STUDY MATERIAL

PROFESSIONAL PROGRAMME

GOVERNANCE, RISK
MANAGEMENT,
COMPLIANCES AND ETHICS

MODULE I
PAPER 1

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 PROFESSIONAL PROGRAMME

GOVERNANCE, RISK MANAGEMENT, COMPLIANCES

AND ETHICS

Corporate governance offers a comprehensive, interdisciplinary approach to the management and control of
companies. Corporate professionals of today and tomorrow must imbibe in themselves the evolving principles
of good corporate governance across the globe on a continual basis. Therefore Corporate Governance has
emerged as an important academic discipline in its own right, bringing together contributions from accounting,
finance, law and management. Excellence can be bettered only through continuous study, research and
academic and professional interaction of the highest quality in the theory and practice of good corporate
governance. The corporate world especially looks upon Company Secretaries to provide the impetus, guidance
and direction for achieving world-class corporate governance. Company Secretaries are the primary source of
advice on the conduct of business. This can take into its fold everything from legal advice on conflicts of interest,
through accounting advice, to the development of strategy/corporate compliance and advice on sustainability
aspects.
The paper on Governance, Risk Management, Compliances and Ethics has been introduced to provide
knowledge on global development on governance, risk management, compliances, ethics and sustainability
aspects and best governance practices followed worldwide.
This Paper is divided into four parts: Part I deals with Governance, Part II deals with Risk Management, Part III
deals with Compliances and Part IV deals with Ethics & Sustainability.
Part I elaborates on the conceptual and legal framework of Corporate Governance and the role of Board of
Directors, promoters and stakeholders. Part II explains about the Risk identification, its management, mitigation
and audit. Part III explains the significance of Compliance and essentials of a compliance management program.
This part also details about the Internal Control and Reporting. Part IV details about the relation of Ethics and
business. This part also explains about Sustainability and approaches to measure Business Sustainability.
The legislative changes made up to June, 2020 have been incorporated in the study material. The students
to be conversant with the amendments to the laws made upto six months preceding the date of examination.
It may happen that some developments might have taken place during the printing of the study material and
its supply to the students. The students are therefore advised to refer to the updations at the Regulator’s
website, Supplement relevant for the subject issued by ICSI and ICSI Journal Chartered Secretary and other
publications for updation of study material.
In the event of any doubt, students may write to the Directorate of Academics of the Institute for clarification at
academics@icsi.edu.
Although due care has been taken in publishing this study material, the possibility of errors, omissions and/or
discrepancies cannot be ruled out. This publication is released with an understanding that the Institute shall not
be responsible for any errors, omissions and/or discrepancies or any action taken in that behalf.
Should there be any discrepancy, error or omission noted in the study material, the Institute shall be obliged if
the same is brought to its notice for issue of corrigendum in the e-bulletin ‘Student Company Secretary’.

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 PROFESSIONAL PROGRAMME

GOVERNANCE, RISK MANAGEMENT, COMPLIANCES

AND ETHICS

This study material is divided into four parts with following weightage of marks:
Part I – Governance (50 marks)
Part II - Risk Management (20 marks)
Part III - Compliances (20 marks)
Part IV - Ethics & Sustainability (10 marks)
PART I – GOVERNANCE
Corporate Governance has a broad scope. It includes both social and institutional aspects. Corporate
Governance encourages a trustworthy, moral, as well as ethical environment. In other words, the heart of
corporate governance is transparency, disclosure, accountability and integrity. In the last decade, many
emerging markets, international bodies, governments, financial institutions, public and private sector bodies
have reformed their corporate governance systems and are encouraging debate and spearheading initiatives
towards good corporate governance. Better regulatory and self-regulatory corporate governance frameworks
and enforcement mechanisms are being implemented through tougher legislations and Corporate Governance
Codes.
This part of the study apprise about the developments across jurisdictions and brief about the historic origin,
need and importance of corporate governance, legislative framework of Corporate Governance explaining the
need, scope and evolution of Corporate Governance, Contemporary Developments in Corporate Governance
Corporate Governance codes in major jurisdictions, Corporate Governance in Indian Ethos and family
enterprises. This part further explains the Board effectiveness, its committees, performance evaluation of Board
and role of Promoters.
PART II - RISK MANAGEMENT
Risk is inherent in every business, whether it is of financial nature or non-financial nature. Thus, management
of the risk is very important. Risk management begins with the risk identification, analyzing the risk factors,
making assessment of the risk and mitigation of the risk. Better risk management techniques provide early
warning signals so that the same may addressed in time. In traditional concept the natural calamities like fire,
earthquake, flood, etc were only treated as risk and keeping the safe guard equipments etc were assumed to
have mitigated the risk. But now in the era of fast changing global economy, the management of various types
of risks has gained utmost importance.
This part of the study explains the concepts, process, its advantages and steps for implementation of risk
management. It also deals with the fraud and reputation risk management and how the negative reputation of
an entity may have adverse impact on the operations and profitability.
PART III - COMPLIANCES
Compliance means the complete alliance of various parts of the business – whether commercial, financial, or
regulatory. It necessitates following the rules, both external and internal. Compliance with law and regulation
must be managed as an integral part of any corporate strategy. The board of directors and management must

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recognize the scope and implications of laws and regulations that apply to the company. They must establish a
compliance management system as a supporting system of risk management system as it reduces compliance
risk to a great extent. Compliance with the requirements of law through a compliance management programme
can produce positive results at several levels.
This part of study explains the adequacy and effectiveness of the compliance system, internal compliance
reporting mechanism and ensuring the best practices available for the good governance principles for
compliance issues. It further details about the concept of internal control, elements of internal control and its
efficacy, concept of Reporting which includes the financial as well as non-financial reporting.
PART IV - ETHICS & SUSTAINABILITY
Business Ethics is the application of ethical principles and methods of analysis to business. In past few decades
business ethics has been given due importance in business, commerce and industry. Promotion of culture of
ethics is an imperative, and it is increasingly being realized that it is the bedrock of good governance which
ultimately re-instills the confidence of the stakeholder in the company.
Sustainable development is a broad concept that balances the need for economic growth with environmental
protection and social equity. Sustainability is based on a simple principle: Everything that we need for our
survival and well-being depends, either directly or indirectly, on our natural environment. Sustainability creates
and maintains the conditions under which humans and nature can exist in productive harmony that permits
fulfilling the social, economic and other requirements of the present and future generations.
This part of the study elaborates the concept and advantages of business ethics and also explains about
corporate sustainability and sustainable development.

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 PROFESSIONAL PROGRAMME
MODULE 1
PAPER 1
GOVERNANCE, RISK MANAGEMENT, COMPLIANCES
AND ETHICS
(100 MARKS)

SYLLABUS
Objective
Part-I: To develop skills of high order so as to provide thorough knowledge and insight into the corporate
governance framework, best governance practices.
Part–II: To develop skills of high order so as to provide thorough knowledge and insight into the spectrum
of risks faced by businesses.
Part-III: To develop the ability to devise and implement adequate and effective systems to ensure
compliance of all applicable laws.
Part-IV: To acquire knowledge of ethics in business and framework for corporate sustainability reporting.
Detailed Contents
Part I: Governance (50 Marks)

1. Conceptual Framework of Corporate Governance: Introduction, Need and Scope, Evolution of

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

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

Part II: Risk Management (20 Marks)

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

Part III: Compliances (20 Marks)

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

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 Part IV: Ethics & Sustainability (10 Marks)
26. Ethics & Business: Ethics, Business Ethics, Organization Structure and Ethics, Addressing Ethical
Dilemmas, Code of Ethics, Indian Ethos, Designing Code of Conduct, Policies, Fair practices and
frameworks.
27. Sustainability: Corporate Social Responsibility, Corporate Sustainability Reporting Framework, Legal
Framework, Conventions, Treaties on Environmental and Social Aspects, Triple Bottom Line, Principle
of Absolute Liability - Case Studies, Contemporary Developments, Indian Ethos.
28. Models / Approaches to measure Business Sustainability: Altman Z-Score Model, Risk Adjusted
Return on Capital, Economic Value Added (EVA), Market Value Added (MVA), Sustainable Value Added
Approach.
29. Indian and contemporary Laws relating to Anti-bribery: Prevention of corruption Act,1988, Central
Vigilance Commission Act, 2003, Lokpal & Lokayukta Act, 2013, Foreign Corrupt Practices Act, 1977,
Unlawful Activities (Prevention) Act, 1967 & Delhi Special Police Establishment Act, 1946; ICSI Anti
Bribery Code.
Case Studies & Practical Aspects

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 ARRANGEMENT OF STUDY LESSONS

MODULE 1 – PAPER 1

GOVERNANCE, RISK MANAGEMENT, COMPLIANCES AND ETHICS

PART I: GOVERNANCE
Lesson No. Lesson Title
1 Conceptual Framework of Corporate Governance
2 Legislative Framework of Corporate Governance in India
3 Board Effectiveness
4 Board Processes through Secretarial Standards
5 Board Committees
6 Corporate Policies and Disclosures
7 Accounting and Audit related issues, RPTs and Vigil Mechanism
8 Corporate Governance and Shareholders Rights
9 Corporate Governance and Other Stakeholders
10 Governance and Compliance Risk
11 Corporate Governance Forums
PART II: RISK MANAGEMENT
12 Risk Management
PART III: COMPLIANCE
13 Internal Control
14 Reporting
PART IV: ETHICS & SUSTAINABILITY
15 Ethics and Business
16 CSR and Sustainability
17 Anti-Corruption and Anti-Bribery Laws in India

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 LESSON WISE SUMMARY
GOVERNANCE, RISK MANAGEMENT, COMPLIANCES
AND ETHICS

Lesson 1: Conceptual Framework of Corporate Governance

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

Lesson 2: Legislative Framework of Corporate Governance in India

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

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 Lesson 3: Board Effectiveness
Company being an artificial person it requires certain natural persons to represent the company at various
fronts. The position of directors in their relationship to the company is not only as the agents, but also trustees
of the company.
The Board of Directors plays a pivotal role in ensuring good governance. The contribution of directors on
the Board is critical to the way a corporate conducts itself. A board’s responsibilities derive from law, custom,
tradition and prevailing practices.
In the present times transparency, disclosure, accountability, issues of sustainability, corporate citizenship,
globalization are some of the concerns that the Boards have to deal with. In addition, the Boards have to
respond to the explosive demands of the marketplace. This two dimensional role of the Board of Directors is the
cornerstone in evolving a sound, efficient, vibrant and dynamic corporate sector for attaining of high standards
in integrity, transparency, conduct, accountability as well as social responsibility.
Therefore in this Lesson Board’s role, powers and duties, types of directors required to be appointed under the
laws, board composition and role of independent director in ensuring board effectiveness have been discussed.
The lesson also gives an insight on training of directors and performance evaluation of directors.

Lesson 4: Board Processes through Secretarial Standards

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

Lesson 5: Board Committees

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

Lesson 6: Corporate Policies and Disclosures

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

Lesson 7: Accounting and Audit related issues, RPTs and Vigil Mechanism
Corporate Governance is concerned with holding the balance between economic and social goals and between
individual and communal goals. The corporate governance framework is there to encourage the efficient use of
resources and equally to require accountability for the stewardship of those resources. The aim is to align as
nearly as possible the interests of individuals, corporations and society.
Good accounting and auditing practices are highly effective as an instrument of corporate governance.
Companies Act 2013 has provided for various mandatory and voluntary practices to improve financial reporting,
internal audit and statutory audit of companies in India. Keeping this in view, this study lesson covers various
good governance initiatives taken by the government of our country for accounting and audit related issues.
It also covers in brief various legal provisions as well as background to related party transactions, meaning of
related parties, transactions covered under RPT and the procedure for approval etc.
At the end, lesson provides brief about vigil mechanism, background of whistle blower concept and various laws
pertaining to it.

Lesson 8 : Corporate Governance and Shareholders Rights

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

Lesson 9: Corporate Governance and Other Stakeholders

In a business context, customers, investors, shareholders, employees, suppliers, government agencies,
communities and many others who have a ‘stake’ or claim in some aspect of a company’s products, operations,
markets, industry and outcomes are known as stakeholders.
Stakeholders are characterized by their relationship to the company and their needs, interests and concerns,
which will be foremost in their minds at the start of an engagement process. However, as the process unfolds
they will soon take a particular role with related tasks and responsibilities.
A major reason for increasing adoption of a Stakeholder Concept in setting business objectives is the recognition
that businesses are affected by the “environment” in which they operate. Businesses come into regular contact

xii
with customers, suppliers, government agencies, families of employees, special interest groups. Decisions
made by a business are likely to affect one or more of these “stakeholder groups”.
Stakeholders can only be well informed and knowledgeable if companies are transparent and report on issues
that impact stakeholders. Both parties have an obligation to communicate sincerely and attempt to understand,
not just be understood.
In this lesson relationship between company and various stakeholders has been discussed and explained how
better stakeholder engagement ensures good governance.

Lesson 10: Governance and Compliance Risk

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

Lesson 11: Corporate Governance Forums

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

Lesson 12: Risk Management

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

Lesson 13: Internal Control

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

Lesson 14: Reporting

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

Lesson 15: Ethics and Business

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

xiv
 • The concept of business ethics
• Advantages of Ethics

Lesson 16: CSR and Sustainability

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

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

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

xv
 LIST OF RECOMMENDED BOOKS
PAPER 1 – GOVERNANCE, RISK MANAGEMENT, COMPLIANCE AND ETHICS

READINGS
1. Corporate Governance, Principles, policies and Practices – A.C. Fernando, Pearson Education

2. Business, Ethics and Corporate Governance - A.C. Fernando, Pearson Education

3. Corporate Governance – IICA, Taxmann

4. Business Ethics- Concepts and Cases – Manuel G. Velasquez

5. The Art of Corporate Governance – Dr. Joffy George

6. Journals – (a) ICSI – Chartered Secretary

(b) ICSI – Student Company Secretary – E-bulletin

7. Companies Act, 2013 and Rules

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

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 CONTENTS
PAPER 1 – GOVERNANCE, RISK MANAGEMENT, COMPLIANCE AND ETHICS

LESSON 1
CONCEPTUAL FRAMEWORK OF CORPORATE GOVERNANCE

Meaning and Definitions of Corporate Governance 2

Regulatory Framework 3
Need for Corporate Governance 4
Elements / Scope of Good Corporate Governance 6
Evolution of Corporate Governance 8
Concept of Management Vs. Ownership 10
Concept Of Majority Rule Vs. Minority Interest 10
History of Development of Corporate Governance 10
Corporate Governance Codes in Major Jurisdictions Across the World 18
Corporate Governance Framework in USA 18
UK Corporate Governance Code, 2018 21
Corporate Governance Principles and Recommendations, Australia - 2019 23
Code of Corporate Governance, Singapore - 2018 24
King IV Report on Corporate Governance, South Africa – 2016 26
OECD Principles of Corporate Governance 28
Roots of Corporate Governance in Indian Ethos 33
Corporate Governance – Contemporary Developments in India 37
GLOSSARY OF TECHNICAL WORDS 41
LESSON ROUND UP 41
TEST YOURSELF 42

LESSON 2
LEGISLATIVE FRAMEWORK OF CORPORATE GOVERNANCE IN INDIA

Introduction 46
Regulatory Framework 47
Principles for Periodic Disclosures and for Corporate Governance 47

xvii
Corporate governance of banking and Financial Institutions 52
Ganguly Committee Recommendations on Corporate Governance in Banks 53
Basel Committee on Corporate Governance 56
Reserve Bank of India (‘Fit and Proper’ Criteria for Elected Directors on the Boards of PSBs)
Directions, 2019 57
Guidelines on Corporate Governance for NBFCs 60
Corporate Governance Guidelines for Insurance Companies 62
1. Governance Structure 62
2. Board of Directors 62
3. Delegation of Functions- Committees of the Board 65
4. CEO/ Managing Director/ Whole-Time Director 67
5. Role of Appointed Actuaries 67
6. External Audit - Appointment of Statutory Auditors 68
7. Access to Board and Audit Committee 68
8. Disclosure Requirements 68
9. Outsourcing Arrangements 69
10. Interaction with the Regulator 69
11. Whistle Blower Policy 70
12. Evaluation of Board of Directors including Independent Directors 70
Stewardship Code for Insurers In India 70
Corporate Governance in Public Sector Enterprises 74
Grading of CPSEs on the basis of their compliance with Guidelines on Corporate Governance for
Central Public Sector Enterprises (CPSEs) 79
Guidelines on Corporate Social Responsibility and Sustainability for Central Public Sector Enterprises
(With Effect from 1st April, 2013) 88
GLOSSARY OF TECHNICAL WORDS 91
LESSON ROUND UP 91
TEST YOURSELF 92

LESSON 3
BOARD EFFECTIVENESS

Introduction 94
Regulatory Framework 94
Role of the Board of directors 94
Meaning of Board of Directors 95
xviii
Directors 95
Types of Directors under Companies Act 2013 95
Composition and Structure of Board 98
Selection and Appointment of Directors 100
Duties of the Directors 101
Powers of the Board 101
Independent Directors for Better Board Effectiveness 103
Meaning of Independent Director under Regulation 16(1)(b) of SEBI (LODR) Regulations 105
Role and Functions of Independent Directors 106
Duties of Independent Directors 106
Separate Meetings of Independent Directors 107
Liability of Independent Directors 107
Other Good Practices to Enhance Board Effectiveness 109
Appointment of Lead Independent Director 109
Separation of role of Chairman and Chief Executive Officer 110
Succession Planning 111
Directors Training, Development and Familarisation 112
Performance Evaluation of the Board and management 114
Requirements under the Companies Act 2013 115
Provisions under the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 116
Frequency of Board Evaluation 116
Broad Evaluation framework and parameters 116
Board Effectiveness and the Role of the Company Secretary 119
GLOSSARY OF TECHNICAL WORDS 122
LESSON ROUND UP 123
TEST YOURSELF 123

LESSON 4
BOARD PROCESSES THROUGH SECRETARIAL STANDARDS

Introduction 126
Regulatory Framework 126
SS-1: Meetings of the Board of Directors 127
Board processes through Secretarial Standards 127
Meeting Through Video Conferencing 136
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Glossary 138
Lesson Round-up 138
Test yourself 139

LESSON 5
BOARD COMMITTEES

Introduction 142
Regulatory Framework 142
Need for Committees 143
Rational behind Board Committees 143
Committee Management 144
Selection of Committee Members 144
Appointment of the Committee Chairman 145
Mandatory Committees of the Board 146
Audit Committee 146
Constitution under Companies Act, 2013 146
Under SEBI Listing Regulations, 2015 147
Functions/Role of the Audit Committee 148
Powers of the Audit Committee 151
Number of Meetings and Quorum of the Audit Committee 151
Disclosure in Board’s Report 151
Nomination and Remuneration Committee 152
Constitution of Nomination and Remuneration Committee 152
Composition 152
Functions of the Nomination and Remuneration Committee 153
Stakeholders Relationship Committee 155
Constitution / Compostion of the Stakeholders Committee 155
Role of Stakeholders Relationship Committee 155
Corporate Social Responsibility Committee 156
Under Companies Act, 2013 156
Composition of the CSR Committee 156
Functions of the CSR Committee 157
Risk Management Committee (RMC) 157
Other Committees / Non-Mandatory Committees of the Board 158
xx
GLOSSARY OF TECHNICAL WORDS 160
LESSON ROUND UP 161
TEST YOURSELF 162

LESSON 6
CORPORATE POLICIES AND DISCLOSURES

Corporate policies – Meaning and Importance 164

Regulatory Framework 164
Policies under the Companies Act 2013 165
Policies/Codes under the SEBI (LODR), Regulations, 2015 167
Policies under other Laws and Voluntary Policies 170
Disclosure and Transparency Requirements 170
1. In Terms of Companies Act, 2013 171
2. In Terms of Various Rules Made under Companies Act, 2013 173
3. Under SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 177
4. Under SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 179
5. Under SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 180
6. Under SEBI (Prohibition of Insider Trading) Regulations, 2015 193
Code of Conduct (Regulation 9) 195
Institutional Mechanism for Prevention of Insider trading (Regulation 9A) 196
GLOSSARY 196
LESSON ROUND UP 196
TEST YOURSELF 197

LESSON 7
ACCOUNTING AND AUDIT RELATED ISSUES, RELATED PARTY TRANSACTIONS (RPTS)
AND VIGIL MECHANISM

Introduction 200
Regulatory Framework 200
Strengthening Financial Reporting Standards 201
Improving Auditors’ Effectiveness 206
Auditor’s Independence 206
Mandatory Rotation of Auditors 208

xxi
Auditing Standards 209
Internal Audit 210
Secretarial Audit 211
Constitution of National Financial Reporting Authority (NFRA) 212
Related Party Transactions 217
Identification of Related Parties 217
Identification of Related Party Transaction 219
Approval process 220
Provisions under SEBI (LODR) Regulations, 2015 222
Vigil Mechanism / Whistle Blower 224
Meaning and Definition 224
Types of Whistleblowers 225
Whistle Blowing under Sarbanes-Oxley Act, 2002 (SOX) 225
Vigil Mechanism under Companies Act, 2013 225
Vigil mechanism under SEBI Listing Obligations and Disclosure Requirements, 2015 226
GLOSSARY 228
LESSON ROUND UP 228
TEST YOURSELF 229

LESSON 8
CORPORATE GOVERNANCE AND SHAREHOLDERS RIGHTS

Introduction 232
Regulatory Framework 232
Rights of Shareholders 232
Under the Companies Act, 2013 232
Rights of shareholders under SEBI (LODR) Regulations, 2015 238
Promoter / Controlling Shareholder 238
Role and Liabilities of Promoters 241
Majority and Minority Shareholders 243
PROTECTION of rights of shareholders/investors In India 243
Investor Education & Protection Fund 244
Investor Associations 245
Protection of Rights of Minority Shareholders 245
Institutional Investors and their Role in Promoting Good Corporate Governance 250
xxii
UK Stewardship Code 252
Principles for Responsible Investment (PRI) 254
Code for Responsible Investing in South Africa (CRISA) 256
California Public Employees’ Retirement System (CalPERS) 258
Dealing with institutional investors 261
Role of Proxy Advisory Firms 262
Governance of Group Entities/ Subsidiaries 263
Corporate Governance in Family Owned Enterprises 265
Conclusion 267
GLOSSARY OF TECHNICAL WORDS 267
LESSONS ROUND UP 267
TEST YOURSELF 268

LESSON 9
CORPORATE GOVERNANCE AND OTHER STAKEHOLDERS

Introduction 270
Regulatory Framework 270
Definition and Evolution of Stakeholder Theory 271
Recognition of Stakeholder Concept In Law 273
Under the UK Corporate Governance Code, 2018 275
Under the UAE Corporate Governance Rules, 2016 277
Under the South Africa, King IV Report on Corporate Governance, 2016 281
Under the Code of Corporate Governance for Listed Companies in China 284
Under the German Corporate Governance Code, 2019 284
Under the Japan’s Corporate Governance Code, 2018 287
Stakeholder Engagement 295
Stakeholder Analysis 296
Better Stakeholder Engagement Ensures Good Governance 297
Types of Stakeholders 298
The Caux Round Table 298
Crt Stakeholder Management Guidelines 300
The Clarkson Principles Of Stakeholder Management 302
Governance Paradigm and Various Stakeholders 303
Conclusion 305
xxiii
Glossary of Technical Words 306
LESSON ROUND UP 306
REFERENCE FOR FURTHER READING 306
TEST YOURSELF 307

LESSON 10
GOVERNANCE AND COMPLIANCE RISK

Introduction 310
Regulatory Framework 311
Compliance Risk 311
Elements of Effective Compliance Program 312
Consequences/ Risks of Non-Compliance 313
Compliance Risk Management 319
Steps in Compliance Risk Management 320
Compliance Risk Mitigation 321
Essentials of a successful compliance-risk management program 324
New Developments- Governance, Risk Management and Compliance (Grc) 324
Conclusion 325
GLOSSARY OF TECHNICAL WORDS 326
LESSON ROUND UP 326
TEST YOURSELF 326

LESSON 11
CORPORATE GOVERNANCE FORUMS

Introduction 330
Regulatory Framework 330
A. Institute of Company Secretaries of India (ICSI) 330
Vision and Mission Statements 330
ICSI’s Philosophy on Corporate Governance 330
ICSI Initiatives 330
ICSI’s Approach - Solution to Critical Development Issues 332
The ICSI National Awards for Excellence in Corporate Governance 332
B. National Foundation for Corporate Governance (Nfcg) 333

xxiv
C. Organization for Economic Co-Operation and Development (Oecd) 335
D. Institute of Directors (Iod), Uk 336
E. International Corporate Governance Network (Icgn) 337
F. European Corporate Governance Institute (Ecgi) 338
G. Conference Board 339
H. Asian Corporate Governance Association (ACGA) 339
I. Corporate Secretaries International Association Limited (CSIA) 340
Conclusion 341
GLOSSARY OF TECHNICAL WORDS 342
LESSON ROUND UP 342
TEST YOURSELF 342
REFERENCE FOR FURTHER READING 343

LESSON 12
RISK MANAGEMENT

Risk 346
Classification of Risks 346
Types of Risks on the Basis of Impact on Finance 347
Risk Management 350
Advantages of Risk Management 351
Steps in Risk Management Process 351
I. Risk Identification 352
II. Risk Analysis 353
III. Risk Assessment 355
IV. Handling of risk 356
Risk Mitigation Strategy 357
Maintaining the Risk Strategy 358
Fraud Risk Management 359
Reporting of fraud under Companies Act 2013 360
Reputation Risk Management 360
Responsibility of Risk Management 361
Role of Company Secretary in Risk Management 361
Risk Governance 362
Risk management frameworks and Standards 364
xxv
1) Enterprise Risk Management – Integrated Framework (2004) 364
Case Study 366
2. ISO 31000: International Standard for Risk Management 368
Strategic Risk Management 369
Risk Management and Internal Controls 372
Risk Matrix 372
GLOSSARY OF TECHNICAL WORDS 373
LESSON ROUND UP 373
TEST YOURSELF 375

LESSON 13
INTERNAL CONTROL

Introduction 378
Regulatory Framework 378
Objectives of Internal Control 379
Nature of Internal Control 379
Classification of Internal Control 379
Elements of Internal Control 381
Components of Internal Control 382
Limitations of Internal Control 386
Considerations Specific to Smaller Entities 386
Division of Internal Control into Components 386
Techniques of Internal Control System 388
Internal Check 389
Internal Audit 391
Steps for Internal Control 393
Coso’s Internal Control Framework 393
Difference between Internal Control, Internal Check and Internal Audit 395
Components of Internal Control as defined by COSO 396
Control Testing and Evaluation 398
Efficiency of Internal Controls and its Review 398
Limitation of Internal control 398
Role and Responsibilities with Regard to Internal Control 398
Conclusion 402
xxvi
GLOSSARY OF TECHNICAL WORDS 403
LESSON ROUND UP 403
REFERENCE FOR FURTHER READING 403
SELF TEST QUESTIONS 404

LESSON 14
REPORTING

Introduction 406
Regulatory Framework 406
Financial Reporting 406
Objectives of Financial Reporting 407
Importance of Financial Reporting 407
Limitations of Financial Reporting 407
Non-Financial Reporting 408
Board’s Report 408
Corporate Social Responsibility Report 410
Corporate Sustainability Reporting 410
Benefits of sustainability reporting 411
Global Reporting Initiative - Sustainability Reporting Framework 412
Reporting Principles and Standard Disclosures 415
Sustainability Reporting Framework In India 416
National Guidelines on Responsible Business Conduct (NGRBC) 427
Challenges in Mainstreaming Sustainability Reporting 431
Towards Integrated Reporting 431
Integrated Reporting by Listed Entities in India 434
Relation between Integrated Reporting and Sustainability Reporting 435
Glossary of Technical Words 436
LESSON ROUND UP 436
TEST YOURSELF 436

LESSON 15
ETHICS AND BUSINESS

Introduction 440

xxvii
What is Ethics 440
Business Ethics 440
Context and relevance of Business Ethics in today’s business 440
Five Bottom Lines of the future 442
Importance of Business Ethics 443
Organisation Structure and Ethics 444
Four fundamental ethical principles 445
Ethical Dilemma 446
Addressing Ethical Dilemmas 446
Case studies on Ethical dilemma 446
Code of Ethics 452
Indian Ethos 454
Code of Conduct 455
Model Code Of Business Conduct & Ethics 457
Preamble 457
Applicability 457
General Moral Imperatives 457
Specific Professional Responsibilities 458
Specific Additional Provisions for Board Members and Management Committee Members 460
Compliance with the Code 461
Miscellaneous 461
Advantages of Business Ethics 461
Conclusion 462
GLOSSARY OF TECHNICAL WORDS 463
LESSON ROUND-UP 463
TEST YOURSELF 464

LESSON 16
CSR AND SUSTAINABILITY

Introduction 466
Corporate Social Responsibility (CSR) 467
Why CSR At All? 469
Factors Influencing CSR 470
Triple Bottom Line Approach of CSR 471
Corporate Citizenship – Beyond The Mandate of Law 472

xxviii
Global Principles and Guidelines 475
Corporate Sustainability 477
United Nations Global Compact’s Ten Principles, 2000 478
CSR and Sustainability in India 484
Corporate Social Responsibility Voluntary Guidelines, 2009 485
National Voluntary Guidelines on Social, Environmental and Economic Responsibilities of
Business – 2011 486
The Companies Act, 2013 492
The Companies (Corporate Social Responsibility Policy) Rules, 2014 494
SEBI (LODR) Regulations, 2015 499
National Guidelines on Responsible Business Conduct (NGRBC), 2019 499
Sustainable Development 504
1. United Nations Conference on Human Environment 506
2. United Nations Environment Programme 506
3. Brundtland Commission 508
4. United Nations Conference on Environment and Development (UNCED) 508
5. Kyoto Protocol 509
6. Bali Roadmap 511
7. United Nations Conference on Sustainable Development, Rio+20 511
8. Paris Agreement on Climate Change, 2015 512
The 2030 Agenda for Sustainable Development 512
Sustainability Indices 514
Measuring Business Sustainability 515
Altman Z-Score 515
Risk-Adjusted Return on Capital - RAROC 515
Economic Value Added (EVA) 516
Market Value Added (MVA) 517
Sustainable Value Added (SVA) 518
GLOSSARY OF TECHNICAL WORDS 519
LESSON ROUND-UP 520
TEST YOURSELF 520

LESSON 17
ANTI-CORRUPTION AND ANTI-BRIBERY LAWS IN INDIA

Introduction 524
Forceful and Regulatory Ethics 524
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Regulatory Framework 524
Bribery and Corruption - Global Scenarios 525
Brief Information on the laws and enforcement regime in India 525
(A) Delhi Special Police Establishment Act, 1946 525
(B) Unlawful Activities (Prevention) Act, 1967 527
(C) Foreign Corrupt Practices Act, 1977 (The FCPA) 529
(D) Prevention of Corruption Act, 1988 (The PCA) 530
Offence relating to Public Servant being bribed [Section 7] 532
Offence relating to bribing of a Public Servant [Section 8] 533
Offence relating to bribing a public servant by a commercial organisation [Section 9] 533
Person in charge of commercial organization to be guilty of offence [Section 10] 534
Public servant obtaining undue Advantage without consideration from person concerned in
proceeding or business transacted by such public servant [ Section 11] 534
Punishment for Abetment of Offences [ Section 12] 535
Criminal Misconduct by a Public Servant [Section 13] 535
Punishment for Habitual Offender [Section 14] 535
Punishment for Attempt [Section 15] 535
Matters to be taken into Consideration for Fixing Fine [Section 16] 535
Persons Authorised to Investigate [Section 17] 535
Enquiry or Inquiry or Investigation of Offences Relatable to Recommendations made or Decision
Taken by Public Servant in Discharge of Official Functions or Duties [Section 17A] 536
Power to Inspect Bankers’ Books [Section 18] 536
Previous Sanction Necessary for Prosecution [Section 19] 537
Presumption where Public Servant Accepts any undue Advantage [Section 20] 538
Accused Person to be a Competent Witness [Section 21] 538
The Code of Criminal Procedure, 1973 to apply Subject to Certain Modifications [Section 22] 539
Particulars in a Charge in Relation to an Offence under section 13(1)(a) – [Section 23] 539
Military, Naval and Air Force or Other Law not to be Affected [Section 25] 539
Special Judges appointed under Act 46 of 1952 to be special Judges appointed under this Act
[Section 26] 540
Appeal and Revision [Section 27] 540
Act to be in addition to any other law [Section 28] 540
Amendment of the Ordinance 38 of 1944 [Section 29] 540
(E) Central Vigilance Commission Act, 2003 540
The Central Vigilance Commission - Chapter II 541

xxx
Functions and Powers of the Central Vigilance Commission (Chapter III) 544
Expenses and Annual Report (Chapter IV) 547
Miscellaneous (Chapter V) 547
(F) Lokpal and Lokayukta Act, 2013 (LLA) 552
Powers of Lokpal (Chapter VIII) 559
Complaints against Chairperson, Members and Officials of Lokpal (Chapter X) 562
Assessment of Loss and Recovery thereof by Special Court (Chapter XI) 564
Offences and Penalties (Chapter XIV) 564
Establishment of the Lokayukta (Part III) 565
(G) ICSI Anti Bribery Code 565
GLOSSARY OF TECHNICAL WORDS 567
LESSON ROUND-UP 568
TEST YOURSELF 568

Model Test Papers 571

xxxi
xxxii
 Lesson 1
Conceptual Framework of
Corporate Governance

LESSON OUTLINE
LEARNING OBJECTIVES
– Meaning and Definitions of Corporate
Governance The objective of this study lesson is to enable the
students to understand the concept of Corporate
– Regulatory Framework Governance, to apprise about the developments
– Advantages of Corporate Governance across jurisdictions and to brief about the
historic origin, need and importance of corporate
– Need for Corporate Governance
governance.
– Elements/Scope of Corporate Governance
This lesson also describes the importance and
– Evolution of Corporate Governance the elements of Good Corporate Governance.
– Theories of Corporate Governance Besides, it also highlights the evolution of
Corporate Governance across countries including
– Concept of Management vs. India. It also discusses the corporate governance
Ownership framework and its evolution in the Indian Ethos.
– Concept of Majority vs. Minority
This lesson provides working knowledge for
– History of development of Corporate application of principles, theory and concepts of
Governance Corporate Governance. This chapter may also be
useful in performing the advisory role in practical
– Stages of Development of corporate
areas of work.
governance in USA
– Development of corporate governance
in UK
– Corporate Governance Codes in Major
Jurisdictions of the world
– OECD Principles of Corporate Governance
– Roots of Corporate Governance in Indian
Ethos
– Corporate Governance in India-
Contemporary Developments
– Glossary
– LESSON ROUND-UP
– TEST YOURSELF

“Global market forces will sort out those companies that do not have sound corporate governance.”
– Mervyn King S.C.
2 EP-GRMCE

MEANING AND DEFINITIONS OF CORPORATE GOVERNANCE

Corporate Governance is “the conduct of business in accordance with shareholders’ desires,
which generally is to make as much money as possible, while conforming to the basic rules of the
society embodied in law and local customs.”
Noble Laureate Milton Friedman
Corporate or a Corporation is derived from the Latin term “corpus” which means a “body”. Governance means
administering the processes and systems placed for satisfying stakeholder expectation. The root of the word
Governance is from ‘gubernate’, which means to steer. When combined, Corporate Governance means a set
of systems, procedures, policies, practices, standards put in place by a corporate to ensure that relationship
with various stakeholders is maintained in transparent and honest manner and business is conducted ethically.
The phrase “corporate governance” describes “the framework of rules, relationships, systems and processes
within and by which authority is exercised and controlled within corporations. It encompasses the mechanisms
by which companies, and those in control, are held to account.”
Corporate governance is the broad term used to describe the processes, customs, policies, laws and institutions
that direct the organizations and corporations in the way they act or administer and control their operations. It
works to achieve the goal of the organization and manages the relationship with the stakeholders including the
board of directors and the shareholders.
Corporate governance means to steer an organization in the desired direction by determining ways to take
effective strategic decisions. It also deals with the accountability of the individuals through a mechanism which
reduces the principal-agent problem in the organization.
Corporate Governance has a broad scope. It includes both social and institutional aspects. Corporate
Governance encourages a trustworthy, moral, as well as ethical environment. In other words, the heart of
corporate governance is transparency, disclosure, accountability and integrity. It is to be borne in mind that
mere legislation does not ensure good governance. Good governance flows from ethical business practices
even when there is no legislation.
Good corporate governance promotes investor confidence, which is crucial to the ability of entities listed on
stock exchanges to compete for capital. Good corporate governance is essential to develop additional values to
the stakeholders as it ensures transparency which ensures strong and balanced economic development. This
also ensures that the interests of all shareholders (majority as well as minority shareholders) are safeguarded.
It ensures that all shareholders fully exercise their rights and that the organization fully recognizes their rights.
Some other definitions of Corporate Governance are given hereunder for better understanding:-

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

“Corporate Governance is concerned with the way corporate entities are governed, as distinct from the way
business within those companies are managed. Corporate governance addresses the issues facing Board
of Directors, such as the interaction with top management and relationships with the owners and others
interested in the affairs of the company” - Robert Ian (Bob) Tricker (who introduced the words corporate
governance for the first time in his book in 1984)
 Lesson 1 n Conceptual Framework of Corporate Governance 3

“Corporate Governance is about promoting corporate fairness, transparency and accountability”.

James D. Wolfensohn (Ninth President World Bank)

“Corporate governance involves a set of relationships between a company’s management, its board, its
shareholders and other stakeholders. Corporate governance also provides the structure through which the
objectives of the company are set, and the means of attaining those objectives and monitoring performance
are determined.”
G20/OECD Principles of Corporate Governance

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

“Good corporate governance is about ‘intellectual honesty’ and not just sticking to rules and regulations,
capital flowed towards companies that practiced this type of good governance.”
Mervyn King (Chairman: King Report)

“Corporate governance deals with laws, procedures, practices and implicit rules that determine a company’s
ability to take informed managerial decisions vis-a-vis its claimants - in particular, its shareholders, creditors,
customers, the State and employees. There is a global consensus about the objective of ‘good’ corporate
governance: maximizing long-term shareholder value.”
Confederation of Indian Industry (CII) – Desirable Corporate Governance Code (1998)

Regulatory Framework

Sl. No. Description

1. U.K Stewardship Code 2020

2. Sarbanes-Oxley Act, 2002

3. U.K Corporate Governance Code, 2018

4. Corporate Governance Principles and Recommendations, Australia, 2019

5. Code of Corporate Governance, Singapore, 2018

6. King IV Report on Corporate Governance, South Africa, 2016

7. OECD Principles of Corporate Governance

Advantages of Corporate Governance

Before we proceed to understand the need for corporate governance, it is imperative to have a feel of its
advantages. Some of the salient advantages of Corporate Governance are stated hereunder:
4 EP-GRMCE

1. Good corporate governance ensures corporate success and economic growth.

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

NEED FOR CORPORATE GOVERNANCE

Corporate Governance is integral to the existence of the company. Corporate Governance is needed to create
a corporate culture of transparency, accountability and disclosure.

Corporate Enhanced Investor Better Access to

Performance Trust Global Market

Enhancing
Easy Finance Combating
Enterprise
from Institutions Corruption
Valuation

Reduced Risk of
Corporate Crisis Accountability
and Scandals

(a) Corporate Performance

Improved governance structures and processes ensure quality decision-making, encourage effective succession
planning for senior management and enhance the long-term prosperity of companies, independent of the type
of company and its sources of finance. This can be linked with improved corporate performance- either in terms
of share price or profitability.
 Lesson 1 n Conceptual Framework of Corporate Governance 5

(b) Enhanced Investor Trust

As individuals and institutions invest capital directly or through intermediary funds, they look to see if well-
governed corporate boards are there to protect their interests. Investors who are provided with high levels of
disclosure and transparency such as relating to data on matters such as pay governance, pay components,
performance goals, and the rationale for pay decisions etc. are likely to invest openly in those companies.
On Apple’s investor relations site, for example, the firm outlines its leadership and governance, including its
executive team, its board of directors and also the firm’s committee charters and governance documents, such
as bylaws, stock ownership guidelines etc.

(c) Better Access to Global Market

Good corporate governance systems attract investment from global investors, which subsequently leads
to greater efficiencies in the financial sector. The relation between corporate governance practices and the
increasing international character of investment is very important. International flows of capital enable companies
to access financing from a much larger pool of investors. In order to reap the full benefits of the global capital
market and attract long-term capital, corporate governance arrangements must be credible, well understood
across borders and should adhere to internationally accepted principles. On the other hand, even if corporations
do not rely primarily on foreign sources of capital, adherence to good corporate governance practices helps
improve the confidence of domestic investors, reduces the cost of capital, enables good functioning of financial
markets and ultimately leads to more stable sources of finance.

(d) Combating Corruption

Companies that are transparent, and have sound system that provide full disclosure of accounting and auditing
procedures, allow transparency in all business transactions, provide environment where corruption would
certainly fade out. Corporate Governance enables a corporation to compete more efficiently and prevent fraud
and malpractices within the organization.

(e) Easy Finance from Institutions

Several structural changes like increased role of financial intermediaries and institutional investors, size of the
enterprises, investment choices available to investors, increased competition, and increased risk exposure have
made monitoring the use of capital more complex thereby increasing the need of Good Corporate Governance.
Evidences indicate that well-governed companies receive higher market valuations. The credit worthiness of a
company can be trusted on the basis of corporate governance practiced in the company.

(f) Enhancing Enterprise Valuation

Improved management accountability and operational transparency fulfill investors’ expectations and confidence
on management and corporations, and in return, increase the value of corporations.

(g) Reduced Risk of Corporate Crisis and Scandals

Effective Corporate Governance ensures efficient risk mitigation system in place. A transparent and accountable
system makes the Board of a company aware of the majority of the mask risks involved in a particular strategy,
thereby, placing various control systems in place to facilitate the monitoring of the related issues.

(h) Accountability
Investor relations are essential part of good corporate governance. Investors directly/ indirectly entrust
management of the company to create enhanced value for their investment. The company is hence obliged to
make timely disclosures on regular basis to all its shareholders in order to maintain good investor relation. Good
Corporate Governance practices create the environment whereby Boards cannot ignore their accountability to
6 EP-GRMCE

these stakeholders.

ELEMENTS / SCOPE OF GOOD CORPORATE GOVERNANCE

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

1. Role and powers of Board

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

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

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

4. Board skills
To be able to undertake its functions efficiently and effectively, the Board must possess the necessary blend
of qualities, skills, knowledge and experience. Each of the directors should make quality contribution to the
organizations policies, operations and management. Illustratively, a Board should have a mix of the following
skills, knowledge and experience:
– Operational or technical expertise, commitment to establish leadership;
– Financial skills;
– Legal skills; and
– Knowledge of Government and regulatory requirement.

5. Board appointments
To ensure that the most competent people are appointed on the Board, the Board positions should be filled only
 Lesson 1 n Conceptual Framework of Corporate Governance 7

after making an extensive search. A well-defined and open procedure must be in place for re-appointments as
well as for appointment of new directors. Appointment mechanism should satisfy all statutory and administrative
requirements. High on the priority should be an understanding of skill requirements of the Board particularly
at the time of making a choice for appointing a new director. All new directors should be provided with a letter
of appointment setting out in detail their duties and responsibilities. Orientation program for new directors
should also be provided to apprise them about the company, its internal and external management and the
expectations from the directors and the Board.
The role of the board of directors was summarized by the King Report (a South African report on corporate
governance) as:
• to define the purpose of the company,
• to define the values by which the company will perform its daily duties,
• to identify the stakeholders relevant to the company,
• to develop a strategy combining these factors,
• to ensure implementation of this strategy.

6. Board induction and training

Directors must have a broad understanding of the area of operation of the company’s business, corporate
strategy and challenges being faced by the Board. Attendance at continuing education and professional
development programmes is essential to ensure that directors remain abreast of all developments, which are
or may impact their corporate governance and other related duties.

7. Board independence
Independent Board is essential for sound corporate governance. This goal may be achieved by associating
sufficient number of independent directors with the Board. Independence of directors would ensure that there
are no actual or perceived conflicts of interest. It also ensures that the Board is effective in supervising and,
where necessary, challenging the activities of management. The Board needs to be capable of assessing the
performance of managers with an objective perspective. Accordingly, a portion of the Board members should be
independent of both the management team and any commercial dealings with the company. At the same time
a proper balance between independent and non-independent directors is also very important.

8. Board meetings
Directors must devote sufficient time and give due attention to meet their obligations. Attending Board meetings
regularly and preparing thoroughly before entering the Boardroom increases the quality of interaction at Board
meetings. Board meetings are the forums for Board decision-making. These meetings enable directors to
discharge their responsibilities. The effectiveness of Board meetings is dependent on carefully planned agendas
and providing relevant papers and material to directors sufficiently prior to Board meetings.

9. Code of conduct
It is essential that the organization’s explicitly prescribed norms of ethical practices and code of conduct are
communicated to all concerned and are clearly understood and followed by each member of the organization.
Systems should be in place to periodically measure, evaluate and if possible recognize the adherence to code
of conduct.

10. Strategy setting

The objectives of the company must be clearly documented in a long-term corporate strategy including an
8 EP-GRMCE

annual business plan together with achievable and measurable performance targets and milestones.

11. Business and community obligations

Though basic activity of a business entity is inherently commercial yet it must also take care of community’s
obligations. Commercial objectives and community service obligations should be clearly documented after
approval by the Board. The stakeholders must be informed about the proposed and ongoing initiatives taken
to meet the community obligations. Corporate Social Responsibility is rapidly becoming an integral part of the
management’s role and responsibility.

12. Financial and operational reporting

The Board requires comprehensive, regular, reliable, timely, correct and relevant information in a form and of
a quality that is appropriate to discharge its function of monitoring corporate performance. For this purpose,
clearly defined performance measures - financial and non-financial should be prescribed which would add to
the efficiency and effectiveness of the organization.
The reports and information provided by the management must be comprehensive but not so extensive and
detailed as to hamper comprehension of the key issues. The reports should be available to Board members
well in advance to allow informed decision-making. Reporting should include status report about the state of
implementation to facilitate the monitoring of the progress of all significant Board approved initiatives.

13. Monitoring the Board performance

The Board must monitor and evaluate its combined performance and also that of individual directors at periodic
intervals, using key performance indicators besides peer review. The Board should establish an appropriate
mechanism for reporting the results of Board’s performance evaluation. Companies Act, 2013 mandates Board
evaluation of specified classes of Companies.

14. Audit Committee

The Audit Committee is inter alia responsible for liaison with the management; internal and statutory auditors,
reviewing the adequacy of internal control and compliance with significant policies and procedures, reporting to
the Board on the key issues. The quality of Audit Committee significantly contributes to the governance of the
company.

15. Risk management

Risk is an important element of corporate functioning and governance. There should be a clearly established
process of identifying, analyzing and treating risks, which could prevent the company from effectively achieving
its objectives. It also involves establishing a link between risk-return and resourcing priorities. Appropriate
control procedures in the form of a risk management plan must be put in place to manage risk throughout the
organization. The plan should cover activities as diverse as review of operating performance, effective use of
information technology, contracting out and outsourcing.

EVOLUTION OF CORPORATE GOVERNANCE

The following theories elucidate the basis of evolution of corporate governance:
(a) Agency Theory
(b) Shareholder Theory
(c) Stakeholder Theory
(d) Stewardship Theory
 Lesson 1 n Conceptual Framework of Corporate Governance 9

(a) Agency Theory

According to this theory, managers act as ‘Agents’ of the corporation. The owners set the central objectives of
the corporation. Managers are responsible for carrying out these objectives in day-to-day work of the company.
Corporate Governance is control of management through designing the structures and processes.
In agency theory, the owners are the principals. But principals may not have knowledge or skill for getting the
objectives executed. Thus, principal authorizes the mangers to act as ‘Agents’ and a contract between principal
and agent is made. Under the contract of agency, the agent should act in good faith. He should protect the
interest of the principal and should remain faithful to the goals.
In modern corporations, the shareholding is widely spread. The management (the agent) directly or indirectly
selected by the shareholders (the Principals), pursue the objectives set out by the shareholders. The main thrust
of the Agency Theory is that the actions of the management differ from those required by the shareholders to
maximize their return.
The principals who are widely scattered may not be able to counter this in the absence of proper systems
in place as regards timely disclosures, monitoring and oversight. Corporate Governance puts in place such
systems of oversight.

(b) Shareholder Theory

According to this theory, it is the corporation which is considered as the property of shareholders. They can
dispose off this property as they like. They want to get maximum return from this property.
The owners seek a return on their investment and that is why they invest in a corporation. But this narrow
role has been expanded into overseeing the operations of the corporations and its mangers to ensure that
the corporation is in compliance with ethical and legal standards set by the government. So the directors are
responsible for any damage or harm done to their property i.e., the corporation. The role of managers is to
maximise the wealth of the shareholders. They, therefore should exercise due diligence, care and avoid conflict
of interest and should not violate the confidence reposed in them. The agents must be faithful to shareholders.

(c) Stakeholder Theory

According to this theory, the company is seen as an input-output model and all the interest groups which include
creditors, employees, customers, suppliers, local-community and the government are to be considered. From
their point of view, a corporation exists for them and not the shareholders alone.
Different stakeholders have different self-interest. The interests of these different stakeholders are at times
conflicting. The managers and the corporation are responsible to mediate between these different stakeholders
interest. The stake holders have solidarity with each other. This theory assumes that stakeholders are capable
and willing to negotiate and bargain with one another. This results in long term self interest.
The role of shareholders is reduced in the corporation. But they should also work to make their interest
compatible with the other stake holders. This requires integrity and managers play an important role here. They
are faithful agents but of all stakeholders, not just stockholders.

(d) Stewardship Theory

The word ‘steward’ means a person who manages another’s property or estate. Here, the word is used in the
sense of guardian in relation to a corporation (this theory is value based). The managers and employees are to
safeguard the resources of corporation and its property and interest when the owner is absent. They are like a
caretaker. They have to take utmost care of the corporation. They should not use the property for their selfish
ends. This theory thus makes use of the social approach to human nature.
10 EP-GRMCE

The managers should manage the corporation as if it is their own corporation. They are not agents as such
but occupy a position of stewards. The managers are motivated by the principal’s objective and the behavior
pattern is collective, pro-organizational and trustworthy. Thus, under this theory, first of all values as standards
are identified and formulated. Second step is to develop training programmes that help to achieve excellence.
Thirdly, moral support is important to fill any gaps in values.

CONCEPT OF MANAGEMENT VS. OWNERSHIP

The shareholders vest control of the business in the board of directors, who employ specialist management to
run the business and return the profits of the business back to the shareholders.
Company law’s central dilemma has been the separation of ownership and control in companies. On one side
are shareholders, the ostensible owners; on the other side are corporate officers, the shareholders’ ostensible
fiduciaries. Between them is the board of directors.
Theoretically, shareholders own the company and hence the company ought to work according to the dictates
of the shareholders. However, it is not practically possible for each shareholder to participate in the decision-
making process on a day-to-day basis. Further shareholders generally cannot know and manage the full details
of a corporation’s business (nor do many wish to), they elect a board of directors to make broad corporate policy.
Companies allow for the separation of ownership and management. That means that owners don’t need to be
managers and managers don’t need to be owners. In most small corporations, the owners typically manage the
company but it is not necessary that owners run the company or are even involved in the day-to- day operations
of the company.
Management and owners may have different views on various issues in the company. Managers fear risk more
than shareholders do because managers cannot diversify their investment of human capital as shareholders
can diversify their investments of money. Managers, therefore, pursue growth rather than maximum share
value. Whereas, shareholders prefer high leverage because it increases share values.

