines for professional conducts for Independent Directors, role & responsibilities of Independent Directors, their duties and man-ner of appointment etc. These measures have been introduced with intention to ensure that the independent directors shall act in the interest of the company and with no partiality towards management.

Women Director

Every listed company and public

companies having paid up capital of Rs. 100 cr. or more, or turnover of Rs. 300 cr. or more, shall have at least one Woman Director. This requirement has been introduced to facilitate gender equality in the Board room. All the Companies covered in aforesaid bracket have been given 1 year time i.e. upto 1st April 2015 to comply with the provision.

Resident Director

The section 149 also stipulates that at least one director of the company shall stay in India for 182 days or more in the previous calendar year. This will ensure that the Board shall continue to monitor directly the management of the company on a regular basis and shall be responsible for acts and deeds of the company. Their continued presence will not delay statutory action steps and will be a step forward towards meeting the timely corporate compliance requirements.

This requirement was missing in the old Act and foreign com-panies starting business in India typically appoint foreign direc-tors as the directors of the Indian subsidiary. With the implementa-tion of this prerequisite, foreign companies doing business in India will now have to appoint at least one resident director or Indian national to act as director to comply with this qualification.

Role of DirectorsThe Companies Act, 2013 has brought a paradigm shift by con-siderably enhancing the role of the directors individually and Board collectively. The Board of Director is no longer a mere apex decision making body. The new Act introduces some new con-cepts which have increas

Documents

Kaleidoscope-Issue Sep Oct 2014