CONCEPT OF MAJORITY RULE VS. MINORITY INTEREST

As a company is an artificial person with no human existence, it functions through the instrumentality of the
board of directors who is guided by the wishes of the majority, subject, of course, to the welfare of the company
as a whole. It is, therefore, a cardinal rule of company law that prima facie a majority of members of the
company are entitled to exercise the powers of the company and generally to control its affairs.
The rule of majority was established way back in 1843 in the case of Foss v. Harbottle [1843] 67 ER 189
wherein it was held that the Courts would not generally interfere with the decisions of the company which it
was empowered to take insofar they had been approved of by the majority and made exceptions to breaches
of charter documents, fiduciary duties and frauds or oppression and inadequate notice to the shareholders of
USA.

HISTORY OF DEVELOPMENT OF CORPORATE GOVERNANCE

After World War II, the United States of America (USA) experienced strong economic growth, which had a strong
impact on the history of corporate governance. Corporations were thriving and growing rapidly. In the 1970s,
the Securities and Exchange Commission (SEC) brought the issue of corporate governance to the forefront
when they took a stance on official corporate governance reforms. In 1976, the term “corporate governance”
first appeared in the Federal Register, the official journal of the federal government.
 Lesson 1 n Conceptual Framework of Corporate Governance 11

Stages of development of Corporate Governance in USA

Years Developments

1977 Provided for specific provisions regarding establishment,

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

1979 Prescribed mandatory reporting on internal financial controls.

US Securities Exchange Commission

1985 Emphasized the need of putting in place a proper control

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

1992 The Committee of Sponsoring Organizations of the Treadway

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

2002 The Act made fundamental changes in virtually every aspect

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

The Dodd-Frank Wall Street Reform and The Dodd-Frank Act is legislation signed into law by President
Consumer Protection Act, 2010 Barack Obama in 2010 in response to the financial crisis that
became known as the Great Recession. Dodd-Frank put
regulations on the financial industry and created programs to
stop mortgage companies and lenders from taking advantage of
consumers.
The Dodd-Frank Act is a comprehensive and complex legislation
that contains 16 major areas of reform. The law places strict
regulations on lenders and banks in an effort to protect consumers
and prevent another all-out economic recession. Dodd-Frank
also created several new agencies to oversee the regulatory
process and implement certain changes.
Some of the main provisions found in the Dodd-Frank Act include:
l Banks are required to come up with plans for a quick
shutdown if they approach bankruptcy or run out of
money.
l Financial institutions must increase the amount of
money they hold in reserve to account for potential future
slumps.
12 EP-GRMCE

l Every bank with more than $50 billion of assets must take
an annual “stress test,” given by the Federal Reserve,
which can help determine if the institution could survive
a financial crisis.
l The Financial Stability Oversight Council (FSOC)
identifies risks that affect the financial industry and keeps
large banks in check.
l The Consumer Financial Protection Bureau (CFPB)
protects consumers from the corrupt business
practices of banks. This agency works with bank
regulators to stop risky lending and other practices
that could hurt American consumers. It also oversees
credit and debit agencies as well as certain payday
and consumer loans.
l The Office of Credit Ratings ensures that agencies
provide reliable credit ratings to those they evaluate.
l A whistle-blowing provision in the law encourages
anyone with information about violations to report it to
the government for a financial reward.

Development of Corporate Governance in Union Kingdom (UK)

1992 The Committee on the Financial Aspects of Corporate Governance under

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

1995 The Confederation of British Industry constituted a group under the

chairmanship of Sir Richard Greenbury to make recommendations on
Greenbury Report
Directors’ Remuneration. The group submitted its report in 1995, its major
findings were as under:
l Constitution of a Remuneration Committee comprising of Non
Executive Directors
 Lesson 1 n Conceptual Framework of Corporate Governance 13

l Responsibility of this committee in determining the remuneration of

CEO and executive directors
l Responsibility of the committee in determining the remuneration
policy.
l Level of disclosure to shareholders regarding the remuneration of
directors’.
l Remuneration should be linked more explicitly to performance.
These findings were incorporated in Code of Best Practice on Directors’
Remuneration of the Report. The majority of the recommendations were
incorporated in Listing Rules of London Stock Exchange.

1998 The Hampel Committee was established in November, 1995 to review

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

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

1999 The Turnbull Committee was established to provide direction on the internal
control requirements of the Combined Code, including how to carry out
Turnbull Report
risk management. The report informs directors of their obligations under
the Combined Code with regard to keeping good “internal controls” in
their companies, or having good audits and checks to ensure the quality
of financial reporting and catch any fraud before it becomes a problem.
Turnbull Committee published “Internal Control Guidance for Directors on
Combined Code”.

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

2001, was commissioned by the Government, ‘to consider whether there
Myners : Review of Institutional
were factors distorting the investment decision-making of institutions.’ The
Investment
analysis contained in the Report pointed to a number of problems with the
existing structures used by the various types of institutional investors to make
investment decisions.
14 EP-GRMCE

2003 Sir Derek Higgs was commissioned by the UK Government to review the
roles of independent directors and of audit committees. The resulting Report
Higgs Report
proposed that:
l at least half of a board (excluding the Chair) be comprised of non-
executive directors;
l that the non-executives should meet at least once a year in isolation
to discuss company performance;
l that a senior independent director be nominated and made available
for shareholders to express any concerns to; and
l that potential non-executive directors should satisfy themselves that
they possess
the knowledge, experience, skills and time to carry out their duties with due
diligence.

2003 The Financial Reporting Council published the Smith Report, “Guidance on
Audit Committees”.
The Tyson Report on the recruitment and development of non-executive
directors commissioned by the Department of Trade and Industry.

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

2011 The Financial Reporting Council announced the launch of an enquiry led by
Lord Sharman to identify lessons for companies and auditors addressing
Sharman Inquiry
going concern and liquidity risk.
 Lesson 1 n Conceptual Framework of Corporate Governance 15

2010 - 2012 The UK Stewardship Code traces its origins to ‘The Responsibilities of
Institutional Shareholders and Agents: Statement of Principles,’ first published
Stewardship Code
in 2002 by the Institutional Shareholders Committee (ISC), and was converted
to a code in 2009.
The Stewardship Code aims to enhance the quality of engagement between
institutional investors and companies to help improve long-term returns
to shareholders and the efficient exercise of governance responsibilities.
Engagement includes pursuing purposeful dialogue on strategy, performance
and the management of risk, as well as on issues that are the immediate subject
of votes at general meetings. The Code is addressed in the first instance to
firms who manage assets on behalf of institutional shareholders such as
pension funds, insurance companies, investment trusts and other collective
investment vehicles.

2003 - 2016 l Recommendations of Higgs Report, Smith Report & Tyson Report
relating to role and effectiveness of non-executive directors, audit
Revision of Combined Code
committee and recruitment & development of non-executive directors,
on Corporate Governance
provided recommendations for the revised combined code in 2003.
l The Code was further revised in 2006 after following two consultation
exercises.
l Changes reflecting new European Union (EU) requirements relating
to Audit Committees and corporate governance statements catered
through the revision in 2008.
l In 2010, the Code was further revised for changes included a revised
format to give clearer advice on board composition; that all FTSE 350
directors be put forward for re-election every year; and improved risk
management reporting provisions.

l The changes in the revised Code of 2012 included better reporting by

Audit Committees; confirmation by Boards that the annual report and
accounts taken as whole are fair, balanced and understandable; and
that companies explain and report on progress with their policies on
boardroom diversity.
l The changes in 2014 to the Corporate Governance Code were
designed to strengthen the focus of companies and investors on the
longer term and the sustainability of value creation.
l The revised Code (2016) is also based on the Comply - or – explain
approach and has set standards of good practice in relation to board
leadership and effectiveness, remuneration, accountability and
relations with shareholders. Listed companies are required to report
on how they have applied the main principles of the Code, and either
to confirm that they have complied with the Code's provisions or -
where they have not - to provide an explanation.
16 EP-GRMCE

2018 – 2018 UK Corporate In November 2016 the Department for Business, Energy and Industrial
Governance Code Strategy (BEIS) published a Green Paper on corporate governance reforms
which focused on executive pay and strengthening the voice of employees
and other stakeholders in the boardroom. Consequently, FRC made an
announcement in February 2017 to take account of the issues raised in
the BEIS Green Paper by undertaking a fundamental review of UK Code of
Corporate Governance.
On 29 August 2017 the Government identified a number of proposals that it
intended to take forward, including inviting the FRC to initiate a consultation
with the aim of revising the UK Corporate Governance Code in a number
of key areas. On 5 December, 2017 the FRC published for consultation
proposed revisions to the UK Corporate Governance Code and Guide on
Board Effectiveness.
The Financial Reporting Council (FRC) published its new 2018 UK Corporate
Governance Code (2018 Code) on July 16, 2018, together with revised
Guidance on Board Effectiveness (Guidance) which supplements the 2018
Code by suggesting good practice to assist companies in applying the 2018
Code’s Principles and reporting on that application.
The 2018 Code sets higher standards of corporate governance in the UK so
as to promote transparency and integrity in business and, at the same time,
attract investment in the UK in the long-term, benefiting the economy and
wider society.
The 2018 Code emphasizes the importance of positive relationships between
companies, shareholders and stakeholders, a clear purpose and strategy
aligned with healthy corporate culture, high quality board composition and
a focus on diversity, and remuneration which is proportionate and supports
long-term success.

2020 – New 2020 UK Stewardship is the responsible allocation, management and oversight of
Stewardship Code capital to create long-term value for clients and beneficiaries leading to
sustainable benefits for the economy, the environment and society.
The UK Stewardship Code 2020 is a substantial and ambitious revision to
the 2012 edition of the Code which took effect from 1 January 2020.The UK
Stewardship Code 2020 (the Code) sets high stewardship standards for asset
owners and asset managers, and for service providers that support them. The
Code comprises a set of ‘apply and explain’ Principles for asset managers
and asset owners, and a separate set of Principles for service providers. The
Code does not prescribe a single approach to effective stewardship. Instead,
it allows organisations to meet the expectations in a manner that is aligned
with their own business model and strategy.
The Code consists of 12 Principles for asset managers and asset owners,
and six Principles for service providers.
The code has specified the following principles for asset owners and asset
managers:
 Lesson 1 n Conceptual Framework of Corporate Governance 17

Purpose and Governance:

Principle 1
Signatories’ purpose, investment beliefs, strategy, and culture enable
stewardship that creates long-term value for clients and beneficiaries leading
to sustainable benefits for the economy, the environment and society.
Principle 2
Signatories’ governance, resources and incentives support stewardship.
Principle 3
Signatories manage conflicts of interest to put the best interests of clients and
beneficiaries first.
Principle 4
Signatories identify and respond to market-wide and systemic risks to promote
a well-functioning financial system.
Principle 5
Signatories review their policies, assure their processes and assess the
effectiveness of their activities.
Investment Approach:
Principle 6
Signatories take account of client and beneficiary needs and communicate
the activities and outcomes of their stewardship and investment to them.
Principle 7
Signatories systematically integrate stewardship and investment, including
material environmental, social and governance issues, and climate change,
to fulfil their responsibilities.
Principle 8
Signatories monitor and hold to account managers and/or service providers.
Engagement:
Principle 9
Signatories engage with issuers to maintain or enhance the value of assets.
Principle 10
Signatories, where necessary, participate in collaborative engagement to
influence issuers.
Principle 11
Signatories, where necessary, escalate stewardship activities to influence
issuers.
18 EP-GRMCE

Exercising Rights and Responsibilities:

Principle 12
Signatories actively exercise their rights and responsibilities.
PRINCIPLES FOR SERVICE PROVIDERS
Principle 1
Signatories’ purpose, strategy and culture enable them to promote effective
stewardship.
Principle 2
Signatories’ governance, workforce, resources and incentives enable them to
promote effective stewardship.
Principle 3
Signatories identify and manage conflicts of interest and put the best interests
of clients first.
Principle 4
Signatories identify and respond to market-wide and systemic risks to promote
a well-functioning financial system.
Principle 5
Signatories support clients’ integration of stewardship and investment, taking
into account, material environmental, social and governance issues, and
communicating what activities they have undertaken.
Principle 6
Signatories review their policies and assure their processes.

CORPORATE GOVERNANCE CODES IN MAJOR JURISDICTIONS ACROSS THE WORLD

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

Corporate Governance Framework in USA

The companies in U.S are governed by a variety of legal regimes relating to corporate governance matters.
These consist of state laws and federal statutory rules and regulations of various government agencies including
rules promulgated by U.S. Securities and Exchange Commission (the SEC) and self regulatory organizations
such as stock exchanges that impose requirements on companies whose securities are listed on such stock
exchanges.
 Lesson 1 n Conceptual Framework of Corporate Governance 19

The primary sources of federal rules and regulations include the Securities Act of 1933 and the Securities
Exchange Act of 1934 and the regulations framed under those Acts.

Other regulations imposing disclosure and compliance requirements include the Sarbanes Oxley Act of 2002
and the Dodd-Frank Wall Street reform and Consumer Protection Act of 2010.

Also, major stock exchanges like NYSE and NASDAQ provides for the rules pertaining to corporate governance
matters which companies must comply as a condition to being listed on the stock exchange.

U.S. Securities and Exchange Commission: The aim of U.S. Securities and Exchange Commission is to
protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation. The SEC oversees
the key participants in the securities world, including securities exchanges, securities brokers and dealers,
investment advisors, and mutual funds. The SEC is concerned primarily with promoting the disclosure of
important market-related information, maintaining fair dealing, and protecting against fraud.

The laws and rules that govern the securities industry in the United States derive from a simple and straightforward
concept: all investors, whether large institutions or private individuals, should have access to certain basic facts
about an investment prior to buying it, and so long as they hold it. To achieve this, the SEC requires public
companies to disclose meaningful financial and other information to the public. This provides a common pool of
knowledge for all investors to use to judge for themselves whether to buy, sell, or hold a particular security. Only
through the steady flow of timely, comprehensive, and accurate information can people make sound investment
decisions.

The SEC is the primary overseer and regulator of the U.S. securities markets. It works closely with many other
institutions, including Congress, other federal departments and agencies, the self-regulatory organizations (e.g.
the stock exchanges), state securities regulators, and various private sector organizations. In addition, the
Chairman of the SEC represents the agency as a member of the Financial Stability Oversight Council (FSOC).

Sarbanes-Oxley Act of 2002

In 2002, the United States Congress passed the Sarbanes-Oxley Act (SOX) to protect shareholders and the
general public from accounting errors and fraudulent practices in enterprises, and to improve the accuracy
of corporate disclosures. Congressmen Paul Sarbanes and Michael Oxley drafted the act with the goal of
improving corporate governance and accountability, in light of the financial scandals that occurred at Enron,
WorldCom, and Tyco, among others.

The act sets deadlines for compliance and publishes rules on requirements. The Act mandated a number
of reforms to enhance corporate responsibility, enhance financial disclosures and combat corporate and
accounting fraud, and also created the “Public Company Accounting Oversight Board,” also known as the
PCAOB, to oversee the activities of the auditing profession. The Act became effective since 2006 for all publicly-
traded companies which are required to implement and report to the SEC for compliance. In addition, certain
provisions of Sarbanes-Oxley also apply to privately-held companies.

The summary highlights of the most important Sarbanes-Oxley sections for compliance are listed below.
20 EP-GRMCE

SOX Section 302 a) CEO and CFO must review all financial reports.
Corporate Responsibility for b) Financial report does not contain any misrepresentations.
Financial Reports
c) Information in the financial report is “fairly presented”.
d) CEO and CFO are responsible for the internal accounting
controls.
e) CEO and CFO must report any deficiencies in internal
accounting controls, or any fraud involving the management of
the audit committee.
f) CEO and CFO must indicate any material changes in internal
accounting controls.

SOX Section 401 All financial statements and their requirement to be accurate and
presented in a manner that does not contain incorrect statements or
Disclosures in Periodic Reports
admit to state material information. Such financial statements should
also include all material off-balance sheet liabilities, obligations, and
transactions.

SOX Section 404 All annual financial reports must include an Internal Control Report
stating that management is responsible for an “adequate” internal control
Management Assessment of
structure, and an assessment by management of the effectiveness
Internal Controls
of the control structure. Any shortcomings in these controls must also
be reported. In addition, registered external auditors must attest to
the accuracy of the company management’s assertion that internal
accounting controls are in place, operational and effective.

SOX Section 409 Companies are required to disclose on a almost real-time basis
information concerning material changes in its financial condition or
Real Time Issuer Disclosures
operations.

SOX Section 802 This section specifies the penalties for knowingly altering documents in
an ongoing legal investigation, audit, or bankruptcy proceeding.
Criminal Penalties for Altering
Documents

SOX Section 806 This section deals with whistleblower protection.

Protection for Employees of
Publicly Traded Companies
Who Provide Evidence of Fraud

SOX Section 902 It is a crime for any person to corruptly alter, destroy, mutilate, or conceal
any document with the intent to impair the object’s integrity or availability
Attempts & Conspiracies to
for use in an official proceeding.
Commit Fraud Offenses

SOX Section 906 Section 906 addresses criminal penalties for certifying a misleading or
fraudulent financial report. Under SOX 906, penalties can be upwards of
Corporate Responsibility for
$5 million in fines and 20 years in prison.
Financial Reports
 Lesson 1 n Conceptual Framework of Corporate Governance 21

UK Corporate Governance Code, 2018

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

Heading Principles

BOARD LEADERSHIP A. A successful company is led by an effective and entrepreneurial board,

AND COMPANY whose role is to promote the long-term sustainable success of the
PURPOSE company, generating value for shareholders and contributing to wider
society.
B. The board should establish the company’s purpose, values and strategy,
and satisfy itself that these and its culture are aligned. All directors must
act with integrity, lead by example and promote the desired culture.
C. The board should ensure that the necessary resources are in place for the
company to meet its objectives and measure performance against them.
The board should also establish a framework of prudent and effective
controls, which enable risk to be assessed and managed.

D. In order for the company to meet its responsibilities to shareholders and

stakeholders, the board should ensure effective engagement with, and
encourage participation from, these parties.

E. The board should ensure that workforce policies and practices are
consistent with the company’s values and support its long-term sustainable
success. The workforce should be able to raise any matters of concern.
22 EP-GRMCE

DIVISION OF F. The chair leads the board and is responsible for its overall effectiveness
RESPONSIBILITIES in directing the company. They should demonstrate objective judgement
throughout their tenure and promote a culture of openness and debate. In
addition, the chair facilitates constructive board relations and the effective
contribution of all non-executive directors, and ensures that directors
receive accurate, timely and clear information.

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

non-executive (and, in particular, independent non-executive) directors,
such that no one individual or small group of individuals dominates
the board’s decision-making. There should be a clear division of
responsibilities between the leadership of the board and the executive
leadership of the company’s business.

H. Non-executive directors should have sufficient time to meet their board

responsibilities. They should provide constructive challenge, strategic
guidance, offer specialist advice and hold management to account.

I. The board, supported by the company secretary, should ensure that it

has the policies, processes, information, time and resources it needs in
order to function effectively and efficiently.

COMPOSITION, J. Appointments to the board should be subject to a formal, rigorous and

SUCCESSION AND transparent procedure, and an effective succession plan should be
EVALUATION maintained for board and senior management.4 Both appointments and
succession plans should be based on merit and objective criteria5 and,
within this context, should promote diversity of gender, social and ethnic
backgrounds, cognitive and personal strengths.

K. The board and its committees should have a combination of skills,

experience and knowledge. Consideration should be given to the
length of service of the board as a whole and membership regularly
refreshed.

L. Annual evaluation of the board should consider its composition, diversity

and how effectively members work together to achieve objectives.
Individual evaluation should demonstrate whether each director continues
to contribute effectively.
 Lesson 1 n Conceptual Framework of Corporate Governance 23

AUDIT, RISK AND M. The board should establish formal and transparent policies and
INTERNAL CONTROL procedures to ensure the independence and effectiveness of internal and
external audit functions and satisfy itself on the integrity of financial and
narrative statements.
N. The board should present a fair, balanced and understandable assessment
of the company’s position and prospects.
O. The board should establish procedures to manage risk, oversee the
internal control framework, and determine the nature and extent of the
principal risks the company is willing to take in order to achieve its long-
term strategic objectives.

REMUNERATION P. Remuneration policies and practices should be designed to support

strategy and promote long-term sustainable success. Executive
remuneration should be aligned to company purpose and values, and
be clearly linked to the successful delivery of the company’s long-term
strategy.
Q. A formal and transparent procedure for developing policy on executive
remuneration and determining director and senior management10
remuneration should be established. No director should be involved in
deciding their own remuneration outcome.
R. Directors should exercise independent judgement and discretion when
authorising remuneration outcomes, taking account of company and
individual performance, and wider circumstances.

Corporate Governance Principles and Recommendations, Australia - 2019

The ASX Corporate Governance Council (“Council”), convened in August 2002 is the organisation which brings
together various business, shareholder and industry groups, each offering valuable insights and expertise
on governance issues from the perspective of their particular stakeholders. Its primary work has been the
development of the Principles and Recommendations.
The Corporate Governance Principles and Recommendations (“Principles and Recommendations”) were first
introduced in 2003. A second edition was published in 2007 and a third in 2014. In 2017, the Council agreed
that it was an appropriate time to commence work on a fourth edition of the Principles and Recommendations
to address emerging issues around culture, values and trust, fuelled by recent examples of conduct by some
listed entities falling short of community standards and expectations.
The fourth edition comes into force for financial years commencing on or after 1 January 2020.
These Principles and Recommendations set out recommended corporate governance practices for entities
admitted to the ASX official list as an ASX listing, regardless of the legal form they take, whether they are
established in Australia or elsewhere, and whether they are internally or externally managed. The Principles
and Recommendations are not mandatory and do not seek to prescribe the corporate governance practices
that a listed entity must adopt.
The “if not, why not” approach is fundamental to the operation of the Principles and Recommendations. This
approach ensures that the market receives an appropriate level of information about the entity’s governance
arrangements so that investors and other stakeholders can have a meaningful dialogue with the board and
management on governance matters and can factor the information provided into their decision on whether or
not to invest in the entity and how to vote on particular resolutions.
24 EP-GRMCE

The Principles and Recommendations are structured around, and seek to promote, 8 central principles. There
are 35 specific recommendations of general application intended to give effect to these principles, as well as 3
additional recommendations that only apply in certain limited cases.

8 Central Principles
1. Lay solid foundations for management and oversight: A listed entity should clearly delineate
the respective roles and responsibilities of its board and management and regularly review their
performance.
2. Structure the board to be effective and add value: The board of a listed entity should be of an
appropriate size and collectively have the skills, commitment and knowledge of the entity and the
industry in which it operates, to enable it to discharge its duties effectively and to add value.
3. Instill a culture of acting lawfully, ethically and responsibly: A listed entity should instill and
continually reinforce a culture across the organisation of acting lawfully, ethically and responsibly.
4. Safeguard the integrity of corporate reports: A listed entity should have appropriate processes to
verify the integrity of its corporate reports.
5. Make timely and balanced disclosure: A listed entity should make timely and balanced disclosure of
all matters concerning it that a reasonable person would expect to have a material effect on the price
or value of its securities.
6. Respect the rights of security holders: A listed entity should provide its security holders with
appropriate information and facilities to allow them to exercise their rights as security holders effectively.
7. Recognise and manage risk: A listed entity should establish a sound risk management framework and
periodically review the effectiveness of that framework.
8. Remunerate fairly and responsibly: A listed entity should pay director remuneration sufficient to
attract and retain high quality directors and design its executive remuneration to attract, retain and
motivate high quality senior executives and to align their interests with the creation of value for security
holders and with the entity’s values and risk appetite.

Code of Corporate Governance, Singapore - 2018

The Code of Corporate Governance (the “Code”), which is applicable to listed companies in Singapore on a
comply-or-explain basis, first came into effect on 1 January 2003.
On August 6, 2018, the Monetary Authority of Singapore (“MAS”) announced the adoption of a new Code of
Corporate Governance (the “2018 Code”) along with the new Practice Guidance. The new Code comes after
MAS conducted a public consultation on changes to Singaporean corporate governance practices. The 2018
Code supersedes and replaces the Code that was issued in May 2012.
The Code has initially taken effect for companies with a financial year beginning January 1, 2019, concurrent
with changes to Singapore Exchange Limited (“SGX”) Listing Rules, however some of the changes will not be
phased in until 2022.
The Code aims to promote high levels of corporate governance in Singapore by putting forth Principles of good
corporate governance and Provisions with which companies are expected to comply. The Practice Guidance
complements the Code by providing guidance on the application of the Principles and Provisions and setting
out best practices for companies. Adoption of the Practice Guidance is voluntary.
This version of the Code, has at its core broad Principles of corporate governance. Compliance with, and
observation of, these Principles is mandatory. These Principles set out broadly accepted characteristics of good
 Lesson 1 n Conceptual Framework of Corporate Governance 25

corporate governance. Companies are required to describe their corporate governance practices with reference
to both the Principles and Provisions, and how the company’s practices conform to the Principles.
The emphasis of the Code is for companies to provide thoughtful and meaningful explanations around their
practices, and for investors to carefully consider these discussions as part of their engagements with companies.
Frank and informed dialogue between companies and their shareholders is a central tenet of good corporate
governance, and encourages more active stewardship. Better engagement between these parties will benefit
the company and investors.

Principles
1. The company is headed by an effective Board which is collectively responsible and works with
Management for the long-term success of the company.
2. The Board has an appropriate level of independence and diversity of thought and background in its
composition to enable it to make decisions in the best interests of the company.
3. There is a clear division of responsibilities between the leadership of the Board and Management, and
no one individual has unfettered powers of decision-making.
4. The Board has a formal and transparent process for the appointment and reappointment of directors,
taking into account the need for progressive renewal of the Board.
5. The Board undertakes a formal annual assessment of its effectiveness as a whole, and that of each of
its board committees and individual directors.
6. The Board has a formal and transparent procedure for developing policies on director and executive
remuneration, and for fixing the remuneration packages of individual directors and key management
personnel. No director is involved in deciding his or her own remuneration.
7. The level and structure of remuneration of the Board and key management personnel are appropriate
and proportionate to the sustained performance and value creation of the company, taking into account
the strategic objectives of the company.
8. The company is transparent on its remuneration policies, level and mix of remuneration, the procedure
for setting remuneration, and the relationships between remuneration, performance and value creation.
9. The Board is responsible for the governance of risk and ensures that Management maintains a sound
system of risk management and internal controls, to safeguard the interests of the company and its
shareholders.
10. The Board has an Audit Committee (“AC”) which discharges its duties objectively.
11. The company treats all shareholders fairly and equitably in order to enable them to exercise shareholders’
rights and have the opportunity to communicate their views on matters affecting the company. The
company gives shareholders a balanced and understandable assessment of its performance, position
and prospects.
12. The company communicates regularly with its shareholders and facilitates the participation of
shareholders during general meetings and other dialogues to allow shareholders to communicate their
views on various matters affecting the company.
13. The Board adopts an inclusive approach by considering and balancing the needs and interests of
material stakeholders, as part of its overall responsibility to ensure that the best interests of the company
are served.
On 12 February 2019, MAS established the Corporate Governance Advisory Committee (CGAC)
as a permanent, industry-led body to advocate good corporate governance practices among listed
26 EP-GRMCE

companies in Singapore. The CGAC will identify current and potential risks to the quality of corporate
governance in Singapore, and monitor international trends. The CGAC will also revise the Practice
Guidance to clarify the Code from time to time, and recommend updates to the Code.
The CGAC submitted its report for the year 2019 in March 2020. Highlights of the CGAC’s key actions
in 2019 are set out below:
1. Identification of Focus Areas
2. Assessment of Companies’ Readiness for the 9-year Rule for Independent Directors
3. Review of the Risk-based Approach to Quarterly Reporting
4. Addition to the CGAC’s Terms of Reference

King IV Report on Corporate Governance, South Africa – 2016

The King Committee, a private-sector body comprising of former South African Supreme Court Judge, Mervyn
King was formed in 1992, to draft corporate governance guidelines. Four reports have been issued by the King
Committee since then –
l (King I), 1994
l (King II), 2002
l (King III), 2009 and
l (King IV) 2016.
The body issued its first report King I Report on Corporate Governance in South Africa, in 1994 which was
regarded by many as ahead of its time in adopting an integrated and inclusive approach to the business life of
companies, embracing stakeholders other than shareholders. In 2002, the second King Report on Corporate
Governance was published. It contained a Code of Corporate Practices and Conduct and referred to seven
characteristics of good corporate governance. The King III report was released on 1 September 2009 which
marked a significant milestone in the evolution of corporate governance in South Africa and brought significant
opportunities for organisations that embrace its principles. The King III was on an ‘apply or explain’ basis. The
‘apply or explain’ approach required more consideration – application of the mind - and explanation of what has
actually been done to implement the principles and best practice recommendations of governance.
King IV was released on 1 November 2016. It was effective for financial years commencing from 1 April 2017.
King IV builds on King III. It has been revised to bring it up to date with international governance codes and best
practice; to align it to shifts in the approach to capitalism (towards inclusive, integrated thinking across the six
capitals) and to take account of specific corporate governance developments in relation to effective governing bodies,
increased compliance requirements, new governance structures (e.g. Social and Ethics Committee), emerging risks
and opportunities from new technologies and new reporting and disclosure requirements e.g. Integrated Reporting.
King IV is structured as a Report that includes a Code, with additional, separate sector supplements for SME’s,
NPO’s, State-Owned Entities, Municipalities and Retirement Funds. The King Code contains both principles
and recommended practices aimed at achieving governance outcomes.
King IV requires an “Apply AND Explain” approach to disclosure, as opposed to King III which was ‘Apply Or
Explain’. This means that application of the principles is assumed and that an explanation is disclosed on the
practices that have been implemented and how these support achieving the associated governance principle.
Whilst King IV is voluntary (unless prescribed by law or a stock exchange Listings Requirement) it is envisaged
that it will be applicable to all organisations irrespective of their form or manner of incorporation.
 Lesson 1 n Conceptual Framework of Corporate Governance 27

GOVERNANCE ELEMENT PRINCIPLES

LEADERSHIP, ETHICS AND 1. The governing body should lead ethically and effectively.
CORPORATE CITIZENSHIP
2. The governing body should govern the ethics of the organisation
in a way that supports the establishment of an ethical culture.
3. The governing body should ensure that the organisation is and is
seen to be a responsible corporate citizen.

STRATEGY, PERFORMANCE 4. The governing body should appreciate that the organisation’ score
AND REPORTING purpose, its risks and opportunities, strategy, business model,
performance and sustainable development are all inseparable
elements of the value creation process.
5. The governing body should ensure that reports issued by the
organisation enable stakeholders to make informed assessments
of the organisation’s performance, and its short, medium and
long-term prospects.

GOVERNING STRUCTURES 6. The governing body should serve as the focal point and custodian
AND DELEGATION of corporate governance in the organisation.
7. The governing body should comprise the appropriate balance of
knowledge, skills, experience, diversity and independence for it to
discharge its governance role and responsibilities objectively and
effectively.
8. The governing body should ensure that its arrangements for
delegation within its own structures promote independent
judgement, and assist with balance of power and the effective
discharge of its duties.
9. The governing body should ensure that the evaluation of its own
performance and that of its committees, its chair and its individual
members, support continued improvement in its performance and
effectiveness.
10. The governing body should ensure that the appointment of, and
delegation to, management contribute to role clarity and the
effective exercise of authority and responsibilities.

GOVERNANCE FUNCTIONAL 11. The governing body should govern risk in a way that supports the
AREAS organisation in setting and achieving its strategic objectives.
12. The governing body should govern technology and information
in a way that supports the organisation setting and achieving its
strategic objectives.
13. The governing body should govern compliance with applicable
laws and adopted, non-binding rules, codes and standards in
a way that supports the organisation being ethical and a good
corporate citizen.
28 EP-GRMCE

14. The governing body should ensure that the organisation

remunerates fairly, responsibly and transparently so as to promote
the achievement of strategic objectives and positive outcomes in
the short, medium and long term.
15. The governing body should ensure that assurance services and
functions enable an effective control environment, and that these
support the integrity of information for internal decision-making
and of the organisation’s external reports.

STAKEHOLDER 16. In the execution of its governance role and responsibilities, the
RELATIONSHIPS governing body should adopt a stakeholder-inclusive approach
that balances the needs, interests and expectations of material
stakeholders in the best interests of the organisation over time.
17. The governing body of an institutional investor organisation
should ensure that responsible investment is practiced by the
organisation to promote the good governance and the creation
of value by the companies in which it invests.

OECD PRINCIPLES OF CORPORATE GOVERNANCE

Good corporate governance is not an end in itself. It is a means to create market confidence and business
integrity, which in turn is essential for companies that need access to equity capital for long term investment.
Access to equity capital is particularly important for future oriented growth companies and to balance any
increase in leveraging. The updated G20/OECD Principles of Corporate Governance (the Principles) therefore
provide a very timely and tangible contribution to the G20 priority in 2015 to support investment as a powerful
driver of growth.
The Principles are also about inclusiveness. Today, millions of households around the world have their savings
in the stock market, directly or indirectly. And publicly listed companies provide for more than 200 million jobs.
The Principles also address the rights of these stakeholders and their ability to participate in corporate wealth
creation.
The Principles were originally developed by the OECD in 1999 and further updated in 2004. Following the request
by the G20 Finance Ministers and Central Bank Governors at their meeting on 9-10 February 2015 in Istanbul, a
draft of the revised Principles was presented and discussed at the G20/OECD Corporate Governance Forum in
Istanbul on 10 April 2015 where they found broad support among participants. The Principles were subsequently
presented at the May and August 2015 meetings of the G20 Investment and Infrastructure Working Group. The
OECD Council adopted the Principles on 8 July 2015. The Principles were then submitted to the G20 Finance
Ministers and Central Bank Governors meeting in Ankara 4-5 September for endorsement as joint G20/OECD
Principles and transmission to the G20 Leaders Summit in November 2015.
The Principles provide guidance through recommendations and annotations across six chapters.
I. Ensuring the basis for an effective corporate governance framework:
The corporate governance framework should promote transparent and fair markets, and the efficient
allocation of resources. It should be consistent with the rule of law and support effective supervision
and enforcement:
A. The corporate governance framework should be developed with a view to its impact on overall
economic performance, market integrity and the incentives it creates for market participants and
 Lesson 1 n Conceptual Framework of Corporate Governance 29

the promotion of transparent and well-functioning markets.

B. The legal and regulatory requirements that affect corporate governance practices should be
consistent with the rule of law, transparent and enforceable.
C. The division of responsibilities among different authorities should be clearly articulated and
designed to serve the public interest.
D. Stock market regulation should support effective corporate governance
E. Supervisory, regulatory and enforcement authorities should have the authority, integrity and
resources to fulfil their duties in a professional and objective manner. Moreover, their rulings
should be timely, transparent and fully explained.
F. Cross-border co-operation should be enhanced, including through bilateral and multilateral
arrangements for exchange of information.
II. The rights and equitable treatment of shareholders and key ownership functions:
The corporate governance framework should protect and facilitate the exercise of shareholders’ rights
and ensure the equitable treatment of all shareholders, including minority and foreign shareholders. All
shareholders should have the opportunity to obtain effective redress for violation of their rights:
A. Basic shareholder rights should include the right to: 1) secure methods of ownership registration;
2) convey or transfer shares; 3) obtain relevant and material information on the corporation on
a timely and regular basis; 4) participate and vote in general shareholder meetings; 5) elect and
remove members of the board; and 6) share in the profits of the corporation.
B. Shareholders should be sufficiently informed about, and have the right to approve or participate
in, decisions concerning fundamental corporate changes such as: 1) amendments to the statutes,
or articles of incorporation or similar governing documents of the company; 2) the authorisation of
additional shares; and 3) extraordinary transactions, including the transfer of all or substantially
all assets, that in effect result in the sale of the company.
C. Shareholders should have the opportunity to participate effectively and vote in general shareholder
meetings and should be informed of the rules, including voting procedures, that govern general
shareholder meetings:
1. Shareholders should be furnished with sufficient and timely information concerning the date,
location and agenda of general meetings, as well as full and timely information regarding the
issues to be decided at the meeting.
2. Processes and procedures for general shareholder meetings should allow for equitable
treatment of all shareholders. Company procedures should not make it unduly difficult or
expensive to cast votes.
3. Shareholders should have the opportunity to ask questions to the board, including questions
relating to the annual external audit, to place items on the agenda of general meetings, and
to propose resolutions, subject to reasonable limitations.
4. Effective shareholder participation in key corporate governance decisions, such as the
nomination and election of board members, should be facilitated. Shareholders should
be able to make their views known, including through votes at shareholder meetings, on
the remuneration of board members and/or key executives, as applicable. The equity
component of compensation schemes for board members and employees should be subject
to shareholder approval.
30 EP-GRMCE

5. Shareholders should be able to vote in person or in absentia, and equal effect should be
given to votes whether cast in person or in absentia.
6. Impediments to cross border voting should be eliminated.
D. Shareholders, including institutional shareholders, should be allowed to consult with each other on
issues concerning their basic shareholder rights as defined in the Principles, subject to exceptions
to prevent abuse.
E. All shareholders of the same series of a class should be treated equally. Capital structures
and arrangements that enable certain shareholders to obtain a degree of influence or control
disproportionate to their equity ownership should be disclosed.
1. Within any series of a class, all shares should carry the same rights. All investors should be
able to obtain information about the rights attached to all series and classes of shares before
they purchase. Any changes in economic or voting rights should be subject to approval by
those classes of shares which are negatively affected.
2. The disclosure of capital structures and control arrangements should be required.
F. Related-party transactions should be approved and conducted in a manner that ensures proper
management of conflict of interest and protects the interest of the company and its shareholders.
1. Conflicts of interest inherent in related-party transactions should be addressed.
2. Members of the board and key executives should be required to disclose to the board
whether they, directly, indirectly or on behalf of third parties, have a material interest in any
transaction or matter directly affecting the corporation.
G. Minority shareholders should be protected from abusive actions by, or in the interest of, controlling
shareholders acting either directly or indirectly, and should have effective means of redress.
Abusive self dealing should be prohibited.
H. Markets for corporate control should be allowed to function in an efficient and transparent manner.
1. The rules and procedures governing the acquisition of corporate control in the capital
markets, and extraordinary transactions such as mergers, and sales of substantial portions
of corporate assets, should be clearly articulated and disclosed so that investors understand
their rights and recourse. Transactions should occur at transparent prices and under fair
conditions that protect the rights of all shareholders according to their class.
2. Anti-take-over devices should not be used to shield management and the board from
accountability.
III. Institutional investors, stock markets, and other intermediaries:
The corporate governance framework should provide sound incentives throughout the investment
chain and provide for stock markets to function in a way that contributes to good corporate governance:
A. Institutional investors acting in a fiduciary capacity should disclose their corporate governance
and voting policies with respect to their investments, including the procedures that they have in
place for deciding on the use of their voting rights.
B. Votes should be cast by custodians or nominees in line with the directions of the beneficial owner
of the shares.
C. Institutional investors acting in a fiduciary capacity should disclose how they manage material
conflicts of interest that may affect the exercise of key ownership rights regarding their investments.
 Lesson 1 n Conceptual Framework of Corporate Governance 31

D. The corporate governance framework should require that proxy advisors, analysts, brokers, rating
agencies and others that provide analysis or advice relevant to decisions by investors, disclose
and minimise conflicts of interest that might compromise the integrity of their analysis or advice.
E. Insider trading and market manipulation should be prohibited and the applicable rules enforced.
F. For companies who are listed in a jurisdiction other than their jurisdiction of incorporation, the
applicable corporate governance laws and regulations should be clearly disclosed. In the case
of cross listings, the criteria and procedure for recognising the listing requirements of the primary
listing should be transparent and documented.
G. Stock markets should provide fair and efficient price discovery as a means to help promote
effective corporate governance.
IV. The role of stakeholders in corporate governance:
The corporate governance framework should recognise the rights of stakeholders established by law or
through mutual agreements and encourage active co-operation between corporations and stakeholders
in creating wealth, jobs, and the sustainability of financially sound enterprises:
A. The rights of stakeholders that are established by law or through mutual agreements are to be
respected.
B. Where stakeholder interests are protected by law, stakeholders should have the opportunity to
obtain effective redress for violation of their rights.
C. Mechanisms for employee participation should be permitted to develop.
D. Where stakeholders participate in the corporate governance process, they should have access to
relevant, sufficient and reliable information on a timely and regular basis.
E. Stakeholders, including individual employees and their representative bodies, should be able
to freely communicate their concerns about illegal or unethical practices to the board and to the
competent public authorities and their rights should not be compromised for doing this.
F. The corporate governance framework should be complemented by an effective, efficient insolvency
framework and by effective enforcement of creditor rights.
V. Disclosure and transparency:
The corporate governance framework should ensure that timely and accurate disclosure is made on all
material matters regarding the corporation, including the financial situation, performance, ownership,
and governance of the company:
A. Disclosure should include, but not be limited to, material information on:
1. The financial and operating results of the company.
2. Company objectives and non-financial information.
3. Major share ownership, including beneficial owners, and voting rights.
4. Remuneration of members of the board and key executives.
5. Information about board members, including their qualifications, the selection process, other
company directorships and whether they are regarded as independent by the board.
6. Related party transactions.
7. Foreseeable risk factors.
8. Issues regarding employees and other stakeholders.
32 EP-GRMCE

9. Governance structures and policies, including the content of any corporate governance
code or policy and the process by which it is implemented.
B. Information should be prepared and disclosed in accordance with high quality standards of
accounting and financial and non-financial reporting.
C. An annual audit should be conducted by an independent, competent and qualified, auditor in
accordance with high-quality auditing standards in order to provide an external and objective
assurance to the board and shareholders that the financial statements fairly represent the financial
position and performance of the company in all material respects.
D. External auditors should be accountable to the shareholders and owe a duty to the company to
exercise due professional care in the conduct of the audit.
E. Channels for disseminating information should provide for equal, timely and cost-efficient access
to relevant information by users.
VI. The responsibilities of the board:
The corporate governance framework should ensure the strategic guidance of the company, the
effective monitoring of management by the board, and the board’s accountability to the company and
the shareholders:
A. Board members should act on a fully informed basis, in good faith, with due diligence and care,
and in the best interest of the company and the shareholders.
B. Where board decisions may affect different shareholder groups differently, the board should treat
all shareholders fairly.
C. The board should apply high ethical standards. It should take into account the interests of
stakeholders.
D. The board should fulfil certain key functions, including:
1. Reviewing and guiding corporate strategy, major plans of action, risk management policies
and procedures, annual budgets and business plans; setting performance objectives;
monitoring implementation and corporate performance; and overseeing major capital
expenditures, acquisitions and divestitures.
2. Monitoring the effectiveness of the company’s governance practices and making changes
as needed.
3. Selecting, compensating, monitoring and, when necessary, replacing key executives and
overseeing succession planning.
4. Aligning key executive and board remuneration with the longer term interests of the company
and its shareholders.
5. Ensuring a formal and transparent board nomination and election process.
6. Monitoring and managing potential conflicts of interest of management, board members and
shareholders, including misuse of corporate assets and abuse in related party transactions.
7. Ensuring the integrity of the corporation’s accounting and financial reporting systems,
including the independent audit, and that appropriate systems of control are in place, in
particular, systems for risk management, financial and operational control, and compliance
with the law and relevant standards.
8. Overseeing the process of disclosure and communications.
 Lesson 1 n Conceptual Framework of Corporate Governance 33

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

ROOTS OF CORPORATE GOVERNANCE IN INDIAN ETHOS

The concept of corporate governance in India has ancient connections. There is a great deal of similarity in the
governance structures of the ancient kingdoms and modern corporations as is evident from our ancient text
and scriptures like Vedas, Manu Smriti, Somadevaneetistuti, Baharspatya Neetistuti, Arthashastra etc. which
focuses on good governance. All Upanishads, Vedas, and the Epic Kavyas like Mahabharata, Ramayana and
Bhagwad Gita emphasize the essence of ethics being followed from within, be it Individual or be it the King
or be it the whole kingdom. Further, all religious teachings or philosophical writing contain some directives on
governance.
Ramayana: The Ramayana, the saga of Rama’s life written by Valmiki, is widely acclaimed as among the
greatest of all Indian epics. In fact, this famous Grantha carries useful tips on ethics and values, statecraft
and politics, and even general and human resources management. With Rama Rajya as a model for good
governance, the Ramayana is a must read for practitioners of statecraft.
The Ayodhya Kanda, the second chapter, contains comprehensive lessons on good governance. When
Bharata, the younger brother of Rama, goes to meet the latter in the forest to request him to return to Ayodhya
and rule, the two brothers enter into a long and instructive dialogue. Rama counsels Bharata on governance.
From quality of ministers and the importance of strategy sessions, to temperance in administration to justice,
Rama expounds on all the subtleties of statecraft in a lucid manner. Apparently, Rama seems to be inquiring of
Bharata his well-being, whether all is well at Ayodhya - in fact, however, in the process, the lessons on effective
governance are offered in a powerful manner. A critical factor in good governance is the quality of ministers.
Rama asks Bharata whether he has appointed courageous, knowledgeable, strong-willed men with a high
emotional quotient as his ministers, because quality advice is the key to effective governance.
The emphasis is on competence and confidentiality. Rama’s advice to Bharata is to take a decision on a
complex issue neither unilaterally nor in consultation with too many people. There should be an efficient core
group. A good administrator can ensure high returns from minimum investments. Rama tells Bharata to prefer
34 EP-GRMCE

one wise man to a thousand fools as it is the wise that can ensure prosperity during an economic crisis. Even if
there is one minister who is really effective, the king will gain immensely. Appointing tested men of noble lineage
and integrity for strategic positions is the key to successful government. Moderate taxes should be levied on
the people, lest they revolt. Rama wants Bharata to treat his soldiers well and pay their legitimate wages on
time. Delays in payment of wages and other allowances that make the soldiers disturb and depress which can
lead to dangerous consequences. Trade and agriculture are important and Rama wants Bharata to ensure
good irrigation facilities rather than being overly dependent on rains. Traders need to be ensured of a fear-
free environment and their grievances should be redressed promptly. Protecting the forests and maintaining
livestock have also been dealt with as important aspects of effective governance.
In fact, the vision of the Ramayana has eternal relevance. Law and justice, finance and business, corruption
framing of innocents for monetary gains, injustice to the poor are all mentioned. Rama’s words of advice
to Bharata are as relevant today as they were in the ancient period. For the benefit of present and future
generations, Rama gave valuable tips to Bharata on good governance.
Bhagwad Gita: In Bhagwad Gita, Lord Krishna details the divine treasure as fearlessness, purity of heart,
steadfastness in knowledge and yoga, charity, self control, and sacrifice, study of scriptures, austerity and
uprightness. The Bhagavad Gita emphasized the concept of duty and its importance for good leadership. In the
Bhagavad Gita, Lord Krishna motivates and encourages leaders who govern to do their duties and not to run
away from the duties as he asserted that leaders should perform their prescribed duty, for doing so is better
than not working. Besides, one cannot even maintain one’s physical body without work. Lord Krishna further
stressed that duty needs to be done without attachment and for those who do their duty without attachment
will attain the supreme goal. By doing their duties without attachment, the leaders also set examples for their
people. Lord Krishna asserted that whatever the leader does, the people will follow and whatever standards or
example the leader sets people in general will follow. It is therefore imperative; leaders need to perform their
work (duty) in governing effectively for the sake of educating the people in general (leadership by example).
This has a great implication for sustainable development as it is a must for leaders to practice what they preach.
Arthashastra
Kautilya’s Arthashastra maintains that for good governance, all administrators, including the king are considered
servants of the people. Good governance and stability are completely linked. If rulers are responsive, accountable,
removable, recallable, there is stability. If not there is instability. These tenets hold good even today.

Kautilya’s fourfold duty The substitution of the state with the corporation, the king with the CEO or the
of a king– board of a corporation, and the subjects with the shareholders, bring out the
quintessence of corporate governance, because central to the concept of corporate
governance is the belief that public good should be ahead of private good and that
the corporation’s resources cannot be used for personal benefit.

Raksha Raksha – literally means protection, in the corporate scenario it can be equated
with the risk management aspect.

Vriddhi Vriddhi – literally means growth, in the present day context can be equated to
stakeholder value enhancement

Palana Palana – literally means maintenance/compliance, in the present day context it

can be equated to compliance to the law in letter and spirit.

Yogakshema Yogakshema – literally means well being and in Kautilya’sArthashastra it is used

in context of a social security system. In the present day context it can be equated
to corporate social responsibility.
 Lesson 1 n Conceptual Framework of Corporate Governance 35

Arthashastra talks self-discipline for a king and the six enemies which a king should overcome – lust, anger,
greed, conceit, arrogance and foolhardiness. In the present day context, this addresses the ethics aspect of
businesses and the personal ethics of the corporate leaders.
Kautilya asserts that “A king can reign only with the help of others; one wheel alone does not move a chariot.
Therefore, a king should appoint advisors (as councilors and ministers) and listen to their advice.”
“The opinion of advisers shall be sought individually as well as together [as a group]. The reason why each one
holds a particular opinion shall also be ascertained.”
Kautilya has emphasized on the imperatives of the king and his counselors acting in concert. Cohesion is key
to the successful functioning of a board and the company it directs. A board that contributes constructively to
sustainable success but does not compromise on the integrity and independence of the non-executive directors
is the most desirable instrument of good corporate governance.
“If the king and his counselors do not agree on the course of action, it spells future trouble, irrespective of
whether the venture is crowned with success or ends in failure.” There could be no stronger counsel relevant
to modern day corporate governance structures for executive managements to heed the advice given by the
non-executive independent colleagues on the board of directors.
Balancing the interests of the various stakeholders is again at the core of good corporate governance, is
highlighted in the Arthashastra and the other ancient texts. There is no prescription in the scriptures that the
interests of only selected few need to be the concern of the king. This generic approach to an across-the- board
welfare of all the citizens in the kingdom lends credence also to the modern theories of corporate accountability
to a wider group of stakeholders, than merely to a single component thereof comprising shareholders.
Corporate Governance is managing, monitoring and overseeing various corporate systems in such a manner
that corporate reliability, reputation are not put at stake. Corporate Governance pillars on transparency and
fairness in action satisfying accountability and responsibility towards the stakeholders.

Fairness

Responsibility Corporate Transparency

Governance

Accountability

The long term performance of a corporate is judged by a wide constituency of stakeholders. Various stakeholders
36 EP-GRMCE

affected by the governance practices of the company include:

Government

Employees Society

Vendors Stakeholders Customers

Teachings of Lord Buddha & Jain Sutra: Lord Buddha also propounded five principles, which were known
as panchsheel. These five principles are non-violence, truth, non-stealing, celibacy and non-intoxication. In the
23rd chapter of the Uttaradhyayana Sutra, Kesi Gautama discusses the five teachings of Lord Mahavira. There
is no difference between panchsheel and these five teachings.
Mahabharata: Shanti Parva which is the part of Indian Epic Mahabharata recites the duties of the ruler, dharma
and good governance, as counselled by the dying Bhishmato Yudhishthira and various Rishis. Shanti parva
recites a theory of governance and duties of a leader. The Shanti parva dedicates over 100 chapters on duties
of a king and rules of proper governance. A prosperous kingdom must be guided by truth and justice. The duty
of a ruler and his cabinet is to enable people to be happy, pursue truth and act sincerely. The proper function
of a ruler is to rule according to dharma; he should lead a simple life and he should not use his power to enjoy
the luxuries of life. Shanti parva asserts rulers have a dharma (duty, responsibility) to help the upliftment of all
living beings. The best law, claims Shanti parva, is one that enhances the welfare of all living beings, without
injuring any specific group.
A great Tamil poet also gave a wonderful advice to the King of her time about how the King can achieve fame.
In a beautifully described phenomenon of ‘bottom up glory’ years ago, she said:
“When the height of the boundaries of the paddy field increases, the water level in the field increases;
when the water level increases, the paddy level increases; when the paddy level increases,
the quality of life increases;
when the quality of life increases, the quality of governance increases;
and when the quality of governance increases, the country flourishes and the greatness of
those who govern admired.”
The dynasty kingdom is history now, though it exists in politics and business. The vacuum created by the
phasing out of the King rule and the kingdom has been slowly and steadily filled by the corporate houses of
today. The corporate houses are equivalent to the dynasty kingdom in addition to other kingdoms in other area
like politics, culture etc. Thus, the principles which applied to the Kings and Rulers of the dynasty Kingdom
simply apply to the organisation and their management which manages the organisation. The principle of good
governance what was talked of during the ancient period is that which is gaining more prominence today.
 Lesson 1 n Conceptual Framework of Corporate Governance 37

CORPORATE GOVERNANCE – CONTEMPORARY DEVELOPMENTS IN INDIA

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

1998 CII took a special initiative on Corporate Governance, the first institution
initiative in Indian Industry. The objective was to develop and promote
Desirable Corporate Governance:
a code for Corporate Governance to be adopted and followed by Indian
A Code
companies, whether in the Private Sector, the Public Sector, Banks or
Financial Institutions, all of which are corporate entities. The final draft
of the said Code was widely circulated in 1997. In April 1998, the Code
was released. It was called Desirable Corporate Governance: A Code.

1999 The Securities and Exchange Board of India (SEBI) had set up a
Committee on May 7, 1999 under the Chairmanship of Kumar Mangalam
Kumar Mangalam Birla Committee
Birla to promote and raise standards of corporate governance. The
Report of the committee was the first formal and comprehensive attempt
to evolve a Code of Corporate Governance, in the context of prevailing
conditions of governance in Indian companies, as well as the state of
capital markets at that time. The recommendations of the Report, led to
inclusion of Clause 49 in the Listing Agreement in the year 2000.

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

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

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

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

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

2004 The Government constituted a committee under the Chairmanship of Dr.

J. J. Irani, Director, Tata Sons, with the task of advising the Government
Dr. J. J. Irani Committee on
on the proposed revisions to the Companies Act, 1956 with the objective
Company Law
to have a simplified compact law that would be able to address the
changes taking place in the national and international scenario, enable
adoption of internationally accepted best practices as well as provide
adequate flexibility for timely evolution of new arrangements in response
to the requirements of ever- changing business models.

The Committee recommended that effective measures be initiated

for protecting the interests of stakeholders and investors, including
small investors, through legal basis for sound corporate governance
practices. With a view to protect the interest of various stakeholders,
the Committee also recommended the constitution of a “Stakeholders’
Relationship Committee” and provision of duties of directors in the Act
with civil consequences for non-performance.

2009 In 2009, CII’s Task Force on Corporate Governance gave its report and
suggested certain voluntary recommendations for industry to adopt.
CII’s Task Force on Corporate
Governance

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

released a set of voluntary guidelines on corporate governance. The
Corporate Governance Voluntary
Guidelines were derived out of the unique challenges of the Indian
Guidelines
economy, and took cognizance of the fact that all agencies need to
collaborate together, to ensure that businesses flourish, even as they
contribute to the wholesome and inclusive development of the country.
The Guidelines emphasized that responsible businesses alone will be
able to help India meet its ambitious goal of inclusive and sustainable
all round development. It urged businesses to embrace the “triple
bottom-line” approach whereby their financial performance could be
harmonized with the expectations of society, the environment and the
many stakeholders in a sustainable manner.

2010 Corporate Governance and Ethics Committee of the National

Association of Software and Services Companies (NASSCOM) issued
NASSCOM Recommendations
recommendations in mid-2010, focusing on the stakeholders of the
company.
 Lesson 1 n Conceptual Framework of Corporate Governance 39

2012 The Ministry of Corporate Affairs constituted a Committee to formulate a

Policy Document on Corporate Governance under the chairmanship of
Policy Document on Corporate
Mr. Adi Godrej with the President ICSI as Member Secretary/ Convenor.
Governance
The Policy Document sought to synthesize the disparate elements
in the diverse guidelines, draw on innovative best practices adopted
by specific companies, incorporate current international trends and
anticipate emerging demands on corporate governance in enterprises
in various classes and scale of operations.
The Adi Godrej Committee submitted its report which was articulated in
the form of 17 Guiding Principles of Corporate Governance.

2013 The Companies Act, 2013 brought with it radical changes in the sphere of
Corporate Governance in India. It provided a major overhaul in Corporate
Companies Act
Governance norms and sought to have far-reaching implications on the
manner in which corporate operates in India. The Act has since been
amended thrice – in 2015, 2017 and 2019. The Amendments impacts
different aspects of business management in India, including key
structuring, disclosure, and compliance requirements.

2015 With a view to consolidate and streamline the provisions of the erstwhile
listing agreements for different segments of the capital market and the
SEBI (Listing Obligations and
provisions pertaining to listed entities with the Companies Act, 2013, the
Disclosure Requirements)
SEBI notified SEBI (Listing Obligations and Disclosure Requirements)
Regulations
Regulations, 2015 for the listed entities having listed designated
securities on recognized stock exchanges. The provisions of Corporate
Governance in SEBI (LODR) Regulations, 2015 are discussed at
relevant places in this study material.

2017 The SEBI Committee on corporate governance was formed in June 2017
under the Chairmanship of Mr.Uday Kotak with the aim of improving
Uday Kotak Committee
standards of corporate governance of listed companies in India.
With the aim of improving standards of Corporate Governance of
listed companies in India, the Committee was requested to make
recommendations to SEBI on the following issues:
l Ensuring independence in spirit of Independent Directors and
their active participation in functioning of the company;
l Improving safeguards and disclosures pertaining to Related
Party Transactions;
l Issues in accounting and auditing practices by listed companies;
l Improving effectiveness of Board Evaluation practices;
l Addressing issues faced by investors on voting and participation
in general meetings;
l Disclosure and transparency related issues, if any;
l Any other matter, as the Committee deems fit pertaining to
corporate governance in India.
40 EP-GRMCE

The Committee submitted its report to SEBI in October 2017. The

recommendations of the Committee were given in 11 Chapters as
follows:
l Composition and Role of the Board of Directors
l The Institution of Independent Directors
l Board Committees
l Enhanced Monitoring of Group Companies
l Promoters/Controlling Shareholders and Related Party
Transactions
l Disclosures and Transparency
l Accounting and Audited related Issues
l Investors participation in Meetings of Listed Entities
l Governance aspects of Public Sector Enterprises
l Leniency Mechanism
l Capacity building in SEBI for enhancing Corporate Governance
in Listed Entities
In its board meeting on March 27, 2018, SEBI, after detailed
consideration and due deliberation, accepted several recommendations
of the Kotak Committee without any modifications and accepted a few
other recommendations with certain modifications as to timelines for
implementation, applicability thresholds among others. Some of the
major changes accepted relate to:
l Increasing Transparency -Enhanced Disclosure Requirements
l Disclosure of Utilization of Funds from Qualified Institutional
Placement (QIP) /Preferential Issues
l Disclosures of Auditor Credentials, Audit Fee, Reasons for
Resignation of Auditors
l Disclosure of Expertise/Skills of Directors
l Enhanced Disclosure of Related Party Transactions (RPT)-A
l Mandatory Disclosure of Consolidated Quarterly Results with
effect from Financial Year 2019-2020-
l Reshaping the Institution of the Board of Directors and
Enhancing the Role of Committees of the Board
l Separation of the office of the chairperson (i.e. the leader of the
board) and CEO/MD (i.e. the leader of the management)
l Augmenting board strength and diversity
l Enhanced Quorum
l Capping the Maximum Number of Directorships
l Expanded Eligibility Criteria for Independent Directors
 Lesson 1 n Conceptual Framework of Corporate Governance 41

l Enhanced Role of committees

l Down-streaming Corporate Governance
l Enhanced Obligations on Listed Entities with Respect to
Subsidiaries
l Secretarial Audit to be Mandatory for Listed Entities and their
Material Unlisted Subsidiaries

GLOSSARY OF TECHNICAL WORDS

l Governance: relates to "the processes of interaction and decision-making among the actors involved
in a collective problem that lead to the creation, reinforcement, or reproduction of social norms and
institutions."
l Corporate Performance: is a composite assessment of how well an organization executes on its most
important parameters, typically financial, market and shareholder performance.
l Triple Bottom Line: is an accounting framework with three parts: social, environmental and financial.
Organizations have adopted the TBL framework to evaluate their performance in a broader perspective
to create greater business value.
l Sarbanes Oxley Act: An American federal law, 2002, which substantially revised and strengthened
securities laws and their administration in the aftermath of high profile corporate accounting scandals
such as that involving Enron.

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

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

l Since the majority of the members are in an advantageous position to run the company according
to their command, the minority shareholders are often oppressed. The corporate governance
provide for adequate protection for the minority shareholders when their rights are trampled by
the majority.

l OECD has defined corporate governance to mean “A system by which business corporations are
directed and controlled”. Corporate governance structure specifies the distribution of rights and
responsibilities among different participants in the company such as board, management, shareholders
and other stakeholders; and spells out the rules and procedures for corporate decision making. By
doing this, it provides the structure through which the company’s objectives are set along with the
means of attaining these objectives as well as for monitoring performance.

l The initiatives taken by Government of India in 1991, aimed at economic liberalization and globalization
of the domestic economy, led India to initiate reform process in order to suitably respond to the
developments taking place world over. On account of the interest generated by Cadbury Committee
Report, the Confederation of Indian Industry (CII), the Associated Chambers of Commerce and Industry
42 EP-GRMCE

(ASSOCHAM) and, the Securities and Exchange Board of India (SEBI) constituted Committees to
recommend initiatives in Corporate Governance.

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

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

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

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

l Initiated by Cadbury Committee, corporate governance has grown multifold in UK. UK Corporate
Governance Code, 2016 is a revised version of earlier code with few new recommendations.

l With the introduction of Sarbanes–Oxley Act, 2002 Corporate Governance practices have been
fundamentally altered – auditor independence, conflict of interests, financial disclosures, severe
penalties for willful default by managers and auditors in particular. The Dodd-Frank Wall Street Reform
and Consumer Protection Act, 2010 has given an opportunity to shareholders to hold accountable
executives of the companies they own.

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

l Corporate Governance extends beyond corporate law. Its fundamental objective is not mere fulfillment
of the requirements of law but in ensuring commitment of the Board in managing the company in a
transparent manner for maximizing stakeholder value. The real onus of achieving desired levels of
corporate governance lies with corporates themselves and not in external measures.

l Ancient Indian scriptures contain learning on governance. Kautilya’s Arthashastra maintains that
for good governance, all administrators, including the king were considered servants of the people.
Good governance and stability were completely linked. There is stability if leaders are responsive,
accountable and removable. These tenets hold good even today.

TEST YOURSELF
(These are meant for recapitulation only. Answers to these questions are not to be submitted for evaluation)
1. Discuss in brief the development of the concept of Corporate Governance in U.K.
 Lesson 1 n Conceptual Framework of Corporate Governance 43

2. Discuss briefly the Corporate Governance developments in India.

3. Explain why Corporate Governance is gaining importance.
4. What are the elements of Good Corporate Governance?
5. What are the basic theories of that led to the evolution of concept of the Corporate Governance?
44 EP-GRMCE
 Lesson 2
Legislative Framework of
Corporate Governance in India

LESSON OUTLINE
LEARNING OBJECTIVES
– Introduction
The objective of this study lesson is to understand
– Regulatory Framework legislative framework of Corporate Governance
– Principles for Periodic Disclosures and for for unlisted companies, listed companies,
Corporate Governance Banks, Insurance Companies and Public Sector
Undertakings (PSUs) in our country.
– Corporate Governance of Banking and
Financial Institutions The Companies Act, 2013 is applicable to all
companies registered under the Act. SEBI (LODR)
– Ganguly Committee recommendations
Regulations, 2015 are for all listed entities.
– BASEL Committee Corporate
Banking and financial institutions has to comply
Governance Principles
with various circulars issued by RBI, the Ganguly
– Guidelines on Corporate Governance Committee Report on Corporate Governance in
for NBFCs Banks, and Corporate Governance under the
Basel I, II and III.
– Corporate Governance Guidelines for
insurance Companies The Insurance companies are also subject to
compliance with IRDA guidelines in addition to
– Stewardship Code for Insurers in India
other applicable legislations. The guidelines issued
– Corporate governance in Public Sector by the IRDA on the Corporate Governance norms
Enterprises applicable to the Insurance Company have been
– Guidelines on CSR and Sustainability for dealt with in the chapter.
Central Public Sector Enterprises The PSUs/CPSEs are subject to additional
– Glossary supervision and compliance of DPE/Vigilance/
C&AG directives as compared to the private
– LESSON ROUND-UP sector companies. The CSR and Sustainability for
– TEST YOURSELF the Central Public Enterprises provisions as per
Companies Act 2013 which are applicable to CPEs
have been included in this chapter.
The study aims to enable the students to understand
the aforesaid sector specific governance structure.

“A well balanced, inclusive approach, according to certain standard and ideals, is essential for the proper
governance of any country”
- Laisenia Qarase
46 EP-GRMCE

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

Legislative Framework of Corporate

Governance in India

All Companies Banking and

Insurance Public Sector
formed under Listed Entities Financial
Companies Enterprises
Companies Act Institutions

SEBI LODR RBI Circulars

Companies Act IRDAI Laws DPE
Regulations, and Special
2013 and Circulars Guidelines
2015 Acts

The companies in our country are formed, registered and regulated mainly by the Companies Act, 2013. The
erstwhile Companies Act 1956 was completely revamped in 2013 and new Act was framed which is landmark
legislation with regard to improving corporate governance of companies. The Companies Act, 2013 clearly
indicates focus of regulators toward enhancing the responsibility and accountability of boards. The Act outlines
various requirements for Governance, disclosures and enhanced roles, responsibilities and liabilities of the
board, its committees and independent directors. Some of the Provisions of Companies Act, 2013 related to
Corporate Governance are:
l Appointment and maximum tenure of Independent Directors;
l Appointment of Woman Director;
l Appointment of Whole time Key Managerial Personnel;
l Performance Evaluation of the Directors and Committee & Board as a whole;
l Enhanced disclosures and assertions in Board Report and Annual Return with regard to Managerial
Remuneration, risk management, internal control for financial reporting, legal compliance, Related
Party Transactions, Corporate Social Responsibility, shareholding pattern, public money lying
unutilised, etc.
l Stricter yet forward-looking procedural requirements for Secretarial compliances and Secretarial
Standards made mandatory;
l Enhanced compliances of Related Party Transactions and introduction of concept of arm’s length
pricing;
l Enhanced restrictions on appointment of Auditors and mandatory rotation of Auditors;
l Separation of role of Chairperson and Chief Executive Officer;
l Mandatory provisions regarding vigil mechanism;
 Lesson 2 n Legislative Framework of Corporate Governance in India 47

l Constitution of Audit Committee and Nomination and Remuneration Committee;

l Constitution of CSR Committee
l Secretarial Audit
l Constitution of NFRA
l Mandatory provision of E-voting by certain class of Companies
l Class Action Suits
l Registered Valuer
All such provisions of new Company Law are instrumental in providing a good Corporate Governance structure.
Further, the Companies (Amendment) Act, 2017 and the Companies (Amendment) Act, 2019 introduced several
amendments to the Companies Act 2013, realigning provisions with other legislations and the changing business
environment to improve corporate governance norms and ease of doing business in India while continuing to
strengthen compliance and investor protection.
Apart from the Companies Act, 2013, all the listed entities are regulated by the Securities and Exchange Board
of India. SEBI is a regulatory authority established on April 12, 1992. SEBI was established with the main
purpose of curbing the malpractices and protecting the interest of its investors. Its main objective is to regulate
the activities of Stock Exchange and at the same time ensuring the healthy development in the financial market.
In order to ensure good corporate governance SEBI had issued detailed Corporate Governance Norms in form
of Clause 49 of Listing Agreement which has since been repealed and notified as a separate regulation being
the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015.
Apart from these, a gamut of legislations like the Competition Act, the Consumer Protection Laws, the labor
laws, the environment laws, the anti money laundering laws, Insolvency and Bankruptcy Code etc seeks to
ensure good governance practices among the corporate.

NOTE: The Companies Act, 2013 and SEBI (LODR) Regulations, 2015 together deals with virtually
all areas affecting Corporate Governance which are discussed at relevant places in the entire study
material.

Regulatory Framework

Sl.No. Description

1 Regulation 4 of SEBI (Listing Obligation and Disclosure Requirement), Regulations, 2015.

2 Ganguli Committee recommendations on Corporate Governance in Banks.

3 Basel Committee on Corporate Governance.

4 RBI Guidelines on Corporate Governance for NBFCs.

5 Guidelines on Corporate Governance for Insurance Companies by IRDAI.

6 Stewardship Code for Insurers in India.

7 Guidelines on Corporate Governance for CPSEs.

8 Grading of CPSEs on the basis of compliance with Corporate Governance Guidelines for CPSEs.

PRINCIPLES FOR PERIODIC DISCLOSURES AND FOR CORPORATE GOVERNANCE

Regulation 4 of the SEBI (LODR) Regulations, 2015 provides for broad principles for periodic disclosures and for
48 EP-GRMCE

corporate governance by listed entities. The principles for periodic disclosures are based on the principles given
by International Organization of Securities Commissions (IOSCO). and also have incorporated the principles for
corporate governance (in line with OECD principles). These principles underlie specific requirements prescribed
in different chapters of the Regulations. In the event of the absence of specific requirements or ambiguity, these
principles would serve to guide the listed entities.
(A) Principles governing Disclosures and obligations: The listed entity which has listed its securities
shall make disclosures and abide by its obligations under these regulations, in accordance with the
following principles:
(a) Information shall be prepared and disclosed in accordance with applicable standards of accounting
and financial disclosure.
(b) The listed entity shall implement the prescribed accounting standards in letter and spirit in the
preparation of financial statements taking into consideration the interest of all stakeholders and
shall also ensure that the annual audit is conducted by an independent, competent and qualified
auditor.
(c) The listed entity shall refrain from misrepresentation and ensure that the information provided to
recognised stock exchange(s) and investors is not misleading.
(d) The listed entity shall provide adequate and timely information to recognised stock exchange(s)
and investors.
(e) The listed entity shall ensure that disseminations made under provisions of these regulations
and circulars made thereunder, are adequate, accurate, explicit, timely and presented in a simple
language.
(f) Channels for disseminating information shall provide for equal, timely and cost efficient access to
relevant information by investors.
(g) The listed entity shall abide by all the provisions of the applicable laws including the securities
laws and also such other guidelines as may be issued from time to time by the Board and the
recognised stock exchange(s) in this regard and as may be applicable.
(h) The listed entity shall make the specified disclosures and follow its obligations in letter and spirit
taking into consideration the interest of all stakeholders.
(i) Filings, reports, statements, documents and information which are event based or are filed
periodically shall contain relevant information.
(j) Periodic filings, reports, statements, documents and information reports shall contain information
that shall enable investors to track the performance of a listed entity over regular intervals of time
and shall provide sufficient information to enable investors to assess the current status of a listed
entity.
The above principles for periodic disclosures are based on the principles given by International
Organization of Securities Commissions (IOSCO). IOSCO has framed certain principles of disclosures
recognizing that disclosure of reliable, timely information contributes to liquid and efficient markets by
enabling investors to make investment decisions based on all the information that would be material to
their decisions.
(B) Corporate Governance Principles : The listed entity which has listed its specified securities shall
comply with the corporate governance principles under following broad headings- :
 Lesson 2 n Legislative Framework of Corporate Governance in India 49

The rights of shareholders : The listed entity shall seek to protect and facilitate the exercise of
(a)
the following rights of shareholders:
(i) right to participate in, and to be sufficiently informed of, decisions concerning fundamental
corporate changes.
(ii) opportunity to participate effectively and vote in general shareholder meetings.
(iii) being informed of the rules, including voting procedures that govern general shareholder
meetings.
(iv) opportunity to ask questions to the board of directors, to place items on the agenda of
general meetings, and to propose resolutions, subject to reasonable limitations.
(v) effective shareholder participation in key corporate governance decisions, such as the
nomination and election of members of board of directors.
(vi) exercise of ownership rights by all shareholders, including institutional investors.
(vii) adequate mechanism to address the grievances of the shareholders.
(viii) protection of minority shareholders from abusive actions by, or in the interest of, controlling
shareholders acting either directly or indirectly, and effective means of redress.
Timely information: The listed entity shall provide adequate and timely information to
(b)
shareholders, including but not limited to the following:
(i) sufficient and timely information concerning the date, location and agenda of general
meetings, as well as full and timely information regarding the issues to be discussed at the
meeting.
(ii) Capital structures and arrangements that enable certain shareholders to obtain a degree of
control disproportionate to their equity ownership.
(iii) rights attached to all series and classes of shares, which shall be disclosed to investors
before they acquire shares.
50 EP-GRMCE

Equitable treatment: The listed entity shall ensure equitable treatment of all shareholders,
(c)
including minority and foreign shareholders, in the following manner:
(i) All shareholders of the same series of a class shall be treated equally.
(ii) Effective shareholder participation in key corporate governance decisions, such as the
nomination and election of members of board of directors, shall be facilitated.
(iii) Exercise of voting rights by foreign shareholders shall be facilitated.
(iv) The listed entity shall devise a framework to avoid insider trading and abusive self-dealing.
(v) Processes and procedures for general shareholder meetings shall allow for equitable
treatment of all shareholders.
(vi) Procedures of listed entity shall not make it unduly difficult or expensive to cast votes.
Role of stakeholders in corporate governance: The listed entity shall recognise the rights of
(d)
its stakeholders and encourage co-operation between listed entity and the stakeholders, in the
following manner:
(i) The listed entity shall respect the rights of stakeholders that are established by law or through
mutual agreements.
(ii) Stakeholders shall have the opportunity to obtain effective redress for violation of their
rights.
(iii) Stakeholders shall have access to relevant, sufficient and reliable information on a timely
and regular basis to enable them to participate in corporate governance process.
(iv) The listed entity shall devise an effective whistle blower mechanism enabling stakeholders,
including individual employees and their representative bodies, to freely communicate their
concerns about illegal or unethical practices.
Disclosure and transparency: The listed entity shall ensure timely and accurate disclosure on
(e)
all material matters including the financial situation, performance, ownership, and governance of
the listed entity, in the following manner:
(i) Information shall be prepared and disclosed in accordance with the prescribed standards of
accounting, financial and non-financial disclosure.***
(ii) Channels for disseminating information shall provide for equal, timely and cost efficient
access to relevant information by users.
(iii) Minutes of the meeting shall be maintained explicitly recording dissenting opinions, if any.
Responsibilities of the board of directors: The board of directors of the listed entity shall have
(f)
the following responsibilities:
(i) Disclosure of information:
(1) Members of board of directors and key managerial personnel shall disclose to the
board of directors whether they, directly, indirectly, or on behalf of third parties, have a
material interest in any transaction or matter directly affecting the listed entity.
(2) The board of directors and senior management shall conduct themselves so as to meet
the expectations of operational transparency to stakeholders while at the same time
maintaining confidentiality of information in order to foster a culture of good decision-
making.
 Lesson 2 n Legislative Framework of Corporate Governance in India 51

(ii) Key functions of the board of directors :

(1) Reviewing and guiding corporate strategy, major plans of action, risk policy, annual
budgets and business plans, setting performance objectives, monitoring implementation
and corporate performance, and overseeing major capital expenditures, acquisitions
and divestments.
(2) Monitoring the effectiveness of the listed entity’s governance practices and making
changes as needed.
(3) Selecting, compensating, monitoring and, when necessary, replacing key managerial
personnel and overseeing succession planning.
(4) Aligning key managerial personnel and remuneration of board of directors with the
longer term interests of the listed entity and its shareholders.
(5) Ensuring a transparent nomination process to the board of directors with the diversity
of thought, experience, knowledge, perspective and gender in the board of directors.
(6) Monitoring and managing potential conflicts of interest of management, members of
the board of directors and shareholders, including misuse of corporate assets and
abuse in related party transactions.
(7) Ensuring the integrity of the listed entity’s accounting and financial reporting systems,
including the independent audit, and that appropriate systems of control are in place,
in particular, systems for risk management, financial and operational control, and
compliance with the law and relevant standards.
(8) Overseeing the process of disclosure and communications.
(9) Monitoring and reviewing board of director’s evaluation framework.
(iii) Other responsibilities:
(1) The board of directors shall provide strategic guidance to the listed entity, ensure
effective monitoring of the management and shall be accountable to the listed entity
and the shareholders.
(2) The board of directors shall set a corporate culture and the values by which executives
throughout a group shall behave.
(3) Members of the board of directors shall act on a fully informed basis, in good faith, with
due diligence and care, and in the best interest of the listed entity and the shareholders.
(4) The board of directors shall encourage continuing directors training to ensure that the
members of board of directors are kept up to date.
(5) Where decisions of the board of directors may affect different shareholder groups
differently, the board of directors shall treat all shareholders fairly.
(6) The board of directors shall maintain high ethical standards and shall take into account
the interests of stakeholders.
(7) The board of directors shall exercise objective independent judgement on corporate
affairs.
(8) The board of directors shall consider assigning a sufficient number of non-executive
members of the board of directors capable of exercising independent judgement to
tasks where there is a potential for conflict of interest.
52 EP-GRMCE

(9) The board of directors shall ensure that, while rightly encouraging positive thinking,
these do not result in over-optimism that either leads to significant risks not being
recognised or exposes the listed entity to excessive risk.
(10) The board of directors shall have ability to ‘step back’ to assist executive management
by challenging the assumptions underlying: strategy, strategic initiatives (such as
acquisitions), risk appetite, exposures and the key areas of the listed entity’s focus.
(11) When committees of the board of directors are established, their mandate, composition
and working procedures shall be well defined and disclosed by the board of directors.
(12) Members of the board of directors shall be able to commit themselves effectively to
their responsibilities.
(13) In order to fulfil their responsibilities, members of the board of directors shall have
access to accurate, relevant and timely information.
(14) The board of directors and senior management shall facilitate the independent
directors to perform their role effectively as a member of the board of directors and
also a member of a committee of board of directors.

CORPORATE GOVERNANCE OF BANKING AND FINANCIAL INSTITUTIONS

Banking and financial institutions are the strong backbone of any economy. Functioning of banking and financial
institutions differs with other corporate entities in many ways which makes good corporate governance of banks
very critical and important. RBI had undertaken several measures to strengthen the corporate governance
in the Indian banking sector. Various advisory groups and consultative groups were formed to deeply study
banking sector in the light of effective corporate governance.
l In March 2000, an advisory group on corporate governance was formed under the chairmanship of Dr.
R. H. Patil.
l Subsequently, another consultative group was formed in November 2001 under the Chairmanship of Dr.
A.S. Ganguly, with an objective to strengthen the internal supervisory role of the Boards in banks. The
Committee made several recommendations for effective functioning of banks which were circulated by
RBI for adoption by all banks.
l On 20th January, 2014, another Committee to Review Governance of Boards of Banks in India was
constituted by the RBI Governor under the Chairmanship of Mr. P.J Nayak. The Committee had
submitted its report with various recommendations in May 2014.
Considering the recommendations of these advisory groups and the global corporate governance experiences,
various areas of governance which were potentially important and needed attention, were emphasized. It
included defined role of supervisors, ensuring an environment supportive to the sound corporate governance,
effective organizational structure to have responsible board of directors, etc. Another global initiative in 1999 of
the Basel Committee also brought important principles on corporate governance for banks.
Presently Indian banking sector comprises of Scheduled and Non Scheduled banks, co-operative banks,
commercial banks dominated by the government-managed banks including public sector banks, nationalized
banks and rural banks, etc. These banks in our country have been established under the different statutes.
l Majorly banks are governed by the Banking Regulation Act 1949.
l The State Bank of India is governed by the State Bank of India Act, 1955.
l Nationalized banks are governed by the Banking Companies (Acquisition and Transfer of Undertakings)
Act, 1970 and the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980.
 Lesson 2 n Legislative Framework of Corporate Governance in India 53

l The private sector banks came into being as company registered under the Companies Act (whether
under the Companies Act, 2013/1956 or under the Indian Companies Act, 1913 or prior to that) and
hence are regulated by the Companies Act also to the extent applicable.
l The banks listed with the stock exchange have to additionally adhere to the requirement of the SEBI
(Listing Obligations and Disclosure Requirements) Regulations, 2015.
Additionally Foreign Exchange Management Act (FEMA), 1999, Payment and Settlement Systems Act, 2007,
and other directives/ regulations/ guidelines/ instructions issued by RBI and SEBI from time to time also need
to be adhered.

Ganguly Committee Recommendations on Corporate Governance in Banks

The RBI vide its circular number DBOD. No. BC.-116/08.139.001/2001-02 dated 20th June 2002, circulated to
all scheduled commercial banks, a Report of the Consultative Group of Directors of Banks/Financial Institutions
(Dr. Ganguly Group) - Implementation of recommendations. The RBI through this circular urged the banks
to place the Report as well as the list of recommendations enclosed in circular before the Board of Directors
of respective banks. Based on the decision taken by the Board, these recommendations be adopted and
implemented in banks.

The list of the recommendations is as under:

Recommendations which may be implemented by all banks :
(i) Responsibilities of the Board of Directors:
(a) A strong corporate board should fulfill the following four major roles viz. overseeing the risk profile
of the bank, monitoring the integrity of its business and control mechanisms, ensuring the expert
management, and maximising the interests of its stakeholders.
(b) The Board of Directors should ensure that responsibilities of directors are well defined and every
director should be familiarised on the functioning of the bank before his induction, covering the
following essential areas:
l delegation of powers to various authorities by the Board,
l strategic plan of the institution
l organisational structure
l financial and other controls and systems
l economic features of the market and competitive environment.
(ii) Role and responsibility of independent and non-executive directors:
(a) The independent/non-executive directors have a prominent role in inducting and sustaining a pro-
active governance framework in banks.
(b) In order to familiarise the independent /non-executive directors with the environment of the
bank, banks may circulate among the new directors a brief note on the profile of the bank, the
sub committees of the Board, their role, details on delegation of powers, the profiles of the top
executives etc.
(c) It would be desirable for the banks to take an undertaking from each independent and non-
executive director to the effect that he/she has gone through the guidelines defining the role and
responsibilities and enter into covenant to discharge his/her responsibilities to the best of their
abilities, individually and collectively.
54 EP-GRMCE

(iii) Training facilities for directors:

(a) Need-based training programmes/seminars/ workshops may be designed by banks to acquaint
their directors with emerging developments/challenges facing the banking sector and participation
in such programmes could make the directors more sensitive to their role.
(b) The Board should ensure that the directors are exposed to the latest managerial techniques,
technological developments in banks, and financial markets, risk management systems etc. so as
to discharge their duties to the best of their abilities.
(c) While RBI can offer certain training programmes/seminars in this regard at its training
establishments, large banks may conduct such programmes in their own training centres.
(iv) Submission of routine information to the Board: Reviews dealing with various performance areas
may be put up to the Management Committee of the Board and only a summary on each of the reviews
may be put up to the Board of directors at periodic intervals. This will provide the Board more time to
concentrate on more strategic issues such as risk profile, internal control systems, overall performance
of the bank, etc.
(v) Agenda and minutes of the board meeting:
(a) The draft minutes of the meeting should be forwarded to the directors, preferably via the electronic
media, within 48 hours of the meeting and ratification obtained from the directors within a definite
time frame. The directors may be provided with necessary technology assistance towards this
end.
(b) The Board should review the status of the action taken on points arising from the earlier meetings
till action is completed to the satisfaction of the Board, and any pending item should be continued
to be put up as part of the agenda items before the Board.
(vi) Committees of the Board:
(a)
Shareholders’ Redressal Committee: As communicated to banks vide circular DBOD
No.111/08.138.001/2001-02 dated June 4, 2002 on SEBI Committee on Corporate Governance
, the banks which have issued shares,/debentures to public may form a committee under the
chairmanship of a non-executive director to look into redressal of shareholders’ complaints.
(b)
Risk Management Committee: In pursuance of the Risk Management Guidelines issued by the
Reserve Bank of India in October 1999, every banking organisation is required to set up Risk
Management Committee. The formation and operationalisation of such committee should be
speeded up and their role further strengthened.
(c)
Supervisory Committee: The role and responsibilities of the Supervisory Committee as envisaged
by the Group viz., monitoring of the exposures (both credit and investment) of the bank, review
of the adequacy of the risk management process and upgradation thereof, internal control
system, ensuring compliance with the statutory/regulatory framework etc., may be assigned to
the Management Committee/Executive Committee of the Board.
(vii) Disclosure and transparency
The following disclosures should be made by banks to the Board of Directors at regular intervals as
may be prescribed by the Board in this regard.
l progress made in putting in place a progressive risk management system, and risk management
policy and strategy followed by the bank.
 Lesson 2 n Legislative Framework of Corporate Governance in India 55

l exposures to related entities of the bank, viz. details of lending to/investment in subsidiaries, the
asset classification of such lending/investment, etc.
l conformity with corporate governance standards viz. in composition of various committees, their
role and functions, periodicity of the meetings and compliance with coverage and review functions
etc.

Recommendations applicable only to public sector bank

(i) Information flow: In order to improve manner in which the proceedings are recorded and followed up
in public sector banks, they may initiate measures to provide the following information to the board:
l A summary of key observations made by the directors which should be submitted in the next
board meeting.
l A more detailed recording of the proceedings which will clearly bring out the observations, dissents,
etc. by the individual directors which could be forwarded to them for their confirmation.
(ii) Company Secretary: The Company Secretary has important fiduciary and Company Law responsibilities.
The Company Secretary is the nodal point for the Board to get feedback on the status of compliance
by the organisation in regard to provisions of the Company Law, listing agreements, SEBI regulations,
shareholder grievances, etc. In view of the important role performed by the Company Secretary vis-à-
vis the functioning of the Boards of the banks, as also in the context of some of the public sector banks
having made public issue it may be necessary to have Company Secretary for these banks also. Banks
should therefore consider appointing qualified Company Secretary as the Secretary to the Board and
have a Compliance Officer (reporting to the Secretary) for ensuring compliance with various regulatory/
accounting requirements.

Recommendations applicable only to private sector bank

(i) Eligibility criteria and ‘fit and proper’ norms for nomination of directors:
(a) The Board of Directors of the banks while nominating/ co-opting directors should be guided
by certain broad ‘fit and proper’ norms for directors, viz. formal qualification, experience, track
record, integrity etc. For assessing integrity and suitability features like criminal records, financial
position, civil actions initiated to pursue personal debts, refusal of admission to or expulsion from
professional bodies, sanctions applied by regulators or similar bodies, previous questionable
business practices etc should be considered. The Board of Directors may, therefore, evolve
appropriate systems for ensuring ‘fit and proper’ norms for directors, which may include calling for
information by way of self-declaration, verification reports from market, etc.
(b) The following criteria, which is in vogue in respect of nomination to the boards of public sector
banks, may also be followed for nominating independent/ non-executive directors on private
sector banks:
l The candidate should normally be a graduate (which can be relaxed while selecting directors
for the categories of farmers, depositors, artisans, etc.)
l He/she should be between 35 and 65 years of age.
l He/she should not be a Member of Parliament/Member of Legislative Assembly/ Member of
Legislative Council.
(ii) Commonality of directors of banks and non-banking finance companies (NBFC): In case, a
director on the board of an NBFC is to be considered for appointment as director on the board of the
bank, the following conditions must be followed:
56 EP-GRMCE

l He/she is not the owner of the NBFC, [i.e., share holdings (single or jointly with relatives,
associates, etc.) should not exceed 50%] ,
l He/she is not related to the promoter of the NBFC,
l He/she is not a full-time employee in the NBFC.
l The concerned NBFC is not a borrower of the bank.
(iii) Composition of the Board: In the context of banking becoming more complex and competitive, the
composition of the Board should be commensurate with the business needs of the banks. There is an
urgent need for making the Boards of banks more contemporarily professional by inducting technical
and specially qualified personnel. Efforts should be aimed at bringing about a blend of ‘historical skills’
set, i.e. regulation based representation of sectors like agriculture, SSI, cooperation etc. and the ‘new
skills’ set, i.e. need based representation of skills such as, marketing, technology and systems, risk
management, strategic planning, treasury operations, credit recovery etc. The above suggestions may
be kept in view while electing/co-opting directors to their boards.

Basel Committee on Corporate Governance

Basel Committee on Banking Supervision (BCBS) released Guidelines on Corporate Governance for banks
which were released in July 2015.
The principles of corporate governance of these guidelines are as under:
l Principle 1 : Board’s overall responsibilities: The board has overall responsibility for the bank,
including approving and overseeing the implementation of the bank’s strategic objectives, governance
framework and corporate culture. The board is also responsible for providing oversight of senior
management.
l Principle 2: Board qualifications and composition: Board members should be and remain qualified,
individually and collectively, for their positions. They should understand their oversight and corporate
governance role and be able to exercise sound, objective judgment about the affairs of the bank.
l Principle 3: Board’s own structure and practices: The board should define appropriate governance
structures and practices for its own work, and put in place the means for such practices to be followed
and periodically reviewed for ongoing effectiveness.
l Principle 4: Senior management: Under the direction and oversight of the board, senior management
should carry out and manage the bank’s activities in a manner consistent with the business strategy,
risk appetite, remuneration and other policies approved by the board.
l Principle 5: Governance of group structures: In a group structure, the board of the parent company
has the overall responsibility for the group and for ensuring the establishment and operation of a clear
governance framework appropriate to the structure, business and risks of the group and its entities. The
board and senior management should know and understand the bank group’s operational structure and
the risks that it poses.
l Principle 6: Risk management function: Banks should have an effective independent risk management
function, under the direction of a chief risk officer (CRO), with sufficient stature, independence, resources
and access to the board.
l Principle 7: Risk identification, monitoring and controlling: Risks should be identified, monitored
and controlled on an ongoing bank-wide and individual entity basis. The sophistication of the bank’s
risk management and internal control infrastructure should keep pace with changes to the bank’s risk
profile, to the external risk landscape and in industry practice.
 Lesson 2 n Legislative Framework of Corporate Governance in India 57

l Principle 8: Risk communication: An effective risk governance framework requires robust

communication within the bank about risk, both across the organisation and through reporting to the
board and senior management.
l Principle 9: Compliance: The bank’s board of directors is responsible for overseeing the management
of the bank’s compliance risk. The board should establish a compliance function and approve the
bank’s policies and processes for identifying, assessing, monitoring and reporting and advising on
compliance risk.
l Principle 10: Internal audit: The internal audit function provides independent assurance to the board
and supports board and senior management in promoting an effective governance process and the long-
term soundness of the bank. The internal audit function should have a clear mandate, be accountable
to the board, be independent of the audited activities and have sufficient standing, skills, resources and
authority within the bank.
l Principle 11: Compensation: The bank’s compensation structure should support sound corporate
governance and risk management, it should be effectively aligned with sound risk management and
should promote long term health of the organisation and appropriate risk- taking behavior.
l Principle 12: Disclosure and transparency: The governance of the bank should be adequately
transparent to its shareholders, depositors, other relevant stakeholders and market participants.
l Principle 13: The role of supervisors: Supervisors should provide guidance for and supervise
corporate governance at banks, including through comprehensive evaluations and regular interaction
with boards and senior management, should require improvement and remedial action as necessary,
and should share information on corporate governance with other supervisors.
The Reserve Bank of India plans to overhaul the corporate governance structure of Indian banking system,
limiting the terms of directors and chief executive officers and placing more responsibility on the board of
directors for a bank’s culture and compensation. Board of directors would be responsible for the remuneration
and the outcome or performance and would be accountable for the risk a bank takes. Related party transactions
and conflict of interest between various entities of a group to which the bank belongs also dominate the latest
set of governance rules that the regulator is proposing. Among other things, the new guidelines put the burden
of outcomes vis-a-vis the compensation on the board.

Reserve Bank of India (‘Fit and Proper’ Criteria for Elected Directors on the Boards of PSBs)
Directions, 2019
The Reserve Bank of India on August 2, 2019 being satisfied that it is necessary and expedient in the public
interest to do so notified and specified the authority, manner, procedure and criteria for determining the ‘fit and
proper’ status of a person to be eligible to be elected as a director on the Board of Public Sector Banks, and
issued the Directions hereinafter specified.
These Directions are called the Reserve Bank of India (‘Fit and Proper’ Criteria for Elected Directors on the
Boards of PSBs) Directions, 2019 and are applicable to Public Sector Banks.

Fit and Proper’ Criteria for Elected Directors on the Boards of State Bank of India and
Nationalised Banks:
Authority
All the banks are required to constitute a Nomination and Remuneration Committee [hereinafter referred to as
the Committee] consisting of a minimum of three non-executive directors from amongst the Board of Directors
[hereinafter referred to as Board], out of which not less than one-half shall be independent directors and should
include at least one member from Risk Management Committee of the Board, for undertaking a process of due
58 EP-GRMCE

diligence to determine the ‘fit and proper’ status of the persons to be elected as directors under sub-section (c)
of Section 19 of the SBI Act/clause (i) of sub-section (3) of Section 9 of the Banking Companies (Acquisition
and Transfer of Undertakings) Act, 1970/1980. The Government of India nominee director and the director
nominated under section 19(f) of the SBI Act/section 9(3)(c) of the Banking Companies (Acquisition and Transfer
of Undertakings) Act, 1970/1980 shall not be part of the Committee. The non-executive Chairperson of the
bank may be appointed as a member of the Committee but shall not chair such Committee. The Board should
also nominate one among them as Chairman of the Committee. The quorum required is three, including the
Chairman. In case the absence of any nominated member results in want of quorum, the Board may nominate
any other non-executive director in his place for the meeting. At the time of constituting the Committee, the
Board can decide on its tenure.
Manner and procedure
The banks shall obtain necessary information, and a declaration & undertaking, in the format specified from
the persons who file their nominations for election. The Committee shall meet after the last date prescribed for
acceptance of nominations and determine whether or not the person’s candidature should be accepted, based
on the criteria mentioned below. The Committee’s discussions shall be properly recorded as formal minutes
of the meeting and the voting, if done, shall also be noted. Based on the information provided in the signed
declaration, the Committee shall decide on the acceptance or otherwise of the candidature and shall make
references, where considered necessary, to the appropriate authority / persons, to ensure that the candidate
conforms to the requirements indicated.
Criteria
The Committee shall determine the ‘fit and proper’ status of the proposed candidates based on the broad
criteria mentioned hereunder:
(i) Age – The candidate’s age should be between 35 to 67 years as on the cut-off date fixed for submission
of nominations for election.
(ii) Educational qualification – The candidate should at least be a graduate.
(iii) Experience and field of expertise – The candidate shall have special knowledge or practical
experience in respect of one or more of the matters enumerated in section 19A(a) of the SBI Act /
section 9(3A)(A) of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970/1980,
as the case may be, read with RBI Circular DBR.Appt.BC No 39/29.39.001/2016-17 dated November
24, 2016.
(iv) Disqualifications : In addition to ‘Disqualifications of Directors’ as prescribed in Section 22 of the SBI
Act, 1955 / Clause 10 of Nationalised Banks (Management and Miscellaneous Provisions) Scheme,
1970/80:
a. The candidate should not be a member of the Board of any bank or the Reserve Bank or a
Financial Institution (FI) or an Insurance Company or a NOFHC holding any other bank.

Explanation: For the purpose of this sub-para and sub-para (c), the expression “bank” shall include
a banking company, a corresponding new bank, State Bank of India, a co-operative bank and a
regional rural bank.
b. A person connected with hire purchase, financing, money lending, investment, leasing and other
para banking activities shall not be considered for appointment as elected director on the board of
a PSB. However, investors of such entities would not be disqualified for appointment as directors
if they do not enjoy any managerial control in them.
c. No person may be elected/ re-elected on the Board of a bank if he/she has served as director in
the past on the board of any bank1/FI/RBI/Insurance Company under any category for six years,
 Lesson 2 n Legislative Framework of Corporate Governance in India 59

whether continuously or intermittently.

d. The candidate should not be engaging in the business of stock broking.
e. The candidate should not be holding the position of a Member of Parliament or State Legislature
or Municipal Corporation or Municipality or other local bodies2.
f. The candidate should not be acting as a partner of a Chartered Accountant firm which is currently
engaged as a Statutory Central Auditor of any nationalised bank or State Bank of India.
g. The candidate should not be acting as a partner of a Chartered Accountant firm which is currently
engaged as Statutory Branch Auditor or Concurrent Auditor of the bank in which nomination for
election is filed.
(v) Tenure – An elected director shall hold office for three years and shall be eligible for re-election:
Provided that no such director shall hold office for a period exceeding six years, whether served
continuously or intermittently.
(vi) Professional Restrictions –
(a) The candidate should neither have any business connection (including legal services, advisory
services etc.) with the concerned bank nor should be engaged in activities which might result in a
conflict of business interests with that bank.
(b) The candidate should not be having any professional relationship with a bank or any NOFHC
holding any other bank.
Provided that a candidate having any such relationship with a bank at the time of filing nomination
for election shall be deemed to be meeting the requirement under item (b), the candidate shall
submit a declaration to the Committee that such relationship with the bank shall be severed if he
is elected as a director, and upon being elected, severs such relationship before appointment as
a director of the bank.
(vii) Track record and integrity - The candidate should not be under adverse notice of any regulatory or
supervisory authority/agency, or law enforcement agency and should not be a defaulter of any lending
institution.
5. The banks shall obtain from the elected director:
(a) a Deed of Covenant executed in the format annexed (Annex 2), before such person assumes office of
director;
(b) a simple declaration every year as on 31st March to the effect that the information already provided by
such person has not undergone any change.
(c) Where the elected director informs that there is change in the information provided earlier, the bank
shall obtain from such director a fresh Annex 1 incorporating the changes.
6. The banks shall also -
Ensure compliance to Section 20 of the Banking Regulation Act, 1949. In addition,
(a) Put in place a system of safeguards, including proper disclosure of the elected CA director’s/his firm’s
clients, and not participating in bank’s credit/investment decisions involving his/firm’s clients. The
elected CA director should be required to compulsorily dissociate himself from the entire process and
sign a covenant to this effect.
(b) Require the elected director to make a full and proper disclosure of his interests and directorships in
business entities, with the director personally distancing himself from and not participating in the bank’s
60 EP-GRMCE

credit/investment decisions involving entities in which he is interested.

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

GUIDELINES ON CORPORATE GOVERNANCE FOR NBFCS

In order to enable NBFCs to adopt best practices and greater transparency in their operations the guidelines as
given below were proposed by RBI vide Circular dated 1st July, 2013.
These Guidelines are for consideration of the Board of Directors of all Deposit taking NBFCs and all non-deposit
taking NBFCs with asset size of Rs 500 crore and above (NBFC-ND-SI) henceforth called as applicable NBFcs.
The provisions of these directions shall not apply to a Systematically Important core Investment Company as
defined in the Core Investment Companies (Reserve Bank) Directions, 2011. Listed NBFCs which are required
to adhere to listing regulations and rules framed by SEBI on Corporate Governance are also required to comply
with SEBI prescriptions on Corporate Governance.
1. Constitution of Audit Committee:
i. All Applicable NBFCs shall constitute an Audit Committee, consisting of not less than three
members of its Board of Directors.
Explanation I : The Audit Committee constituted by a non-banking financial company as required
under Section 177 of the Companies Act, 2013 shall be the Audit Committee for the purposes of
this paragraph.
Explanation II : The Audit Committee constituted under this paragraph shall have the same
powers, functions and duties as laid down in Section 177 of the Companies Act, 2013.
ii. The Audit Committee must ensure that an Information System Audit of the internal systems and
processes is conducted at least once in two years to assess operational risks faced by the NBFCs
2. Constitution of Nomination Committee: All Applicable NBFCs shall form a Nomination Committee to
ensure ‘fit and proper’ status of proposed/ existing directors.
Explanation I : The Nomination Committee constituted under this paragraph shall have the same
powers, functions and duties as laid down in Section 178 of the Companies Act, 2013.
 Lesson 2 n Legislative Framework of Corporate Governance in India 61

Fit and Proper Criteria:

All Applicable NBFCs shall
i. ensure that a policy is put in place with the approval of the Board of Directors for ascertaining the
fit and proper criteria of the directors at the time of appointment, and on a continuing basis.
ii. obtain a declaration and undertaking from the directors giving additional information on the directors.
iii. obtain a Deed of Covenant signed by the directors, which shall be in the prescribed format
iv. furnish to the Reserve Bank a quarterly statement on change of directors, and a certificate from
the Managing Director of the NBFC that fit and proper criteria in selection of the directors has
been followed. The statement must reach the Regional Office of the Reserve Bank within 15 days
of the close of the respective quarter. The statement submitted by NBFCs for the quarter ending
March 31, should be certified by the auditors. Provided that the Bank, if it deems fit and in public
interest, reserves the right to examine the fit and proper criteria of directors of any non-banking
financial company irrespective of the asset size of such non-banking financial company
3. Constitution of Risk Management Committee: To manage the integrated risk, all Applicable NBFCs
shall form a Risk Management Committee, besides the Asset Liability Management Committee
4. Disclosure and transparency:
(1) All Applicable NBFCs shall put up to the Board of Directors, at regular intervals, as may be
prescribed by the Board in this regard, the following:
i. the progress made in putting in place a progressive risk management system and risk
management policy and strategy followed by the NBFC;
ii. conformity with corporate governance standards viz., in composition of various committees,
their role and functions, periodicity of the meetings and compliance with coverage and
review functions, etc.
(2) All Applicable NBFCs shall also disclose the following in their Annual Financial Statements, with
effect from March 31, 2015:
i. registration/ licence/ authorisation, by whatever name called, obtained from other financial
sector regulators;
ii. ratings assigned by credit rating agencies and migration of ratings during the year;
iii. penalties, if any, levied by any regulator;
iv. information namely, area, country of operation and joint venture partners with regard to Joint
ventures and overseas subsidiaries and
v. Asset-Liability profile, extent of financing of parent company products, NPAs and movement
of NPAs, details of all off-balance sheet 4 exposures, structured products issued by them as
also securitization/assignment transactions and other disclosures.
5. Framing of Internal Guidelines:
All applicable NBFCs shall frame their internal guidelines on corporate governance with the approval
of the Board of Directors, enhancing the scope of the guidelines without sacrificing the spirit underlying
the above guidelines and it shall be published on the company’s web-site, if any, for the information of
various stakeholders.
62 EP-GRMCE

6. Rotation of partners of the statutory auditors audit firm

All Applicable NBFCs shall rotate the partner/s of the Chartered Accountant firm conducting the audit,
every three years so that same partner does not conduct audit of the company continuously for more
than a period of three years. However, the partner so rotated will be eligible for conducting the audit of
the NBFC after an interval of three years, if the NBFC, so decides. NBFCs shall incorporate appropriate
terms in the letter of appointment of the firm of auditors and ensure its compliance.

CORPORATE GOVERNANCE GUIDELINES FOR INSURANCE COMPANIES

The Insurance Regulatory and Development Authority of India (IRDAI) issued Guidelines on Corporate
Governance for insurance companies vide circular dated 5th August, 2009. The Authority had also issued
separate guidelines for appointment/ reappointment and remuneration of MD/CEO/ WTD as well as other
Key Management Persons (KMPs) and also the Appointment of statutory auditors of insurers through various
circulars.
The IRDAI revised the existing Guidelines in the light of changes brought in by the Companies Act, 2013
vide Circular Dated 18th May 2016 to ensure that the structure, responsibilities and functions of Board of
Directors and the management of the company recognize the expectations of all stakeholders as well as
those of the regulator. These guidelines are applicable to all insurers granted registration by the Authority
except:
(i) reinsurance companies may not be required to have the Policyholders’ Protection Committee; and
(ii) branches of foreign reinsurers in India may not be required to constitute the Board and its mandatory
committees as indicated herein.
The guidelines address the various requirements broadly covering the following major structural elements of
Corporate Governance in insurance companies:-

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

2. Board of Directors
(a) Composition
l The Insurance Act stipulates that the insurance companies in India would be public companies and
hence, would require a properly constituted Board.
l Insurance companies should ensure that the Board comprises of competent and qualified Directors to
drive the strategies in a manner that would sustain growth and protect the interests of the stakeholders
in general and policyholders in particular.
 Lesson 2 n Legislative Framework of Corporate Governance in India 63

l The size of the Board in addition to being compliant with legal requirements (where applicable), should
be consistent with scale, nature and complexity of business.
l It is expected that the shareholders of the companies elect or nominate Directors from various areas of
financial and management expertise such as accountancy, law, insurance, pension, banking, securities,
economics, etc., with qualifications and experience that is appropriate to the company.
l It is essential that the Directors possess the knowledge of group structure, organizational structure,
process and products of the insurer and the Board generally complies with the following requirements:-
– The Board of Directors and Key Management Persons should understand the operational
structure of the insurer and have a general understanding of the lines of business and products of
the insurer, more particularly as the insurer grows in size and complexity.
– The Board of Directors of an insurer belonging to a larger group structure/ conglomerate should
understand the material risks and issues that could affect the group entities, with attendant
implication on the insurer.
l The Board of Directors is required to have a minimum of three “Independent Directors”. However, this
requirement is relaxed to ‘two’ independent directors, for the initial five years from grant of Certificate of
Registration to insurers. An independent Director shall fulfill all the conditions specified under Section
149 of the Companies Act, 2013.
In case the number of independent directors falls below the required minimum laid down, such vacancy
shall be filled up before the immediately following Board meeting or 3 months from the date of such
vacancy, whichever is later, under intimation to the Authority.
l Where the Chairman of the Board is non-executive, the Chief Executive Officer should be a whole time
director of the Board.
l As required under Section 149 of the Companies Act, 2013, there shall be at least one Woman Director
on the Board of every Insurance company.
(b) The Role and responsibility of the Board
The specific areas of responsibilities of the Board of insurers are provided as under-
(1) The Board should ensure that the Governance principles set for the insurer comply with all relevant
laws, regulations and other applicable codes of conduct.
(2) The Board should set the following policies in consultation with the Management of the Company.
(a) Define and periodically review the business strategy.
(b) Define the underwriting policy of the insurer.
(c) Determine the retention and reinsurance policy and in particular, the levels of retentions of risk by
the insurer and the nature and extent of reinsurance protection to be maintained by the insurer.
(d) Define the policy of the insurer as regards investment of its assets consistent with an appropriate
asset liability management structure.
(e) Define the insurer’s policy on appointments and qualification requirements for human resources
and ensure that the incentive structure does not encourage imprudent behaviour.
(3) The Board should define and set the following standards:-
(a) Define the standards of business conduct and ethical behaviour for directors and senior
management.
64 EP-GRMCE

(b) Define the standards to be maintained in policyholder servicing and in redressal of grievances of
policyholders.
(4) The Board would be responsible to provide guidance for implementation of business strategy and
review the same periodically.
(5) As an integral part of proper implementation of the business strategy, the Board should take action as
under:-
(a) Establish appropriate systems to regulate the risk appetite and risk profile of the Company. It will
also enable identification and measurement of significant risks to which the company is exposed
in order to develop an effective risk management system.
(b) Ensure that all directions of IRDAI are submitted to the Board and the recommendations are
implemented as per the Board philosophy.
(c) Ensure that the IT systems in the company are appropriate and have built-in checks and balances
to produce data with integrity and put in place a business continuity and disaster recovery plan.
(d) Ensure that the company has put in place a robust compliance system for all applicable laws and
regulations.
(e) Prescribe requirements and frequency of reporting in respect of each of the above areas of
responsibility as may be decided by the Board.
(6) In discharge of the above and other Governance functions, the Board may delegate the responsibilities
to mandated/ other recommended Empowered Committees of Directors while retaining its primary
accountability.
(c) Eligibility Criteria
The Directors of insurers have to meet the “fit and proper” criteria. Currently, the fit and proper requirements
seek to ensure that the Director should not have been convicted or come under adverse notice of the laws and
regulations involving moral turpitude or of any professional body.
(d) Disclosures about Meetings of the Board and its Committees
Insurers shall ensure compliance with the provisions of the Companies Act, 2013 and the Secretarial Standards
issued by the ICSI from time to time as regards conduct of the meetings of the Board of Directors and their
committees. In addition to the above, all insurers shall disclose the following in the Director’s Report:
l Number of meetings of the Board of Directors and Committees mandated under these Guidelines, in
the financial year
l Details of the composition of the Board of Directors and Committees mandated, setting out name,
qualification, field of specialization, status of directorship held etc.
l Number of meetings attended by the Directors and members of the Committee
l Details of the remuneration paid, if any, to all directors (including Independent Directors)
(e) Control Functions
Given the risks that an insurer takes in carrying out its operations, and the potential impact it has on its business,
it is important that the Board lays down the policy framework to put in place:
l robust and efficient mechanisms for the identification, assessment, quantification, control, mitigation
and monitoring of the risks;
l appropriate processes for ensuring compliance with the Board approved policy, and applicable laws
and regulations;
 Lesson 2 n Legislative Framework of Corporate Governance in India 65

l appropriate internal controls to ensure that the risk management and compliance policies are observed;
l an internal audit function capable of reviewing and assessing the adequacy and effectiveness of,
and the insurer’s adherence to its internal controls as well as reporting on its strategies, policies and
procedures; and
l Independence of the control functions, including the risk management function, from business operations
demonstrated by a credible reporting arrangement.

3. Delegation of Functions- Committees of the Board:

With a view to providing adequate Board time for discharge of the significant corporate responsibilities, the Board
can consider setting up of various Committees of Directors by delegating the overall monitoring responsibilities
after laying down the roles and responsibilities of these Committees to the Board.
Insurers may establish several Committees to undertake specific functions depending on the size and level of
the complexity of the operations. Typically, the Committees that assist the Board are Audit Committee, Risk
Management Committee, Nomination and Remuneration Committee, Investment Committee, Ethics Committee
and Asset-Liability Management Committee.
However, the Authority advises all insurers that it is mandatory to establish Committees for Audit, Investment,
Risk Management, Policyholder Protection, Nomination and Remuneration, Corporate Social Responsibility
(only for insurers earning profits).
In addition, Regulation 45d of the IRDA (Non-linked Insurance Products) Regulations, 2013 requires constitution
of a ‘With Profits’ Committee by Life Insurance Companies comprising of one Independent Director of the Board,
the Chief Executive Officer, the Appointed Actuary of the Company and an Independent Actuary. Establishment
of the other Committees is left to the option of the insurer.
(i) Audit Committee (mandatory)
Every Insurer shall constitute an Audit Committee as per Section 177 of the Companies Act, 2013 and will play
role provided as provided under the Act. As required under Section 177 of the Companies Act, 2013, the Audit
Committee shall comprise of a minimum of three directors, majority of whom shall be Independent Directors.
(ii) Investment Committee (mandatory)
The Board of every Insurer shall set up an Investment Committee comprising of at least two Non-Executive
Directors, the Chief Executive Officer, Chief of Finance, Chief of Investment, Chief Risk Officer and, the Appointed
Actuary. The Committee shall be responsible to recommend investment policy and lay down the operational
framework for the investment operations of the insurer. The policy should focus on a prudential Asset Liability
Management (ALM) supported by robust internal control systems. The investment policy and operational
framework should, inter alia, encompass aspects concerning liquidity for smooth operations, compliance with
prudential regulatory norms on investments, risk management / mitigation strategies to ensure commensurate
yield on investments and above all protection of policyholders’ funds.
(iii) Risk Management Committee (mandatory)
It is now well recognized that the sound management of insurance in pursuit of development of a strong risk
management system and mitigation strategies, insurers shall set up a separate Risk Management Committee
to implement the company’s Risk Management Strategy. The risk management function should be under the
overall guidance and supervision of the Chief Risk Officer (CRO) with a clearly defined role. It shall be organized
in such a way that it is able to monitor all the risks across the various lines of business of the company and the
operating head has direct access to the Board.
(iv) Policyholder Protection Committee (mandatory)
The Authority is mandated by statute to protect policyholders’ interests and therefore adoption of sound and
66 EP-GRMCE

healthy market practices in terms of sales, marketing, advertisements, promotion, publicity, redressal of
customer grievances, consumer awareness and education is essential. The Authority has, therefore, notified
various Regulations/Guidelines/Circulars in this regard.
With a view to addressing the various compliance issues relating to protection of the interests of policyholders,
as also relating to keeping the policyholders well informed of and educated about insurance products and
complaint-handling procedures, each insurer shall set up a Policyholder Protection Committee.
Such Committee shall be headed by a Non-Executive Director and shall include an expert/representative of
customers as an invitee to enable insurers to formulate policies and assess compliance thereof.
(v) Nomination and Remuneration Committee (mandatory)
The Nomination and Remuneration Committee shall be constituted in line with the provisions of Section
178 of the Companies Act, 2013. Indian Insurance Companies which have constituted two independent
committees for Nomination and Remuneration separately may merge these two Committees after seeking
the Board approval, under intimation to the Authority, within a period of 180 days from the date of issue of
these guidelines.
It is pertinent to draw attention to the provisions of Section 34 (A) (1) of the Insurance Act, 1938 which stipulates
that the remuneration of CEOs/Whole-time Directors of Indian insurance companies is subject to statutory
approval of the IRDAI. Further, the overall management costs of the insurer are also additionally governed by
the limits prescribed statutorily in the Insurance Act and Regulations framed there under in order to protect the
interests of the policyholders. The setting up of a Nomination and Remuneration Committee should keep the
above requirements in view.
(vi) Corporate Social Responsibility Committee (‘CSR Committee’) (mandatory)
Section 135 of the Companies Act, 2013 requires constitution of a CSR Committee if certain conditions as
mentioned in the said Section are fulfilled. For Indian Insurance Companies, a CSR Committee is required
to be set up if the Insurance company earns a Net Profit of Rs. 5 Crores or more during the immediately
preceding financial year.
In line with Section 135(5) of Companies Act, 2013, the Board of Directors of the Company shall ensure that
the Company spends not less than 2% of the three years’ average Net Profits as defined above towards the
CSR activities.
(vii) With Profits Committee:
The Authority has issued IRDA (Non-Linked Insurance Products) Regulations 2013, which lay down the
framework about the With Profit Fund Management and Asset sharing, among other things. In terms of these
Regulations, every Insurer transacting life insurance business shall constitute a With Profits Committee
comprising of an Independent Director, the CEO, The Appointed Actuary and an independent Actuary. The
Committee shall meet as often as is required to transact the business and carry out the functions of determining
the following:
l the share of assets attributable to the policyholders
l the investment income attributable to the participating fund of policyholders
l the expenses allocated to the policyholders
The report of the With Profits Committee in respect of the above matters should be attached to the Actuarial
Report and Abstract furnished by the insurers to the Authority.
(viii) Other Committees
The other Committees which can be set up by the Board, include the Ethics Committee and ALM Committee
 Lesson 2 n Legislative Framework of Corporate Governance in India 67

(other than life insurers). In cases where Board decides not to constitute such Committees, their functions and
responsibilities can be addressed in such manner as the Board may deem fit.

4. CEO/ Managing Director/ Whole-Time Director

The Chief Executive Officer/Whole Time Director/ Managing Director of the company and other key functionaries
are responsible for the operations and day to day management of the company in line with the directions of the
Board and the Committees set up by the Board. Section 34A of the Insurance Act, 1938 requires prior approval
of the Authority for appointment, re-appointment or termination of the Chief Executive Officer and the Whole
Time Directors. The Authority expects the CEO to be responsible for the conduct of the company’s affairs in a
manner which is not detrimental to the interests of the policyholders and which is consistent with the policies
and directions of the Board.

5. Role of Appointed Actuaries

IRDAI has brought out detailed Regulations on Appointed Actuary vide IRDA (Appointed Actuary) Regulations,
2000, detailing the procedure for his appointment, qualifications, powers along with his duties and obligations.
The Regulations also stipulate that prior approval of the Authority shall be taken for the appointment of the
Appointed Actuary. The Board should ensure that the requirements are scrupulously complied with. In brief, it
is reiterated that:
l A procedure for appointment of Appointed Actuary should be put in place.
l The Appointed Actuary should qualify and satisfy the ‘Fit & Proper’ criteria and other eligibility conditions
as mentioned in IRDA (Appointed Actuary) Regulations, 2000, as amended from time to time.
l The insurance companies shall clearly set forth the Appointed Actuary’s responsibilities and any
advisory role vis-à-vis the Board or the management as well as his/her rights and obligations. These
shall be in addition to the duties of the Appointed Actuaries as specified in the IRDA Regulations and
any other directions of IRDA in the matter.
l As soon as the Appointed Actuary realizes that the entity does not comply or is likely to fail in complying
with the requirements of solvency and other parameters of sound operations, he/she shall inform the
Board of the insurer. If no viable/acceptable action is taken by the Board, then he/she has to inform the
same to IRDAI.
l The Board shall interact directly with the Appointed Actuary wherever it considers it expedient to secure
his advice, it may do so in such manner as it may deem fit. The Appointed Actuary shall provide
professional advice or certification to the board with regard to:-
– Estimation of technical provisions in accordance with the valuation framework set up by the insurer
– Identification and estimation of material risks and appropriate management of the risks
– Financial condition testing
– Solvency margin requirements
– Appropriateness of premiums (and surrender value)
– Allocation of bonuses to with-profit insurance contracts
– Management of participating funds (including analysis of material effects caused by strategies
and policies)
– Product design, risk mitigation (including reinsurance) and other related risk management roles.
While the areas of advice/certification listed above are with specific reference to life companies, the
68 EP-GRMCE

appointed actuaries in case of non life insurance companies shall provide such advice/certification to
the extent applicable. In order to facilitate the Appointed Actuary in discharging his/ her responsibilities,
he/ she shall at all times be provided access to the information as required.

6. External Audit - Appointment of Statutory Auditors

The IRDAI (Preparation of Financial Statements and Auditors’ Report of Insurance Companies) Regulations,
2002 empower the Authority to issue directions/guidelines on appointment, continuance or removal of auditors
of an insurer. These guidelines/directions may include prescriptions on qualifications and experience of auditors,
their rotation, period of appointment, etc. as may be deemed necessary by the Authority.
The detailed guidelines as regards appointment of auditors and the reporting about all the auditors appointed
by insurers are given in Annexure 7 to these guidelines. The Board should therefore ensure that the statutory
auditors are compliant with the regulatory requirements and there are no conflicts of interest in their appointment.
The auditors should possess the competence and integrity to alert the appropriate authorities promptly of any
event that could seriously affect the insurance company’s financial position or the organization structure of its
administration or accounting and of any criminal violations or material irregularities that come to his notice.

7. Access to Board and Audit Committee

The Audit Committee should have discussions with the statutory auditors periodically about internal control
systems, the scope of audit including the observations of the auditors (where applicable) and review the
quarterly/half yearly and annual financial statements as the case may be before submission to the Board of
Directors and also ensure compliance with the internal control systems. The statutory auditors should also have
access to the Board of Directors through the Audit Committee.

8. Disclosure Requirements
The IRDAI (Preparation of Financial Statements and Auditors’ Report of Insurance Companies) Regulations,
2002, have prescribed certain disclosures in the financial statements and the Authority is in the process of
finalizing additional disclosures to be made by insurers at periodical intervals. In the meantime, it may be
ensured by the Board that the information on the following, including the basis, methods and assumptions
on which the information is prepared and the impact of any changes therein are also disclosed in the annual
accounts:-
l Quantitative and qualitative information on the insurance company’s financial and operating ratios, viz.
incurred claim, commission and expenses ratios.
l Actual solvency margin details vis-à-vis the required margin
l Insurers engaged in life insurance business shall disclose persistency ratio of policies sold by them
l Financial performance including growth rate and current financial position of the insurance company
l Description of the risk management architecture
l Details of number of claims intimated, disposed off and pending with details of duration
l All pecuniary relationships or transactions of the Non-Executive Directors vis-à-vis the insurance
company shall be disclosed in the Annual Report
l Elements of remuneration package(including incentives) of MD & CEO and all other directors and Key
Management Persons
l Payments made to group entities from the Policyholders Funds
l Any other matters, which have material impact on the insurer’s financial position.
 Lesson 2 n Legislative Framework of Corporate Governance in India 69

Where finalization of annual accounts extends beyond 90 days from the end of the Financial Year, the status
on disclosure in the financial statements required under this clause may be made within 15 days of adoption of
annual accounts by the Board of Directors of the Insurers.

9. Outsourcing Arrangements
All outsourcing arrangements of an Insurer shall have the approval of a Committee of Key Management Persons
and should meet the terms of the Board approved outsourcing policy. The Board or the Risk Management
Committee should be periodically apprised about the outsourcing arrangements entered into by the insurer
and also confirmation to the effect that they comply with the stipulations of the Authority as well as the internal
policy be placed before them. An insurer shall not outsource any of the company’s core functions other than
those that have been specifically permitted by the Authority. Every outsourcing contract shall contain explicit
safeguards regarding confidentiality of data and all outputs from the data, continuing ownership of the data
with the insurer and orderly handing over of the data and all related software programs on termination of the
outsourcing arrangement.
The management of the insurance company shall monitor and review the performance of agencies to whom
operations have been outsourced at least annually and report findings to the Board.
The Authority reserves the right to access the operations of the outsourced entity to the extent these are
relevant to the insurance company and for the protection of policyholder.

10. Interaction with the Regulator

Effective corporate governance practices in the office of the insurance company will enable IRDAI to have
greater confidence in the work and judgment of its board, Key Management Persons and control functions.
In assessing the governance practices in place, the IRDAI would:
l Seek confirmation that the insurance company has adopted and effectively implemented sound
corporate governance policies and practices;
l Assess the fitness and propriety of board members;
l Monitor the performance of boards;
l Assess the quality of insurance company’s internal reporting, risk management, audit and control
functions;
l Evaluate the effects of the insurance company’s group structure on the governance strategies;
l Assess the adequacy of governance processes in the area of crisis management and business
continuity.
The IRDAI would bring to the attention of the Board and senior management, concerns which have been
detected by it through supervisory activities.

Reporting to IRDAI
Insurers should examine to what extent they are currently complying with these guidelines and initiate immediate
action to achieve compliance (where not already in compliance) within a period of three months from the date
of notification of these guidelines. It is expected that all the arrangements should be in place to ensure full
compliance with the guidelines from the financial year 2016-2017. Where such compliance is not possible for
any specific reason, the insurance companies should write to the IRDAI for further guidance.
Each insurer should designate Company Secretary as the Compliance officer whose duty will be to monitor
continuing compliance with these guidelines.
70 EP-GRMCE

Annual Report of insurers shall have a separate certification from the Compliance Officer in the prescriberd
format.
All insurers are required to file a report on status of compliance with the Corporate Governance guidelines on
an annual basis. This report shall be filed in the prescribed format within 3 months from the end of the financial
year, i.e., before 30 June.

11. Whistle Blower Policy

Insurers are well advised to put in place a “whistle blower” policy, where-by mechanisms exist for employees
to raise concerns internally about possible irregularities, governance weaknesses, financial reporting issues or
other such matters. These could include employee reporting in confidence directly to the Chairman of the Board
or of a Committee of the Board or to the Statutory Auditor.
The Policy illustratively covers the following aspects:
l Awareness of the employees that such channels are available, how to use them and how their report
will be handled.
l Handling of the reports received confidentially, for independent assessment, investigation and where
necessary for taking appropriate follow-up actions.
l A robust anti-retaliation policy to protect employees who make reports in good faith.
l Briefing of the board of directors.
The appointed actuary and the statutory/internal auditors have the duty to ‘whistle blow’, i.e., to report in a timely
manner to the IRDAI if they are aware that the insurance company has failed to take appropriate steps to rectify
a matter which has a material adverse effect on its financial condition. This would enable the IRDAI to take
prompt action before policyholders’ interests are undermined.

12. Evaluation of Board of Directors including Independent Directors

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

STEWARDSHIP CODE FOR INSURERS IN INDIA

Insurance companies are significant institutional investors in listed companies and the investments are held by
them as custodians of policyholders’ funds.  The state of governance of the investee companies is an important
aspect and insurance companies must ensure that investee companies maintain corporate governance
standards at high level. Therefore, insurance companies should play an active role in the general meetings of
investee companies and engage with the managements at a greater level to improve their governance.  This
will result in informed decisions by the parties and improve the return on investments of insurers which will
ultimately benefit the policyholders.
In this regard, the Authority had issued a code for stewardship for the insurance companies vide its circular
ref: IRDA/F&A/GDL/CMP/059/03/2017 on 20th March 2017.  The code was in the form of a set of principles
which the insurance companies needed to adopt and made applicable from FY 2017-18. Guidelines for each
principle under the code had also been prescribed by the Authority. As per the code, insurer should have a
board approved stewardship policy which should identify and define the stewardship responsibilities that the
insurer wishes to undertake and how the policy intends to fulfill the responsibilities to enhance the wealth of its
policyholders who are ultimate beneficiaries.
IRDAI decided to review the existing guidelines on stewardship code based on the experience in implementation,
 Lesson 2 n Legislative Framework of Corporate Governance in India 71

compliance by the insurers and the recent developments in this regard.  Accordingly, a revised guidance on
stewardship code has been prepared and placed herewith as Revised Guidelines on Stewardship Code for
Insurers in India.  
All the insurers need to review and update their existing stewardship policy based on the Revised Guidelines
on Stewardship Code for Insurers in India within 3 months from the date of issue of the same and the updated
stewardship policy needs to be approved by the Board of Directors. The updated policy should be disclosed
on the website within 30 days of approval by the Board by all insurers, alongside the public disclosures.  Any
subsequent change / modification to the stewardship policy should be specifically disclosed at the time of
updating the policy document on the website.
All insurers shall comply with all the principles given in the guidelines and submit an Annual Certificate of
Compliance approved by the Board to the IRDAI as per Annexure B referred in the guidelines, duly certified by
CEO and Compliance Officer on or before 30th June every year.

Principles

S. No. Principles Guidance

1. Insurers should Stewardship activities include monitoring and engaging with companies
formulate a policy on matters such as strategy, performance, risk, capital structure, and
on the discharge of corporate governance, including culture and remuneration.
their stewardship
The policy should clearly define the stewardship responsibilities as
responsibilities and
identified by the insurer and how it intends to fulfill the same to enhance
publicly disclose it.
the wealth of its clients. The policy should disclose how the insurer
applies stewardship with the aim of enhancing and protecting the value
for the ultimate beneficiary or client.
In case some of the activities are outsourced to some external service
providers, the policy should provide the responsibilities to be delegated
to such service providers and the mechanisms to ensure that the overall
stewardship responsibilities are carried out seamlessly.

2. Insurers should have Insurers should put in place, maintain and publicly disclose a policy for
a clear policy on how identifying and managing conflicts of interest with the aim of taking all
they manage conflicts reasonable steps to put the interests of their client or beneficiary first. The
of interest in fulfilling policy should identify scenarios of likely conflict of interest as envisaged
their stewardship by the Board and should also address how matters are handled when
responsibilities and the interests of clients or beneficiaries diverge from each other.
publicly disclose it.

3. Insurers should Insurers should have mechanisms for regular monitoring of their investee
monitor their investee companies in respect of their performance, leadership effectiveness,
companies. succession planning, corporate governance, reporting and other
parameters they consider important.
Insurers may or may not wish to have more participation through nominations
on the Board for active involvement with the investee companies. An
insurer who may be willing to have nominations on the Board of an investee
company should indicate in its stewardship statement the willingness to do
so, and the mechanism by which this could be done.
72 EP-GRMCE

4. Insurers should have Insurers should set out the circumstances in which they will actively
a clear policy on intervene and regularly assess the outcomes of doing so. Intervention
intervention in their should be considered regardless of whether an active or passive
investee companies. investment policy is followed. In addition, a low volume of investment
is not, in itself, a reason for not intervening. Instances when insurers
may want to intervene include, but are not limited to, when they have
concerns about the company’s strategy, performance, governance,
remuneration or approach to risks, including those that may arise from
social and environmental matters.
The meetings should be held in a confidential manner with the view to
resolve the issue constructively. If dissatisfied with the response of the
investee company, the insurer may decide to escalate the matter, in
accordance with the pre-defined policy.

5. Insurers should have For issues that require larger engagement with the investee company,
a clear policy for insurers may choose to act collectively with other institutional investors
collaboration with other in order to safeguard the interests of their investors. For such situations,
institutional investors, the insurers should have a policy to guide their actions and extent of
where required, to engagement.
preserve the interests
of the policyholders
(ultimate investors),
which should be
disclosed.

6. Insurers should have a Insurers should not just blindly support the board of the investee
clear policy on voting company but, instead, take their own voting decisions to promote the
and disclosure of voting overall growth of the investee companies and, in turn, enhance the
activity. value of their investors.
The voting policy should be publicly disclosed. The voting decisions
taken in respect of all the investee companies should also be disclosed
publicly along with the rationale for such decision in Annexure B.
Insurers should disclose the use made, if any, of proxy voting or other
voting advisory services. They should describe the scope of such
services, identify the providers and disclose the extent to which they
follow, rely upon or use recommendations made by such services.
Insurers should disclose their approach to stock lending and recalling
lent stock.
Insurers should mandatorily undertake active participation and voting
on resolutions/proposals of the investee companies under the following
circumstances:

Size of the AUM of the compulsory voting required, if the

Insurer (Rs. In crores) lnsurer’s holding of the paid up capital of
investee company (in percentage) is
Up to 2,50,000 3% and above
Above 2,50,000 5% and above
 Lesson 2 n Legislative Framework of Corporate Governance in India 73

7. Insurers should report In addition to the regular fulfilment of their stewardship activities,
periodically on their institutional investors should also provide a periodic report to their
stewardship activities. ultimate beneficiaries (policyholders) of how they have discharged their
responsibilities, in a format which is easy to understand.
However, it may be clarified that compliance with the aforesaid principles
does not constitute an invitation to manage the affairs of a company or
preclude a decision to sell a holding when this is considered in the best
interest of clients or beneficiaries.

Annexure A
Disclosure of voting activities in general meetings of investee companies in which the insurers have actively
participated and voted:
Name of the Insurer: ......................................................................
Period of Reporting: ......................................................................

Meeting Investee Type of Proposal of Description Management Vote Reason

Date Company Meeting Management/ of the Recommendation supporting
(For /
Name (AGM / Shareholders proposal the vote
Against /
EGM) decision
Abstain)

Place: Signature of Compliance Officer

Date: Name:

Annexure B
Annual Certificate of Compliance with regard to status of Stewardship Code principles
Name of the Insurer: ...................................................................... Date: ...................................
Period of Report (FY): .....................................................................
We hereby certify that the guidelines given on Stewardship Code for Insurers in India by Insurance Regulatory
and Development Authority of India are duly followed and all the principles detailed in the guidelines are duly
complied with.
Compliance Officer Chief Executive Officer
(Name and Signature) (Name and Signature)

Disclosure and Reporting:

It is clarified that compliance with the aforesaid principles does not constitute an invitation to manage the affairs
of a company or preclude a decision to sell a holding when this is considered in the best interest of clients or
beneficiaries. The Board shall ensure that there is effective oversight on the insurer’s stewardship activities and
a Committee of the Board entrusted with the compliance with corporate governance code shall exercise the
same.
74 EP-GRMCE

All insurers shall furnish a report on an annual basis to the IRDAI, on the status of compliance with the
Stewardship Code. The status report, approved by the Board shall be endorsed by the Compliance Officer and
should be submitted on or before 30th June every year.

CORPORATE GOVERNANCE IN PUBLIC SECTOR ENTERPRISES

Department of Public Enterprises (DPE) is the nodal department for issuing the corporate governance guidelines
for the Public Sector Enterprises for both at center and state level. Since Government is the major shareholder in
Public Sector Undertakings (PSUs)/Central Public Sector Enterprises (CPSEs), it is responsible to set the high
standard of governance to be followed by these public sector enterprises. As the government’s disinvestment
strategy gathers momentum, there is a genuine need to improve the levels of transparency, and accountability
within PSUs.
To bring in more transparency and accountability in the functioning of CPSEs, the Government in June, 2007
introduced, for an experimental period of one year, the Guidelines on Corporate Governance for CPSEs. These
Guidelines were of voluntary nature. Since the issue of these guidelines, the CPSEs have had the opportunity
to implement them for the whole of the financial year 2008-09. These Guidelines have been modified and
improved upon based on the experience gained during the experimental period of one year.
The Government have felt the need for continuing the adoption of good Corporate Governance Guidelines
by CPSEs for ensuring higher level of transparency and decided to make these Guidelines mandatory and
applicable to all CPSEs. Accordingly, revised Guidelines on Corporate Governance for Central Public Sector
Enterprises was issued by DPE in 2010.
Apart from these instructions of DPE, the CPSEs are governed by the Companies Act, 2013 and regulations of
various authorities like Comptroller and Auditor General of India (C&AG), Central Vigilance Commission (CVC),
Administrative Ministries, other nodal Ministries, etc. In case of Listed CPSEs the Listing Regulations would
also be applicable in addition to other applicable laws and DPE Guidelines. For the purpose of DPE Guidelines
on Corporate Governance, CPSEs have been categorised into two groups, namely, (i) those listed on the Stock
Exchanges; (ii) those not listed on the Stock Exchanges.
CPSEs listed on Stock Exchanges: In so far as listed CPSEs are concerned, they have to follow the SEBI
(LODR) Regulations, 2015. In addition, they shall follow those provisions in these Guidelines which do not exist
in the SEBI Guidelines and also do not contradict any of the provisions of the SEBI Guidelines.
Unlisted CPSEs: Each CPSE should strive to institutionalize good Corporate Governance practices broadly in
conformity with the SEBI Guidelines. The listing of the non-listed CPSEs on the stock exchanges may also be
considered within a reasonable time frame to be set by the Administrative Ministry concerned in consultation
with the CPSEs concerned. The non-listed CPSEs shall follow the Guidelines on Corporate Governance on a
mandatory basis.
DPE guidelines on Corporate Governance provide following governance parameters
l Board of Directors
l Audit Committee
l Remuneration Committee
l Subsidiary Companies
l Disclosures
l Report, Compliance and Schedule of Implementation

Salient features of Guidelines on Corporate Governance for Central Public Sector Enterprises
2010:
 Lesson 2 n Legislative Framework of Corporate Governance in India 75

(a) Board of Directors:

Composition of Board of Directors: The Board of Directors of the company shall have an optimum combination
of Functional, Nominee and Independent Directors. The number of Functional Directors (including CMD/MD)
should not exceed 50% of the actual strength of the Board. The number of Nominee Directors appointed by
Government/other CPSEs shall be restricted to a maximum of two. In case of a CPSE listed on the Stock
Exchanges and whose Board of Directors is headed by an Executive Chairman, the number of Independent
Directors shall be at least 50% of Board Members; and in case of all other CPSEs (i.e. listed on Stock Exchange
but without an Executive Chairman, or not listed CPSEs), at least one-third of the Board Members should be
Independent Directors.
Part-time Directors’ compensation and disclosures: All fees/compensation, if any, paid to part-time
Directors, including Independent Directors, shall be fixed by the Board of Directors subject to the provisions in
the DPE guidelines and the Companies Act, 2013.
Number of Board meetings:- The Board shall meet at least once in every three months and at least four such
meetings shall be held every year. Further, the time gap between any two meetings should not be more than
three months. A Director shall not be a member in more than 10 committees or act as Chairman of more than
five committees across all companies in which he is a Director. Furthermore it should be a mandatory annual
requirement for every Director to inform the company about the committee positions he occupies in other
companies and notify changes as and when they take place.
Compliance of Laws to be reviewed:- The Board shall periodically review compliance reports of all laws
applicable to the company, prepared by the company as well as steps taken by the company to rectify instances
of non-compliances.
Code of Conduct: The Board shall lay down a code of conduct for all Board members and senior management
of the company. The code of conduct shall be circulated and also posted on the website of the company. All
Board members and senior management personnel shall affirm compliance with the code on an annual basis.
The Annual Report of the company shall contain a declaration to this effect signed by its Chief Executive.
Guidelines and policies evolved by the Central Government with respect to the structure, composition, selection,
appointment and service conditions of Boards of Directors and senior management personnel shall be strictly
followed. There shall be no extravagance in expenditure on the part of Board members and senior management
personnel. CPSEs executives shall be accountable for their performance in conformity with established
norms of conduct. Any external/internal changes made from time to time, due to addition of or amendment
to laws/regulatory rules, applicable to CPSEs, need to be dealt with carefully by the respective Boards/senior
management personnel.
Functional Role Clarity between Board of Directors and Management: A clear definition of the roles and
the division of responsibilities between the Board and the Management is necessary to enable the Board to
effectively perform its role. The Board should have a formal statement of Board Charter which clearly defines the
roles and responsibilities of the Board and individual Directors. The Board of each CPSE may be encouraged to
articulate its Corporate Governance objectives and approach (within the broad parameters of these guidelines
and the general perception of business risk) to satisfy the expectations of its majority shareholders and other
stakeholders.
Risk Management: Enterprise risk management helps management in achieving CPSE’s performance and
profitability targets. It helps to ensure effective reporting and compliance with laws and regulations, and helps
avoid damage to the entity’s reputation and associated consequences. Considering the significance of risk
management in the scheme of corporate management strategies, its oversight should be one of the main
responsibilities of the Board/Management. The Board should ensure the integration and alignment of the risk
management system with the corporate and operational objectives and also that risk management is undertaken
as a part of normal business practice and not as a separate task at set times.
76 EP-GRMCE

Training of Directors: The company concerned shall undertake training programme for its new Board members
(Functional, Government, Nominee and Independent) in the business model of the company including risk profile
of the business of company, responsibility of respective Directors and the manner in which such responsibilities
are to be discharged. They shall also be imparted training on Corporate Governance, model code of business
ethics and conduct applicable for the respective Directors.
(b) Audit Committee
Qualified and Independent Audit Committee: A qualified and independent Audit Committee shall be set
up, giving the terms of reference. The Audit Committee shall have minimum three Directors as members.
Two-thirds of the members of audit committee shall be Independent Directors. The Chairman of the Audit
Committee shall be an Independent Director. All members of Audit Committee shall have knowledge of financial
matters of Company, and at least one member shall have good knowledge of accounting and related financial
management expertise. The Chairman of the Audit Committee shall be present at Annual General Meeting
to answer shareholder queries; provided that in case the Chairman is unable to attend due to unavoidable
reasons, he may nominate any member of the Audit Committee.
The Audit Committee may invite such of the executives, as it considers appropriate (and particularly the head
of the finance function) to be present at the meetings of the Committee. The Audit Committee may also meet
without the presence of any executives of the company. The Finance Director, Head of Internal Audit and a
representative of the Statutory Auditor may be specifically invited to be present as invitees for the meetings of
the Audit Committee as may be decided by the Chairman of the Audit Committee. The Company Secretary shall
act as the Secretary to the Audit Committee.
Role of Audit Committee: The role of the Audit Committee shall include the following:
l Oversight of the company’s financial reporting process and the disclosure of its financial information to
ensure that the financial statement is correct, sufficient and credible.
l Recommending to the Board the fixation of audit fees.
l Approval of payment to statutory auditors for any other services rendered by the statutory auditors.
l Reviewing, with the management, the annual financial statements before submission to the Board for
approval, with particular reference to: (a) Matters required to be included in the Directors‟ Responsibility
Statement to be included in the Board’s report (b) Changes, if any, in accounting policies and practices
and reasons for the same; (c) Major accounting entries involving estimates based on the exercise of
judgment by management; (d) Significant adjustments made in the financial statements arising out of
audit findings; (e) Compliance with legal requirements relating to financial statements; (f) Disclosure of
any related party transactions; and (g) Qualifications in the draft audit report.
l Reviewing, with the management, the quarterly financial statements before submission to the Board for
approval.
l Reviewing, with the management, performance of internal auditors and adequacy of the internal control
systems.
l Reviewing the adequacy of internal audit function, if any, including the structure of the internal audit
department, staffing and seniority of the official heading the department, reporting structure, coverage
and frequency of internal audit.
l Discussion with internal auditors and/or auditors any significant findings and follow up there on.
l Reviewing the findings of any internal investigations by the internal auditors/auditors/agencies into
matters where there is suspected fraud or irregularity or a failure of internal control systems of a material
nature and reporting the matter to the Board.
 Lesson 2 n Legislative Framework of Corporate Governance in India 77

l Discussion with statutory auditors before the audit commences, about the nature and scope of audit as
well as post-audit discussion to ascertain any area of concern.
l To look into the reasons for substantial defaults in the payment to the depositors, debenture holders,
shareholders (in case of non-payment of declared dividends) and creditors.
l To review the functioning of the Whistle Blower Mechanism.
l To review the follow up action on the audit observations of the C&AG audit.
l To review the follow up action taken on the recommendations of Committee on Public Undertakings
(COPU) of the Parliament.
l Provide an open avenue of communication between the independent auditor, internal auditor and the
Board of Directors
l Review all related party transactions in the company. For this purpose, the Audit Committee may
designate a member who shall be responsible for reviewing related party transactions.
l Review with the independent auditor the co-ordination of audit efforts to assure completeness of
coverage, reduction of redundant efforts, and the effective use of all audit resources.
l Consider and review the following with the independent auditor and the management: (i) The adequacy
of internal controls including computerized information (ii) system controls and security, and -Related
findings and recommendations of the independent auditor and internal auditor, together with the
management responses.
l Consider and review the following with the management, internal auditor and the independent auditor:
(i) Significant findings during the year, including the status of previous audit recommendations (ii) - Any
difficulties encountered during audit work including any restrictions on the scope of activities or access
to required information.
Powers of Audit Committee: Commensurate with its role, the Audit Committee should be invested by the
Board of Directors with sufficient powers, which should include the following:
l To investigate any activity within its terms of reference.
l To seek information on and from any employee.
l To obtain outside legal or other professional advice, subject to the approval of the Board of Directors.
l To secure attendance of outsiders with relevant expertise, if it considers necessary.
l To protect whistle blowers.
Meeting of Audit Committee: The Audit Committee should meet at least four times in a year and not more
than four months shall elapse between two meetings. The quorum shall be either two members or one third of
the members of the Audit Committee whichever is greater, but a minimum of two independent members must
be present.
Review of information by Audit Committee: The Audit Committee shall review the following information:
l Management discussion and analysis of financial condition and results of operations;
l Statement of related party transactions submitted by management;
l Management letters/letters of internal control weaknesses issued by
l the statutory auditors;
l Internal audit reports relating to internal control weaknesses;
78 EP-GRMCE

l The appointment and removal of the Chief Internal Auditor shall be placed before the Audit Committee;
and Certification/declaration of financial statements by the Chief Executive/Chief Finance Officer.
(c) Remuneration Committee: Each CPSE shall constitute a Remuneration Committee comprising of at least
three Directors, all of whom should be part-time Directors (i.e. Nominee Directors or Independent Directors). The
Committee should be headed by an Independent Director. CPSE will not be eligible for Performance Related
Pay unless the Independent Directors are on its Board. Remuneration Committee will decide the annual bonus/
variable pay pool and policy for its distribution across the executives and non unionized supervisors, within the
prescribed limits.
(d) Subsidiary Companies: At least one Independent Director on the Board of Directors of the holding
company shall be a Director on the Board of Directors of its subsidiary company. The Audit Committee of
the holding company shall also review the financial statements of its subsidiary company. The minutes of the
Board meetings of the subsidiary company shall be placed at the Board meeting of the holding company. The
management should periodically bring to the attention of the Board of Directors of the holding company, a
statement of all significant transactions and arrangements entered into by its subsidiary company.
Explanation: For the purpose of these guidelines, only those subsidiaries whose turnover or net worth is not
less than 20% of the turnover or net worth respectively of the Holding company in the immediate preceding
accounting year may be treated as subsidiary companies.
(e) Disclosures:
Transactions : A statement in summary form of transactions with related parties in the normal and ordinary
course of business shall be placed periodically before the Audit Committee. Details of material individual
transactions with related parties, which are not in the normal and ordinary course of business, shall be placed
before the Audit Committee. Details of material individual transactions with related parties or others, which
are not on an arm’s length basis should be placed before the Audit Committee, together with Management’s
justification for the same.
Accounting Standards : Where in the preparation of financial statements, a treatment different from that
prescribed in an Accounting Standard has been followed, the fact shall be disclosed in the financial statements,
together with the management’s explanation in the Corporate Governance Report as to why it believes such
alternative treatment is more representative of the true and fair view of the underlying business transaction.
Board Disclosures – Risk management:
l The company shall lay down procedures to inform Board members about the risk assessment and
minimization procedures. These procedures shall be periodically reviewed to ensure that executive
management controls risk through means of a properly defined framework. Procedure will be laid down
for internal risk management also.
l The Board should implement policies and procedures which should include: (a) staff responsibilities
in relation to fraud prevention and identification (b) responsibility of fraud investigation once a fraud
has been identified (c) process of reporting on fraud related matters to management (d) reporting and
recording processes to be followed to record allegations of fraud (e) requirements of training to be
conducted on fraud prevention and identification.
Remuneration of Directors:
l All pecuniary relationship or transactions of the part-time Directors vis-à-vis the company shall be
disclosed in the Annual Report.
l Further the following disclosures on the remuneration of Directors shall be made in the section on
the Corporate Governance of the Annual Report: (a) All elements of remuneration package of all the
directors i.e. salary, benefits, bonuses, stock options, pension, etc. (b) Details of fixed component and
 Lesson 2 n Legislative Framework of Corporate Governance in India 79

performance linked incentives, along with the performance criteria (c) Service contracts, notice period,
severance fees. (d) Stock option details, if any – and whether issued at a discount as well as the period
over which accrued and over which exercisable.
Management: As part of the Directors Report or as an addition thereto, a Management Discussion and Analysis
Report should form part of the Annual Report. This Management Discussion and Analysis should include
discussion on the following matters within the limits set by the company’s competitive position: (a) Industry
structure and developments, (b) Strength and weakness (c) Opportunities and Threats (d) Segment–wise or
product-wise performance (e) Outlook (f) Risks and concerns (g) Internal control systems and their adequacy
(h) Discussion on financial performance with respect to operational performance (i) Material developments
in Human Resources, Industrial Relations front, including number of people employed. (j) Environmental
Protection and Conservation, Technological conservation, Renewable energy developments, Foreign Exchange
conservation (k) Corporate social responsibility.
Senior management shall make disclosures to the board relating to all material financial and commercial
transactions, where they have personal interest that may have a potential conflict with the interest of the company
(e.g. dealing in company shares, commercial dealings with bodies, which have shareholding of management
and their relatives, etc.)
Explanation: For this purpose, the term “senior management” shall mean personnel of the company who are
members of its core management team excluding Board of Directors. Normally, this would comprise all members
of management one level below the Functional Directors, including all functional heads.
Report on Corporate Governance: There shall be a separate section on Corporate Governance in each
Annual Report of company, with details of compliance on Corporate Governance.
Compliance: The company shall obtain a certificate from either the auditors or practicing Company Secretary
regarding compliance of conditions of Corporate Governance as stipulated in these Guidelines and Annexes.
The aforesaid certificate with the Directors‟ Report, which is sent annually to all the shareholders of the
company, should also be included in the Annual Report. Chairman’s speech in Annual General Meeting (AGM)
should also carry a section on compliance with Corporate Governance guidelines/norms and should form part
of the Annual Reports of the concerned CPSE. The grading of CPSEs may be done by DPE on the basis of the
compliance with Corporate Governance guidelines/norms.
Schedule of implementation: These Guidelines on Corporate Governance are mandatory. The CPSEs shall
submit quarterly progress reports, within 15 days from the close of each quarter, in the prescribed format to
respective Administrative Ministries/ Departments. The Administrative Ministries will consolidate the information
obtained from the CPSEs and furnish a comprehensive report to the DPE by 31st May of every financial year on
the status of compliance of Corporate Governance Guidelines during the previous financial year by the CPSEs
under their jurisdiction. DPE will, from time to time, make suitable modifications to these Guidelines in order to
bring them in line with prevailing laws, regulations, acts, etc., DPE may also issue clarifications to the concerned
Administrative Ministries/CPSEs on issues relating to the implementation of these Guidelines.

Grading of CPSEs on the basis of their compliance with Guidelines on Corporate Governance
for Central Public Sector Enterprises (CPSEs)
DPE on 06 Sept. 2012 issued office memorandum prescribing format for the grading of CPSEs on the basis
of their compliance with guidelines on Corporate Governance for CPSEs. DPE had set up a Committee of
Company Secretaries of select CPSEs to suggest changes in DPE guidelines relating to the Board of Directors
and Corporate Governance. The Committee has suggested modifications in the format for grading CPSEs to
align it with provisions of Companies Act, 2013. The revised format got approved by DPE for implementation
from year 2018-19 on 28th December, 2018. The enclosed format may continue to be filled by the CPSEs
on quarterly basis and submitted to their administrative Ministries/Departments within 15 days from close of
80 EP-GRMCE

each quarter. All administrative Ministries/Departments are required to furnish consolidated annual score and
grading of CPSEs under their respective jurisdiction for the year 2018-19 and onwards within 31 st May of every
financial year.
FORMAT FOR GRADING OF CENTRAL PUBLIC SECTOR ENTERPRISES (CPSES) ON THE BASIS OF
THEIR COMPLIANCE OF GUIDELINES ON CORPORATE GOVERNANCE
Name of CPSE
Name of Ministry/Department
Listed/Unlisted
Financial Year: Quarter ended:

Prescribed Guideline Prescribed Criteria for Awarded

Marks Measurement Marks
1.1 Composition of Board (2 Marks)
i Does the Board of the Company have an 1 Yes – 1
optimum combination of functional, nominee
No – 0
and independent directors?
ii Does the number of functional directors in the 1 Yes – 1
company (including CMD/MD) not exceed 50%
No – 0
of the actual strength of the board?

1.2 Non-official Directors (5 Marks)

i. Is the number of Nominee Directors appointed 1 Yes – 1
by Government/other CPSE as per the DPE
No – 0
Guidelines?
ii Is the number of Independent Directors at least 4 Yes – 4
50% of Board Members (in the case of listed
No – 0
CPSE with an executive chairman) and at least
one-third (in the case of listed but without an
executive chairman or not listed CPSE)?

1.3 Part-time Directors' Compensation and Disclosure (1 Mark)

i Is the fee/ compensation of Non-Official Part- 1 Yes – 1
time Directors fixed by Board as per the DPE
Guidelines and Companies Act, 2013?

1.4 Board Meetings (2 Marks)

i Does the Board meet at least once in every 1 Yes – 1
three months and the time gap between any two
No – 0
meetings is not more than three months?
 Lesson 2 n Legislative Framework of Corporate Governance in India 81

ii Does the Company send to all the members 1 Yes

of Board notification of Board Meeting with at
least one volume of agenda at least 7 days in
advance of meetings?

1.5 Review of Compliance of Laws (5 Marks)

i Does the Board periodically review compliance 5 Yes
report of all laws applicable to the company as
No – 0
well as steps taken by the company to rectify
instances of noncompliances?

1.6 Code of Conduct (2 Marks)

i Does the company have Code of Conduct 1 Yes
approved by the Board applicable to Board
No – 0
Members and senior management of the
company?
ii Do the members of the Board having conflict of 1 Yes – 1
interest abstain from participating in the agenda
No – 0
item in which he/she has personal interest?

1.7 Risk Management (4 Marks)

i Does the company have risk management plan 2 Yes – 2
approved by the Board?
ii Does the Board periodically review and 2 Yes
take remedial action to implement the risk
No – 0
management plan?
1.8 Training of New Board Members (4 Marks)
i Does the Company have a policy specifying 2 Yes – 2
training requirements for board members?
No

ii Does the company provide training to the new 2 Yes – 2

Board members of at least three days after
No – 0
appointment to the Board?

2.1 Constitution of Audit Committee (4 Marks)

i Does the Board of Directors have a qualified 1 Yes
and independent Audit Committee with a Terms
No – 0
of Reference?
 82 EP-GRMCE

ii Does the Audit Committee have Minimum 1 Yes – 1

three directors as members and two-third of its
No – 0
members as Independent
Directors?
Is the Audit Committee chaired by an Independent 1 Yes – 1
Director?
No – 0
Do all members of the Audit Committee have No – 0
knowledge of financial matters of the company
and at least one member has expertise in
accounting and financial management?

2.2 Audit Committee Role (6 Marks)

i Does the scope/terms of reference governing 1 Yes – 1
the Audit Committee specify that the Audit
No – 0
Committee is responsible for the oversight of the
company's financial reporting process and the
disclosures of its financial information?

ii Does the scope/terms of reference governing the 1 Yes – 1

Audit Committee specify that it can recommend
to the Board the fixation of audit fees?

iii Does the scope/terms of reference governing 1 Yes – 1

the Audit Committee specify that it can approve
No – 0
the payment to statutory auditors for any other
services rendered by them?

iv Does the scope/terms of reference governing 1 Yes

the Audit Committee specify that the Audit
No – 0
Committee is responsible for reviewing with the
management and ensuring that the company's
annual financial statements and audits are in
compliance with applicable laws, regulations,
and company policies before submission to the
Board for approval?
Does the scope/terms of reference governing 1 Yes
the Audit Committee special that the Audit
No – 0
Committee is responsible for reviewing with
the management the performance of internal
auditors and adequacy of the internal control
systems?
 Lesson 2 n Legislative Framework of Corporate Governance in India 83

Does the scope/terms of reference governing the 1 Yes – 1

Audit Committee approved by the Board?
No – 0

2.3 Audit Committee Powers (5 Marks)

i Is the Audit Committee empowered to seek 1 Yes – 1
information from any employee of the CPSE?
No – 0

ii Does the Audit Committee have powers to secure 1 Yes – 1

help of outside legal or any other experts when
No – 0
necessary?
iii Does the Audit Committee have powers to 1 Yes – 1
mitigate conflicts of interest by strengthening
No – 0
auditor independence?
Is the Audit Committee empowered to ensure 1 Yes – 1
the effectiveness of internal controls and risk
No – 0
management?
Is there a system of protection for employees and 1 Yes – 1
others who report infractions (to protect "whistle
No – 0
blowers")?
2.4 Meeting of Audit Committee (5 Marks)
i Did the Audit Committee meet at least four times 1 Yes
during the last 12 months?
No – 0
ii Did the frequency of the Audit Committee 2 Yes
meetings as per the norms (i.e. not more than
four months shall elapse between two meetings)?

iii Did the minimum of two Independent Directors 2 Yes – 2

attend the meeting of the Audit
No – 0
Committee?
2.5 Review of Information by Audit Committee (5 Marks)
i Does the Audit Committee review the 1 Yes – 1
management discussion and analysis of financial
No – 0
condition and results of operations?

ii Does the Audit Committee review the statement 1 Yes – 1

of related party transactions submitted by
No – 0
management?
iii Is the internal audit report relating to internal 1 Yes – 1
control weaknesses reviewed by the Audit
No – 0
Committee?
Is the information regarding appointment and/or 1 Yes – 1
removal of Chief Internal Auditor placed before
No – 0
the Audit Committee?
 84 EP-GRMCE

Does the Audit Committee review the declaration 1 Yes – 1

of financial statements by the CEO/CFO?
No – 0

3.1 Constitution of Remuneration Committee (5 Marks)

i. Does the Company have Remuneration 1 Yes – 1

Committee? No – 0

ii Does the Remuneration committee comprise of 2 No – 0

at least 3 directors who are all part-time directors
(Nominee or Independent)?

iii Is the remuneration committee chaired by an 2 Yes

Independent Director?
No – 0

4.1 Board of Subsidiary Companies (3 Marks)

i Does the Board of Subsidiary company, whose 1 Yes – 1

turnover or net-worth is not less than 20% of
No – 0
the turnover or net-worth respectively of the
Holding Company in the immediately preceding
accounting year, include at least one independent
director of the holding company as a director?

ii Are the minutes of meetings of Board of Directors 1 Yes

of subsidiary company placed in the Board
No – 0
meetings of the holding company?

iii Does the number of functional directors (including 1 Yes – 1

CMD/MD) not exceed 50% of the actual strength
No – 0
of the board of Subsidiary Company, whose
turnover or net-worth respectively is not less than
20% of the turnover or net-worth respectively
of the Holding Company in the immediately
preceding accounting year?

4.2 Review of Financial Statement of Subsidiary by Audit Committee (1 Mark)

i Does the Audit Committee of the holding company 1 Yes – 1 1

review the financial statements of the subsidiary
No – 0
company?

4.3 Review of Performance of Subsidiary by Board (1 Mark)

i Does the Board of Directors of the holding 1 Yes

company review the performance of the
No – 0
subsidiary company?
 Lesson 2 n Legislative Framework of Corporate Governance in India 85

5.1 Transactions (3 Marks)

i Is the summary of transactions with related parties 1 Yes – 1

in the normal and ordinary course of business
No – 0
placed periodically before the Audit Committee?

ii Are the details of material individual transactions 1 Yes – 1

with related parties undertaken in extraordinary
No – 0
circumstances of business placed before the
Audit Committee?

iii Are the details of material individual transactions 1 Yes – 1

with related parties or others, which are not on
No – 0
an arm's length basis placed before the Audit
Committee along with Management's Justification
for the same?

5.2 Accounting Standards (3 Marks)

i Do the company's accounting procedures comply 2 No – 0

with the Accounting Standards adopted by
concerned regulatory authority from time to time?

ii Is the deviation from the prescribed Accounting 1 Yes – 1

Standards disclosed and explained in the financial
No – 0
statements and in the Corporate Governance
Report of the Company?

5.3 Consolidated Financial Statements (3 Marks)

i Are the Consolidated Financial Statements of 3 Yes – 3

the Company prepared in accordance with the
No – 0
Accounting Standards, issued by concerned
regulatory authority from time to time?

5.4 Segment-wise Profit and Loss Statement (3 Marks)

i Does the company disclose segment-vise profit 3 Yes – 3

& loss as per Accounting Standard issued by
No – 0
concerned regulatory authority from time to
time?

5.5 Board Disclosures — Risk Management (3 Marks)

i Do the company's latest Annual Report include 2 Yes – 1

management's assessment of the company’s
No – 0
outlook for the future and identify important risks
that the company may face in future?
86 EP-GRMCE

ii Has the company included in its latest Annual 1 Yes – 1

Report a statement of its corporate objectives
No – 0
(Mission)?

5.6 Remuneration of Directors (3 Marks)

i Does the company's latest Annual Report 2 Yes – 2

disclose all pecuniary relationship or transactions
No – 0
of the part-time directors vis-a-vis the company?

ii Does the company disclose in its latest Annual 1 Yes – 1

Report the details on remuneration of Directors?
No – 0

5.7 Management Discussion and Analysis (1 Mark)

i Does the Management Discussion and Analysis 1 Yes – 1

Report include the rnatters as specified in the
No – 0
DPE Guidelines?

5.8 Disclosures by Senior Management (1 Mark)

i Does the company's latest Annual Report 1 Yes – 1

disclose significant "related party" transactions
No – 0
of Board members where they have personal
interest?

6.1 Report on Corporate Governance (4 Marks)

i Does the company's latest Annual Report have 2 Yes – 2

a separate section on Compliance to Corporate
No – 0
Governance Guidelines issued by DPE?

ii Does the company produce periodic reports 1 Yes – 1

and press releases to indicate significant
No – 0
developments impact on corporate governance
(such as, legal and environmental issues;
commitment to workforce, suppliers, customers
and local communities etc.)?

iii Does the company have a facility for information 1 Yes – 1

sharing with stakeholders through the use of
information and Communication Technologies
(ICT)?

6.2 Compliance Certificate (4 Marks)

i Has the company obtained a Certificate from the 2 Yes – 2

auditors and/ or practicing Company Secretary
No – 0
regarding Compliance of Corporate Governance
Guidelines and Annexes?
 Lesson 2 n Legislative Framework of Corporate Governance in India 87

ii Does the latest Annual Report of the company 2 Yes – 2

include the Compliance Certificate along with
No – 0
the Directors' Report, which is also sent to all
shareholders?

6.3 Chairman's Message in AGM and Annual Report (4 Marks)

i Does the Chairman's Message to shareholders 2 No – 0

form part of Annual Report of the company?

ii Does the Chairman's Message at the latest AGM 2 Yes – 2

include a section on compliance with Corporate
No – 0
Governance guidelines?

6.4 Holding AGM, Adoption of Audited Accounts and Filing of adopted Accounts with the Registrar of
Companies within the stipulated time (4 Marks)

i Did the company hold an Annual General 1 Yes – 1

Meeting (AGM) as per the provision of the
No – 0
Companies Act, 2013?

ii Are the year-end Audited Accounts placed in 2 Yes – 2

the AGM for adoption by the shareholders of the
No – 0
company?

iii Are the year-end Audited Accounts adopted in 1 Yes – 1

the AGM filed with the Registrar of Companies
No – 0
within the stipulated time?

6.5 Timely Submission of Grading Report (4 Marks)

i Does the company submit quarterly grading 4 Yes=4 No= o 4

report regarding DPE Guidelines on Corporate
Governance in the prescribed format to
respective Administrative Ministries within 15
days from the close of each quarter?

Total

Date:

Company Secretary/Authorised Signatory

(Name & Designation)
Note:
1. The grading report in the above format shall be filled for each quarter and total marks (out of 100) shall
be calculated for each quarter. The scores for each of the quarter shall be averaged for arriving at the
annual score.
2. In case, a particular guideline is not applicable to a CPSE, the same shall be mentioned in the format
along with reason thereof and the total marks under the format shall stand reduced to that extent and
the percentage of marks secured shall be calculated accordingly.
88 EP-GRMCE

3. The grading shall be determined as under:

Grade Annual/ quarterly Score (in %)

Excellent 85 and above

Very Good 75 - 84

Good 60 - 74

Fair 50 - 59

Poor Below 50

GUIDELINES ON CORPORATE SOCIAL RESPONSIBILITY AND SUSTAINABILITY FOR

CENTRAL PUBLIC SECTOR ENTERPRISES (WITH EFFECT FROM 1ST APRIL, 2013)
Prior to the notification of CSR Rules under the Companies Act 2013, DPE Guidelines on CSR and Sustainability
issued in December 2012, were applicable to all CPSEs w.e.f. 01.04.2013.
After the enactment of the Companies Act 2013, all CPSEs shall have to comply with the provisions of the
Act and the CSR Rules. Any amendment notified by the Ministry of Corporate Affairs in the CSR Rules, or in
Schedule VII of the Act will also be binding on the CPSEs. Along with these, Guidelines on Corporate Social
Responsibility and Sustainability for Central Public Sector Enterprises, 2014 have been notified by DPE which
shall be applicable to all CPSEs.
In earlier DPE guidelines, CSR and sustainable development were treated as complementary and, therefore,
were dealt with together. CSR was seen as an important constituent of the overarching framework of sustainability.
The present guidelines of DPE are also intended to reinforce the complementarity of CSR and sustainability and
to advise the CPSEs not to overlook the larger objective of sustainable development in the conduct of business
and in pursuit of CSR agenda.
The Revised Guidelines applicable to all CPSEs are generally in the nature of guiding principles. The guidelines
contain certain additional requirements as mentioned below:
1. It is mandatory for all profit making CPSEs to undertake CSR activities as per the provisions of the
Act and the CSR Rules. Even the CPSEs which are not covered under the eligibility criteria based on
threshold limits of net-worth, turnover, or net profit as specified by Section 135 (1) of the Act, but which
made profit in the preceding year, would also be required to take up CSR activities as specified in the
Act and the CSR Rules, and such CPSEs would be expected to spend at least 2% of the profit made in
the preceding year on CSR activities.
2. All CPSEs must adopt a CSR and Sustainability Policy specific to their company with the approval of
the Board of Directors. The philosophy and spirit of CSR and Sustainability must be firmly ingrained in
the policy and it must be consistent with the CSR provisions of the Act, Schedule VII of the Act, CSR
Rules, the Guidelines, and the policy directions issued by the Government from time to time. The
CSR and Sustainability policy of a CPSE should serve as the referral document for planning its CSR
activities in accordance with Schedule VII of the Act and give a road map for formulation of actionable
plans.
3. If the CPSEs feel the necessity of taking up new CSR activities / projects during the course of a year,
which are in addition to the CSR activities already incorporated in the CSR policy of the company,
the Board’s approval of such additional CSR activities would be treated as amendment to the
policy.
 Lesson 2 n Legislative Framework of Corporate Governance in India 89

4. It would be mandatory for all CPSEs which meet the criteria as laid down in Section 135(1) of the Act,
to spend at least 2% of the average net profits of the three immediately preceding financial years
in pursuance of their CSR activities as stipulated in the Act and the CSR Rules. This stipulated
percentage of average net profits is to be spent every year in a manner specified in the Act and
CSR Rules.
In case a company fails to spend such amount, it shall have to specify the reasons for not spending it.
However, in case of CPSEs mere reporting and explaining the reasons for not spending this amount in
a particular year would not suffice and the unspent CSR amount in a particular year would not lapse.
It would instead be carried forward to the next year for utilisation for the purpose for which it was
allocated.
5. While selecting CSR activities / projects from the activities listed in Schedule VII of the Act, CPSEs
should give priority to the issues which are of foremost concern in the national development agenda,
like safe drinking water for all, provision of toilets especially for girls, health and sanitation, education,
etc. The main focus of CSR and Sustainability policy of CPSEs should be on sustainable development
and inclusive growth, and to address the basic needs of the deprived, 5 under privileged, neglected and
weaker sections of the society which comprise of SC, ST, OBCs, minorities, BPL families, old and aged,
women / girl child, physically challenged, etc.
6. For CPSEs to fully exploit their core competence and mobilize their resource capabilities in the
implementation of CSR activities / projects, they are advised to align their CSR and Sustainability
policy with their business policies and strategies to the extent possible, and select such CSR activities
/ projects which can be better monitored through in-house expertise.
7. All CPSEs are expected to act in a socially, economically and environmentally sustainable manner
at all times. Even in their normal business activities, public sector companies should try to promote
sustainable development through sustainability initiatives by conducting business in a manner that
is beneficial to both, business and society. They are advised not to lose sight of their social and
environmental responsibility and commitment to sustainable development even in activities undertaken
in pursuance of their normal course of business. National and global sustainability standards which
promote ethical practices, transparency and accountability in business may be referred to as guiding
frameworks to plan, implement, monitor and report sustainability initiatives. But the amount spent on
sustainability initiatives in the pursuit of sustainable development while conducting normal business
activities would not constitute a part of the CSR spend from 2% of profits as stipulated in the Act and
the CSR Rules.
8. As a part of their sustainability initiatives CPSEs are expected to give importance to environmental
sustainability even in their normal mainstream activities by ensuring that their internal operations and
processes promote renewable sources of energy, reduce / re-use / recycle waste material, replenish
ground water supply, protect / conserve / restore the ecosystem, reduce carbon emissions and help
in greening the supply chain. CPSEs are expected to behave in a responsible manner by producing
goods and services which are safe and healthy for the consumers and the environment, resource
efficient, consumer friendly, and environmentally sustainable throughout their life cycles i.e. from the
stage of raw material extraction to production, use / consumption, and final disposal. However, such
sustainability initiatives will not be considered as CSR activities as specified in the CSR Rules, and the
expenditure incurred thereon would also not constitute a part of the CSR spend. Nevertheless, CPSEs
are encouraged to take up such sustainability initiatives from their normal budgetary expenditure as it
would demonstrate their commitment to sustainable development.
9. Sustainability initiatives would also include steps taken by CPSEs to promote welfare of employees,
especially women, physically challenged, SC / ST / OBC categories, by addressing their concerns of
90 EP-GRMCE

safety, security, professional enrichment and healthy working conditions beyond what is mandated by
law. However, expenditure on such sustainability initiatives would not qualify as CSR spend.

10. The philosophy and spirit of CSR and Sustainability should be understood and imbibed by the employees
at all levels and get embedded in the core values of the company.

11. CPSEs should extend their reach and oversight to the entire supply chain network to ensure that as far
as possible suppliers, vendors, service providers, clients, and partners are also committed to the same
principles and standards of corporate social responsibility and sustainability as the company itself.
CPSEs are encouraged to initiate and implement measures aimed at `greening’ the supply chain.

12. As mentioned in the Act, CPSEs should give preference to the ‘local area’ in selecting the location
of their CSR activities. It is desirable that the Board of Directors of CPSEs define the scope of
the ‘local area’ of their commercial units / plants / projects, keeping in view the nature of their
commercial operations, the extent of the impact of their operations on society and environment,
and the suggestions / demands of the key stakeholders, especially those who are directly impacted
by the company’s commercial operations / activities. The definition of ‘local area’ may form part of
the CSR policy of the CPSE.

13. After giving due preference to the local area, CPSEs may also undertake CSR activities anywhere
in the country. The Board of Directors of each CPSE may also decide on an indicative ratio of CSR
spend between the local area and outside it, and this may be mentioned in the CSR policy of the
CPSE. CPSEs, which by the very nature of their business have no specific geographical area of
commercial operations, may take up CSR activities / projects at any location of their choice within
the country.

14. As far as possible, CPSEs should take up the CSR activities in project, which entails planning the
stages of execution in advance by fixing targets at different milestones, with pre-estimation of quantum
of resources required within the allocated budget, and having a definite time span for achieving desired
outcomes.

15. CPSEs should devise a communication strategy for regular dialogue and consultation with key
stakeholders to ascertain their views and suggestions regarding the CSR activities and sustainability
initiatives undertaken by the company. However, the ultimate decision in the selection and implementation
of CSR activities would be that of the Board of the CPSE.

16. As per the CSR Rules, all companies are required to include an annual report on CSR in their
Board’s Report. The template / format for reporting CSR activities as provided by CSR Rules
should be strictly adhered to. However, CPSEs shall also have to include in the Board’s Report a
brief narrative on the action taken for the implementation of the Guidelines so that the stakeholders
are informed of not only the CSR activities but also of the sustainability initiatives taken by the
CPSEs. CPSEs are further advised to prepare an Annual Sustainability Report, which would go a
long way in imparting greater transparency and accountability to the company’s operations, apart
from improving the brand image.

17. It is desirable that CPSEs get a baseline/ need assessment survey done prior to the selection of any
CSR activity. It is also desirable that CPSEs should get an impact assessment study done by external
agencies of the CSR activities / projects undertaken by them. Impact assessment is mandatory for
mega projects, the threshold value of which can be determined by the Board of a CPSE and specified
in its CSR and Sustainability policy. However, the expenditure incurred on baseline survey and impact
assessment study should be within the overall limit of 5% of administrative overheads of CSR spend as
provided for under the CSR Rules.
 Lesson 2 n Legislative Framework of Corporate Governance in India 91

18. Within the provisions of the Act, Schedule VII of the Act, and the CSR Rules, CPSEs are encouraged
to take up CSR activities / projects in collaboration with other CPSEs for greater social, economic and
environmental impact of their CSR activities/projects.

GLOSSARY OF TECHNICAL WORDS

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

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

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

LESSON OUTLINE
LEARNING OBJECTIVES
– Introduction
The objective of this study lesson is to enable the
– Regulatory Framework
students to understand who are board of directors,
– Role of the Board of directors their role, powers and duties etc. The types of
– Meaning of Board of Directors directors required to be appointed under the laws,
– Types of Directors under Companies Act, 2013 board composition and role of independent director
– Composition and Structure of Board in ensuring board effectiveness.

– Selection and Appointment of Directors Various other provisions and guidance which
– Duties of the Directors improves board effectiveness like appointment of
Lead Independent Director, Separation of role of
– Powers of the Board
Chairman and Chief Executive Officer, Succession
– Independent Directors for better board planning, Directors training, Development and
effectiveness familarisation and Performance Evaluation of the
– Other Good Practices to enhance board Board and Management has been dealt in detail in
effectiveness this Chapter.
– Appointment of Lead Independent
The study also enables the students to understand
– Director the – importance of Director Induction and
– Separation of role of Chairman and Development programmes, Performance Review
Chief Executive Officer of Board & Individual Directors, Major Factors
– Succession planning for Evaluation, Parameters and for Evaluation
purpose etc.
– Directors training, Development and
familarisation
– Performance Evaluation of the Board
and Management
– Board effectiveness and the Role of the
Company Secretary
– Guidance on Board Effectiveness
(Issued by FRC, UK – July 2018)
– Board Effectiveness Indicators
– MODEL Board Charter
– GLOSSARY
– LESSON ROUND UP
– TEST YOURSELF

“Heterogeneous BoDs with independent thinking enforce governance, and diversity strengthens creativity.” 
– Pearl Zhu
94 EP-GRMCE

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

Regulatory Framework

SI.No. Description

1 Section 149 of the Companies Act, 2013

2 Section 166 of the Companies Act, 2013

3 Section 179 of the Companies Act, 2013

4 Section 180 of the Companies Act, 2013

5 Schedule IV of the Companies Act, 2013

6 Regulation 16 of SEBI (LODR) Regulations, 2015

7 Regulation 17 of SEBI (LODR) Regulations, 2015

8 Regulation 25(7) of SEBI (LODR) Regulations, 2015

ROLE OF THE BOARD OF DIRECTORS

The board’s role is to provide entrepreneurial leadership of the company within a framework of prudent and
effective controls which enables risk to be assessed and managed. An effective board develops and promotes
its collective vision of the company’s purpose, its culture, its values and the behaviour it wishes to promote in
conducting its business. The role of Board in particular includes:
 Lesson 3 n Board Effectiveness 95

l providing direction for management;

l demonstrate ethical leadership, displaying – and promoting throughout the company – behaviour
consistent with the culture and values it has defined for the organisation;
l create a performance culture that drives value creation without exposing the company to excessive risk
of value destruction;
l make well-informed and high-quality decisions based on a clear line of sight into the business;
l create the right framework for helping directors meet their statutory duties under the Companies Act
2013, and/or other relevant statutory and regulatory regimes;
l being accountable, particularly to those that provide the company’s capital; and
l think carefully about its governance arrangements and embraces evaluation of their effectiveness.

MEANING OF BOARD OF DIRECTORS

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

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

TYPES OF DIRECTORS UNDER COMPANIES ACT 2013

Executive Director/
Non Executive
Whole Time Director Director
& Managing Director

Women Director Resident Director Independent

Director

Nominee Small Shareholders

Director Director

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

→ managing people
96 EP-GRMCE

→ looking after assets

→ hiring and firing

→ entering into contracts, etc.

Executive directors are usually employed by the company and paid a salary, so are protected by employment
law. Examples of executive directors are production director, finance director or managing director or whole
time director.

As per Rule 2(1)(k) of the  Companies (Specification of definitions details) Rules, 2014  “Executive Director”
means a Whole Time Director as defined in clause (94) of section 2 of the Act”.

As per Clause 2(94) of Companies Act, 2013 “whole-time director” includes a Director in the whole-time
employment of the company.

Section 2(54) of the Companies Act, 2013 defines Managing Director as - “managing director” means a director
who, by virtue of articles of a company or an agreement with the company or of a resolution passed by the
company in general meeting or by its Board of directors,, is entrusted with substantial powers of management
of the affairs of the company and includes a director occupying the position of a managing director, by whatever
name called.

The explanation to section 2(54) excludes administrative acts of a routine nature when so authorised by the
Board such as the power to affix the common seal of the company to any document or to draw and endorse
any cheque on the account of the company in any bank or to draw and endorse any negotiable instrument or
to sign any certificate of share or to direct registration of transfer of any share, from the substantial powers of
management.

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

3. Shadow Director
Shadow Director is a person who is not formally appointed as a director, but in accordance with whose directions
or instructions the directors of a company are accustomed to act. This is a concept adopted from English law.
However, a person is not a shadow director merely because the directors act on advice given by him in a
professional capacity.

Holder of controlling or majority share of a private company who is not (technically) a director and does not
openly participate in the Company’s governance, but whose directions or instructions are routinely complied
with by the employees or other directors. In the eyes of law, he or she is a de facto director and is held equally
liable for the obligations of the company with the other de facto and de jure directors. Though shadow director
is not expressly mentioned in the Act, the Act has references to it at various places.
 Lesson 3 n Board Effectiveness 97

4. Woman Director
A board composed of directors representing a range of perspectives leads to an environment of collaborative
discussion which is the essence of good governance. Organizations that aim to deliver the highest standards of
leadership require a diversity of thought, skills, experience, working style and talent capability. It is increasingly
being recognized that by bringing together men and women from diverse background and giving each person
the opportunity to contribute their skills, experience and perspectives, the corporates are able to deliver the best
solutions to challenges and sustainable value to their stakeholders.

The Companies Act, 2013 in India recognized the importance of gender diversity and provides for mandatory
appointment of atleast one women director on the Board of listed and certain other specified class of
companies.

Rule 3 of Companies (Appointment and Qualification of Directors) Rules, 2014, prescribes the following class
of companies which shall appoint at least one woman director-

(i) every listed company;

(ii) every other public company having :-

(a) paid-up share capital of one hundred crore rupees or more; or

(b) turnover of three hundred crore rupees or more .

Regulation 17(i) of the SEBI (LODR) Regulations also requires that at least one woman director shall be
appointed on the board of all listed entities. SEBI (LODR) (Amendment) Regulations, 2018 further requires that
the top 500 listed companies shall have atleast one independent woman director by 1st April 2019 and for the
top 1000 listed entities by 1 April 2020.

5. Resident Director
Section 149(3) of the Act has provided for atleast one director to be resident in India as a compulsory requirement
for every company registered under the Act i.e. every company shall have at least one director who has stayed
in India for a total period of not less than 182 days in the previous calendar year.

6. Independent Director
Independent Directors play a pivotal role in maintaining a transparent working environment in the corporate
regime. Independent Directors constitute such category of Directors who are expected to have impartial and
objective judgment for the proper functioning of the company.

Section 2(47) of the Companies Act 2013 provides that “independent director” means an independent director
referred to in sub-section (6) of section 149. (Details pertaining to independent directors are discussed later in
this chapter).

7. Nominee Director
A nominee director belongs to the category of non-executive director and is appointed on behalf of an interested
party. It is pertinent to mention here that there is a divergent view as to whether a nominee director can be
considered independent or not. Naresh Chandra Committee in its report stated that ‘nominee director’ will be
excluded from the pool of directors in the determination of the number of independent directors. In other words,
such a director will not feature either in the numerator or the denominator.

Both SEBI (LODR) Regulations, 2015 and section 149(6) of the Companies Act, 2013 specifically exclude
nominee director from being considered as Independent.
98 EP-GRMCE

8. Small Shareholders Director

According to Section 151 of the Companies Act, 2013 every listed company may have one director elected by
“small shareholders”. For the purpose of this section, “small shareholder” means a shareholder holding shares
of nominal value of not more than twenty thousand rupees or such other sum as may be prescribed.

Rule 7 of Companies (Appointment and Qualifications of Directors) Rules, 2014 lays down the terms and
conditions for appointment of Small Shareholder’s Director. A listed company, may upon notice of not
less than 1000 or one-tenth of the total number of small shareholders, whichever is lower, have a Small
Shareholders’ Director elected by the small shareholders. A listed company may suo moto (on its own
accord) opt to have a director representing small shareholders. Thus the Small Shareholder’s Director’s
appointment is optional and made available to listed companies only.

COMPOSITION AND STRUCTURE OF BOARD

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

The composition and structure of the Board as prescribed under the law is given hereunder-

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

Size of the Board Section 149(1) provides every l Regulation 17(1)(a) provides that Board
company shall have a Board of of directors shall have an optimum
Directors consisting of individuals as combination of executive and non-
directors and shall have – executive directors with at least one
woman director and not less than fifty
l A minimum number of three
per cent. of the board of directors shall
directors in the case of a public
comprise of non-executive directors;
company,
l The top 500 listed companies shall have
l Atleast two directors in the case
atleast one independent woman director
of a private company, and
by 1 April 2019 and for the top 1000
l Atleast one director in the case listed entities by 1 April 2020.
of a One Person Company; and
l Regulation 17(1)(c) provides that the
l A maximum of fifteen directors board of directors of the top 1000 listed
provided that a company may entities (with effect from April 1, 2019)
appoint more than fifteen and the top 2000 listed entities (with
directors after passing a special effect from April 1, 2020) shall comprise
resolution. of not less than six directors.
Note: Maximum directors’ clause Explanation : The top 500, 1000 and 2000
is not applicable to Government entities shall be determined on the basis of
Company and Section 8 Company. market capitalisation, as at the end of the
immediate previous financial year.]
 Lesson 3 n Board Effectiveness 99

Board Composition Section 149(4) provides that every Regulation 17 (1) (b) provides that the
public listed company shall have composition of board of directors of the listed
at- least one third of total number of entity shall be as follows:
directors as independent directors
where the chairperson of the board of
and Central Government may
directors is a non-executive director, at
prescribe the minimum number of
least one-third of the board of directors shall
independent directors for any class
comprise of independent directors;
or classes of companies.
where the listed entity does not have a
Note: Not applicable to Government
regular non-executive chairperson, at least
Company and IFSC Public Company
half of the board of directors shall comprise
Rule 4 of the Companies of independent directors:
(Appointment and Qualification of
Provided that where the regular non-
Directors) Rules, 2014 prescribes
executive chairperson is a promoter of the
that the following class or classes of
listed entity or is related to any promoter or
companies shall have at least two
person occupying management positions at
independent directors:
the level of board of director or at one level
l Public Companies having paid- below the board of directors, at least half of
up share capital of 10 crore the board of directors of the listed entity shall
rupees or more; or consist of independent directors.

l Public Companies having Explanation. – For the purpose of this clause,

turnover of 100 crore rupees or the expression “related to any promoter” shall
more; or have the following meaning:

l Public Companies which have, (i) if the promoter is a listed entity, its
in aggregate, outstanding directors other than the independent
loans, debentures and deposits, directors, its employees or its
exceeding 50 crore rupees. nominees shall be deemed to be
related to it;
However, the following classes of
unlisted public company shall not (ii) if the promoter is an unlisted entity,
be required to appoint Independent its directors, its employees or its
Directors, namely:- nominees shall be deemed to be
(a) a joint venture; related to it.

(b) a wholly owned subsidiary; Regulation 17 (1A) specifies that no listed

and entity shall appoint a person or continue the
directorship of any person as a non-executive
(c) a dormant company as
director who has attained the age of seventy
defined under section 455 of
five years unless a special resolution is
the Act.
passed to that effect, in which case the
explanatory statement annexed to the notice
for such motion shall indicate the justification
for appointing such a person.
100 EP-GRMCE

Board Composition as per

SEBI LODR, 2015

Atleast 50% of Atleast One Women

Non Executive Directors Director

If Chairperson is If Chairperson is a If Chairperson is Non-Executive Director

Non-Executive Executive but promoter of the listed entity or is
Director Director related to any promoter

at least 1/3rd of
the board of at least 50% of the at least 50% of the
directors shall board of directors board of directors
comprise of shall comprise of shall comprise of
independent independent independent
directors directors directors

SELECTION AND APPOINTMENT OF DIRECTORS

Board is critical to performance of the company and for this a robust selection and appointment process for
directors is must. The company must ensure that the Board consists of members with the range of skills and
capabilities to meet its primary responsibility for promoting the interest of the company in a way which ensures
that the interests of shareholders and stakeholders are promoted and protected.
Both the Companies Act 2013 and SEBI (LODR) Regulations, 2015 provides for the mandatory constitution of
the Nomination and Remuneration Committee (NRC) for selection and appointment of directors.
The NRC should consider the selection and re-appointment of Directors and makes its recommendation to the
Board. It should assess the current Board’s skills, experience and expertise to identify the skills that would best
increase Board effectiveness. It must also assess the needs of the business currently and going forward. The
Board should be structured in a way that it:-
l Has a proper understanding of, and competence to deal with, the current and emerging issues of the
business
l Exercises independent judgement
l Encourages enhanced performance of the Company
l Can effectively review and challenge the performance of management.
The company should develop selection criteria for potential board candidate(s). Informal discussion may be
carried by the NRC or the Board to generate a list of potential candidates who may fill the stated criteria.
Where considered necessary, the company may use the services of an independent executive search firm to
assess the appropriateness of potential candidates or to supplement a candidate list provided by directors.
The NRC should measure -the final potential candidate(s) against the selection criteria and approach desired
candidate(s) to obtain consent of intended director, and recommend to the Board.
 Lesson 3 n Board Effectiveness 101

The company should follow the legal process pertaining to appointment of directors to the Board. In addition,
the company should prepare terms of reference and issue an appointment letter containing such terms to the
appointed director.
Various provisions regarding the Nomination and Remuneration Committee are discussed in Chapter
of Board Committees.

DUTIES OF THE DIRECTORS

A director is “bound to take such precautions and show such diligence in their office as a prudent man of
business would exercise in the management of his own affairs.”
– Trustees of the Orange River Land & Asbestos Company vs King (1892)
The Duties and Responsibilities can be broadly classified into two categories:
l The duties, liabilities and responsibilities which promote corporate governance through the sincerest
efforts of directors in efficient management and swift resolution of critical corporate issues and sincere
and mature decision making to avoid unnecessary risks to the corporate entity and its shareholders.
l Keeping the interests of company and its stakeholders ahead of personal interests.
The following duties of the directors have been provided under Section 166 of the Companies Act, 2013 and
apply to all types of directors including Independent Directors.
(1) Subject to the provisions of this Act, a director of a company shall act in accordance with the articles of
the company.
(2) A director of a company shall act in good faith in order to promote the objects of the company for
the benefit of its members as a whole, and in the best interests of the company, its employees, the
shareholders, the community and for the protection of environment.
(3) A director of a company shall exercise his duties with due and reasonable care, skill and diligence and
shall exercise independent judgment.
(4) A director of a company shall not involve in a situation in which he may have a direct or indirect interest
that conflicts, or possibly may conflict, with the interest of the company.
(5) A director of a company shall not achieve or attempt to achieve any undue gain or advantage either
to himself or to his relatives, partners, or associates and if such director is found guilty of making any
undue gain, he shall be liable to pay an amount equal to that gain to the company.
(6) A director of a company shall not assign his office and any assignment so made shall be void.
(7) If a director of the company contravenes the provisions of this section such director shall be punishable
with fine which shall not be less than one lakh rupees but which may extend to five lakh rupees.

POWERS OF THE BOARD

In terms Section 179 of the Companies Act, 2013 the Board of directors of a company shall be entitled to
exercise all such powers, and to do all such acts and things, as the company is authorised to exercise and do.
The Board shall not exercise any power or do any act or thing which is required, whether by this or any other Act
or by the memorandum or articles of the company, to be exercised or done by the company in general meeting.
As per Section 179(3) read with Rule 8 of Companies (Meetings of Board and its Powers) Rules, 2014, the
Board of Directors of a company shall exercise the following powers on behalf of the company only by means
of resolutions passed at meetings of the Board, namely:–
(1) to make calls on shareholders in respect of money unpaid on their shares;
102 EP-GRMCE

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

(3) to issue securities, including debentures, whether in or outside India;
(4) to borrow monies;
(5) to invest the funds of the company;
(6) to grant loans or give guarantee or provide security in respect of loans;
(7) to approve financial statement and the Board’s report;
(8) to diversify the business of the company;
(9) to approve amalgamation, merger or reconstruction;
(10) to take over a company or acquire a controlling or substantial stake in another company;
(11) to make political contributions;
(12) to appoint or remove key managerial personnel (KMP);
(13) to appoint internal auditors and secretarial auditor.
The Board may, by a resolution passed at a meeting, delegate to any committee of directors, the managing
director, the manager or any other principal officer of the company or in the case of a branch office of the
company, the principal officer of the branch office, the powers specified in (4) to (6) above on such conditions
as it may specify.
The banking company is not covered under the purview of this section. Also that in case of a Specified IFSC public
company, the Board can exercise powers by means of resolutions passed at the meetings of the Board or through
resolutions passed by circulation. The company may impose restriction and conditions on the powers of the Board.
Section 180 of the Act imposes restrictions on the powers of the Board. It provides that the board can exercise
the following powers only with the consent of the company by special resolution:–
(a) to sell, lease or otherwise dispose of the whole or substantially the whole of the undertaking of the
company or where the company owns more than one undertaking, of the whole or substantially the
whole of any of such undertakings;
(b) to invest otherwise in trust securities the amount of compensation received by it as a result of any
merger or amalgamation;
(c) to borrow money, where the money to be borrowed, together with the money already borrowed by the
company will exceed aggregate of its paid-up share capital and free reserves and securities premium,
apart from temporary loans obtained from the company’s bankers in the ordinary course of business;
(d) to remit, or give time for the repayment of, any debt due from a director.
The special resolution relating to borrowing money exceeding paid up capital and free reserves specify the total
amount up to which the money may be borrowed by Board. The title of buyer or the person who takes on lease
any property, investment or undertaking on good faith cannot be affected and also in case if such sale or lease
covered in the ordinary business of such company. The special resolution may also stipulate the conditions,
including conditions regarding the use, disposal, investment of the sale proceeds, which may result from such
transactions but this doesn’t authorise the company to reduce its capital except the provisions contained in this
Act.
The debt incurred by the company exceeding the paid up capital and free reserves is not valid and effectual,
unless the lender proves that the loan was advanced on good faith and without knowledge that the limit imposed
had been exceeded.
 Lesson 3 n Board Effectiveness 103

INDEPENDENT DIRECTORS FOR BETTER BOARD EFFECTIVENESS

Independent directors are known to bring an objective view in board deliberations. They also ensure that there is no
dominance of one individual or special interest group or the stifling of healthy debate. They act as the guardians of
the interest of all shareholders and stakeholders, especially in the areas of potential conflict of interest.
Independent Directors bring a valuable outside perspective to the deliberations. They contribute significantly
to the decision-making process of the Board. They can bring on objective view to the evaluation of the
performance of Board and management. In addition, they can play an important role in areas where the interest
of management, the company and shareholders may converge such as executive remuneration, succession
planning, changes in corporate control, audit function etc.
Independent directors are required because they perform the following important role:
(i) Balance the often-conflicting interests of the stakeholders.
(ii) Facilitate withstanding and countering pressures from owners.
(iii) Fulfill a useful role in succession planning.
(iv) Act as a coach, mentor and sounding Board for their full-time colleagues.
(v) Provide independent judgment and wider perspectives.
Section 149(6) of Companies Act, 2013 defines independent director as below:
An independent director in relation to a company, means a director other than a managing director or a whole-
time director or a nominee director, –
(a) who, in the opinion of the Board, is a person of integrity and possesses relevant expertise and
experience;
(b) (i) who is or was not a promoter of the company or its holding, subsidiary or associate company;
(ii) who is not related to promoters or directors in the company, its holding, subsidiary or associate company;
(c) who has or had no pecuniary relationship, other than remuneration as such director or having
transaction not exceeding ten per cent. of his total income or such amount as may be prescribed, with
the company, its holding, subsidiary or associate company, or their promoters, or directors, during the
two immediately preceding financial years or during the current financial year; (This provision does not
apply to Government Companies).

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

(d) none of whose relatives –

(i) is holding any security of or interest in the company, its holding, subsidiary or associate company
during the two immediately preceding financial years or during the current financial year:
Provided that the relative may hold security or interest in the company of face value not exceeding
fifty lakh rupees or two per cent. of the paid-up capital of the company, its holding, subsidiary or
associate company or such higher sum as may be prescribed;
(ii) is indebted to the company, its holding, subsidiary or associate company or their promoters, or
directors, in excess of such amount as may be prescribed during the two immediately preceding
financial years or during the current financial year;
(iii) has given a guarantee or provided any security in connection with the indebtedness of any
third person to the company, its holding, subsidiary or associate company or their promoters,
or directors of such holding company, for such amount as may be prescribed during the two
immediately preceding financial years or during the current financial year; or
(iv) has any other pecuniary transaction or relationship with the company, or its subsidiary, or its
holding or associate company amounting to two per cent. or more of its gross turnover or total
income singly or in combination with the transactions referred to in sub-clause (i), (ii) or (iii);
(e) who, neither himself nor any of his relatives—
(i) holds or has held the position of a key managerial personnel or is or has been employee of
the company or its holding, subsidiary or associate company in any of the three financial years
immediately preceding the financial year in which he is proposed to be appointed;
Provided that in case of a relative who is an employee, the restriction under this clause shall not
apply for his employment during preceding three financial years.
(ii) is or has been an employee or proprietor or a partner, in any of the three financial years immediately
preceding the financial year in which he is proposed to be appointed, of—
(A) a firm of auditors or company secretaries in practice or cost auditors of the company or its
holding, subsidiary or associate company; or
(B) any legal or a consulting firm that has or had any transaction with the company, its holding,
subsidiary or associate company amounting to ten per cent. or more of the gross turnover of
such firm;
(iii) holds together with his relatives two per cent. or more of the total voting power of the company; or
(iv) is a Chief Executive or director, by whatever name called, of any nonprofit organisation that
receives twenty-five per cent. or more of its receipts from the company, any of its promoters,
directors or its holding, subsidiary or associate company or that holds two per cent. or more of the
total voting power of the company; or
(f) who possesses such other qualifications as may be prescribed.
Explanation – for the purposes of this section, “nominee director” means a director nominated by any financial
institution in pursuance of the provisions of any law for the time being in force, or of any agreement, or appointed
by any Government, or any other person to represent its interests.
Additions made to meaning of Independent Directors under the Rules:
(1) An independent director shall possess appropriate skills, experience and knowledge in one or more
fields of finance, law, management, sales, marketing, administration, research, corporate governance,
technical operations or other disciplines related to the company’s business.
 Lesson 3 n Board Effectiveness 105

(2) None of the relatives of an independent director, for the purposes of sub-clauses (ii) and (iii) of clause
(d) of sub-section (6) of section 149,-
(i) is indebted to the company, its holding, subsidiary or associate company or their promoters, or
directors; or
(ii) has given a guarantee or provided any security in connection with the indebtedness of any
third person to the company, its holding, subsidiary or associate company or their promoters, or
directors of such holding company,
for an amount of fifty lakhs rupees, at any time during the two immediately preceding financial years or during
the current financial year.

Meaning of Independent Director under Regulation 16(1)(b) of SEBI (LODR) Regulations

The expression ‘independent director’ means a non-executive director, other than a nominee director of the
listed entity:
(i) who, in the opinion of the Board, is a person of integrity and possesses relevant expertise and
experience;
(ii) who is or was not a promoter of the listed entity or its holding, subsidiary or associate company or
member of the promoter group of the listed entity;
(iii) who is not related to promoters or directors in the listed entity or its holding, subsidiary or associate
company;
(iv) who, apart from receiving director’s remuneration, has or had no material pecuniary relationship with
the listed entity, its holding, subsidiary or associate company, or their promoters, or directors, during the
two immediately preceding financial years or during the current financial year;
(v) none of whose relatives has or had pecuniary relationship or transaction with the listed entity, its holding,
subsidiary or associate company, or their promoters, or directors, amounting to two per cent. or more
of its gross turnover or total income or fifty lakh rupees or such higher amount as may be prescribed,
whichever is lower, during the two immediately preceding financial years or during the current financial
year;
(vi) who, neither himself nor any of his relatives –
(A) holds or has held the position of a key managerial personnel or is or has been employee of the
listed entity or its holding, subsidiary or associate company in any of the three financial years
immediately preceding the financial year in which he is proposed to be appointed;
(B) is or has been an employee or proprietor or a partner, in any of the three financial years immediately
preceding the financial year in which he is proposed to be appointed, of –
(i) a firm of auditors or company secretaries in practice or cost auditors of the listed entity or its
holding, subsidiary or associate company; or
(ii) any legal or a consulting firm that has or had any transaction with the listed entity, its holding,
subsidiary or associate company amounting to ten per cent or more of the gross turnover of
such firm;
(C) holds together with his relatives two per cent or more of the total voting power of the listed entity;
or
(D) is a Chief Executive or director, by whatever name called, of any non-profit organisation that
receives twenty-five per cent or more of its receipts or corpus from the listed entity, any of its
106 EP-GRMCE

promoters, directors or its holding, subsidiary or associate company or that holds two per cent or
more of the total voting power of the listed company;
(E) is a material supplier, service provider or customer or a lessor or lessee of the listed company;
(vii) who is not less than 21 years of age.
(viii) who is not a non-independent director of another company on the board of which any non- independent
director of the listed entity is an independent director.

Role and Functions of Independent Directors

Schedule IV of the Companies Act, 2013 specifies that the independent directors shall:
(1) help in bringing an independent judgment to bear on the Board’s deliberations especially on issues of
strategy, performance, risk management, resources, key appointments and standards of conduct;
(2) bring an objective view in the evaluation of the performance of board and management;
(3) scrutinise the performance of management in meeting agreed goals and objectives and monitor the
reporting of performance;
(4) satisfy themselves on the integrity of financial information and that financial controls and the systems
of risk management are robust and defensible;
(5) safeguard the interests of all stakeholders, particularly the minority shareholders;
(6) balance the conflicting interest of the stakeholders;
(7) determine appropriate levels of remuneration of executive directors, key managerial personnel and
senior management and have a prime role in appointing and where necessary recommend removal of
executive directors, key managerial personnel and senior management;
(8) moderate and arbitrate in the interest of the company as a whole, in situations of conflict between
management and shareholder’s interest.

Duties of Independent Directors

Schedule IV of the Companies Act, 2013 provides that the independent directors shall have following duties-
(1) undertake appropriate induction and regularly update and refresh their skills, knowledge and familiarity
with the company;
(2) seek appropriate clarification or amplification of information and, where necessary, take and follow
appropriate professional advice and opinion of outside experts at the expense of the company;
(3) strive to attend all meetings of the Board of Directors and of the Board committees of which he is a
member;
(4) participate constructively and actively in the committees of the Board in which they are chairpersons or
members;
(5) strive to attend the general meetings of the company;
(6) where they have concerns about the running of the company or a proposed action, ensure that these
are addressed by the Board and, to the extent that they are not resolved, insist that their concerns are
recorded in the minutes of the Board meeting;
(7) keep themselves well informed about the company and the external environment in which it operates;
(8) not to unfairly obstruct the functioning of an otherwise proper Board or committee of the Board;
 Lesson 3 n Board Effectiveness 107

(9) pay sufficient attention and ensure that adequate deliberations are held before approving related party
transactions and assure themselves that the same are in the interest of the company;
(10) ascertain and ensure that the company has an adequate and functional vigil mechanism and to ensure
that the interests of a person who uses such mechanism are not prejudicially affected on account of
such use;
(11) report concerns about unethical behaviour, actual or suspected fraud or violation of the company’s
code of conduct or ethics policy;
(12) “act within their authority”, assist in protecting the legitimate interests of the company, shareholders and
its employees;
(13) not disclose confidential information, including commercial secrets, technologies, advertising and sales
promotion plans, unpublished price sensitive information, unless such disclosure is expressly approved
by the Board or required by law.
These duties are in addition to the duties that they have as a director of the Company.

Separate Meetings of Independent Directors

Schedule IV of the Companies Act 2013 and Regulation 25(3) of SEBI (LODR) regulations, 2015 provides that
the independent directors of the company shall hold at least one meeting in a year, without the attendance of
non-independent directors and members of management and all the independent directors of the company
shall strive to be present at such meeting to undertake following-
(a) review the performance of non-independent directors and the Board as a whole;
(b) review the performance of the Chairperson of the company, taking into account the views of executive
directors and non-executive directors;
(c) assess the quality, quantity and timeliness of flow of information between the company management
and the Board that is necessary for the Board to effectively and reasonably perform their duties.

Liability of Independent Directors

Section 149(12) of the Companies Act 2013 provides that an independent director and a non-executive director
not being promoter or key managerial personnel, shall be held liable, only in respect of such acts of omission or
commission by a company which had occurred with his knowledge, attributable through Board processes, and
with his consent or connivance or where he had not acted diligently.
Regulation 25(5) of SEBI (LODR) regulations, 2015 provides that an independent director shall be held liable,
only in respect of such acts of omission or commission by the listed entity which had occurred with his knowledge,
attributable through processes of board of directors, and with his consent or connivance or where he had not
acted diligently with respect to the provisions contained in these regulations.
Also Regulation 25(10) provides that with effect from October 1, 2018, the top 500 listed entities by market
capitalization calculated as on March 31 of the preceding financial year, shall undertake Directors and Officers
insurance (‘D and O insurance’) for all their independent directors of such quantum and for such risks as may
be determined by its board of directors.
Clarification provided by MCA vide General Circular No. 1 / 2020 dated 02nd March, 2020
Section 149 (12) is a non obstante clause which provides that the liability of an independent director (ID) or a
non-executive director (NED) not being promoter or key managerial personnel would be only in respect of such
acts of omission or commission by a company which had occurred with his knowledge, attributable through
Board processes, and with his consent or connivance or where he had not acted diligently. In View of the
108 EP-GRMCE

express provisions of section 149(12), IDs and NEDs (non-promoter and non-KMP), should not be arrayed in
any criminal or civil proceedings under the Act, unless the above mentioned criteria is met, Typically, apart from
IDs, non -promoter and non-KMP, NEDs, would exist in the following cases:
a) Directors nominated by the Government on the public sector undertakings;
b) Directors nominated by Public Sector Financial Institutions, Financial Institutions or Banks having
participation in equity of a company, or otherwise;
c) Directors appointed in pursuance to any statutory or regulatory requirement such as directors appointed
by the NCLT.
The nature of default is also crucial for arraigning officers of the company for defaults committed under the Act.
All instances of filing of information/ records with the registry, maintenance of statutory registers or minutes of
the meetings, or compliance with the orders issued by the statutory authorities, including the NCLT under the
Act are not the responsibility of the IDs or the NEDs, unless any specific requirement is provided in the Act or
in such orders, as the case may be. The responsibility of the NEDs, ordinarily arise in such cases, where there
are no WTDs and KMPs.
At the time of serving notices to the company, during inquiry, inspection, investigation, or adjudication
proceedings, necessary documents may be sought so as to ascertain the involvement of the concerned officers
of the company. In case, lapses are attributable to the decisions taken by the Board or its Committees, all care
must be taken to ensure that civil or criminal proceedings are not unnecessarily initiated against the IDs or the
NEDs, unless sufficient evidence exists to the contrary.

CASE STUDIES
Securities Exchange Commission, USA, in a recent case has begun a new era of scrutinizing liability of
independent directors by bringing an action against independent director. In SEC v. Raval, Civil Action No.
8:10-cv-00101 (D.Neb. filed Mar.15,2010) it was alleged that Vasant Raval, former Chairman of the Audit
Committee of InfoGroup Inc.(now InfoUSA, Inc.) had failed to sufficiently investigate certain “red flags”
surrounding the company’s former CEO and Chairman of the Board, Vinod Gupta.
The SEC’s complaint alleged that Vasant Raval 70, resident of Nebraska, served on the board of directors
for InfoGroup in various positions from 2003 to 2008, including a stint as Chairman of the Audit Committee.
During this period, Raval allegedly turned a blind eye to allegations that Vinod Gupta directed the company
to improperly pay himself $9.5 million that he then spent on corporate jets, service for his yacht, life
insurance premiums, and payment of personal credit cards. In addition, the complaint alleged that Gupta
directed the company to enter into related party transactions totaling approximately $9.3 million with entities
that he controlled or with whom he was affiliated viz. Annapurna Corporation (now Everest Corporation),
Aspen Leasing Services, LLC (“Aspen Leasing”). These related party transactions were not disclosed in the
company’s public filings.
The Commission also alleged that Raval failed to respond appropriately to various red flags concerning Gupta’s
expenses and Info’s related party transactions with Gupta’s entities. According to the complaint, Raval failed to take
appropriate action regarding the concerns expressed to him by two internal auditors of Infogroup Inc., that Gupta
was submitting requests for reimbursement of personal expenses. In a board meeting, Raval was tasked with
investigating the propriety of the transactions. Rather than seeking assistance from outside counsel or rigorously
scrutinizing the transactions, Raval began his “in depth investigation” and presented a report to the company’s
board merely in 12 days. The “Raval Report” however, omitted critical facts.
 Lesson 3 n Board Effectiveness 109

Despite numerous prompts by internal auditor, Raval failed to undertake a thorough investigation. As a
result, the company allegedly failed to disclose related party transactions and materially understated Gupta’s
compensation. Although Raval did not make any pecuniary benefits, he failed to discharge his duties and take
meaningful action to further investigate Gupta’s misconduct and misappropriation of company funds.
The SEC charged Raval for failing in his ‘affirmative responsibilities’ and thus violating the anti-fraud, proxy,
and reporting provisions of the US Exchange Act. To settle his case, Raval consented to the entry of a
permanent injunction prohibiting future violations of the related provisions of the federal securities laws, a
$50,000 civil penalty, and a five-year ban from serving as an officer or director of a company.
Indian scenario
In Bhopal Gas Tragedy verdict, the Bhopal Trial Court on 7th June 2010 has held Keshub Mahindra reputed
industrialist, the then non executive chairman of Union Carbide India limited(UCIL), guilty and sentenced him to
two years of imprisonment along with seven others accused. He was charged of attending only a few meetings
in a year and took only macro view of the company’s developments. A non-vigilant act of non-executive
chairman, accounted for death of thousands. “Ignorance” of the system by the director of the company is
unacceptable. Role of non executive director in this case is questionable. Later he was granted bail.

OTHER GOOD PRACTICES TO ENHANCE BOARD EFFECTIVENESS

APPOINTMENT OF LEAD INDEPENDENT DIRECTOR

Internationally, it is considered a good practice to designate an independent director as a lead independent
director or senior independent director. The lead independent director is a highly versatile intermediary between
the chair, the board and the board’s stakeholders. The lead independent director must keep a keen eye on
whether the chair is performing their role to the board’s satisfaction without losing objectivity or independence.
They monitor the relationship between the chair and the CEO, and ensure that it is a well-functioning working
relationship without becoming too close or powerful. The lead independent director also coordinates the
activities of other non-employee directors and advises the chairman on issues ranging from the schedule of
board meetings to recommending retention of advisors and consultants to the management.

Role of the lead independent director

l Acts as the principal liaison between the independent directors of the Board and the Chairman of the
Board;
l Develops the agenda for and preside at executive sessions of the Board’s independent directors;
l Advises the Chairman of the Board as to an appropriate schedule for Board meetings, seeking to
ensure that the independent directors can perform their duties responsibly while not interfering with the
flow of Company operations;
l Approves with the Chairman of the Board the agenda for Board and Board Committee meetings and
the need for special meetings of the Board;
l Advises the Chairman of the Board as to the quality, quantity and timeliness of the information submitted
by the Company’s management that is necessary or appropriate for the independent directors to
effectively and responsibly perform their duties;
l Recommends to the Board the retention of advisors and consultants who report directly to the Board;
l Interviews, along with the chair of the Nominating and Corporate Governance Committee, all Board
candidates, and make recommendations to the Nominating and Corporate Governance Committee;
110 EP-GRMCE

l Assists the Board and Company officers in better ensuring compliance with and implementation of the
Governance Guidelines;
l Serves as Chairman of the Board when the Chairman is not present; and
l Serves as a liaison for consultation and communication with shareholders.

SEPARATION OF ROLE OF CHAIRMAN AND CHIEF EXECUTIVE OFFICER

Chairman: Good boards are created by good chairmen. The chairman creates the conditions for overall board
and individual director effectiveness. The chairman should demonstrate the highest standards of integrity and
probity, and set clear expectations concerning the company’s culture, values and behaviours, and the style and
tone of board discussions. The chairman, with the help of the executive directors and the company secretary,
sets the agenda for the board’s deliberations.
The Companies Act, 2013 does not legally recognize chairman of a company. They are elected by the board to
take the chair at a particular meeting. Boards are not bound to continue with the same chairman for successive
meetings. In law, all directors have broadly equal responsibilities and chairmen are no more equal than any
other board member. Thus, under the law, chairman or chairperson is not legal position but a momentary
position in meetings.
The chairman is responsible for leadership of the board, ensuring its effectiveness on all aspects of its role and
setting its agenda. The chairman is also responsible for ensuring that the directors receive accurate, timely and
clear information. The chairman should ensure effective communication with shareholders. The chairman’s role
includes
l demonstrating ethical leadership;
l setting a board agenda which is primarily focused on strategy, performance, value creation and
accountability, and ensuring that issues relevant to these areas are reserved for board decision;
l ensuring a timely flow of high-quality supporting information; regularly considering succession planning
and the composition of the board etc.
Chief Executive Officer (CEO): The Board appoints the CEO based on the criterion of his capability and
competence to manage the company effectively.
As per Section 2(18) of the Companies Act, 2013, “Chief Executive Officer” means an officer of a company, who
has been designated as such by it.
His main responsibilities include developing and implementing high-level strategies, making major corporate
decisions, managing the overall operations and resources of a company, and acting as the main point of
communication between the board of directors and the corporate operations. He is involved with every aspect
of the company’s performance. The CEO is supported and advised by a skilled board and CEO is ultimately
accountable to the board for his actions. The most important skill of a CEO is to think strategically.
Separation of Role: It is perceived that separating the roles of chairman and chief executive officer (CEO)
increases the effectiveness of a company’s board. It is the board’s and chairman’s job to monitor and evaluate
a company’s performance. A CEO, on the other hand, represents the management team. If the two roles
are performed by the same person, then there is less accountability. A clear demarcation of the roles and
responsibilities of the Chairman of the Board and that of the Managing Director/CEO promotes balance of
power.
The benefits of separation of roles of Chairman and CEO can be:
l Director Communication: A separate chairman provides a more effective channel for the board to
express its views on management
 Lesson 3 n Board Effectiveness 111

l Guidance: A separate chairman can provide the CEO with guidance and feedback on his/her
performance
l Shareholders’ interest: The chairman can focus on shareholder interests, while the CEO manages the
company
l Governance: A separate chairman allows the board to more effectively fulfill its regulatory requirements
l Long-Term Outlook: Separating the position allows the chairman to focus on the long-term strategy
while the CEO focuses on short-term profitability
l Succession Planning: A separate chairman can more effectively concentrate on corporate succession
plans.
Provisions under Companies Act, 2013: First proviso to Section 203(1) of the Companies Act, 2013 provides
for the separation of role of Chairman and Chief Executive Officer subject to conditions thereunder. It specifies
that an individual shall not be appointed or reappointed as the chairperson of the company, in pursuance of the
articles of the company, as well as the managing director or Chief Executive Officer of the company at the same
time after the date of commencement of this Act unless,—
(a) the articles of such a company provide otherwise;
(b) the company does not carry multiple businesses:
This proviso does not apply to public companies having paid-up share capital of rupees one hundred crore or
more and annual turnover of rupees one thousand crore or more which are engaged in multiple businesses and
have appointed Chief Executive Officer for each such businesses. For the purposes of this, the paid-up share
capital and the annual turnover shall be decided on the basis of the latest audited balance sheet.

Provisions under SEBI (LODR) Regulations, 2015

Regulation 17(1B) of SEBI (LODR) Regulations, 2015 provides that effect from April 1, 2022, the top 500 listed
entities shall ensure that the Chairperson of the board of such listed entity shall -
(a) be a non-executive director;
(b) not be related to the Managing Director or the Chief Executive Officer as per the definition of the term
“relative” defined under the Companies Act, 2013:
Provided that this sub-regulation shall not be applicable to the listed entities which do not have any identifiable
promoters as per the shareholding pattern filed with stock exchanges.
The top 500 entities shall be determined on the basis of market capitalisation, as at the end of the immediate
previous financial year.

SUCCESSION PLANNING
Succession planning is a strategy for identifying and developing future leaders. Succession plans are used
to address the inevitable changes that occur when directors resign, retire or die. Attention to succession
planning can help ensure the board includes directors with a balanced level of institutional knowledge and fresh
perspectives.
A well-prepared board should develop a succession plan that provides guidance on identifying and sourcing
potential board members who can fulfil key requirements. Succession planning is an ongoing process of
identifying, assessing and developing people to ensure the continuity of the Board. It is most important that
boards of directors are prepared for resignation and/or retirement of its members. The board should continually
ensure that it has the right set of skills, talents, and attributes represented.
112 EP-GRMCE

Succession planning for the Board includes succession and renewal for the Board as a whole and the Board’s
leadership positions. The key to getting succession planning right is maintaining an ongoing and dynamic
process. The nomination and remuneration committee should review the skills required, identify the gaps,
develop transparent appointment criteria and inform succession planning. The nomination and remuneration
committee should periodically assess whether the desired outcome has been achieved, and propose changes
to the process as necessary.
Executive directors may be recruited from external sources, but companies should also develop internal talent
and capability. Initiatives might include middle management development programmes, facilitating engagement
from time to time with non-executive directors, and partnering and mentoring schemes.
Some leading practices for board succession planning are:
l Using a skills matrix to proactively shape board composition that incorporates strategic direction and
opportunities, regulatory and industry developments, challenges, and transformation
l Conducting robust annual performance evaluations, including facilitation by an independent third party
l Establishing and enhancing written director qualification standards that align with the company’s
business and corporate strategy, and including these standards in corporate governance policies and
bylaws as appropriate
l Reviewing evolving committee and board leadership needs, including the time commitments required
l Considering director election results and engagement by investors regarding board composition,
independence, leadership and diversity
l Prioritizing an independent mindset on boards, including through board diversity, to foster debate,
challenge norms and invigorate board oversight processes and strategy development
l Making sure mentoring and development opportunities are available for incoming directors.

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

on Succession
planning There is no specific provision. It is Regulation17(4)
usually included in terms of reference
The Board of the listed entity shall satisfy itself
of NRC.
that plans are in place for orderly succession
for appointments to the Board and to senior
management.

DIRECTORS TRAINING, DEVELOPMENT AND FAMILARISATION

Director’s Training: An important aspect of Board effectiveness would be appropriate attention to development
and training of directors. Director orientation/induction should be seen as the first step of the board’s continuing
improvement. Since the Board composition is getting more diverse, a system of formal training and evaluation
is very important to foster trust, cohesion and communication among board members. Investing in board
development strengthens the board and individual directors. As the Board of Directors is primarily responsible
for good governance practices, which is quite different from management, it calls for new areas of knowledge
and different skills.
Training should encompass both a thorough induction programme and an ongoing training and development
opportunities for the board members. Training should focus on improving the knowledge and skills of the board
and individual members and on overall board performance. Training should be required for each board member
and compliance with the requirement used to assess individual board member performance for reappointment
 Lesson 3 n Board Effectiveness 113

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

Familiarisation Programme for Independent Directors: Regulation 25(7) of SEBI (LODR) regulations, 2015
provides that the listed entity shall familiarise the independent directors through various programmes about the
listed entity, including the following:
(a) nature of the industry in which the listed entity operates;
(b) business model of the listed entity;
(c) roles, rights, responsibilities of independent directors; and
(d) any other relevant information.
Schedule IV of the Companies Act 2013 also provides that the Independent Directors shall undertake appropriate
induction and regularly update and refresh their skills, knowledge and familiarity with the company.

PERFORMANCE EVALUATION OF THE BOARD AND MANAGEMENT

Board evaluation is a key means by which boards can recognize and correct corporate governance problems
and add real value to their organizations. A properly conducted board evaluation can contribute significantly to
performance improvements on organisational; board and individual member level. Board evaluation typically
examines the roles of the Board and the entailing responsibilities, and assesses how effectively these are
fulfilled by the Board. The stakeholders and investors are interested to know whether the members of Board
are effectively functioning individually and collectively. The Board at many times requires new skills for promptly
responding to the dynamic changing business environment. Performance measurement, against the set
benchmarks, in the form of Board evaluation has the potential to significantly enhance Board effectiveness,
maximize strengths, tackle weaknesses and improve corporate relationships. Annual assessment is a powerful
tool to convert good boards into great boards.
Evaluation provides the board and its committees with the opportunity to consider how group culture,
cohesiveness, composition, leadership, meetings information processes and governance policies influence
performance. Board Evaluation helps to identify areas for potential adjustment and provides an opportunity to
remind directors of the importance of group dynamics and effective board and committee processes in fulfilling
board and committee responsibilities.
Thus, Board evaluation contributes significantly to improved performance at three levels - organizational, Board
and individual Board member level. It also improves the leadership, teamwork, accountability, decision-making,
communication and efficiency of the board. A commitment to annual evaluation is powerful change agent.
The Board evaluation sets the standards of performance and improves the culture of collective action by Board.
Evaluation also improves teamwork by creating better understating of Board dynamics, board-management
relations and thinking as a group within the board. It helps to maximize board/ director contribution by
encouraging participation in meetings and highlighting the skill gaps on the Board and those of individual
members. Directors demonstrate commitment to improvement, based on the feedback provided on individual
and collective skill gaps.
The purposes of the Board evaluation may be enumerated as under:
l Improving the performance of Board towards corporate goals and objectives.
l Assessing the balance of skills, knowledge and experience on the Board.
l Identifying the areas of concern and areas to be focused for improvement.
l Identifying and creating awareness about the role of Directors individually and collectively as Board.
l Building Team work among Board members.
l Effective Coordination between Board and Management.
l Overall growth of the organisation.
 Lesson 3 n Board Effectiveness 115

Requirements under the Companies Act 2013

1. The Role of the Nominations and Remuneration Committee in performance evaluation of

directors
Section 178 (2): The Nomination and Remuneration Committee shall identify persons who are qualified to
become directors and who may be appointed in senior management in accordance with the criteria laid down,
recommend to the Board their appointment and removal and shall specify the manner for effective evaluation
of performance of Board, its committees and individual directors to be carried out either by the Board, by the
Nomination and Remuneration Committee or by an independent external agency and review its implementation
and compliance.

2. Independent Directors’ role in performance evaluation of Boards, non-independent directors

and Chairperson
Schedule IV [Part II (2)] : Independent directors are required to bring an objective view in the evaluation of the
performance of board and management.
Schedule IV (Part VII) : The independent directors are required to hold at least one meeting in a year, without
the attendance of non-independent directors and members of the management and in that meeting they are
required to review the performance of
l the non-independent directors and
l the Board as whole; and
l also review the performance of the Chairperson of the company, taking into account the views of the
executive and non-executive directors.
l assess the quality, quantity and timeliness of flow of information between the company management
and the Board that is necessary for the Board to effectively and reasonably perform their duties.

3. Performance evaluation of Independent Directors

Schedule IV Part V: Re appointment - The reappointment of the independent directors would be based on their
report of performance evaluation.
Schedule IV Part VIII : Evaluation mechanism
The performance of the independent directors would have to be done by the entire Board excluding the director
to be evaluated.
On the basis of the report of performance evaluation, the continuance or extension of the term of appointment
of the independent director would be determined.

Thus, the Board of every listed company and every other public company having paid- up share capital
of twenty five crores or more calculated at the end of the preceding financial year except Government
Companies has to do formal annual evaluation of the-
l board

l its committees and

l all individual directors.
The Board’s report of such companies must include a statement indicating the manner & criteria of formal
Board Evaluation.
116 EP-GRMCE

Provisions under the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015
It also requires Boards to conduct an annual performance evaluation and its disclosure in the annual report
through the following provisions:
1. Regulation 17(10) mandates that entire board of directors shall do the performance evaluation
of independent directors, provided that in the evaluation process, the directors who are subject to
evaluation shall not participate.
2. Regulation 19(4) read with Part D of Schedule II - It provides that the role of committee shall, inter-alia,
include the following:
l formulation of criteria for evaluation of performance of independent directors and the board of
directors;
l whether to extend or continue the term of appointment of the independent director, on the basis
of the report of performance evaluation of independent directors.

Frequency of Board Evaluation

Section 134(3)(p) provides that there has to be a formal annual evaluation of Board of its own performance
and that of its committees and individual directors. The Company may undertake annual evaluation either in
accordance with calendar year or financial year, as there is no clarity on this. Ideally, the same should be as
per financial year.

Broad Evaluation framework and parameters

Boards should understand the framework under which board and committee evaluations are conducted, and
take steps to ensure evaluations are carried out effectively. As per the Companies Act 2013 or SEBI (Listing
Obligations and Disclosure Requirements) Regulations, 2015, Board evaluation would generally include
following:
1. Evaluation of the Board as a whole
2. Evaluation of the Committees
3. Evaluation of Individual Directors
l Managing Director / Whole time Director / Executive Director
l Independent Directors
l Non- executive Directors
4. Evaluation of the Chairperson

1. Evaluation of the Board as a whole:

The performance of the Board as a whole may be evaluated either from the reviews/ feedback of the directors
themselves or by some external source. The Independent Directors at their separate meeting shall also assess
the quality, quantity and timeliness of flow of information between the company management and the Board that
is necessary for the Board to effectively and reasonably perform their duties. The evaluation of the performance
of the Boards is essentially an assessment of how the Board has performed on following parameters which
determines the effectiveness of boards.
l Board Structure : its composition, constitution and diversity and that of its Committees, competencies
of the members, Board and Committee charters, frequency of meetings, procedures;
l Dynamics and Functioning of the Board : annual Board calendar, information availability, interactions
 Lesson 3 n Board Effectiveness 117

and communication with CEO and senior executives, Board agenda, cohesiveness and the quality of
participation in Board meetings;
l Business Strategy Governance: Board’s role in company strategy;
l Financial Reporting Process, Internal Audit and Internal Controls: The integrity and the robustness
of the financial and other controls regarding abusive related party transactions, vigil mechanism and
risk management;
l Monitoring Role: Monitoring of policies, strategy implementation and systems;
l Supporting and Advisory Role; and
l The Chairperson’s Role.

2. EVALUATION OF THE COMMITTEES

The Board is responsible for the evaluation of the performance of the Committees of the Board. The performance
of the committees may be evaluated by the Directors, on the basis of the terms of reference of the committee
being evaluated. Alternatively, the evaluation may be externally facilitated. The broad parameters of reviewing
the performance of the Committees, inter alia, are:
l Discharge of its functions and duties as per its terms of reference;
l Process and procedures followed for discharging its functions;
l Effectiveness of suggestions and recommendations received;
l Size, structure and expertise of the Committee;
l Conduct of its meetings and procedures followed in this regard; and
l Recommendations made to the Board.

3. EVALUATION OF INDIVIDUAL DIRECTOR(S)

(a) Evaluation of Managing Director / Whole time Director / Executive Director
The performance evaluation of Managing Director, Executive Director of the Company may be
done by all the directors. External facilitation may also serve as an efficient tool for evaluation.
The Code for Independent Directors also provides that Independent Directors should review the
performance of non-independent Directors, which include Managing Director / Whole time Director/
Executive Director. The broad parameters for reviewing the performance of Managing Director/
Executive Director are:
l Achievement of financial/business targets prescribed by the Board;
l Developing and managing / executing business plans, operational plans, risk management, and
financial affairs of the organization;
l Display of leadership qualities i.e. correctly anticipating business trends, opportunities, and
priorities affecting the Company’s prosperity and operations;
l Development of policies, and strategic plans aligned with the vision and mission of Company
and which harmoniously balance the needs of shareholders, clients, employees, and other
stakeholders;
l Establishment of an effective organization structure to ensure that there is management focus on
key functions necessary for the organization to align with its mission; and
118 EP-GRMCE

l Managing relationships with the Board, management team, regulators, bankers, industry
representatives and other stakeholders.
(b) Evaluation of Independent Directors:
The performance evaluation of independent directors should be done by the entire Board of Directors,
excluding the director being evaluated. On the basis of the report of performance evaluation, it shall be
determined whether to extend or continue the term of appointment of the independent director.
The Nomination Committee shall lay down the evaluation criteria for performance evaluation of
independent directors. The company should disclose the criteria for performance evaluation, as laid
down by the Nomination Committee, in its Annual Report.
Major Factors for Evaluation
l The quality of the issues that get raised, discussed and debated at the meetings of the Board and
its Committees.
l The guidance provided by the Board in the light of changing market conditions and their impact
on the organisation.
l The methodology adopted by the Board to solve issues referred to them.
l The effectiveness of the directions provided by the Board on the issues discussed in meetings.
Parameters: In addition to the parameters laid down for Directors, which shall be common for evaluation
to both Independent and Non- executive directors, an Independent director shall also be evaluated on
the following parameters:
l Exercise of objective independent judgment in the best interest of Company;
l Ability to contribute to and monitor corporate governance practice; and
l Adherence to the code of conduct for independent directors.
l Performance of the Board against the benchmark performance set.
l Overall value addition by the discussions taking place at the Board meetings.
l The regularity and quality of participation in the deliberations of the Board and its Committees.
l The answerability of the top management to the Board on performance related matters.
(c) Evaluation of Non-Executive Directors
In terms of the Code for Independent Directors, the Independent director(s) on the Board of the
Company should evaluate the performance of Non-independent director(s) which include non-executive
director(s). Peer Review method or external evaluation may also facilitate the purpose of evaluating
Non-executive directors. The broad parameters for reviewing the performance of Non-executive
Directors are:
l Participation at the Board / Committee meetings;
l Commitment (including guidance provided to senior management outside of Board/ Committee
meetings);
l Effective deployment of knowledge and expertise;
l Effective management of relationship with stakeholders;
l Integrity and maintaining of confidentiality;
l Independence of behaviour and judgment; and
 Lesson 3 n Board Effectiveness 119

l Impact and influence.

4. EVALUATION OF CHAIRPERSON OF THE BOARD

The performance of the Chairperson is linked to both the functioning of the Board as a whole as well as the
performance of each director. The Code for Independent Directors provides that the Independent Directors
should review the performance of the Chairperson of the company taking into account the views of the executive
directors and non-executive directors.
Therefore, all the directors of the Board of the company thereof contribute in evaluating the performance of the
Chairperson of the Board. External agencies may also be involved in evaluating the Chairperson.
The broad parameters for reviewing the performance of Chairperson of the Board are:
l Managing relationship with the members of the Board and management;
l Demonstration of leadership qualities;
l Relationship and communication within the Board;
l Providing ease of raising of issues and concerns by the Board members; and
l Promoting constructive debate and effective decision making at the board;
l Relationship and effectiveness of communication with the shareholders and other stakeholders;
l Promoting shareholder confidence in the Board and
l Personal attributes i.e. Integrity, Honesty, Knowledge,etc.

BOARD EFFECTIVENESS AND THE ROLE OF THE COMPANY SECRETARY

A Company Secretary acts as a vital link between the company and its Board of Directors, shareholders and
other stakeholders and regulatory authorities. A Company Secretary is a close confidante of the board and
commands confidence of individual directors so as to ensure that the culture of independence is promoted at
the board and committee meetings and at the level of individual directors.
As per Section 2(24) of the Companies Act, 2013, “company secretary” or “secretary” means a company
secretary as defined in clause (c) of sub-section (1) of section 2 of the Company Secretaries Act, 1980 who is
appointed by a company to perform the functions of a company secretary under this Act;
Under Section 2(60) of the Companies Act, 2013, the company secretary has also been included in the category
of the officer of the company and shall be considered to be in default in complying with any provisions of the
Companies Act, 2013.

Company Secretary:
 acts as a vital link between the company and its Board of Directors, shareholders and other
stakeholders and regulatory authorities
 plays a key role in ensuring that the Board procedures are followed and regularly reviewed
 provides the Board with guidance as to its duties, responsibilities and powers under various laws,
rules and regulations
 acts as a compliance officer as well as an in-house legal counsel to advise the Board and the
functional departments of the company on various corporate, business, economic and tax laws
 is an important member of the corporate management team and acts as conscience keeper of the
company.
120 EP-GRMCE

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

GUIDANCE ON BOARD EFFECTIVENESS

(Issued by FRC, UK – July 2018)
The primary purpose of the Guidance on Board Effectiveness (the Guidance) is to stimulate boards’ thinking
on how they can carry out their role and encourage them to focus on continually improving their effectiveness.
The Guidance on Board Effectiveness is includes commentary on areas such as culture, relations with the
workforce and wider shareholders and diversity. It also incorporates new sections on the workings of board
committees, notably the remuneration committee. Helpfully, the Guidance includes questions for boards to
ask themselves or, in some cases, to ask management, about effectiveness in key areas.
The Guidance is not mandatory and is not prescriptive. It contains suggestions of good practice to support
directors and their advisors in applying the Code.
The Guidance also includes some of the procedural aspects of governance and is intended to act as a
reminder to boards and their support teams that good practice and procedure should continue to be followed.
The tools and techniques for board effectiveness are suggested in the Guidance to assist companies in
applying the Principles of good corporate governance.
 Lesson 3 n Board Effectiveness 121

BOARD EFFECTIVENESS INDICATORS

Sample questions which can be used as a quick check for board effectiveness in any organization.

Are the majority of your board members independent from the organization?

 Do you have a set of required competencies articulated for your board (and committees), and do
your current board members as a whole display the entire set of required competencies?

 Do you have a board manual that articulates terms of reference for the board, board committees,
individual directors, and the code of conduct? Does it have a forward list of topics for the year?

 Does at least one member of the board have extensive experience in the industry of your organization?

 Does each director get a comprehensive orientation on the business of the organization and meet
key senior staff before the first board meeting?

 Are directors offered continuing education in governance or a program of director certification?

 Does each director display a keen interest or passion in the undertaking of the organization?

 Do directors regularly attend both board and committee meetings?

 Are directors encouraged and supported when asking difficult or awkward questions of management?

 Does the Chairman solicit views from each director specifically?

 Does the Chairman ask board members to refrain from expressing their personal views at the outset
of a discussion?

 Does the Chair manage the timing of the board meetings to ensure there is sufficient time for
discussion after each topic addressed by management?

 Does the board regularly have outside experts attend to present on specific topics?

 Does the board have an in-camera meeting both before and after each board meeting?

 Does the board retain an independent consultant to help evaluate director and board performance?

 At the beginning of a board meeting, do the committee chairs have an opportunity to summarize
(verbally or in writing) the issues addressed and decisions taken at prior committee meetings?

 Does the board have an effective system to provide board members with timely, relevant and reliable
financial and strategic information about the organization?

 Does the board review the risk identification and management system of the organization?

 Does the board approve the business plan and major expenditures?

 Does the board work with the CEO and senior staff to develop and review the strategic plan?
122 EP-GRMCE

MODEL BOARD CHARTER

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

GLOSSARY OF TECHNICAL WORDS

– Globalization: Globalization implies the opening of local and nationalistic perspectives to a broader
outlook of an interconnected and interdependent world with free transfer of capital, goods, and
services across national frontiers. However, it does not include unhindered movement of labor and,
as suggested by some economists, may hurt smaller or fragile economies if applied indiscriminately.
– Accountability: The obligation of an individual or organization to account for its activities, accept
responsibility for them, and to disclose the results in a transparent manner. It also includes the
responsibility for money or other entrusted property.
– Corporate Citizen: The legal status of a corporation in the jurisdiction in which it was incorporated.
– Familiarization Programmes: The Familiarization Programmes are aimed to familiarize the independent
directors with the company, their roles responsibilities in the company, nature of industry in which the
company operates and business model of the company by imparting suitable training sessions.
 Lesson 3 n Board Effectiveness 123

LESSON ROUND UP
– The Board of Directors plays a pivotal role in ensuring good governance. The contribution of directors
on the Board is critical to the way a corporate conducts itself.

– Responsibilities of Board - to establish an organizational vision and mission, giving strategic direction
and advice, overseeing strategy implementation and performance, developing and evaluating the
CEO, to ensure the organization has sufficient and appropriate human resources, ensuring effective
stakeholder relations, risk mitigation, procuring resources.

– The board functions on the principle of majority or unanimity. A decision is taken on record if it is
accepted by the majority or all of the directors. A single director cannot take a decision.

– Executive director or ED is a common post in many organisations, but the Companies Act, 2013 does
not define the phrase.

– Non-executive directors do not get involved in the day-to-day running of the business.

– Independent directors are known to bring an objective view in board deliberations. They also ensure
that there is no dominance of one individual or special interest group or the stifling of healthy debate.
They act as the guardians of the interest of all shareholders and stakeholders, especially in the areas
of potential conflict.

– Board composition is one of the most important determinants of board effectiveness. A board should
have a mix of inside/Independent Directors with a variety of experience and core competence if it
is to be effective in setting policies and strategies and for judging the management’s performance
objectively.

– The effectiveness of the board depends largely on the leadership skills, capabilities and commitment
to corporate governance practices of each individual director.

– The Chairman’s primary responsibility is for leading the Board and ensuring its effectiveness.

– Induction and continuous training of Directors is of utmost importance to keep them updated with
latest happenings in the company and major developments that impact the company.

– A formal evaluation of the board and of the individual directors is one potentially effective way to
respond to the demand for greater board accountability and effectiveness.

– An effective board evaluation requires the right combination of timing, content, process, and
individuals.

TEST YOURSELF
(These are meant for recapitulation only. Answers to these questions are not to be submitted for evaluation)
1. Mr. Dutta is the Chairman and CEO of ABC Ltd. Mr. Ramesh, Company Secretary of ABC Ltd. is of
the opinion that the role of Chairman and CEO be separated. Should the role of Chairman and CEO
be separated?
2. ABC Ltd. is a FMCG company. You as a company Secretary are required to prepare a draft of valid
questions for the purpose of Board evaluation.
3. Write Short Notes on –
(a) Board Composition
(b) Training of Directors
124 EP-GRMCE

(c) Board Charter

(d) Lead Independent Director
(e) Board Evaluation
 Lesson 4 Board Processes through Secretarial Standards 125
Lesson 4
n

Board Processes through

Secretarial Standards

LESSON OUTLINE
LEARNING OBJECTIVES
– Introduction
Corporate governance is about owners and the
– Regulatory Framework
managers operating as the trustees on behalf of
– SS-1: Meetings of the Board of Directors every shareholder–large or small. In exchange
– Board processes through Secretarial for the right to run the company for the long term,
Standards boards have an obligation to ensure the proper
management of the affairs of the Company.
– Convening a Meeting
Decisions relating to the policy and operations of
– Frequency of Meetings the company are arrived at meetings of the Board
– Quorum held periodically. Meetings of the Board enable
discussions on matters placed before them and
– Attendance at Meetings facilitate decision making based on collective
– Chairman judgment of the Board.

– Passing of Resolution by Circulation The fundamental principles with respect to Board

Meetings are laid down in the Companies Act,
– Minutes 2013 and the Secretarial Standard -1 facilitates
– Preservation of Minutes and other compliance with these principles by endeavoring to
Records provide further clarity where there is ambiguity and
establishing benchmark standards to harmonise
– Disclosures
prevalent diverse practices.
– Meeting through Video Conferencing
The objective of this study lesson is to enable the
– Glossary students to understand, Board Processes like
Convening a Meeting, Frequency of Meetings,
– LESSON ROUND-UP
Quorum, Attendance at Meetings, Passing of
– TEST YOURSELF Resolution by Circulation, Minutes, Preservation
of Minutes and other Records and Disclosures
through Secretarial Standard-1.

“A decisive Board is cogitative, proactive, and supportive.”

– Pearl Zhu
126 EP-GRMCE

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

Section 118 (10) of Companies Act 2013- Every company shall observe secretarial standards with respect
to general and Board meetings specified by the Institute of Company Secretaries of India constituted
under section 3 of the Company Secretaries Act, 1980 (56 of 1980), and approved as such by the Central
Government.
(In case of Specified IFSC Public Company and Private Company- Sub-section (10) of section 118 Shall not
apply. - Notification Date 4th January, 2017)

In order to ensure high corporate governance standards, the Ministry of Corporate Affairs (MCA) has accorded
its approval to the following Secretarial Standards (“SS”) specified by the Institute of Company Secretaries of
India namely –
(i) SS-1: Meetings of the Board of Directors and
(ii) SS-2: General Meetings
The Secretarial Standards were notified by the Institute of Company Secretaries of India in the Official Gazette
and were effective from July 1, 2015. In 2017, the ICSI has issued the Revised Secretarial Standards which
has been approved by the Central Government under Section 118(10) of the Companies Act, 2013 and were
effective from October 1st, 2017.
Prior to the promulgation of the Companies Act, 2013, the secretarial standards were recommendatory in
nature. With the historical moment of launching the Secretarial Standards by the MCA has marked a new era of
healthy secretarial practices among corporates.

Regulatory Framework

S.No. Description
1. Section 118(10) of the Companies Act, 2013
2. Secretarial Standard 1 ‘Meetings of The Board of Directors’
3. Section 173(2) of the Companies Act, 2013
4. Rule 3 of the Companies (Meeting of Board and its Powers) Rules, 2014
5. Rule 4 of the Companies (Meeting of Board and its Powers) Rules, 2014
 Lesson 4 n Board Processes through Secretarial Standards 127

SS-1: Meetings of the Board of Directors

Decisions relating to the policy and operations of the company are arrived at meetings of the Board held
periodically. Meetings of the Board enable discussions on matters placed before them and facilitate decision
making based on collective judgment of the Board. The fundamental principles with respect to Board Meetings
are laid down in the Act.
SS-1 facilitates compliance with these principles by endeavouring to provide further clarity where there is
ambiguity and establishing benchmark standards to harmonise prevalent diverse practices. For the benefit of
companies, SS-1 provides necessary flexibility in many cases viz. with respect to calling Meeting at shorter
notice, transacting any other business not contained in the agenda and passing of Resolutions by circulation.
Complying with SS-1 ensures a reliable Board process which protects the interests of the company and its
stakeholders.
Companies follow diverse secretarial practices which have evolved over a period of time through varied
usages and as a response to differing business cultures. With a view to integrate, harmonise and standardise
such practices, the ICSI has formulated Secretarial Standards. The objective of such standards is to make
certain uniform corporate practice, procedures and dealings relating to conduct of board meetings. Further,
the Secretarial Standards has also clarified certain provisions of the Act, where the law was either silent or
ambiguous. However, these standards do not overstep or modify the law in any way.
SS-1 requires Company Secretary to oversee the vital process of recording and facilitating implementation of
the decisions of the Board. Where there is no Company Secretary in the company or in the absence of the
Company Secretary, any Director or other Key Managerial Personnel (KMP) or any other person authorised by
the Board for this purpose may discharge such of the functions of the Company Secretary as given in SS-1.
This Standard is applicable to the Meetings of Board of Directors of all companies incorporated under the Act
except One Person Company.
The Secretarial Standard 1 seeks to ensure that a healthy and transparent procedure is followed for convening
a board meeting. It contains the detailed practices and procedures with regard to conduct of board meetings in
companies.

Board processes through Secretarial Standards

1. Convening a Meeting

Authority  Any Director of a company may, at any time, summon a Meeting of

the Board, and the Company Secretary or where there is no Company
Secretary, any person authorised by the Board in this behalf, on the
requisition of a Director, shall convene a Meeting of the Board, in
consultation with the Chairman or in his absence, the Managing Director
or in his absence, the Whole-time Director, where there is any, unless
otherwise provided in the Articles.
 The Chairman may, unless dissented to or objected by the majority of
Directors present at a Meeting at which a Quorum is present, adjourn
the Meeting for any reason, at any stage of the Meeting.

Day, Time, Place, Mode  Every Meeting shall have a serial number.
and Serial Number of
 A Meeting may be convened at any time and place, on any day.
Meeting
128 EP-GRMCE

(Notice of the Meeting shall clearly mention a venue, whether registered

office or otherwise, to be the venue of the Meeting and all the recordings
of the proceedings of the Meeting, if conducted through Electronic Mode,
shall be deemed to be made at such place.)
 Any Director may participate through Electronic Mode in a Meeting
unless the Act or any other law specifically prohibits such participation
through Electronic Mode in respect of any item of business.

Notice  Notice in writing of every Meeting shall be given to every Director by

hand or by speed post or by registered post or by facsimile or by e-mail
or by any other electronic means.
 Notice shall be issued by the Company Secretary or where there is no
Company Secretary, any Director or any other person authorised by the
Board for the purpose.
 The Notice shall specify the serial number, day, date, time and full
address of the venue of the Meeting.
 The Notice shall inform the Directors about the option available to
them to participate through Electronic Mode and provide them all the
necessary information.
 The Notice of a Meeting shall be given even if Meetings are held on pre-
determined dates or at pre-determined intervals.
 Notice convening a Meeting shall be given at least seven days before
the date of the Meeting, unless the Articles prescribe a longer period.

Agenda and Notes on  The Agenda, setting out the business to be transacted at the Meeting,
Agenda and Notes on Agenda shall be given to the Directors at least seven days
before the date of the Meeting, unless the Articles prescribe a longer
period.
 Each item of business requiring approval at the Meeting shall be
supported by a note setting out the details of the proposal, relevant
material facts that enable the Directors to understand the meaning,
scope and implications of the proposal and the nature of concern or
interest, if any, of any Director in the proposal, which the Director had
earlier disclosed.
 Each item of business to be taken up at the Meeting shall be serially
numbered.
 Any item not included in the Agenda may be taken up for consideration
with the permission of the Chairman and with the consent of a majority
of the Directors present in the Meeting
 To transact urgent business, the Notice, Agenda and Notes on Agenda
may be given at shorter period of time than stated above, if at least one
Independent Director, if any, shall be present at such Meeting.
 Lesson 4 n Board Processes through Secretarial Standards 129

2. Frequency of Meetings

Meetings of the Board The company shall hold at least four Meetings of its Board in each Calendar
Year with a maximum interval of one hundred and twenty days between any two
consecutive Meetings.

Meetings of Committees Committees shall meet as often as necessary subject to the minimum number
and frequency prescribed by any law or any authority or as stipulated by the
Board.

Meeting of Independent Where a company is required to appoint Independent Directors under the Act,
Directors such Independent Directors shall meet at least once in a Calendar Year.

3. Quorum

General Provisions  Quorum shall be present throughout the Meeting.

 Quorum shall be present not only at the time of commencement of the
Meeting but also while transacting business.
 A Director shall neither be reckoned for Quorum nor shall be entitled to
participate in respect of an item of business in which he is interested.
However, in case of a private company, a Director shall be entitled to
participate in respect of such item after disclosure of his interest.
 Directors participating through Electronic Mode in a Meeting shall be
counted for the purpose of Quorum, unless they are to be excluded for
any items of business under the provisions of the Act or any other law.

Meetings of the Board  The Quorum for a Meeting of the Board shall be one-third of the total
strength of the Board, or two Directors, whichever is higher.
 Where the number of Directors is reduced below the minimum fixed by
the Articles, no business shall be transacted unless the number is first
made up by the remaining Director(s) or through a General Meeting.

Meetings of Committees Unless otherwise stipulated in the Act or the Articles or under any other law, the
Quorum for Meetings of any Committee constituted by the Board shall be as
specified by the Board. If no such Quorum is specified, the presence of all the
members of any such Committee is necessary to form the Quorum.

4. Attendance at Meetings
 Every company shall maintain attendance register for the Meetings of the Board and Meetings of the
Committee.
 The attendance register shall contain the following particulars: serial number and date of the Meeting;
in case of a Committee Meeting name of the Committee; place of the Meeting; time of the Meeting;
names and signatures of the Directors, the Company Secretary and also of persons attending the
Meeting by invitation and their mode of presence, if participating through Electronic Mode
 The attendance register shall be deemed to have been signed by the Directors participating through
Electronic Mode, if their attendance is recorded in the attendance register and authenticated by the
Company Secretary or where there is no Company Secretary, by the Chairman or by any other Director
present at the Meeting, if so authorised by the Chairman and the fact of such participation is also
recorded in the Minutes.
130 EP-GRMCE

 The attendance register shall be maintained at the Registered Office of the company or such other
place as may be approved by the Board.
 The attendance register is open for inspection by the Directors. Even after a person ceases to be a
Director, he shall be entitled to inspect the attendance register of the Meetings held during the period
of his Directorship.
 The attendance register shall be preserved for a period of at least eight financial years from the date of
last entry made therein and may be destroyed thereafter with the approval of the Board.

 The attendance register shall be in the custody of the Company Secretary.

 Leave of absence shall be granted to a Director only when a request for such leave has been
communicated to the Company Secretary or to the Chairman or to any other person authorised by the
Board to issue Notice of the Meeting.

5. Chairman

Meetings of the Board  The Chairman of the company shall be the Chairman of the Board. If
the company does not have a Chairman, the Directors may elect one of
themselves to be the Chairman of the Board.
 The Chairman of the Board shall conduct the Meetings of the Board. If
no such Chairman is elected or if the Chairman is unable to attend the
Meeting, the Directors present at the Meeting shall elect one of themselves
to chair and conduct the Meeting, unless otherwise provided in the Articles.

Meetings of  A member of the Committee appointed by the Board or elected by the

Committees Committee as Chairman of the Committee, in accordance with the Act or
any other law or the Articles, shall conduct the Meetings of the Committee.
If no Chairman has been so elected or if the elected Chairman is unable to
attend the Meeting, the Committee shall elect one of its members present
to chair and conduct the Meeting of the Committee, unless otherwise
provided in the Articles.

6. Passing of Resolution by Circulation

Authority  The Chairman of the Board or in his absence, the Managing Director or in
their absence, any Director other than an Interested Director, shall decide,
before the draft Resolution is circulated to all the Directors, whether the
approval of the Board for a particular business shall be obtained by means
of a Resolution by circulation.
 Where not less than one-third of the total number of Directors for the time
being require the Resolution under circulation to be decided at a Meeting, the
Chairman shall put the Resolution for consideration at a Meeting of the Board.

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

together with the necessary papers, to all the Directors including Interested
Directors on the same day.
 The draft of the Resolution to be passed and the necessary papers
shall be circulated amongst the Directors by hand, or by speed post or
by registered post or by courier, or by e-mail or by any other recognised
electronic means.
 Lesson 4 n Board Processes through Secretarial Standards 131

 Each business proposed to be passed by way of Resolution by circulation

shall be explained by a note setting out the details of the proposal, relevant
material facts that enable the Directors to understand the meaning, scope
and implications of the proposal, the nature of concern or interest, if any, of
any Director in the proposal, which the Director had earlier disclosed and
the draft of the Resolution proposed. The note shall also indicate how a
Director shall signify assent or dissent to the Resolution proposed and the
date by which the Director shall respond.

Approval  The Resolution is passed when it is approved by a majority of the Directors

entitled to vote on the Resolution, unless not less than one-third of the
total number of Directors for the time being require the Resolution under
circulation to be decided at a Meeting.

Recording  Resolutions passed by circulation shall be noted at a subsequent Meeting

of the Board and the text thereof with dissent or abstention, if any, shall be
recorded in the Minutes of such Meeting.

Validity  Passing of Resolution by circulation shall be considered valid as if it had

been passed at a duly convened Meeting of the Board.

7. Minutes

Maintenance of  Minutes shall be recorded in books maintained for that purpose.

Minutes
 A distinct Minutes Book shall be maintained for Meetings of the Board and
each of its Committees.
 A company may maintain its Minutes in physical or in electronic form.
 The pages of the Minutes Books shall be consecutively numbered.
 Minutes shall not be pasted or attached to the Minutes Book, or tampered
with in any manner.
 Minutes Books, if maintained in loose-leaf form, shall be bound periodically
depending on the size and volume and coinciding with one or more financial
years of the company.
 Minutes Books shall be kept at the Registered Office of the company or at
such other place as may be approved by the Board.

General Contents of  Minutes shall state, at the beginning the serial number and type of the
Minutes Meeting, name of the company, day, date, venue and time of commencement
of the Meeting.
 Minutes shall record the names of the Directors present physically or
through Electronic Mode, the Company Secretary who is in attendance at
the Meeting and Invitees, if any, including Invitees for specific items.
 Minutes shall contain a record of all appointments made at the Meeting.
132 EP-GRMCE

Specific Contents of  Minutes shall inter-alia contain:

Minutes
(a) The name(s) of Directors present and their mode of attendance, if
through Electronic Mode.
(b) In case of a Director participating through Electronic Mode, his
particulars, the location from where he participated and wherever
required, his consent to sign the statutory registers placed at the
Meeting.
(c) The name of Company Secretary who is in attendance and Invitees,
if any, for specific items and mode of their attendance if through
Electronic Mode.
(d) Record of election, if any, of the Chairman of the Meeting.
(e) Record of presence of Quorum.
(f) The names of Directors who sought and were granted leave of
absence.
(g) Noting of the Minutes of the preceding Meeting.
(h) Noting the Minutes of the Meetings of the Committees.
(i) The text of the Resolution(s) passed by circulation since the last
Meeting, including dissent or abstention, if any.
(j) The fact that an Interested Director did not participate in the
discussions and did not vote on item of business in which he was
interested and in case of a related party transaction such director
was not present in the meeting during discussions and voting on such
item.
(k) The views of the Directors particularly the Independent Director, if
specifically insisted upon by such Directors, provided these, in the
opinion of the Chairman, are not defamatory of any person, not
irrelevant or immaterial to the proceedings or not detrimental to the
interests of the company.
(l) If any Director has participated only for a part of the Meeting, the
Agenda items in which he did not participate.
(m) The fact of the dissent and the name of the Director who dissented
from the Resolution or abstained from voting thereon.
(n) Ratification by Independent Director or majority of Directors, as the
case may be, in case of Meetings held at a shorter Notice.
(o) Consideration of any item other than those included in the Agenda
with the consent of majority of the Directors present at the Meeting
and ratification of the decision taken in respect of such item by a
majority of Directors of the company.
(p) The time of commencement and conclusion of the Meeting
 Lesson 4 n Board Processes through Secretarial Standards 133

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

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

Entry in the Minutes  Minutes shall be entered in the Minutes Book within thirty days from the
Book date of conclusion of the Meeting.
 The date of entry of the Minutes in the Minutes Book shall be recorded by
the Company Secretary.
 Minutes, once entered in the Minutes Book, shall not be altered. Any
alteration in the Minutes as entered shall be made only by way of express
approval of the Board at its subsequent Meeting at which the Minutes are
noted by the Board and the fact of such alteration shall be recorded in the
Minutes of such subsequent Meeting.

Signing and Dating of  Minutes of the Meeting of the Board shall be signed and dated by the
Minutes Chairman of the Meeting or by the Chairman of the next Meeting.
 The Chairman shall initial each page of the Minutes, sign the last page and
append to such signature the date on which and the place where he has
signed the Minutes.
 Minutes, once signed by the Chairman, shall not be altered, save as
mentioned in this Standard.
 Within fifteen days of signing of the Minutes, a copy of the said signed
Minutes, certified by the Company Secretary or where there is no Company
Secretary by any Director authorised by the Board, shall be circulated to
all the Directors, as on the date of the Meeting and appointed thereafter,
except to those Directors who have waived their right to receive the same
either in writing or such waiver is recorded in the Minutes.
134 EP-GRMCE

Inspection and Extracts  The Minutes of Meetings of the Board and any Committee thereof can be
of Minutes inspected by the Directors.
 Extracts of the Minutes shall be given only after the Minutes have been
duly entered in the Minutes Book. However, certified copies of any
Resolution passed at a Meeting may be issued even earlier, if the text of
that Resolution had been placed at the Meeting.

8. Preservation of Minutes and other Records

 Minutes of all Meetings shall be preserved permanently in physical or in electronic form with Timestamp
 Office copies of Notices, Agenda, Notes on Agenda and other related papers shall be preserved in good
order in physical or in electronic form for as long as they remain current or for eight financial years,
whichever is later and may be destroyed thereafter with the approval of the Board.
 Minutes Books shall be in the custody of the Company Secretary.

9. Disclosures:
The Report of the Board of Directors shall include a statement on compliances of applicable Secretarial
Standards.
Illustrative list of items of business for the Agenda for the First Meeting of the Board of the company
1. To appoint the Chairman of the Meeting.
2. To note the Certificate of Incorporation of the company, issued by the Registrar of Companies.
3. To take note of the Memorandum and Articles of Association of the company, as registered.
4. To note the situation of the Registered Office of the company and ratify the registered document of the
title of the premises of the registered office in the name of the company or a Notarised copy of lease /
rent agreement in the name of the company.
5. To note the first Directors of the company.
6. To read and record the Notices of disclosure of interest given by the Directors.
7. To consider appointment of Additional Directors.
8. To consider appointment of the Chairman of the Board.
9. To consider appointment of the first Auditors.
10. To adopt the Common Seal of the company, if any.
11. To appoint Bankers and to open bank accounts of the company.
12. To authorise printing of share certificates and correspondence with the depositories, if any.
13. To authorise the issue of share certificates to the subscribers to the Memorandum and Articles of
Association of the company.
14. To approve and ratify preliminary expenses and preliminary agreements.
15. To approve the appointment of the Key Managerial Personnel, if applicable and other senior officers.
 Lesson 4 n Board Processes through Secretarial Standards 135

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

l Information on remuneration of Key Managerial Personnel.

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

Some Good Practices in Convening Board Meetings

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

MEETING THROUGH VIDEO CONFERENCING

Section 173(2) of Companies Act, 2013 read with Rule 3 of the Companies (Meetings of Board and its Powers)
Rules, 2014, provides that the participation of directors in a meeting of the Board may be either in person or
through video conferencing or other audio visual means as may be prescribed, which are capable of recording
and recognizing the participation of the directors and of recording and storing the proceedings of such meetings
along with date and time.
Provided that the Central Government may, by notification, specify such matters which shall not be dealt with in
a meeting through video conferencing or other audio visual means.
Provided further that where there is quorum in a meeting through physical presence of directors, any other
director may participate through video conferencing or other audio visual means in such meeting on any matter
specified under the first proviso.
 Lesson 4 n Board Processes through Secretarial Standards 137

The Complete process for conducting of Board Meeting through video conferencing is prescribed under Rule 3
of the Companies (Meetings of Board and its Powers) Rules, 2014 read with Secretarial Standard – 1.
The notice of the meeting shall inform the Directors regarding the option available to them to participate through
video conferencing mode. The notice shall also contain all the necessary information to enable the directors
to participate through video conferencing mode. Like: contact no. or e-mail address of the Chairman or any
other person authorized by the Board, to whom the Director shall confirm in this regard. The notice shall also
seek advance confirmation from the Directors as to whether they will participate through Electronic Mode in the
Meeting. Director who intends to participate through video conferencing shall give prior intimation to Chairman
of the Company (In the absence of intimation it shall be assumed that Director will attend in person).
At the commencement of the meeting, a Roll Call shall be taken by the Chairperson when every director
participating through video conferencing or other audio visual means shall state, for the record, the following
namely:-
a. Name;
b. The location from where he is participating;
c. That he has received the Agenda and all the relevant material for the meeting (Like: Draft Resolutions,
Notes to Agenda etc) and
d. That no one other than the concerned director is attending or having access to the proceedings of the
meeting at the location mentioned in clause (b);
After the roll call, the Chairperson shall confirm that the required quorum is complete. A director participating in
a meeting through video conferencing or other audio visual means shall be counted for the purpose of quorum.
If a statement of a director in the meeting through video conferencing or other audio visual means is interrupted
or garbled, the Chairperson shall request for a repeat or reiteration by the Director.
The minutes of the meeting shall disclose the particulars of the directors who attended the meeting through
video conferencing or other audio visual means and the location from where and the Agenda items in which he
participated.
As per rule 4 of the Companies (Meeting of Board and its Powers) Rules, 2014. The following types of matters
cannot be discussed in a board meeting conducted through video conference:
1. Approval of the annual financial statements.
2. Approval of the Board’s report.
3. Approval of the prospectus.
4. Audit Committee Meetings for consideration of accounts.
5. Approval of the matter relating to amalgamation, merger, demerger, acquisition and takeover.

If the quorum is present through physical presence of the directors than any other director may participate
conferencing through video or other audio visual means.
For the period beginning from the commencement of the Companies (Meetings of Board and its Powers)
Amendment Rules, 2020 and ending on 30th September, 2020, the meetings on matters referred above may
be held through video conferencing or other audio visual means in accordance with rule 3.
138 EP-GRMCE

GLOSSARY
– Agenda: An agenda is a list of meeting activities in the order in which they are to be taken up, beginning
with the call to order and ending with adjournment. It usually includes one or more specific items of
business to be acted upon. It may, but is not required to, include specific times for one or more activities.
An agenda may also be called a docket, schedule, or calendar. It may also contain a listing of an order
of business.
– Minutes: Minutes, also known as minutes of meeting, protocols or informally notes are the instant
written record of a meeting or hearing.
– Quorum: It is the smallest number of people needed to be present at a meeting before it can
officially begin and before official decisions can be taken.
– Timestamp means the current time of an event that is recorded by a Secured Computer System and
is used to describe the time that is printed to a file or other location to help keep track of when data is
added, removed, sent or received.
– Electronic Mode in relation to Meetings means Meetings through video conferencing or other audio-visual
means. “Video conferencing or other audiovisual means” means audio-visual electronic communication
facility employed which enables all the persons participating in a Meeting to communicate concurrently
with each other without an intermediary and to participate effectively in the Meeting.
– Secretarial Auditor means a Company Secretary in Practice or a firm of Company Secretary(ies) in
Practice appointed in pursuance of the Act to conduct the secretarial audit of the company.
– Maintenance means keeping of registers and records either in physical or electronic form, as may
be permitted under any law for the time being in force, and includes the making of appropriate entries
therein, the authentication of such entries and the preservation of such physical or electronic records.
– Minutes Book means a Book maintained in physical or in electronic form for the purpose of recording
of Minutes.
– Secured Computer System means computer hardware, software, and procedure that –
(a) are reasonably secure from unauthorized access and misuse;
(b) provide a reasonable level of reliability and correct operation;
(c) are reasonably suited to performing the intended functions; and
(d) adhere to generally accepted security procedures.

LESSON ROUND-UP
– According to Section 118 (10) of the Companies Act 2013, every company shall observe secretarial
standards with respect to General and Board meetings specified by the Institute of Company
Secretaries of India and approved as such by the Central Government.
– The Ministry of Corporate Affairs (MCA) has accorded its approval to the Secretarial Standards (“SS”)
specified by the Institute of Company Secretaries of India.
– The Secretarial Standards were notified by the Institute of Company Secretaries of India in the Official
Gazette and were effective from July 1, 2015. 
– SS-1 facilitates compliance with these principles by endeavouring to provide further clarity where
there is ambiguity and establishing benchmark standards to harmonise prevalent diverse practices.
 Lesson 4 n Board Processes through Secretarial Standards 139

– SS-1 requires Company Secretary to oversee the vital process of recording and facilitating
implementation of the decisions of the Board.
– SS-1 is applicable to the Meetings of Board of Directors of all companies incorporated under the Act
except One Person Company having only one director and Section 8 Company.
– SS-1 provides for some of the best standard practices to be followed for conduct of meetings by the
companies.

TEST YOURSELF
(These are meant for recapitulation only. Answers to these questions are not to be submitted for evaluation)
1. As a company secretary can you explain what is the frequency of meetings as per Secretarial
Standard 1.
2. Companies follow diverse secretarial practices. In the light of this statement explain the importance
of Secretarial Standards.
3. What are the Secretarial Standards specified in respect of Notice and Notes on Agenda?
4. Can you explain the following:
a) General Content of Minutes
b) Specific Content of minutes
5. Is there any role of Secretarial Standards in enhancing corporate governance practices of the Board
of Directors? Explain.
140 EP-GRMCE
 Lesson 5 Board Committees 141
Lesson 5
n

Board Committees

LESSON OUTLINE
LEARNING OBJECTIVES
– Introduction
The objective of this study lesson is to enable the
– Regulatory Framework students to understand the need and advantages
– Need for Committees of management through board committees and
the constitution and scope of various Committees.
– Rationale behind Board Committees
In this study lesson, students would be able to
– Committee Management understand effective company management
through the delegation of power and responsibilities
– Selection of Committee Members
to various board committees.
– Appointment of Committee Chairman
This chapter briefs about the Committees to
– Mandatory Committees of the Board be constituted mandatorily - Audit Committee,
– Audit Committee Nomination and Remuneration Committee,
Stakeholders Relationship Committee and CSR
– Nomination and Remuneration Committee Committee and non mandatory committees like
– Stakeholders Relationship Committee Corporate Governance Committee, Science
Technology and Sustainability Committee, Risk
– CSR Committee Management Committee, Regulatory, Compliance
– Risk Management Committee and Government Affairs Committee.

– Other Committees This chapter provides knowledge about various

committees of the Board. This chapter may be
– Glossary
useful in performing the advisory role and in
– LESSON ROUND-UP compliance management in practical areas of
work.
– TEST YOURSELF

“Committees have become so important nowadays that subcommittees have to be appointed to do the
work”
– J. Peter
142 EP-GRMCE

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

Regulatory Framework

S.No. Description
1. Table F of Schedule I of the Companies Act, 2013
2. Section 177 of the Companies Act, 2013
3. Rule 6 of the Companies (Meetings of Board and its Powers) Rules, 2014
4. Regulation 18 of the SEBI (LODR) Regulations, 2015
5. Section 178 of the Companies Act, 2013
6. Regulation 19 of SEBI (LODR) Regulations, 2015
7. Regulation 20 of SEBI (LODR) Regulations, 2015
 Lesson 5 n Board Committees 143

8. Section 135 of the Companies Act, 2013

9. Regulation 21 of the SEBI (LODR) Regulations, 2015
10. Secretarial Standards on Board and General Meetings

NEED FOR COMMITTEES

With increasing business complexities and time commitment of Board members, constituting committees has
become inevitable for organization of any significant size.
The Companies Act, 2013 and SEBI (LODR) Regulations, 2015 have provided a very robust regulatory
framework to emphasize that effectiveness of Board Committees as key to an effective Board.
Committees keep the number of participants manageable; in larger groups, either many people do not get to
speak or discussion gets quite lengthy. Committees can be set up for a specific purpose or to deal with general
issues such as ‘development’. They can be established on a short-term or temporary basis, or they can be
formed as a permanent body for ongoing work.
A Board can either delegate some of its powers to the committee, enabling it to act directly, or can require
the recommendations of the committee to be approved by the Board. The Board will normally depend heavily
on the findings and recommendations of its committees, although final decisions to accept or reject these
recommendations will be made by the Board.
Committees thus have an important role -
l to strengthen the governance arrangements of the company and support the Board in the achievement
of the strategic objectives of the company ;
l to strengthen the role of the Board in strategic decision making and supports the role of non-executive
directors in challenging executive management actions;
l to maximise the value of the input from non-executive directors, given their limited time commitment;
l to support the Board in fulfilling its role, given the nature and magnitude of the agenda.
Committees need clear goals, objectives, and terms of reference in order to function efficiently, and Boards
should ensure that these are developed before establishing the committee. Many committees have been known
to work outside their intended purpose due to a lack of precise objectives.

RATIONAL BEHIND BOARD COMMITTEES

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

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

Table F of Schedule I of the Companies Act, 2013 provides that articles of association of a company
limited by shares shall contain the following:
71. (i) The Board may, subject to the provisions of the Act, delegate any of its powers to committees consisting
of such member or members of its body as it thinks fit.
(ii) Any committee so formed shall, in the exercise of the powers so delegated, conform to any regulations
that may be imposed on it by the Board.
72. (i) A committee may elect a Chairperson of its meetings.
(ii) If no such Chairperson is elected, or if at any meeting the Chairperson is not present within five minutes
after the time appointed for holding the meeting, the members present may choose one of their members to
be Chairperson of the meeting.
73. (i) A committee may meet and adjourn as it thinks fit.
(ii) Questions arising at any meeting of a committee shall be determined by a majority of votes of the members
present, and in case of an equality of votes, the Chairperson shall have a second or casting vote.
74. All acts done in any meeting of the Board or of a committee thereof or by any person acting as a director,
shall, notwithstanding that it may be afterwards discovered that there was some defect in the appointment
of any one or more of such directors or of any person acting as aforesaid, or that they or any of them were
disqualified, be as valid as if every such director or such person had been duly appointed and was qualified
to be a director.
75. Save as otherwise expressly provided in the Act, a resolution in writing, signed by all the members of
the Board or of a committee thereof, for the time being entitled to receive notice of a meeting of the Board or
committee, shall be valid and effective as if it had been passed at a meeting of the Board or committee, duly
convened and held.

SELECTION OF COMMITTEE MEMBERS

Specific committee members may be appointed by either the Board or the committee Chairman. Area of
knowledge and expertise domain and time commitment of the Board member should be considered as the
criteria for the selection on any specific committee. The committee members should be selected with following
questions in mind: What tasks are the committee responsible for and who among the members possess the
skills and experience needed to complete those tasks. Every effort should be made to match the needs and
requirements of the committee and the skills, knowledge and interests of prospective committee members.
 Lesson 5 n Board Committees 145

It is very important that members have a clear view of the committee’s goals and the chairman should have flair
to utilize the committee member’s knowledge exponentially well to achieve those goals.

APPOINTMENT OF THE COMMITTEE CHAIRMAN

The Board may appoint the committee chairman or the committee members can choose/elect the chairman.
The committee chairman is the key to an effective committee, he sets the tone, pace and strategies of the
committees’ functioning, hence chairman selected should have motivational and leadership skills and time
commitment expected of him.
In seeking an effective chairman, most important things are knowledge and experience relevant to the work of
the committee, proven leadership and behavioral skills that will be essential if the committee is to work effectively.
The role of committee chairman requires extra work, time for communication with committee members and
senior management so that he remains informed about the developments and a willingness to resolve conflicts
among members.
The committee chairman co-ordinates work and establishes an environment of thoughtful deliberation. The
chairman is expected to stimulate the members and help the group use all the abilities and experiences its
members possess and new skills that they develop as they work together. The committee’s goal must be
aligned to achieve the objectives of the organization as a whole. The committee chairman will be responsible
for preparing agendas for the meetings, assigning responsibilities to committee members and doing some of
the follow-up to make sure that the assigned work is being done by members.
According to “Articles of Association” under Table F of Schedule I of the Companies Act, 2013, committee may
elect a Chairperson of its meetings. Where no such Chairperson is elected, or if at any meeting the Chairperson
is not present within five minutes after the time appointed for holding the meeting, the members present may
choose one of their members to be Chairperson of the meeting.
The Secretarial Standards (SS-1) provides that a member of the Committee appointed by the Board or elected
by the Committee as Chairman of the Committee, in accordance with the Act or any other law or the Articles,
shall conduct the Meetings of the Committee. If no Chairman has been so elected or if the elected Chairman is
unable to attend the Meeting, the Committee shall elect one of its members present to chair and conduct the
Meeting of the Committee, unless otherwise provided in the Articles.

Suggested Content of the Terms of References of Committees

1. Objectives
2. Composition
3. Secretary
4. Quorum
5. Meetings
6. Annual General Meeting
7. Authority
8. General Responsibilities
9. Specific Responsibilities
10. Reporting
11. Evaluation
12. Review of Committee
146 EP-GRMCE

MANDATORY COMMITTEES OF THE BOARD

Mandatory Committees of the Board are

prescribed under

Companies Act, 2013 SEBI (LODR) Regulations, 2015

(for certain class of companies) (for listed companies)

Audit Committee Audit Committee

Nomination and
Nomination and Remuneration Committee
Remuneration Committee

Stakeholders Relationship
Stakeholders Relationship Committee
Committee

Risk Management
Corporate Social Committee
Responsibility Committee

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

Constitution under Companies Act, 2013

Section 177(1) of the Companies Act, 2013 read with rule 6 of the Companies (Meetings of the Board and is
Powers) Rules, 2014 provides that the Board of directors of following companies are required to constitute a
Audit Committee of the Board –
(i) All public listed companies
(ii) All public companies with a paid up capital of 10 crore rupees or more;
(iii) All public companies having turnover of 100 crore rupees or more;
(iv) All public companies, having in aggregate, outstanding loans or borrowings or debentures or deposits
exceeding 50 crore rupees or more.
The paid up share capital or turnover or outstanding loans or borrowings or debentures or deposits, as the case
may be, as existing on the date of last audited financial statements shall be taken into account for the purposes
of this rule.
Note: As per Notification No. GSR 8(E), dated 4-1-2017: In case of an unlisted public company which is licensed
to operate by RBI or SEBI or IRDA from the International Financial Services Centre located in an approved multi
services SEZ set-up under the SEZ Act, section 177 shall not apply.
 Lesson 5 n Board Committees 147

Under SEBI Listing Regulations, 2015

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

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

Composition of the Audit Committee

Section 177(2) of the Companies Act, 2013 Regulation 18(1) of the SEBI (Listing Obligations
and Disclosure Requirement) Regulations, 2015
Audit Committee shall consist of a minimum of (1) Every listed entity shall constitute a qualified and
three directors. independent audit committee in accordance with the
terms of reference, subject to the following:
(a) Audit Committee shall have minimum three
directors as members.
Independent directors should form a majority. (Not (b) Two-thirds of the members of audit committee
applicable for Section 8 companies vide notification shall be independent directors and in case
no. GSR 466(E), dated 5-6-2015) of a listed entity having outstanding SR
equity shares, the audit committee shall only
comprise of independent directors.
Majority of members of Audit Committee including (c) All members of audit committee shall be
its Chairperson shall be persons with ability to read financially literate and at least 1 (one) member
and understand the financial statement. shall have accounting or related financial
management expertise.
Explanation (1) - For the purpose of this
regulation, “financially literate” shall mean the
ability to read and understand basic financial
statements i.e. balance sheet, profit and loss
account, and statement of cash flows.
Explanation (2).- For the purpose of this
regulation, a member shall be considered
to have accounting or related financial
management expertise if he or she possesses
experience in finance or accounting, or requisite
professional certification in accounting, or any
other comparable experience or background
which results in the individual’s financial
sophistication, including being or having been
a chief executive officer, chief financial officer
or other senior officer with financial oversight
responsibilities.
148 EP-GRMCE

(d) The chairperson of the audit committee shall

be an independent director and he shall
be present at AGM to answer shareholder
queries.
(e) The Company Secretary shall act as the
secretary to the audit committee.
(f) The audit committee at its discretion shall
invite the finance director or head of the
finance function, head of internal audit and
a representative of the statutory auditor and
any other such executives to be present at the
meetings of the committee.
Provided that occasionally the audit committee
may meet without the presence of any
executives of the listed entity.

Functions/Role of the Audit Committee

(1) Under Section 177(4) of the Companies Act, 2013

Every Audit Committee shall act in accordance with the terms of reference specified in writing by the Board.
Terms of reference as prescribed by the board shall inter alia, include, –
(a) the recommendation for appointment, remuneration and terms of appointment of auditors of the
company;
In case of Government Companies, in Clause (1) of sub-section (4) of the section 177, for the words”
recommendation for appointment, remuneration and terms of appointment “the words “recommendation
for remuneration” shall be substituted- Notification No. GSR 463(E) dated 05-06-2015.
(b) review and monitor the auditor’s independence and performance, and effectiveness of audit process;
(c) examination of the financial statement and the auditors’ report thereon;
(d) approval or any subsequent modification of transactions of the company with related parties;
Provided that the Audit Committee may make omnibus approval for related party transactions proposed
to be entered into by the company subject to such conditions as prescribed under rule 6A of the
Companies (Meetings of Board and its Powers) Rules, 2014;
Provided further that in case of transaction, other than transactions referred to in section 188, and
where Audit Committee does not approve the transaction, it shall make its recommendations to the
Board:
Provided also that in case any transaction involving any amount not exceeding one crore rupees is
entered into by a director or officer of the company without obtaining the approval of the Audit Committee
and it is not ratified by the Audit Committee within three months from the date of the transaction,
such transaction shall be voidable at the option of the Audit Committee and if the transaction is with
the related party to any director or is authorised by any other director, the director concerned shall
indemnify the company against any loss incurred by it:
Provided also that the provisions of this clause shall not apply to a transaction, other than a transaction
referred to in section 188, between a holding company and its wholly owned subsidiary company.
 Lesson 5 n Board Committees 149

(e) scrutiny of inter-corporate loans and investments;

(f) valuation of undertakings or assets of the company, wherever it is necessary;
(g) evaluation of internal financial controls and risk management systems;
(h) monitoring the end use of funds raised through public offers and related matters.

(2) Under Regulation 18(3) SEBI Listing Regulations, 2015

The role of the audit committee and the information to be reviewed by the audit committee shall be as specified
in Part C of Schedule II . The Part C of Schedule II is as under: –
A. The role of the audit committee shall include the following:
1. Oversight of the listed entity’s financial reporting process and the disclosure of its financial information
to ensure that the financial statement is correct, sufficient and credible;
2. Recommendation for appointment, remuneration and terms of appointment of auditors of the listed
entity;
3. Approval of payment to statutory auditors for any other services rendered by the statutory auditors;
4. Reviewing, with the management, the annual financial statements and auditor’s report thereon before
submission to the board for approval, with particular reference to:
(a) matters required to be included in the director’s responsibility statement to be included in the
board’s report in terms of clause (c) of sub-section (3) of Section 134 of the Companies Act, 2013;
(b) changes, if any, in accounting policies and practices and reasons for the same;
(c) major accounting entries involving estimates based on the exercise of judgment by management;
(d) significant adjustments made in the financial statements arising out of audit findings;
(e) compliance with listing and other legal requirements relating to financial statements;
(f) disclosure of any related party transactions;
(g) modified opinion(s) in the draft audit report;
5. Reviewing, with the management, the quarterly financial statements before submission to the board for
approval;
6. Reviewing, with the management, the statement of uses / application of funds raised through an issue
(public issue, rights issue, preferential issue, etc.), the statement of funds utilized for purposes other
than those stated in the offer document / prospectus / notice and the report submitted by the monitoring
agency monitoring the utilisation of proceeds of a public or rights issue, and making appropriate
recommendations to the board to take up steps in this matter;
7. Reviewing and monitoring the auditor’s independence and performance, and effectiveness of audit
process;
8. Approval or any subsequent modification of transactions of the listed entity with related parties;
9. Scrutiny of inter-corporate loans and investments;
10. Valuation of undertakings or assets of the listed entity, wherever it is necessary;
11. Evaluation of internal financial controls and risk management systems;
12. Reviewing, with the management, performance of statutory and internal auditors, adequacy of the
150 EP-GRMCE

internal control systems;

13. Reviewing the adequacy of internal audit function, if any, including the structure of the internal audit
department, staffing and seniority of the official heading the department, reporting structure coverage
and frequency of internal audit;
14. Discussion with internal auditors of any significant findings and follow up there on;
15. Reviewing the findings of any internal investigations by the internal auditors into matters where there is
suspected fraud or irregularity or a failure of internal control systems of a material nature and reporting
the matter to the board;
16. Discussion with statutory auditors before the audit commences, about the nature and scope of audit as
well as post-audit discussion to ascertain any area of concern;
17. To look into the reasons for substantial defaults in the payment to the depositors, debenture holders,
shareholders (in case of non-payment of declared dividends) and creditors;
18. To review the functioning of the whistle blower mechanism;
19. Approval of appointment of chief financial officer after assessing the qualifications, experience and
background, etc. of the candidate;
20. Carrying out any other function as is mentioned in the terms of reference of the audit committee.
21. Reviewing the utilization of loans and/or advances from/investment by the holding company in the
subsidiary exceeding rupees 100 crore or 10% of the asset size of the subsidiary, whichever is lower
including existing loans/advances/investments existing as on the date of coming into force of this
provision. [Inserted by the SEBI (Listing Obligations and Disclosure Requirements) (Amendment)
Regulations, 2018, w.e.f. 1-4-2019]
B. The audit committee shall mandatorily review the following information:
1. management discussion and analysis of financial condition and results of operations;
2. statement of significant related party transactions (as defined by the audit committee), submitted by
management;
3. management letters / letters of internal control weaknesses issued by the statutory auditors;
4. internal audit reports relating to internal control weaknesses; and
5. the appointment, removal and terms of remuneration of the chief internal auditor shall be subject to
review by the audit committee.
6. statement of deviations:
a. quarterly statement of deviation(s) including report of monitoring agency, if applicable, submitted
to stock exchange(s) in terms of Regulation 32(1)
b. annual statement of funds utilized for purposes other than those stated in the offer document/
prospectus/notice in terms of Regulation 32(7).
Remarks : The role of audit committee as prescribed in Regulation 18(3) of Part A of SEBI(LODR)
Regulations is of inclusive functions and not exhaustive. Any other functions may be entrusted by the Board of
Directors to the Audit Committee. However, Part B prescribes the mandatory functions, which are essentially to
be addressed by the Audit Committee of Board.
 Lesson 5 n Board Committees 151

Powers of the Audit Committee

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

Number of Meetings and Quorum of the Audit Committee

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

Disclosure in Board’s Report

Section 177(8) of the Act provides that the board’s report shall disclose following –
l Composition of an Audit Committee
l Where the Board had not accepted any recommendation of the Audit Committee, the same shall be
disclosed in the report along with the reasons therefor.
152 EP-GRMCE

SEBI (LODR), Regulations, 2015 interalia provide as below:

The following disclosures shall be made in the section on the corporate governance of the annual report:
Audit committee:
(a) brief description of terms of reference;
(b) composition, name of members and chairperson;
(c) meetings and attendance during the year.
Further, as per Regulation 46, the website of the Company shall disclose at all times composition of various
committees of board of directors.

NOMINATION AND REMUNERATION COMMITTEE

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

Constitution of Nomination and Remuneration Committee

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

Composition

Section 178 of the Act Regulation 19 of SEBI (LODR) Regulations, 2015

(1) The Board of Directors of every listed public (1) The board of directors shall constitute the
company and such other class or classes of nomination and remuneration committee as follows:
companies, as may be prescribed shall constitute a. the Committee shall comprise of at least 3
the Nomination and Remuneration Committee directors.
consisting of three or more non-executive directors
b. all directors of the committee shall be non-
out of which not less than one half shall be
executive directors; and
independent directors:
 Lesson 5 n Board Committees 153

Provided that the chairperson of the company c. at least 50% of the directors shall be
(whether executive or non-executive) may be independent directors and in case of a listed
appointed as a member of the Nomination and entity having outstanding SR equity shares,
Remuneration Committee but shall not chair such two thirds of the nomination and remuneration
Committee. committee shall comprise of independent
directors.
(2) The Chairperson of the nomination and
remuneration committee shall be an independent
director.
Provided that the chairperson of the listed entity,
whether executive or non-executive, may be appointed
as a member of the Nomination and Remuneration
Committee and shall not chair such Committee.
(2A) The quorum for a meeting of the nomination
and remuneration committee shall be either two
members or one third of the members of the
committee, whichever is greater, including at least
one independent director in attendance.
(3) The Chairperson of the nomination and
remuneration committee may be present at the
annual general meeting, to answer the shareholders’
queries; however, it shall be up to the chairperson to
decide who shall answer the queries.
(3A) The nomination and remuneration committee
shall meet at least once in a year.
(4) The role of the nomination and remuneration
committee shall be as specified as in Part D of the
Schedule II

Functions of the Nomination and Remuneration Committee

(1) Under Companies Act 2013

The Nomination and Remuneration Committee shall perform following functions:
l Identify persons who are qualified to become directors and who may be appointed in senior management
in accordance with the criteria laid down, recommend to the Board their appointment and removal and
shall specify the manner for effective evaluation of performance of Board, its committees and individual
directors to be carried out either by the Board, by the Nomination and Remuneration Committee or by
an independent external agency and review its implementation and compliance [Section 178(2)]
l Formulate the criteria for determining qualifications, positive attributes and independence of a director
and recommend to the Board a policy, relating to the remuneration for the directors, key managerial
personnel and other employees. [Section 178(3)]
l While formulating the policy, the Committee shall consider the following:
(a) the level and composition of remuneration is reasonable and sufficient to attract, retain and
motivate directors of the quality required to run the company successfully;
154 EP-GRMCE

(b) relationship of remuneration to performance is clear and meets appropriate performance

benchmarks; and
(c) remuneration to directors, key managerial personnel and senior management involves a balance
between fixed and incentive pay reflecting short and long-term performance objectives appropriate
to the working of the company and its goals. [Section 178(4)]
Disclosure in Board’s Report and website as per Companies Act, 2013
Proviso to Section 178(4) provides that the policy relating to the remuneration of the directors, KMP and other
employees shall be placed on the website of the company, if any, and the salient features of the policy and
changes therein, if any, along with the web address of the policy, if any, shall be disclosed in the Board’s report.
[Section 178(4)]
Note: In case of Government Companies, section 178(2)/(3)/(4) shall not apply to Government company except
with regard to appointment of ‘senior management’ and other employees - Notification No. GSR 463(E), dated
5-6-2015.
As per Section 134(3)(e), the Board report shall contain in case of a company covered under sub-section (1)
of section 178, company’s policy on directors’ appointment and remuneration including criteria for determining
qualifications, positive attributes, independence of a director and other matters provided under sub-section (3)
of section 178;
Provided that where disclosures referred to in sub-section (3) of Section 134 have been included in the financial
statements, such disclosures shall be referred to instead of being repeated in the Board’s report.
Provided further that where the policy referred to in clause (e) of sub-section (3) of Section 134 is made
available on company’s website, if any, it shall be sufficient compliance of the requirement if the salient features
of the policy and any change therein are specified in brief in the Board’s report and the web-address is indicated
therein at which the complete policy is available.

(2) Under Regulation 19(4) of SEBI (LODR) Regulations, 2015

The role of the Nomination and Remuneration Committee shall include the following- (Part D, Schedule II)

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

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

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

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

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

(6) recommend to the board, all remuneration, in whatever form, payable to senior [ Inserted by the SEBI
(Listing Obligations and Disclosure Requirements) (Amendment) Regulations, 2018, w.e.f. 1-4- 2019]

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

SEBI (LODR), Regulations, 2015 interalia provide as below:
 Lesson 5 n Board Committees 155

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

STAKEHOLDERS RELATIONSHIP COMMITTEE

Constitution / Compostion of the Stakeholders Committee

Section 178(5) of the Companies Act 2013 Regulation – 20 of SEBI (Listing Obligations and
Disclosure Requirements) Regulations, 2015

The Board of Directors of a company which consists 20. (1) The listed entity shall constitute a Stakeholders
of more than one thousand shareholders, debenture- Relationship Committee to specifically look into
holders, deposit-holders and any other security various aspects of interest of shareholders, debenture
holders at any time during a financial year shall holders and other security holders.
constitute a Stakeholders Relationship Committee
(2) The chairperson of this committee shall be a non-
consisting of a chairperson who shall be a non-
executive director.
executive director and such other members as may
be decided by the Board. (2A) At least three directors, with at least one being
an independent director, shall be members of the
Committee and in case of a listed entity having
outstanding SR equity shares, at least two thirds
of the Stakeholders Relationship Committee shall
comprise of independent directors.

(3) The Chairperson of the Stakeholders Relationship

Committee shall be present at the annual general
meetings to answer queries of the security holders.
[Substituted by the SEBI (Listing Obligations and
Disclosure Requirements) (Amendment) Regulations,
2018, w.e.f. 1-4-2019]
(3A) The stakeholders’ relationship committee shall
meet at least once in a year. [Inserted by the SEBI
(Listing Obligations and Disclosure Requirements)
(Amendment) Regulations, 2018, w.e.f. 1-4-2019]
(4) The role of the Stakeholders Relationship
Committee shall be as specified as in Part D of the
Schedule II. ( See below)

Role of Stakeholders Relationship Committee

The role of the Stakeholders Relationship Committee shall be to consider and resolve the grievances of the
156 EP-GRMCE

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

(1) Resolving the grievances of the security holders of the listed entity including complaints related to
transfer/transmission of shares, non-receipt of annual report, non-receipt of declared dividends, issue
of new/duplicate certificates, general meetings etc.

(2) Review of measures taken for effective exercise of voting rights by shareholders.

(3) Review of adherence to the service standards adopted by the listed entity in respect of various services
being rendered by the Registrar & Share Transfer Agent.

(4) Review of the various measures and initiatives taken by the listed entity for reducing the quantum of
unclaimed dividends and ensuring timely receipt of dividend warrants/annual reports/statutory notices
by the shareholders of the company. [Part B of Schedule II is substituted by the SEBI (Listing Obligations
and Disclosure Requirements) (Amendment) Regulations, 2018, w.e.f. 1-4-2019]

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

SEBI (LODR), Regulations, 2015 interalia provide as below:
The following disclosures shall be made in the section on the corporate governance of the annual report:
Stakeholders’ grievance committee:
(a) name of non-executive director heading the committee;
(b) name and designation of compliance officer;
(c) number of shareholders’ complaints received so far;
(d) number not solved to the satisfaction of shareholders;
(e) number of pending complaints.
Further, as per Regulation 46, the website of the Company shall disclose at all times composition of various
committees of board of directors.

CORPORATE SOCIAL RESPONSIBILITY COMMITTEE

Under Companies Act, 2013

Section 135 (1) read with rule 3 of Companies (Corporate Social Responsibility Policy) Rules, 2014, mandates
that every company which fulfils any of the following criteria during the immediately preceding financial years
shall constitute a CSR Committee -
● Companies having net worth of rupees five hundred crore or more, or
● Companies having turnover of rupees one thousand crore or more or
● Companies having a net profit of rupees five crore or more

Composition of the CSR Committee

● The CSR Committee shall consist of three or more directors.
● Atleast one director shall be an independent director.
 Lesson 5 n Board Committees 157

Provided that where a company is not required to appoint an independent director under sub-section
(4) of section 149, it shall have in its Corporate Social Responsibility Committee with two or more
directors
● Companies (Corporate Social Responsibility Policy) Rules, 2014, however, provides that-
– an unlisted public company or a private company covered under sub-section (1) of section 135
which is not required to appoint an independent director, shall have its CSR Committee without
such director.
– a private company having only two directors on its Board shall constitute its CSR Committee with
two such directors:
– with respect to a foreign company covered under these rules, the CSR Committee shall comprise
of at least two persons of which one person shall be as specified under clause (d) of subsection
(1) of section 380 of the Act ,i.e. the person resident in India authorized to accept on behalf of the
company, service of process and any notices or other documents and another person shall be
nominated by the foreign company.
● The composition of the CSR Committee shall be disclosed in the Board’s Report. The Board’s Report
shall also include disclosure on reason for non-spending of the minimum specified amount on CSR
initiatives. CSR Policy of the Company is also required to be disclosed in the Board’s report and also
on the website of the Company. The CSR Rules provide for an Annual Report on CSR which needs to
be annexed to the Board’s Report.

Functions of the CSR Committee

In accordance with Section 135, the functions of the CSR committee include:
(a) formulating and recommending to the Board, a CSR Policy which shall indicate the activities to be
undertaken by the company as specified in Schedule VII;
(b) recommending the amount of expenditure to be incurred on the CSR activities.
(c) monitoring the Corporate Social Responsibility Policy of the company from time to time.
Further the rules provide that the CSR Committee shall institute a transparent monitoring mechanism for
implementation of the CSR projects or programs or activities undertaken by the company.

RISK MANAGEMENT COMMITTEE (RMC)

Regulation 21 of the SEBI (LODR) Regulations, 2015 deals with the Risk Management Committee and provides
as under:
(1) The board of directors shall constitute a Risk Management Committee.
(2) The majority of members of Risk Management Committee shall consist of members of the board of
directors and in case of a listed entity having outstanding SR equity shares, at least two thirds of the
Risk Management Committee shall comprise of independent directors.
(3) The Chairperson of the Risk management committee shall be a member of the board of directors and
senior executives of the listed entity may be members of the committee.
(3A) The risk management committee shall meet at least once in a year. [Inserted by the SEBI (Listing
Obligations and Disclosure Requirements) (Amendment) Regulations, 2018, w.e.f. 1-4-2019 ]
(4) The board of directors shall define the role and responsibility of the Risk Management Committee and
may delegate monitoring and reviewing of the risk management plan to the committee and such other
158 EP-GRMCE

functions as it may deem fit such function shall specifically cover cyber security.
(5) The provisions of this regulation shall be applicable to top 500 listed entities, determined on the basis
of market capitalisation, as at the end of the immediate previous financial year.

OTHER COMMITTEES / NON- MANDATORY COMMITTEES OF THE BOARD

In addition to the Committees of the Board mandated by the Companies Act, 2013 or SEBI (LODR) Regulations,
2015, Companies may also constitute other Committees to oversee a specific objective or project. The
nomenclature, composition and role of such Committees will vary, depending upon the specific objectives and
nature of business of the company. A few examples of such Committees prevalent in the corporate sector in
India and abroad are given below:

(a) Corporate Governance Committee

The Corporate Governance Committee is responsible for considering and making recommendations to the
Board concerning the appropriate size, functions and needs of the Board. The Corporate Governance Committee
may, at its sole discretion, engage director search firms and has the sole authority to approve the fees and other
retention terms with respect to any such firms. The Corporate Governance Committee also has the authority, as
necessary and appropriate, to consult with other outside advisors to assist in its duties to the Company.
A company may constitute this Committee to develop and recommend the board a set of corporate governance
guidelines applicable to the company, implement policies and processes relating to corporate governance, to
review, periodically, the corporate governance guidelines of the company. Many companies give the mandate
of corporate governance to nomination committee and is given the nomenclature Nomination and Corporate
Governance Committee.
Typically, the committee may be responsible for considering matters relating to corporate governance including
the composition of board, appointment of new directors, review of strategic human resource decisions,
succession planning for the chairman and other key board and executive positions, performance evaluation of
the board and its committees and individual directors.

(b) Regulatory, Compliance & Government Affairs Committee

The primary objective of the Compliance Committee is to review, oversee, and monitor:
l the Company’s compliance with applicable legal and regulatory requirements,
l the Company’s policies, programmes, and procedures to ensure compliance with relevant laws, the
Company’s Code of Conduct, and other relevant standards;
l the Company’s efforts to implement legal obligations arising from settlement agreements and other
similar documents; and
l perform any other duties as are directed by the Board of Directors of the company.
The committee oversees the Company’s non-financial compliance programmes and systems with respect to
legal and regulatory requirements. Besides, it also oversees compliance with any ongoing Corporate Integrity
Agreements or any similar undertakings by the Company with a government agency. Section 134 (5) of the Act
dealing with Directors Responsibility Statement states that the directors need to ensure that they have devised
proper systems to ensure compliance with the provisions of all applicable laws and that such systems were
adequate and operating effectively. Essentially, this responsibility ought to be the bulwark of the charter of this
committee.
 Lesson 5 n Board Committees 159

ICSI Recommendations to strengthen Corporate Governance framework suggests for constitution of

Corporate Compliance Committee on mandatory basis in respect of all public limited companies having a
paid-up capital of Rs.5 crore or more.
The charter of the committee may include:
l To oversee the Company’s compliance efforts with respect to relevant Company policies, the
Company’s Code of Conduct, and other relevant laws and regulations and monitor the Company’s
efforts to implement legal obligations arising from agreements and other similar documents;
l To review the Company’s overall compliance programme to ensure that it is well communicated,
supports lawful and ethical business conduct by employees, and reduces risk to the Company for
non compliance with laws and regulations related to the Company’s business;
l To review complaints received from internal and external sources, regarding matters other than the
financial matters which are within the purview of the Audit Committee;
l To periodically present to the Board for adoption appropriate changes to the policies, and oversee
implementation of and compliance with these policies;
l To review regularly the company’s compliance risk assessment plan;
l To investigate or cause to be investigated any significant instances of non-compliance, or potential
compliance violations that are reported to the committee;
l To coordinate with other committees regarding matters brought to the committees attention that
relate to issues of compliance with applicable laws and regulations;
l Regularly report to the Board on the Committee’s activities, recommendations and conclusions;
l To discuss any significant compliance issues with the Chief Executive officer;
l To periodically report to the Board and CEO on the adequacy and effectiveness of the company’s
compliance programme;
l To retain at the company’s expense, independent advisors to assist the committee with carrying out
its responsibilities from time to time;
l To perform such other duties and responsibilities as may be assigned to the committee by the board.

(c) Science, Technology & Sustainability Committee

Science, Technology & Sustainability Committee may be constituted to
l Monitor and review the overall strategy, direction and effectiveness of the Company’s research and
development.
l Serve as a resource and provide input, as needed, regarding the scientific and technological aspects
of product safety matters.
l Review the Company’s policies, programmes and practices on environment, health, safety and
sustainability.
l Assist the Board in identifying and comprehending significant emerging science and technology policy
and public health issues and trends that may impact the Company’s overall business strategy.
l Assist the Board in its oversight of the Company’s major acquisitions and business development
activities as they relate to the acquisition or development of new science or technology.
160 EP-GRMCE

(d) Customer Service Committee / Customer Grievance Committee

Some service oriented companies may have separate Board Committee on customer service matters. Grievance
committee may look after the complaints (if any) received from the customer and the steps taken to resolve it.

(e) Fraud Monitoring Committee

Although the fraud related aspects may be taken care of by the Audit Committee, but in some companies which
are in field of financial services, there may be need of the separate fraud monitoring committee, which may
take care of the checks and balances and preventive measures in order to discourage the employees in their
modus operandi.

(f) Information Technology Committee

Information Technology is need of hour. This committee may look after the present and future need of the
induction of Information Technology and also takes care of need of providing the training to the existing as well
new incumbents.

(g) Performance Appraisal Review Committee

This committee periodically (say annually) reviews the performance to Top Executives/ Key Managerial Person
of the company as well as the Directors of the company. It is just like the performance review of the each and
every employee, which happens in most of the organizations. By this annual exercise, the persons sitting at
helm of the affairs of the company comes under the scanner of this committee.

(h) Credit Committee

In financial institutions, the credit proposals beyond a threshold limits are being looked after by the Credit
Committee of the Board.

(i) Ethics Committee

The role of Ethics Committee may involve the review of the standards and procedures, facilitate compliance,
due diligence of prospective employees, oversight of communication and training of ethics programme, monitor
and audit compliance, enforcement of disciplinary mechanism, analysis and follow-up.

GLOSSARY OF TECHNICAL WORDS

– Audit Committee: An audit committee is a group of selected members of a company’s board of
directors whose responsibilities include helping auditors remain independent of management. Most
audit committees are made up of three to five or sometimes as many as seven directors who are not
a part of company management
– Corporate Social Responsibility Committee: The Corporate Social Responsibility Committee is
appointed by the Board of Directors to promote a culture that emphasizes and sets high standards for
corporate social responsibility and reviews corporate performance against those standards.
– Independent Director: .An independent director (also sometimes known as an outside director) is a
director (member) of a board of directors who does not have a material or pecuniary relationship with
company or related persons, except sitting fees.
– Government Company: A “Government company” is defined under Section 2(45) of the Companies
Act, 2013 as “any company in which not less than 51% of the paid-up share capital is held by the Central
Government, or by any State Government or Governments, or partly by the Central Government and
 Lesson 5 n Board Committees 161

partly by one or more State Governments, and includes a company which is a subsidiary company of
such a Government company”
– Fraud monitoring Committee: Pursuant to the directions of the RBI, the Bank has constituted a
Fraud Monitoring Committee, exclusively dedicated to the monitoring and following up of cases of
fraud involving amounts of Rs. 1,00,00,000/- (Rupees One Crore Only) and above. The objectives
of this Committee are the effective detection of frauds and immediate reporting of the frauds and
actions taken against the perpetrators of frauds to the concerned regulatory and enforcement
agencies.

LESSON ROUND UP
– A Board Committee is a small working group identified by the Board, consisting of Board members for the
purpose of supporting the Board’s work.

– To enable better and more focused attention on the affairs of the Corporation, the board delegates particular
matters to committees of the board set up for the purpose.

– Committees are usually formed as a means of improving board effectiveness and efficiency, in areas where more
focused, specialized and technical discussions are required.

– Committees prepare the ground work for decision-making and report at the subsequent Board meeting.
– Audit committee is one of the main pillars of the corporate governance mechanism in any company. The committee
is charged with the principal oversight of financial reporting and disclosures and enhance the confidence in the
integrity of the company’s financial reporting and disclosure and aims to the internal control processes and
procedures and the risk management systems.

– Greater specialization and intricacies of modern board work is one of the reasons for increased use of board
committees.

– Mandatory committees under Companies Act 2013 are Audit Committee, Nomination and Remuneration
Committee, stakeholders Relationship committee, CSR Committee.

– Other committees – Corporate Governance Committee, Compliance Committee, Risk Management Committee,
Ethics Committee, Strategies Committee, Capital Expenditure (Capex) Committee, etc.

– Nomination and Remuneration Committee: Nomination and Remuneration Committee as the name suggests is
constituted by a company is to determine the qualification and remuneration packages of executive directors/
chief executive officers.

– Corporate Governance Committee: A company may constitute this committee to develop and recommend the
board a set of corporate governance guidelines applicable to the company, implement policies and processes
relating to corporate governance principles, to review, periodically, the corporate governance guidelines of the
company.

– Corporate Compliance Committee: The primary objective of the Compliance Committee is to review, oversee,
and monitor the Company’s compliance with applicable legal and regulatory requirements, its policies,
programs, and procedures to ensure compliance with relevant laws, its Code of Conduct, and other relevant
standards.

– Risk Management Committee: A business is exposed to various kind of risk such as strategic risk, data-security
risk, fiduciary risk, credit risk, liquidity risk, reputational risk, environmental risk, competition risk, fraud risk,
technological risk etc. A risk management Committee’s role is to assist the Board in establishing risk management
policy, overseeing and monitoring its implementation.
162 EP-GRMCE

TEST YOURSELF
(These are meant for recapitulation only. Answers to these questions are not to be submitted for evaluation)
1. As a company secretary can you advise if there any need and advantages of Committee Management?
2. Can you explain in detail is constitution of nomination and remuneration committee mandatory?
3. Is the constitution of Risk Management Committee mandatory? Explain the importance of constitution
of Risk Management Committee?
4. Discuss in detail about Audit Committee.
 Lesson 6 Corporate Policies and Disclosures 163
Lesson 6
n

Corporate Policies and Disclosures

LESSON OUTLINE
LEARNING OBJECTIVES
– Corporate Policies - Meaning and
Importance Business incorporates a legal system and, for
most legal systems, it is a requirement in most
– Regulatory Framework countries to formulate and disclose its policies and
– Policies under the Companies Act, 2013 statements. Many countries have developed laws
and procedures and have established guidelines
– Policies under the SEBI (LODR),
on how and when the accounting disclosures have
Regulations, 2015
to be made. Companies release this information
– Policies under other laws and voluntary in their compiled form of annual reports. These
policies disclosures are also made into other publications
other than annual reports. It is compulsory by law
– Introduction to Disclosures and
to disclose accounting policies to the shareholder
Transparency Requirements
and stakeholders of the business. Such disclosures
– Mandatory Disclosures are important for potential investors to decide on
– In terms of Companies Act, 2013 and investment in the business or corporation.
various Rules made thereunder These disclosures ensure active and transparent
– Under SEBI (Issue of Capital and communication that is complete, fair, accurate,
Disclosure Requirements) Regulations, timely, comprehensible, affordable and equally
2018 accessible by all stakeholders, including
the shareholders, investors, employees and
– Under SEBI (Substantial Acquisition of customers, in compliance with the governing
Shares and Takeovers) Regulations, regulations.
2011
In this lesson, the students would learn about
– Under SEBI (Listing Obligations and various policies that are formulated by the
Disclosure Requirements) Regulations, companies under different securities laws and the
2015 Companies Act, 2013. Also the disclosures to be
– Under SEBI (Prohibition of Insider made by companies including the entities that are
Trading) Regulations, 2015 listed on recognized stock exchanges. The Chapter
provides exhaustive coverage on disclosures
– Glossary which are mandatory under the securities laws in
– LESSON ROUND-UP India.

– TEST YOURSELF

“The financial crisis is a stark reminder that transparency and disclosure are essential in today’s marketplace.”

– Jack Reed
164 EP-GRMCE

CORPORATE POLICIES – MEANING AND IMPORTANCE

Corporate Policy is a formal declaration of the guiding principles by which an organization will function. It
is usually developed by its board of directors or a senior management policy committee. The management
of a company typically involves three tiers of documentation addressing operational issues. Memorandum
of association creates the entity in the first place. Articles of association provide structural definition to the
enterprise. Policies and procedures delineate more specific processes for day-to- day operations.
Policies are an essential component of every organisation and address important issues. Utilizing policies
during decision-making ensures that the management is consistent in its decisions. These policies must be
effectively communicated amongst stakeholders. The company should provide easy access to policies and also
publicly disclose them. These policies serve as an important form of internal control, it minimizes cost and helps
in building a learning culture in the Organisation.
In present scenario, corporate policies are essential even for businesses seeking to do things in a different
way. Without proper policies, it is extremely tough for the business to continue and policies work as guide and
help the manager to direct all the actions towards the same goal.
Some points highlighting the importance of corporate policies are given below-
 Policies are necessary to perform the business activities in a smooth way.
 Corporate polices offer clear cut courses for achievement of organizational goals.
 If an appropriate explicit policy has been developed, most of the details can be easily taken care of by
the employees and management would not needlessly spend its time as well as energy in performing
such tasks.
 Corporate Policies present you with instructions and a platform for making decisions.
 Policies promote delegation of the power of making decisions.
 Properly formulated corporate policies give a direction in which all management pursuits are targeted.
 Policies provide steadiness to the action of the members of the organization.
 Policies and guidelines prevent the subordinates to rethink on the day to day challenges and therefore
prevent repeated analysis of problems.
 Policies help in analysis of performance by serving as a standard.
 Corporate policies boost employees’ commitment and loyalty for the business.
 It helps in dealing with the issues for optimal utilization of limited resources.
 Sound policies aid in developing good public image of an organization.
 Corporate Polices give the organization clear targets so that the managers can decide regarding the
future plan of action.
 They act as tool for co-ordination and control.
Thus we can say that corporate policies are significant for a corporation. They help in the all round development
and growth of the organization. A sound corporate policy gives indication to the workers with regards to working
conditions, organizational culture, authority, and responsibility.

Regulatory Framework
This Chapter details the various policies which a company is required to formulate under the Companies Act,
2013 and the various Securities Laws. Labour Laws, Environmental Laws, Sector Specific Laws etc. may have
their own policy requirements which are not covered in this Chapter.
 Lesson 6 n Corporate Policies and Disclosures 165

Sl.No. Description
1 Section 135(4) of the Companies Act, 2013
2 Section 177(10) of the Companies Act, 2013
3 Section 178(3) & (4) of the Companies Act, 2013
4 Regulation 9 of SEBI (LODR) Regulations, 2015
5 Regulation 23 (1) and (1A) of SEBI (LODR) Regulations, 2015
6 Regulation 22 of SEBI (LODR) Regulations, 2015
7 Regulation 43A of SEBI (LODR) Regulations, 2015
8 Section 134(3) & (5) of the Companies Act, 2013
9 Section 178(4) of the Companies Act, 2013
10 Rule 8 of the Companies (Accounts) Rules, 2014
11 Rule 8A of the Companies (Accounts) Rules, 2014
12 Rule 5 of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014
13 Rule 8 of the Companies (CSR) Rules, 2014
14 Regulation 24 of SEBI (ICDR) Regulations, 2018
15 Regulation 25 of SEBI (ICDR) Regulations, 2018
16 Regulation 26 of SEBI (ICDR) Regulations, 2018
17 Regulation 43 of SEBI (ICDR) Regulations, 2018
18 Regulation 51 of SEBI (ICDR) Regulations, 2018
19 Regulation 55 of SEBI (ICDR) Regulations, 2018
20 Regulation 29 of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011
21 Regulation 30 of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011
22 Regulation 31 of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011
23 Regulation 29 of SEBI (LODR) Regulations, 2015
24 Regulation 30 of SEBI (LODR) Regulations, 2015
25 Regulation 33 of SEBI (LODR) Regulations, 2015
26 Regulation 34 of SEBI (LODR) Regulations, 2015
27 Regulation 46 of SEBI (LODR) Regulations, 2015
28 Regulation 6 of SEBI (Prohibition of Insider Trading) Regulations, 2015
29 Regulation 7 of SEBI (Prohibition of Insider Trading) Regulations, 2015
30 Regulation 8 of SEBI (Prohibition of Insider Trading) Regulations, 2015

Policies under the Companies Act 2013

A Company has to formulate specific policies in different areas of operations that help to bring uniformity in
processes by clearly defining the business approach. Some of the policies are legally required, some are
166 EP-GRMCE

organisational needs and some are voluntarily made as part of good governance.

The key policies required for companies under the

Companies Act, 2013 include

Corporate Social Responsibility Policy

Risk Management Policy

Vigil Mechanism Policy; and

Nomination and Remuneration policy

1) Corporate Social Responsibility Policy

Section 135(4) of the Companies Act 2013, contains that the Board of every company which is required to
constitue a CSR Committee shall after taking into account the recommendations made by the Corporate
Social Responsibility Committee, approve the Corporate Social Responsibility Policy for the company
and disclose contents of such Policy in its report and also place it on the company’s website, and
ensure that the activities as are included in Corporate Social Responsibility Policy of the company are undertaken
by the company.
The CSR Policy of the company shall, inter-alia, include the following namely:-
l A list of CSR projects or programs which a company plans to undertake within the areas or subjects
specified in schedule VII of the Act, specifying modalities of execution of such project or programs and
implementation schedules for the same
l Monitoring process of such projects or programs
l A clause specifying that the surplus arising out of the CSR projects or programs or activities shall not
form part of the business profit of the company.
Activities which may be included by companies in their Corporate Social Responsibility Policies are already
mentioned in earlier lesson of the book.

2) Risk Management Policy

Section 134(3)(n) of the Companies Act 2013, provides that a statement indicating development and
implementation of a risk management policy for the company including identification therein of elements of risk,
if any, which in the opinion of the Board may threaten the existence of the company should be included in the
report by its Board of Directors. This indicates that framing a risk management policy is also envisaged under
the provisions of the Companies Act, 2013.

3) Vigil Mechanism Policy

Section 177(10) of the Companies, Act 2013 provides that the vigil mechanism under sub-section (9) of the said
 Lesson 6 n Corporate Policies and Disclosures 167

section shall provide for adequate safeguards against victimisation of persons who use such mechanism and
make provision for direct access to the chairperson of the Audit Committee in appropriate or exceptional cases
and the details of establishment of such mechanism shall be disclosed by the company on its website, if any,
and in the Board’s report. This mechanism is herein referred as a policy.

4) Nomination and Remuneration policy

Section 178 (3) and (4) of the Companies Act 2013 provides that the Nomination and Remuneration Committee
shall formulate the criteria for determining qualifications, positive attributes and independence of a director and
recommend to the Board a policy, relating to the remuneration for the directors, key managerial personnel and
other employees. The Nomination and Remuneration Committee shall, while formulating the policy shall ensure
that –
a) the level and composition of remuneration is reasonable and sufficient to attract, retain and motivate
directors of the quality required to run the company successfully;
b) relationship of remuneration to performance is clear and meets appropriate performance benchmarks;
and
c) remuneration to directors, key managerial personnel and senior management involves a balance
between fixed and incentive pay reflecting short and long-term performance objectives appropriate to
the working of the company and its goals:
The policy shall be placed on the website of the company, if any, and the salient features of the policy and
changes therein, if any, along with the web address of the policy, if any, shall be disclosed in the Board’s report.

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

Policy for
Risk Policy Preservation of Archival Policy
Documents

Policy for Policy on Materiality

Policy for determination
Determining of Related Party
of materiality of events
‘Material’ Subsidiary Transactions

Policy Relating to the

Remuneration of Policy on
Whistle Blower Policy
Directors, KMPs & Diversity of Board
Other Employees

Dividend Distribution
Policy
168 EP-GRMCE

1. Risk policy: A listed entity is required to have a risk policy which shall be reviewed and guided by the
board of directors. [Regulation 4(2)(f)(ii)(1)]
2. Policy for preservation of documents: A listed entity is required to have a policy for preservation of
documents, approved by its board of directors, classifying them in at least two categories as follows-
(a) documents whose preservation shall be permanent in nature ;
(b) documents with preservation period of not less than eight years after completion of the relevant
transactions. The documents may be preserved in electronic mode. [Regulation 9]
3. Archival Policy : A listed entity is required to identify all the documents which need to be preserved
under various regulations relating to securities laws and then develop a suitable archival policy.
According to Section 2 (zf) of Lising Regulations “securities laws” covers the following-
l The Listing regulations
l The Securities Contracts (Regulation) Act, 1956,
l The Depositories Act, 1996,
The provisions of the Companies Act, 1956 and Companies Act, 2013, and the rules, regulations,
circulars or guidelines made thereunder.
4. Policy for Determining ‘Material’ Subsidiary: A listed entity is required to formulate a policy for
determining ‘material’ subsidiary. “Material subsidiary” means a subsidiary, whose income or net worth
exceeds 10% of the consolidated income or net worth respectively, of the listed entity and its subsidiaries
in the immediately preceding accounting year. [Regulation 16(2)(c)]
5. Policy on Materiality of Related Party A listed entity is required to formulate a policy on materiality of
related party transactions and on dealing with related party transactions including clear threshold limits
duly approved by the board of directors and such policy needs to be reviewed by the board of directors
at least once every three years and updated accordingly.
A transaction with a related party is considered material if the transaction(s) to be entered into
individually or taken together with previous transactions during a financial year, exceeds 10% of the
annual consolidated turnover of the listed entity as per the last audited financial statements of the listed
entity. [Regulation 23(1)]
Notwithstanding the above, with effect from July 01, 2019 a transaction involving payments made to a
related party with respect to brand usage or royalty shall be considered material if the transaction(s) to
be entered into individually or taken together with previous transactions during a financial year, exceed
5% of the annual consolidated turnover of the listed entity as per the last audited financial statements
of the listed entity. [Regulation 23(1A)]
6. Policy for determination of materiality of events: A listed entity is required to frame a policy for
determination of materiality, duly approved by its board of directors, which shall be disclosed on its
website. The policy shall be based on the following criteria for determination of materiality of events/
information:
l The omission of an event or information, which is likely to result in discontinuity or alteration of
event or information already available publicly; or
l The omission of an event or information is likely to result in significant market reaction if the said
omission came to light at a later date;
l In case where the criteria specified in sub-clauses (a) and (b) are not applicable, an event/
information may be treated as being material if in the opinion of the board of directors of listed
 Lesson 6 n Corporate Policies and Disclosures 169

entity, the event / information is considered material.

7. Whistle Blower Policy: A listed entity is required to formulate a vigil mechanism for directors and
employees to report genuine concerns under which they can have direct access to the chairperson of
the audit committee in appropriate or exceptional cases. This mechanism / policy should be disclosed
on the website of the listed entity. [Regulation 22 and 46 (2) (e)]
8. Policy relating to the remuneration of the directors, key managerial personnel and other
employees: A listed entity is required to formulate a policy on the remuneration of the directors, key
managerial personnel and other employees. [Part- D, Schedule II (1)]
9. Policy on board diversity: A listed entity is required to formulate a policy on diversity of board of
directors as mentioned in Part- D, Schedule II (3) - role of nomination and remuneration committee.
10. Dividend Distribution Policy: Regulation 43A provides that-
 The top five hundred listed entities based on market capitalization (calculated as on March 31 of
every financial year) shall formulate a dividend distribution policy which shall be disclosed in their
annual reports and on their websites.
 The dividend distribution policy shall include the following parameters:
(a) the circumstances under which the shareholders of the listed entities may or may not expect
dividend;
(b) the financial parameters that shall be considered while declaring dividend;
(c) internal and external factors that shall be considered for declaration of dividend;
(d) policy as to how the retained earnings shall be utilized; and
(e) parameters that shall be adopted with regard to various classes of shares:
 If the listed entity proposes to declare dividend on the basis of parameters in addition to clauses
(a) to (e) or proposes to change such additional parameters or the dividend distribution policy
contained in any of the parameters, it shall disclose such changes along with the rationale for the
same in its annual report and on its website.
 The listed entities other than top five hundred listed entities based on market capitalization may
disclose their dividend distribution policies on a voluntary basis in their annual reports and on their
websites.
11. Code of Conduct for Board of Directors and Senior Management:
 Regulation 17(5) provides that the board of directors shall lay down a code of conduct for all
members of board of directors and senior management of the listed entity. The code of conduct
shall suitably incorporate the duties of independent directors as laid down in the Companies Act,
2013.
 As per Regulation 26, all members of the board of directors and senior management Personnel
shall affirm compliance with the code of conduct of board of directors and senior management on
an annual basis.
 As per Regulation 46, this Code of Conduct needs to be disclosed on the website of the Company.
 As per Schedule V, the Annual Report of the Company shall contain Declaration signed by the
chief executive officer stating that the members of board of directors and senior management
personnel have affirmed compliance with the code of conduct of board of directors and senior
management.
170 EP-GRMCE

POLICIES UNDER OTHER LAWS AND VOLUNTARY POLICIES

1) Insider Trading Policy: A listed company has to also formulate certain Policies as per the requirements
of SEBI (Prohibition of Insider Trading) Regulations, 2015. These are discussed in detail in the later part
of the Chapter.
2) Policy for prevention of sexual harassment at workplace: All companies are required to formulate
policy for prevention of sexual harassment at workplace under the Sexual Harassment of Women at
Workplace (Prevention, Prohibition and Redressal) Act, 2013. The policy should contain the procedures
and guidelines to govern cases against sexual harassment in the company.
3) Voluntary Policies: In addition to above, the companies may also formulate following policies:
 Code of business conduct & Ethics
 Ethics policy
 Information security policy
 Health and safety policy
 Gender diversity policy
 Environmental policy
 Policy on investor relations
 Quality policy
 Social accountability policy
 Communication policy
 Investment and cash policy
 Policy for ascertaining the ‘Fit and Proper’ status of directors
 Affirmative action policy
 Code of corporate disclosures

DISCLOSURE AND TRANSPARENCY REQUIREMENTS

Good corporate governance should ensure that timely and accurate disclosure is made regarding all material
matters concerning the corporation, including its financial situation and results. It is in the interest of each
organisation to provide clear, timely and reliable information that is adequately prepared, and to make relevant
information equally accessible to all stakeholders.
Shareholders and potential investors require access to regular, reliable and comparable information in sufficient
detail for them to assess the stewardship of management and make informed decisions about their share value.
Insufficient or unclear information can negatively affect the organisation in many ways.
The appropriate dissemination of information should provide for:
 Timely and cost-efficient access to relevant information
 Disclosure of all material developments that arise between regular reports
 Simultaneous reporting of information to all shareholders in order to ensure their equitable treatment
 Non-disclose of information that may endanger the organisation’s competitive position
 Lesson 6 n Corporate Policies and Disclosures 171

Information should be prepared and disclosed in accordance with high quality standards of accounting and
financial and non-financial disclosure.
The various disclosures requirements under Companies Act, 2013 and other related legislations in our country
are given hereunder:

1. IN TERMS OF COMPANIES ACT, 2013

In terms of Companies Act, 2013 the aspect of disclosure and transparency spans over several sections.
Given below are the provisions relating to disclosure in the Board’s Report of a Company. However these
are not exhaustive and students are encouraged to read the various provisions to apprise themselves about
disclosures in Board’s Report prescribed at various places in the Act. Besides the Board’s Report, the Students
may also make note of disclosures required on the website of a Company, disclosures required in explanatory
statement to be annexed to notice of a general meeting in various circumstances, disclosures to be made in
financial statements, offer documents, etc. to understand the scope of the Act with respect to disclosure and
transparency.
A. Disclosures under Section 134 of Companies Act 2013
Section 134(3) provides that there shall be attached to statements laid before a company in general
meeting, a report by its Board of Directors, which shall include –
(a) the web address, if any, where annual return referred to in sub-section (3) of section 92 has been
placed.
(b) number of meetings of the Board.
(c) Directors’ Responsibility Statement.
(ca) details in respect of frauds reported by auditors under sub-section (12) of section 143 other than
those which are reportable to the Central Government.
(d) a statement on declaration given by independent directors under section 149(6).
(e) in case of a company covered under sub-section (1) of section 178, company’s policy on directors’
appointment and remuneration including criteria for determining qualifications, positive attributes,
independence of a director and other matters as given under sub-section (3) of section 178.
(f) explanations or comments by the Board on every qualification, reservation or adverse remark or
disclaimer made –
(i) by the auditor in his report; and
(ii) by the company secretary in practice in his secretarial audit report.
(g) particulars of loans, guarantees or investments under section 186.
(h) particulars of contracts or arrangements with related parties referred to in sub-section (1) of
section 188 in the prescribed form.
(i) the state of the company’s affairs.
(j) the amounts, if any, which it proposes to carry to any reserves.
(k) the amount, if any, which it recommends should be paid by way of dividend.
(l) material changes and commitments, if any, affecting the financial position of the company which
have occurred between the end of the financial year of the company to which the financial
statements relate and the date of the report.
172 EP-GRMCE

(m) the conservation of energy, technology absorption, foreign exchange earnings and outgo, in such
manner as may be prescribed.
(n) a statement indicating development and implementation of a risk management policy for the
company including identification therein of elements of risk, if any, which in the opinion of the
Board may threaten the existence of the company.
(o) the details about the policy developed and implemented by the company on corporate social
responsibility initiatives taken during the year.
(p) in case of a listed company and every other public company having such paid-up share capital
as may be prescribed, a statement indicating the manner in which formal annual evaluation of the
performance of the Board, its Committees and of individual directors has been made.
(q) such other matters as may be prescribed.
Provided that where disclosures referred to in this sub-section have been included in the financial
statements, such disclosures shall be referred to instead of being repeated in the Board’s report.
Provided further that where the policy referred to in clause (e) or clause (o) is made available on
company’s website, if any, it shall be sufficient compliance of the requirements under such clauses if
the salient features of the policy and any change therein are specified in brief in the Board’s report and
the web-address is indicated therein at which the complete policy is available.
In case of a Government company, clause (e) is not applicable and in case the directors are evaluated
by the Ministry or Department of the Central Government which is administratively in charge of the
company, or, as the case may be, the State Government, as per its own evaluation methodology, clause
(p) is not applicable.
As per Section 134(5), the Directors’ Responsibility Statement referred to in clause (c) of sub-section
(3) shall state that –
(a) in the preparation of the annual accounts, the applicable accounting standards had been followed
along with proper explanation relating to material departures;
(b) the directors had selected such accounting policies and applied them consistently and made
judgments and estimates that are reasonable and prudent so as to give a true and fair view of
the state of affairs of the company at the end of the financial year and of the profit and loss of the
company for that period;
(c) the directors had taken proper and sufficient care for the maintenance of adequate accounting
records in accordance with the provisions of this Act for safeguarding the assets of the company
and for preventing and detecting fraud and other irregularities;
(d) the directors had prepared the annual accounts on a going concern basis;
(e) the directors, in the case of a listed company, had laid down internal financial controls to be
followed by the company and that such internal financial controls are adequate and were operating
effectively.
Explanation to clause(e) defines the term “internal financial controls as the policies and procedures
adopted by the company for ensuring the orderly and efficient conduct of its business, including
adherence to company’s policies, the safeguarding of its assets, the prevention and detection
of frauds and errors, the accuracy and completeness of the accounting records, and the timely
preparation of reliable financial information; and
(f) the directors had devised proper systems to ensure compliance with the provisions of all applicable
 Lesson 6 n Corporate Policies and Disclosures 173

laws and that such systems were adequate and operating effectively.
B. Disclosures under other Sections of Companies Act, 2013
Section 178 contains that the Board’s Report shall include the salient features of the policy formulated
by Nomination and Remuneration Committee and changes therein, if any, along with the web address
of the policy, if any.
As per section 149(10) an independent director shall be eligible for reappointment on passing of a
special resolution and the Board’s Report shall disclose such appointment.
Under section 177(8), Board’s Report shall disclose the composition of audit committee and shall also
disclose the recommendation of the audit committee which is not accepted by the board along with
reasons thereof.
Proviso to section 177(10) prescribes the inclusion of the details of establishment of vigil mechanism
under section 177(9) in the Board’s Report.
As per section 204(1) every listed company and other companies as prescribed in Rule 9 of the
Companies (Appointment & Remuneration of Managerial Personnel) Rules, 2014 shall annex the
secretarial audit report given by a Company Secretary in practice with Board’s Report. Board in its
report shall explain any qualification or observation or other remarks made by the Company Secretary
in Practice.
Section 135 provides that the Board’s report under sub-section (3) of section 134 shall disclose the
composition of the Corporate Social Responsibility Committee and if the company fails to spend the
minimum CSR amount, the Board shall, in its report made under clause (o) of sub-section (3) of section
134, specify the reasons for not spending the amount.
As per Section 143, the companies, whose auditors have reported frauds under sub-section (12) to
the audit committee or the Board but not reported to the Central Government, shall disclose the details
about such frauds in the Board’s report in the manner as prescribed in Rules.
As per Section 168, a company is required to place the fact of resignation of a Director in the report of
directors laid in the immediately following general meeting by the company
As per Section 67, disclosures in respect of voting rights not exercised directly by the employees in
respect of shares to which the scheme relates shall be made in the Board’s report in such manner as
prescribed in the Rules.
As per Section 92(3), an extract of the annual return in the form as prescribed shall form part of the
Board’s report.
As per Section 188, every contract or arrangement entered into under sub-section (1) shall be referred
to in the Board’s report to the shareholders along with the justification for entering into such contract or
arrangement.
As per Section 197, every listed company shall disclose in the Board’s report, the ratio of the remuneration
of each director to the median employee’s remuneration and other details as prescribed.

2. IN TERMS OF VARIOUS RULES MADE UNDER COMPANIES ACT, 2013

A. Companies (Accounts) Rules 2014
As per Rule 8 of Companies (Accounts) Rules 2014 following matters need to be disclosed in the
Board’s Report:-
(1) The Board’s Report shall be prepared based on the stand alone financial statements of the
174 EP-GRMCE

company and shall report on the highlights of performance of subsidiaries, associates and joint
venture companies and their contribution to the overall performance of the company during the
period under report.
(2) The Report of the Board shall contain the particulars of contracts or arrangements with related
parties referred to in sub-section (1) of section 188 in the Form AOC-2.
(3) The report of the Board shall contain the following information and details, namely:-
(A) Conservation of energy- the capital investment on energy conservation equipments, the
steps taken the steps taken for conservation of energy and utilising alternate sources of
energy and the impact thereon
(B) Technology absorption- the efforts made towards technology absorption, expenditure
incurred on R&D, the benefits derived, in case of imported technology; the details about
year of import, absorption of technology imported.
(C) Foreign exchange earnings and outgo- actual inflows and outgo during the year.
The requirement of furnishing information and details under this sub-rule shall not apply to a
government company engaged in producing defence equipment.
(4) Every listed company and every other public company having a paid up share capital of twenty
five crore rupees or more calculated at the end of the preceding financial year shall include, in
the report by its Board of directors, a statement indicating the manner in which formal annual
evaluation has been made by the Board of its own performance and that of its committees and
individual directors.
(5) In addition to the information and details specified in sub-rule (4), the report of the Board shall also
contain –
(i) the financial summary or highlights;
(ii) the change in the nature of business, if any;
(iii) the details of directors or key managerial personnel who were appointed or have resigned during
the year;
(iiia) a statement regarding opinion of the Board with regard to integrity, expertise and experience
(including the proficiency) of the independent directors appointed during the year”.
Explanation.-For the purposes of this clause, the expression “proficiency” means the proficiency
of the independent director as ascertained from the online proficiency self-assessment test
conducted by the institute notified under sub-section (1) of section 150.
(iv) the names of companies which have become or ceased to be its Subsidiaries, joint ventures or
associate companies during the year;
(v) the details relating to deposits, covered under Chapter V of the Act-
(a) accepted during the year;
(b) remained unpaid or unclaimed as at the end of the year;
(c) whether there has been any default in repayment of deposits or payment of interest thereon
during the year and if so, number of such cases and the total amount involved-
(i) at the beginning of the year;
(ii) maximum during the year;
 Lesson 6 n Corporate Policies and Disclosures 175

(iii) at the end of the year;

(vi) the details relating to deposits, not in compliance with Chapter V of the Act.
(vii) the details of significant and material orders passed by the regulators or courts or tribunals
impacting the going concern status and company’s operations in future.
(viii) the details in respect of adequacy of internal financial controls with reference to the Financial
Statements.
(ix) a disclosure, as to whether maintenance of cost records as specified by the Central Government
under sub-section (1) of section 148 of the Companies Act, 2013, is required by the Company and
accordingly such accounts and records are made and maintained,
(x) a statement that the company has complied with provisions relating to the constitution of Internal
Complaints Committee under the Sexual Harassment of Women at Workplace (Prevention,
Prohibition and Redressal) Act, 2013 [14 of 2013]
(6) This rule shall not apply to One Person Company or Small Company.]
As per Rule 8A of Companies (Accounts) Rules 2014 following matters to be disclose in the Board’s
Report for One Person Company and Small Company :-
(1) The Board’s Report of One Person Company and Small Company shall be prepared based on the
stand alone financial statement of the company, which shall be in abridged form and contain the
following:-
(a) the web address, if any, where annual return referred to in sub-section (3) of section 92 has
been placed;
(b) number of meetings of the Board;
(c) Directors’ Responsibility Statement as referred to in sub-section (5) of section 134;
(d) details in respect of frauds reported by auditors under sub-section (12) of section 143 other
than those which are reportable to the Central Government;
(e) explanations or comments by the Board on every qualification, reservation or adverse
remark or disclaimer made by the auditor in his report;
(f) the state of the company’s affairs;
(g) the financial summary or highlights;
(h) material changes from the date of closure of the financial year in the nature of business and
their effect on the financial position of the company;
(i) the details of directors who were appointed or have resigned during the year;
(j) the details or significant and material orders passed by the regulators or courts or tribunals
impacting the going concern status and company’s operations in future.
(2) The Report of the Board shall contain the particulars of contracts or arrangements with related
parties referred to in sub-section (1) of section 188 in the Form AOC-2.
B. Companies (Share Capital and Debenture) Rules, 2014
The Board of Directors shall, inter alia, disclose details regarding issue of shares with differential rights
in the Board’s Report for the financial year in which the issue of equity shares with differential rights was
completed.
As per sub rule (13) of rule 8 the Board of Directors shall, inter alia, disclose details about the issue of
176 EP-GRMCE

sweat equity shares in the Directors’ Report for the year in which such shares are issued.
As per the rule 12(9) of Companies (Share Capital and Debenture) Rules 2014, the Board of directors,
shall, inter alia, disclose details of the Employees Stock Option Scheme in the Directors’ Report for the
year.
C. Companies (Appointment & Remuneration of Managerial Personnel) Rules, 2014
Rule 5(1) of Companies (Appointment & Remuneration of Managerial Personnel) Rules, 2014 provides
the following disclosure by the listed companies in the Board’s Report:-
(i) the ratio of the remuneration of each director to the median remuneration of the employees of the
company for the financial year;
(ii) the percentage increase in remuneration of each director, Chief Financial Officer, Chief Executive
Officer, Company Secretary or Manager, if any, in the financial year;
(iii) the percentage increase in the median remuneration of employees in the financial year;
(iv) the number of permanent employees on the rolls of company;
(v) average percentile increase already made in the salaries of employees other than the managerial
personnel in the last financial year and its comparison with the percentile increase in the managerial
remuneration and justification thereof and point out if there are any exceptional circumstances for
increase in the managerial remuneration;
(vi) affirmation that the remuneration is as per the remuneration policy of the company.
For the purposes of this rule.-(i) the expression “median” means the numerical value separating the
higher half of a population from the lower half and the median of a finite list of numbers may be found
by arranging all the observations from lowest value to highest value and picking the middle one.
Rule 5(2) prescribes that the board’s report shall include a statement showing the name of the top ten
employees in terms of remuneration drawn and the name of every employee, who-
(i) if employed throughout the financial year, was in receipt of remuneration for that year which, in the
aggregate, was not less than one crore and two lakh rupees;
(ii) if employed for a part of the financial year, was in receipt of remuneration for any part of that
year, at a rate which, in the aggregate, was not less than eight lakh and fifty thousand rupees per
month;
(iii) if employed throughout the financial year or part thereof, was in receipt of remuneration in that
year which, in the aggregate, or as the case may be, at a rate which, in the aggregate, is in excess
of that drawn by the managing director or whole-time director or manager and holds by himself or
along with his spouse and dependent children, not less than two percent of the equity shares of
the company.
(3) The statement referred to in sub-rule (2) shall also indicate -
(i) designation of the employee;
(ii) remuneration received;
(iii) nature of employment, whether contractual or otherwise;
(iv) qualifications and experience of the employee;
(v) date of commencement of employment;
(vi) the age of such employee;
(vii) the last employment held by such employee before joining the company;
(viii) the percentage of equity shares held by the employee in the company within the meaning of
 Lesson 6 n Corporate Policies and Disclosures 177

clause (iii) of sub-rule (2) above; and

(ix) whether any such employee is a relative of any director or manager of the company and if so,
name of such director or manager.
Proviso (i) says that the particulars of employees posted and working in a country outside India, not
being directors or their relatives, drawing more than sixty lakh rupees per financial year or five lakh
rupees per month, as the case may be, as may be decided by the Board, shall not be circulated to the
members in the Board’s report, but such particulars shall be filed with the Registrar of Companies while
filing the financial statement and Board Reports:
Proviso (ii) says that such particulars shall be made available to any shareholder on a specific request
made by him in writing before the date of such Annual General Meeting wherein financial statements for
the relevant financial year are proposed to be adopted by shareholders and such particulars shall be made
available by the company within three days from the date of receipt of such request from shareholders:
Proviso (iii) says that in case of request received even after the date of completion of Annual General
Meeting, such particulars shall be made available to the shareholders within seven days from the date
of receipt of such request.
D. Companies (Corporate Social Responsibility) Rules, 2014
Rule 8 of the Companies (Corporate Social Responsibility) Rules, 2014 prescribes the following CSR
reporting:-
(i) The Board’s Report of a company under these rules pertaining to a financial year commencing
on a or after 1st day of April, 2014 shall include an Annual Report on CSR containing particulars
specified in Annexure.
(ii) In case of a foreign company, the balance sheet filed under section 381(1)(b) shall contain an
Annexure regarding report on CSR.

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

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

Filing of the draft offer document and offer document (Regulation 25)
(1) Prior to making an initial public offer, the issuer shall file three copies of the draft offer document with
178 EP-GRMCE

the concerned regional office of the SEBI under the jurisdiction of which the registered office of the
issuer company is located, in accordance with Schedule IV, along with fees as specified in Schedule III,
through the lead manager(s).
(2) The lead manager(s) shall submit the following to the SEBI along with the draft offer document:
a) a certificate, confirming that an agreement has been entered into between the issuer and the lead
manager(s);
b) a due diligence certificate as per Form A of Schedule V;
c) in case of an issue of convertible debt instruments, a due diligence certificate from the debenture
trustee as per Form B of Schedule V;
(3) The issuer shall also file the draft offer document with the stock exchange(s) where the specified
securities are proposed to be listed, and submit to the stock exchange(s), the Permanent Account
Number, bank account number and passport number of its promoters where they are individuals, and
Permanent Account Number, bank account number, company registration number or equivalent and
the address of the Registrar of Companies with which the promoter is registered, where the promoter
is a body corporate.

Draft offer document and offer document to be available to the public (Regulation 26)
(1) The draft offer document filed with the SEBI shall be made public for comments, if any, for a period
of at least twenty one days from the date of filing, by hosting it on the websites of the SEBI, stock
exchanges where specified securities are proposed to be listed and lead manager(s) associated with
the issue.
(2) The issuer shall, within two days of filing the draft offer document with the SEBI, make a public
announcement in one English national daily newspaper with wide circulation, one Hindi national daily
newspaper with wide circulation and one regional language newspaper with wide circulation at the
place where the registered office of the issuer is situated, disclosing the fact of filing of the draft offer
document with the SEBI and inviting the public to provide their comments to the SEBI, the issuer or the
lead manager(s) in respect of the disclosures made in the draft offer document.
(3) The lead manager(s) shall, after expiry of the period stipulated in sub-regulation (1), file with the SEBI,
details of the comments received by them or the issuer from the public, on the draft offer document,
during that period and the consequential changes, if any, that are required to be made in the draft offer
document.
(4) The issuer and the lead manager(s) shall ensure that the offer documents are hosted on the websites
as required under these regulations and its contents are the same as the versions as filed with the
Registrar of Companies, SEBI and the stock exchanges, as applicable.
(5) The lead manager(s) and the stock exchanges shall provide copies of the offer document to the public
as and when requested and may charge a reasonable sum for providing a copy of the same.

Issue-related advertisements (Regulation 43)

(1) Subject to the provisions of the Companies Act, 2013, the issuer shall, after filing the red herring
prospectus (in case of a book built issue) or prospectus (in case of fixed price issue) with the Registrar
of Companies, make a pre-issue advertisement in one English national daily newspaper with wide
circulation, Hindi national daily newspaper with wide circulation and one regional language newspaper
with wide circulation at the place where the registered office of the issuer is situated.
(2) The pre-issue advertisement shall be in the format and shall contain the disclosures specified in Part A
of Schedule X.
 Lesson 6 n Corporate Policies and Disclosures 179

Provided that the disclosures in relation to price band or floor price and financial ratios contained
therein shall only be applicable where the issuer opts to announce the price band or floor price along
with the pre-issue advertisement pursuant to sub-regulation (4) of regulation 29.
(3) The issuer may release advertisements for issue opening and issue closing, which shall be in the
formats specified in Parts B and C of Schedule X.
(4) During the period the issue is open for subscription, no advertisement shall be released giving an
impression that the issue has been fully subscribed or oversubscribed or indicating investors’ response
to the issue.

Post-issue advertisements (Regulation 51)

(1) The lead manager(s) shall ensure that an advertisement giving details relating to subscription, basis
of allotment, number, value and percentage of all applications including ASBA, number, value and
percentage of successful allottees for all applications including ASBA, date of completion of despatch
of refund orders, as applicable, or instructions to self-certified syndicate banks by the registrar, date of
credit of specified securities and date of filing of listing application, etc. is released within ten days from
the date of completion of the various activities in at least one English national daily newspaper with
wide circulation, one Hindi national daily newspaper with wide circulation and one regional language
daily newspaper with wide circulation at the place where registered office of the issuer is situated.
(2) Details specified in sub regulation (1) shall also be placed on the websites of the stock exchange(s).

Post-issue reports (Regulation 55)

The lead manager(s) shall submit a final post-issue report as specified in Part A of Schedule XVII, along with a
due diligence certificate as per the format specified in Form F of Schedule V, within seven days of the date of
finalization of basis of allotment or within seven days of refund of money in case of failure of issue.

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

Disclosure of acquisition and disposal (Regulation 29)
1. Any acquirer who acquires shares or voting rights in a target company (together with person acting
in concert with him), aggregating to five per cent or more of the shares of such target company, shall
disclose their aggregate shareholding and voting rights in such target company in specified format.
2. Further, any person, who together with persons acting in concert with him, holds shares or voting rights
entitling them to five per cent or more of the shares or voting rights in a target company, shall disclose
the number of shares or voting rights held and subsequent change in shareholding or voting rights,
even if such change results in shareholding falling below five per cent and such change exceeds two
per cent of total shareholding or voting rights in the target company, in the prescribed format.
The disclosures required under sub-regulation (1) and (2) shall be made within two working days of
the receipt of intimation of allotment of shares, or the acquisition of shares or voting rights in the target
company to, –
(a) every stock exchange where the shares of the target company are listed; and
(b) the target company at its registered office.
For the purposes of aforesaid, shares taken by way of encumbrance shall be treated as an acquisition,
shares given upon release of encumbrance shall be treated as a disposal, and disclosures shall be
made by such person accordingly.
However, this requirement shall not apply to a scheduled commercial bank or public financial institution
180 EP-GRMCE

or a housing finance company or a systemically important non-banking financial company as pledgee

in connection with a pledge of shares for securing indebtedness in the ordinary course of business.
Continual disclosures (Regulation 30)
1. Every person, who together with persons acting in concert with him, holds shares or voting rights
entitling him to exercise twenty-five per cent or more of the voting rights in a target company, shall
disclose their aggregate shareholding and voting rights as of the thirty-first day of March, in such target
company in the prescribed format.
2. The promoter of every target company shall together with persons acting in concert with him, disclose
their aggregate shareholding and voting rights as of the thirty-first day of March, in such target company
in such form as may be specified.
3. The disclosures required under sub-regulation (1) and (2) shall be made within seven working days
from the end of each financial year to, –
(a) every stock exchange where the shares of the target company are listed; and
(b) the target company at its registered office.
Disclosure of encumbered shares (Regulation 31)
1. The promoter of every target company shall disclose details of shares in such target company
encumbered by him or by persons acting in concert with him in the prescribed format.
2. The promoter of every target company shall disclose details of any invocation of such encumbrance or
release of such encumbrance of shares in prescribed format.
3. The disclosures required under sub-regulation (1) and sub-regulation (2) shall be made within seven
working days from the creation or invocation or release of encumbrance, as the case may be to,—
(a) every stock exchange where the shares of the target company are listed; and
(b) the target company at its registered office.
4. The promoter of every target company shall declare on a yearly basis that he, along with persons acting
in concert, has not made any encumbrance, directly or indirectly, other than those already disclosed
during the financial year.
5. The declaration required under sub-regulation (4) shall be made within seven working days from the
end of each financial year to –
(a) every stock exchange where the shares of the target company are listed; and
(b) the audit committee of the target company.

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

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

Intimations Disclosures

Disclosure of Annual Report Website

Disclosures in
Events or Disclosures Disclosures
Prior Intimations Financial Results
Information [Regulation [Regulation
(Regulation 29) [Regulation
[Regulation (34)] (46)]
(33)]
(30)]

Disclosure of Material events

Disclosure of events on the applicability of

materiality guidelines

Disclosure of
Other Events

Prior Intimations (Regulation 29)

The listed entity shall give prior intimation to stock exchange about the meeting of the board of directors in the
following manner-
A. At least two working days in advance, excluding the date of the intimation and date of the meeting in
which any of the following proposals is due to be considered-
 proposal for buyback of securities;
 proposal for voluntary delisting by the listed entity from the stock exchange(s);
 fund raising by way of further public offer, rights issue, American Depository Receipts/Global
Depository Receipts/Foreign Currency Convertible Bonds, qualified institutions placement, debt
issue, preferential issue or any other method and for determination of issue price. Provided that
intimation shall also be given in case of any annual general meeting or extraordinary general
meeting or postal ballot that is proposed to be held for obtaining shareholder approval for further
fund raising indicating type of issuance
 declaration/recommendation of dividend, issue of convertible securities including convertible
debentures or of debentures carrying a right to subscribe to equity shares or the passing over of
dividend.
 the proposal for declaration of bonus securities where such proposal is communicated to the
board of directors of the listed entity as part of the agenda papers.
B. At least five days in advance excluding the date of the intimation and date of the meeting in which
following proposal is due to be considered-,
 financial results viz. quarterly, half yearly, or annual, as the case may be; (the intimation shall
include the date of such meeting of board of directors also)
C. At least eleven working days before any of the following proposal is placed before the board of directors -
182 EP-GRMCE

 any alteration in the form or nature of any of its securities that are listed on the stock exchange or
in the rights or privileges of the holders thereof.
 any alteration in the date on which, the interest on debentures or bonds, or the redemption amount
of redeemable shares or of debentures or bonds, shall be payable.
Disclosure of Events or Information [Regulation (30)]
A. Disclosure of Material Events-
Regulation 30(1) and (2) of the Listing Regulations specifies that every listed entity shall make
disclosures upon occurrence of following events or information which are deemed to be material events
as per Part ‘A’ of Schedule III. These events or information should be disclosed as soon as reasonably
possible and not later than 24 hours from the occurrence of event or information. In case the disclosure
is made after 24 hours of occurrence of the event or information, the listed entity shall, along with such
disclosures provide explanation for delay.
(i) Acquisition(s) (including agreement to acquire), Scheme of Arrangement (amalgamation/ merger/
demerger/restructuring), or sale or disposal of any unit(s), division(s) or subsidiary of the listed
entity or any other restructuring
(ii) Issuance or forfeiture of securities, split or consolidation of shares, buyback of securities, any
restriction on transferability of securities or alteration in terms or structure of existing securities
including forfeiture, reissue of forfeited securities, alteration of calls, redemption of securities etc.
(iii) Revision in Rating(s)
(iv) Agreements (viz. shareholder agreement(s), joint venture agreement(s), family settlement
agreement(s) (to the extent that it impacts management and control of the listed entity),
agreement(s)/treaty(ies)/contract(s) with media companies) which are binding and not in normal
course of business, revision(s) or amendment(s) and termination(s) thereof.
(v) Fraud/defaults by promoter or key managerial personnel or by listed entity or arrest of key
managerial personnel or promoter.
(vi) Change in directors, key managerial personnel (Managing Director, Chief Executive Officer, Chief
Financial Officer , Company Secretary etc.), Auditor and Compliance Officer.
(vii) Appointment or discontinuation of share transfer agent.
(viii) Corporate debt restructuring.
(ix) One time settlement with a bank.
(x) Reference to BIFR and winding-up petition filed by any party / creditors.
(xi) Issuance of Notices, call letters, resolutions and circulars sent to shareholders, debenture holders
or creditors or any class of them or advertised in the media by the listed entity.
(xii) Proceedings of Annual and extraordinary general meetings of the listed entity.
(xiii) Amendments to memorandum and articles of association of listed entity, in brief.
(xiv) Schedule of Analyst or institutional investor meet and presentations on financial results made by
the listed entity to analysts or institutional investors.
The listed entity shall disclose to the Exchange(s), outcome of Meetings of the board of directors within
30 minutes of the closure of the meeting, held to consider the following:
 Lesson 6 n Corporate Policies and Disclosures 183

(i) dividends and/or cash bonuses recommended or declared or the decision to pass any dividend
and the date on which dividend shall be paid/dispatched;
(ii) any cancellation of dividend with reasons thereof;
(iii) the decision on buyback of securities;
(iv) the decision with respect to fund raising proposed to be undertaken
(iv) increase in capital by issue of bonus shares through capitalization including the date on which
such bonus shares shall be credited/dispatched;
(vi) reissue of forfeited shares or securities, or the issue of shares or securities held in reserve for
future issue or the creation in any form or manner of new shares or securities or any other rights,
privileges or benefits to subscribe to;
(vii) short particulars of any other alterations of capital, including calls;
(viii) financial results
(ix) decision on voluntary delisting by the listed entity from stock exchange(s).
B. Disclosures of events upon application of the Materiality Guidelines
Regulation 30(3) of the Listing Regulations specifies that the listed entity shall make disclosure of
events specified in Part ‘A’ of Schedule III, based on application of the guidelines for materiality.
The board of directors of the listed entity shall authorize one or more Key Managerial Personnel for the
purpose of determining materiality of an event or information and for the purpose of making disclosures
to stock exchange(s) under this regulation and the contact details of such personnel shall be also
disclosed to the stock exchange(s) and as well as on the listed entity’s website.
What are the Materiality Guidelines?
As per Regulation (4), the listed entity shall frame a policy for determination of materiality of events/
information, approved by the board of directors and which shall be disclosed on its website on the basis
of following criteria-
a) the omission of an event or information, which is likely to result in discontinuity or alteration of
event or information already available publicly; or
b) the omission of an event or information is likely to result in significant market reaction if the said
omission came to light at a later date; or
c) an event/information may be treated as being material if in the opinion of the board of directors of
listed entity, the event / information is considered material.
Following events shall be disclosed upon application of the guidelines for materiality. These events or
information should be disclosed as soon as reasonably possible and not later than 24 hours from the
occurrence of event or information. In case the disclosure is made after 24 hours of occurrence of the
event or information, the listed entity shall, along with such disclosures provide explanation for delay.
1. Commencement or any postponement in the date of commencement of commercial production or
commercial operations of any unit/division.
2. Change in the general character or nature of business brought about by arrangements for strategic,
technical, manufacturing, or marketing tie-up, adoption of new lines of business or closure of
operations of any unit/division (entirety or piecemeal).
3. Capacity addition or product launch.
184 EP-GRMCE

4. Awarding, bagging/ receiving, amendment or termination of awarded/bagged orders/contracts not

in the normal course of business.
5. Agreements (viz. loan agreement(s) (as a borrower) or any other agreement(s) which are binding
and not in normal course of business) and revision(s) or amendment(s) or termination(s) thereof.
6. Disruption of operations of any one or more units or division of the listed entity due to natural
calamity (earthquake, flood, fire etc.), force majeure or events such as strikes, lockouts etc.
7. Effect(s) arising out of change in the regulatory framework applicable to the listed entity
8. Litigation(s) / dispute(s) / regulatory action(s) with impact.
9. Fraud/defaults etc. by directors (other than key managerial personnel) or employees of listed
entity.
10. Options to purchase securities including any ESOP/ESPS Scheme.
11. Giving of guarantees or indemnity or becoming a surety for any third party.
12. Granting, withdrawal, surrender, cancellation or suspension of key licenses or regulatory
approvals.
C. Disclosure of Other Events
Any other information/event viz. major development that is likely to affect business, e.g. emergence
of new technologies, expiry of patents, any change of accounting policy that may have a significant
impact on the accounts, etc. and brief details thereof and any other information which is exclusively
known to the listed entity which may be necessary to enable the holders of securities of the listed entity
to appraise its position and to avoid the establishment of a false market in such securities must be
disclosed. (Para C, Part ‘A’ of Schedule III)
Disclosures of Financial Results [Regulation (33)]
The listed entity shall make the following disclosures while preparing the financial results as specified in Part A
of Schedule IV.
A. Changes in accounting policies, if any, shall be disclosed in accordance with Accounting Standard 5 or
Indian Accounting Standard 8, as applicable, specified in Section 133 of the Companies Act, 2013 read
with relevant rules framed thereunder or by the Institute of Chartered Accountants of India, whichever
is applicable.
B. If the auditor has expressed any modified opinion(s) in respect of audited financial results submitted
or published under this para, the listed entity shall disclose such modified opinion(s) and cumulative
impact of the same on profit or loss, net worth, total assets, turnover/total income, earning per share,
total expenditure, total liabilities, any other financial item(s) which may be impacted due to modified
opinion(s), while publishing or submitting such results.
BA. If the auditor has expressed any modified opinion(s), the management of the listed entity has the option
to explain its views on the audit qualifications and the same shall be included in the Statement on
Impact of Audit Qualifications (for audit report with modified opinion).
BB. With respect to audit qualifications where the impact of the qualification is not quantifiable:
i. The management shall make an estimate and the auditor shall review the same and report
accordingly; or
ii. If the management is unable to make an estimate, it shall provide the reasons and the auditor
shall review the same and report accordingly.
 Lesson 6 n Corporate Policies and Disclosures 185

The above shall be included in the statement on impact of audit qualifications (for audit report with
modified opinion);

C. If the auditor has expressed any modified opinion(s) or other reservation(s) in his audit report or limited
review report in respect of the financial results of any previous financial year or quarter which has
an impact on the profit or loss of the reportable period, the listed entity shall include as a note to the
financial results –

(i) how the modified opinion(s) or other reservation(s) has been resolved; or

(ii) if the same has not been resolved, the reason thereof and the steps which the listed entity intends
to take in the matter.

D. If the listed entity has changed its name suggesting any new line of business, it shall disclose the net
sales or income, expenditure and net profit or loss after tax figures pertaining to the said new line of
business separately in the financial results and shall continue to make such disclosures for the three
years succeeding the date of change in name: Provided that the tax expense shall be allocated between
the said new line of business and other business of the listed entity in the ratio of the respective figures
of net profit before tax, subject to any exemption, deduction or concession available under the tax laws.

E. If the listed entity had not commenced commercial production or commercial operations during the
reportable period, the listed entity shall, instead of submitting financial results, disclose the following
details:

(i) details of amount raised i.e. proceeds of any issue of shares or debentures made by the listed
entity;

(ii) the portions thereof which is utilized and that remaining unutilized;

(iii) the details of investment made pending utilisation;

(iv) brief description of the project which is pending completion;

(v) status of the project; and

(vi) expected date of commencement of commercial production or commercial operations:

Provided that the details mentioned above shall be approved by the board of directors based on
certification by the chief executive officer and chief financial officer.

F. All items of income and expenditure arising out of transactions of exceptional nature shall be disclosed.

G. Extraordinary items, if applicable, shall be disclosed in accordance with Accounting Standard 5 (AS 5 –
Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies) or Companies
(Accounting Standards) Rules, 2006, whichever is applicable.

H. The listed entity, whose revenues are subject to material seasonal variations, shall disclose the seasonal
nature of their activities and the listed entity may supplement their financial results with information for
the twelve month period ending on the last day of the quarter for the current and preceding years on a
rolling basis.

I. The listed entity shall disclose any event or transaction which occurred during or before the quarter that
is material to an understanding of the results for the quarter including but not limited to completion of
expansion and diversification programmes, strikes and lock-outs, change in management, change in
capital structure and the listed entity shall also disclose similar material events or transactions that take
place subsequent to the end of the quarter.
186 EP-GRMCE

J. The listed entity shall disclose the following in respect of dividends paid or recommended for the year,
including interim dividends :

– amount of dividend distributed or proposed for distribution per share; the amounts in respect of
different classes of shares shall be distinguished and the nominal values of shares shall also be
indicated;

– where dividend is paid or proposed to be paid pro-rata for shares allotted during the year, the
date of allotment and number of shares allotted, pro-rata amount of dividend per share and the
aggregate amount of dividend paid or proposed to be paid on pro-rata basis.

K. The listed entity shall disclose the effect on the financial results of material changes in the composition
of the listed entity, if any, including but not limited to business combinations, acquisitions or disposal
of subsidiaries and long term investments, any other form of restructuring and discontinuance of
operations.

L. The listed entity shall ensure that segment reporting is done in accordance with AS-17 or Indian
Accounting Standard 108 as applicable, specified in Section 133 of the Companies Act, 2013 read with
relevant rules framed thereunder or by the Institute of Chartered Accountants of India, whichever is
applicable.

Annual Report Disclosures [Regulation (34)]

The listed entity shall submit to the stock exchange and publish on its website-
(a) a copy of the annual report sent to the shareholders along with the notice of the annual general meeting
not later than the day of commencement of dispatch to its shareholders;
(b) in the event of any changes to the annual report, the revised copy along with the details of and
explanation for the changes shall be sent not later than 48 hours after the annual general meeting.

The annual report shall contain the following:

l audited financial statements i.e. balance sheets, profit and loss accounts etc, and Statement on Impact
of Audit Qualifications as stipulated in regulation 33(3)(d), if applicable;

l consolidated financial statements audited by its statutory auditors;

l cash flow statement presented only under the indirect method as prescribed in Accounting Standard-3
or Indian Accounting Standard 7, as applicable, specified in Section 133 of the Companies Act, 2013
read with relevant rules framed thereunder or as specified by the Institute of Chartered Accountants of
India, whichever is applicable;

l directors report;

l management discussion and analysis report - either as a part of directors report or addition thereto;

l Business Responsibility Reports describing the initiatives taken by them from an environmental, social
and governance perspective, in the format as specified by the Board from time to time by the top one
thousand listed entities based on market capitalization (calculated as on March 31 of every financial
year).
Provided that listed entities other than top one thousand listed companies based on market capitalization
and listed entities which have listed their specified securities on SME Exchange, may include these
business responsibility reports on a voluntary basis in the format as specified.
 Lesson 6 n Corporate Policies and Disclosures 187

Additional Disclosures in Annual Report

The annual report shall contain any other disclosures specified in Companies Act, 2013 alongwith following
additional disclosures as specified in Schedule V.

A. Related Party Disclosure:

1. The listed entity shall make disclosures in compliance with the Accounting Standard on “Related Party
Disclosures”.

2. The disclosure requirements shall be as follows:

Sr. In the accounts of Disclosures of amounts at the year end and the maximum amount
No. of loans/ advances/ Investments outstanding during the year.

l Loans and advances in the nature of loans to subsidiaries by

name and amount.
1 Holding Company
l Loans and advances in the nature of loans to associates by
name and amount.
l Loans and advances in the nature of loans to firms/companies
in which directors are interested by name and amount.

2 Subsidiary Same disclosures as applicable to the parent company in the accounts

of subsidiary company

3 Holding Company Investments by the loanee in the shares of parent company and
subsidiary company, when the company has made a loan or advance
in the nature of loan.

For the purpose of above disclosures directors’ interest shall have the same meaning as given in
Section184 of Companies Act, 2013.
3. Disclosures of transactions of the listed entity with any person or entity belonging to the promoter/
promoter group which hold(s) 10% or more shareholding in the listed entity, in the format prescribed in
the relevant accounting standards for annual results.
4. The above disclosures shall be applicable to all listed entities except for listed banks.
B. Management Discussion and Analysis:
1. This section shall include discussion on the following matters within the limits set by the listed entity’s
competitive position:
(i) Industry structure and developments.
(ii) Opportunities and Threats.
(iii) Segment–wise or product-wise performance.
(iv) Outlook
(v) Risks and concerns.
(vi) Internal control systems and their adequacy.
(vii) Discussion on financial performance with respect to operational performance.
(viii) Material developments in Human Resources / Industrial Relations front, including number of
188 EP-GRMCE

people employed.
(ix) details of significant changes (i.e. change of 25% or more as compared to the immediately
previous financial year) in key financial ratios, along with detailed explanations therefor, including:
(i) Debtors Turnover
(ii) Inventory Turnover
(iii) Interest Coverage Ratio
(iv) Current Ratio
(v) Debt Equity Ratio
(vi) Operating Profit Margin (%)
(vii) Net Profit Margin (%) or sector-specific equivalent ratios, as applicable.
(x) details of any change in Return on Net Worth as compared to the immediately previous financial
year along with a detailed explanation thereof.
2. Disclosure of Accounting Treatment: Where in the preparation of financial statements, a treatment
different from that prescribed in an Accounting Standard has been followed, the fact shall be disclosed
in the financial statements, together with the management’s explanation as to why it believes such
alternative treatment is more representative of the true and fair view of the underlying business
transaction.
C. Corporate Governance Report:
The following disclosures shall be made in the section on the corporate governance of the annual report.
(1) A brief statement on listed entity’s philosophy on code of governance.
(2) Board of directors:
 composition and category of directors (e.g. promoter, executive, non-executive, independent non-
executive, nominee director - institution represented and whether as lender or as equity investor);
 attendance of each director at the meeting of the board of directors and the last annual general
meeting;
 number of other board of directors or committees in which a directors is a member or chairperson
and with effect from the Annual Report for the year ended 31st March 2019, including separately
the names of the listed entities where the person is a director and the category of directorship;
 number of meetings of the board of directors held and dates on which held;
 disclosure of relationships between directors inter-se;
 number of shares and convertible instruments held by non-executive directors;
 web link where details of familiarisation programmes imparted to independent directors is
disclosed.
 A chart or a matrix setting out the skills/expertise/competence of the board of directors specifying
the following:
(i) With effect from the financial year ending March 31, 2019, the list of core skills/expertise/
competencies identified by the board of directors as required in the context of its business(es)
and sector(s) for it to function effectively and those actually available with the board; and
 Lesson 6 n Corporate Policies and Disclosures 189

(ii) With effect from the financial year ended March 31, 2020, the names of directors who have
such skills / expertise / competence.
 confirmation that in the opinion of the board, the independent directors fulfill the conditions
specified in these regulations and are independent of the management.
 detailed reasons for the resignation of an independent director who resigns before the expiry of
his tenure along with a confirmation by such director that there are no other material reasons other
than those provided.
(3) Audit committee:
 brief description of terms of reference;
 composition, name of members and chairperson;
 meetings and attendance during the year.
(4) Nomination and Remuneration Committee:
 brief description of terms of reference;
 composition, name of members and chairperson;
 meeting and attendance during the year;
 performance evaluation criteria for independent directors.
(5) Remuneration of Directors:
 all pecuniary relationship or transactions of the non-executive directors vis-à-vis the listed entity
shall be disclosed in the annual report;
 criteria of making payments to non-executive directors. alternatively, this may be disseminated on
the listed entity’s website and reference drawn thereto in the annual report;
 disclosures with respect to remuneration: in addition to disclosures required under the Companies
Act, 2013, the following disclosures shall be made:
(i) all elements of remuneration package of individual directors summarized under major
groups, such as salary, benefits, bonuses, stock options, pension etc;
(ii) details of fixed component and performance linked incentives, along with the performance
criteria;
(iii) service contracts, notice period, severance fees;
(iv) stock option details, if any and whether issued at a discount as well as the period over which
accrued and over which exercisable.
(6) Stakeholders’ grievance committee:
 name of non-executive director heading the committee;
 name and designation of compliance officer;
 number of shareholders’ complaints received so far;
 number not solved to the satisfaction of shareholders;
 number of pending complaints.
(7) General body meetings:
190 EP-GRMCE

 location and time, where last three annual general meetings held;
 whether any special resolutions passed in the previous three annual general meetings;
 whether any special resolution passed last year through postal ballot – details of voting pattern;
 person who conducted the postal ballot exercise;
 whether any special resolution is proposed to be conducted through postal ballot;
 procedure for postal ballot.
(8) Means of communication:
 quarterly results;
 newspapers wherein results normally published;
 any website, where displayed;
 whether it also displays official news releases; and
 presentations made to institutional investors or to the analysts.
(9) General shareholder information:
 annual general meeting - date, time and venue;
 financial year;
 dividend payment date;
 the name and address of each stock exchange(s) at which the listed entity’s securities are listed
and a confirmation about payment of annual listing fee to each of such stock exchange(s);
 stock code;
 market price data- high, low during each month in last financial year;
 performance in comparison to broad-based indices such as BSE sensex, CRISIL Index etc;
 in case the securities are suspended from trading, the directors report shall explain the reason
thereof;
 registrar to an issue and share transfer agents;
 share transfer system;
 distribution of shareholding;
 dematerialization of shares and liquidity;
 outstanding global depository receipts or American depository receipts or warrants or any
convertible instruments, conversion date and likely impact on equity;
 commodity price risk or foreign exchange risk and hedging activities;
 plant locations;
 address for correspondence.
 list of all credit ratings obtained by the entity along with any revisions thereto during the relevant
financial year, for all debt instruments of such entity or any fixed deposit programme or any
scheme or proposal of the listed entity involving mobilization of funds, whether in India or abroad.
(10) Other Disclosures:
 Lesson 6 n Corporate Policies and Disclosures 191

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

E. Compliance certificate from either the auditors or practicing company secretaries regarding
compliance of conditions of corporate governance shall be annexed with the directors’ report.
F. Disclosures with respect to demat suspense account/ unclaimed suspense account
The listed entity shall disclose the following details in its annual report, as long as there are shares in the demat
suspense account or unclaimed suspense account, as applicable:
 aggregate number of shareholders and the outstanding shares in the suspense account lying at the
beginning of the year;
 number of shareholders who approached listed entity for transfer of shares from suspense account
during the year;
 number of shareholders to whom shares were transferred from suspense account during the year;
 aggregate number of shareholders and the outstanding shares in the suspense account lying at the end
of the year;
 that the voting rights on these shares shall remain frozen till the rightful owner of such shares claims
the shares.

Website Disclosures [Regulation (46)]

The listed entity shall maintain a functional website containing the basic information about the listed entity. The
listed entity shall disseminate the following information under a separate section on its website.
(a) details of its business;
(b) terms and conditions of appointment of independent directors;
(c) composition of various committees of board of directors;
(d) code of conduct of board of directors and senior management personnel;
(e) details of establishment of vigil mechanism/ Whistle Blower policy;
(f) criteria of making payments to non-executive directors , if the same has not been disclosed in annual
report;
(g) policy on dealing with related party transactions;
(h) policy for determining ‘material’ subsidiaries;
(i) details of familiarization programmes imparted to independent directors including the following details:-
 number of programmes attended by independent directors (during the year and on a cumulative
basis till date),
 number of hours spent by independent directors in such programmes (during the year and on
cumulative basis till date), and
 other relevant details
(j) the email address for grievance redressal and other relevant details;
(k) contact information of the designated officials of the listed entity who are responsible for assisting and
handling investor grievances;
(l) financial information including:
 notice of meeting of the board of directors where financial results shall be discussed;
 Lesson 6 n Corporate Policies and Disclosures 193

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

6. UNDER SEBI (PROHIBITION OF INSIDER TRADING) REGULATIONS, 2015

Disclosures of Trading By Insiders

Regulation 6(2) : The disclosures to be made by any person shall include those relating to trading by such
person’s immediate relatives, and by any other person for whom such person takes trading decisions.
(3) The disclosures of trading in securities shall also include trading in derivatives of securities and the traded
value of the derivatives shall be taken into account for purposes of this Chapter, provided that trading in
derivatives of securities is permitted by any law for the time being in force.
(4) The disclosures made shall be maintained by the company, for a minimum period of five years, in such form
as may be specified.
194 EP-GRMCE

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

(a) Every promoter or member of the promoter group, key managerial personnel and director of every
company whose securities are listed on any recognised stock exchange shall disclose his holding of
securities of the company as on the date of these regulations taking effect, to the company within thirty
days of these regulations taking effect;
(b) Every person on appointment as a key managerial personnel or a director of the company or upon
becoming a promoter or member of the promoter group shall disclose his holding of securities of the
company as on the date of appointment or becoming a promoter, to the company within seven days of
such appointment or becoming a promoter.

Continual Disclosures: Regulation 7(2)

(a) Every promoter or member of the promoter group, designated person and director of every company
shall disclose to the company the number of such securities acquired or disposed of within two trading
days of such transaction if the value of the securities traded, whether in one transaction or a series of
transactions over any calendar quarter, aggregates to a traded value in excess of ten lakh rupees or
such other value as may be specified;
(b) Every company shall notify the particulars of such trading to the stock exchange on which the securities
are listed within two trading days of receipt of the disclosure or from becoming aware of such information.
(c) The above disclosures shall be made in such form and such manner as may be specified by the Board
from time to time.

Disclosures by other connected persons

(3) Any company whose securities are listed on a stock exchange may, at its discretion require any other
connected person or class of connected persons to make disclosures of holdings and trading in securities of
the company in such form and at such frequency as may be determined by the company in order to monitor
compliance with these regulations.

Code of Fair Disclosure (Regulation 8)

(1) The board of directors of every company, whose securities are listed on a stock exchange, shall
formulate and publish on its official website, a code of practices and procedures for fair disclosure of
unpublished price sensitive information that it would follow in order to adhere to each of the principles
set out in Schedule A to these regulations, without diluting the provisions of these regulations in any
manner.
(2) Every such code of practices and procedures for fair disclosure of unpublished price sensitive information
and every amendment thereto shall be promptly intimated to the stock exchanges where the securities
are listed.
The board of directors of a listed company shall make a policy for determination of “legitimate purposes”
as a part of “Codes of Fair Disclosure and Conduct” formulated under regulation 8.
Explanation – For the purpose of illustration, the term “legitimate purpose” shall include sharing of
unpublished price sensitive information in the ordinary course of business by an insider.

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

Principles of Fair Disclosure for purposes of Code of Practices and Procedures for Fair Disclosure of
Unpublished Price Sensitive Information
 Lesson 6 n Corporate Policies and Disclosures 195

1. Prompt public disclosure of unpublished price sensitive information that would impact price discovery
no sooner than credible and concrete information comes into being in order to make such information
generally available.
2. Uniform and universal dissemination of unpublished price sensitive unpublished price sensitive
information to avoid selective disclosure.
3. Designation of a senior officer as a chief investor relations officer to deal with dissemination of
information and disclosure of unpublished price sensitive information.
4. Prompt dissemination of unpublished price sensitive information that gets disclosed selectively,
inadvertently or otherwise to make such information generally available.
5. Appropriate and fair response to queries on news reports and requests for verification of market rumours
by regulatory authorities.
6. Ensuring that information shared with analysts and research personnel is not unpublished price
sensitive information.
7. Developing best practices to make transcripts or records of proceedings of meetings with analysts
and other investor relations conferences on the official website to ensure official confirmation and
documentation of disclosures made.
8. Handling of all unpublished price sensitive information on a need-to-know basis.

Code of Conduct (Regulation 9)

(1) The board of directors of every listed company and the board of directors or head(s) of the organisation
of every intermediary shall ensure that the chief executive officer or managing director shall formulate
a code of conduct with their approval to regulate, monitor and report trading by its designated persons
and immediate relatives of designated persons towards achieving compliance with these regulations,
adopting the minimum standards set out in Schedule B (in case of a listed company) and Schedule C
(in case of an intermediary)] to these regulations, without diluting the provisions of these regulations in
any manner.
Explanation – For the avoidance of doubt it is clarified that intermediaries, which are listed, would be
required to formulate a code of conduct to regulate, monitor and report trading by their designated
persons, by adopting the minimum standards set out in Schedule B with respect to trading in their own
securities and in Schedule C with respect to trading in other securities.
(2) The board of directors or head(s) of the organisation, of every other person who is required to handle
unpublished price sensitive information in the course of business operations shall formulate a code
of conduct to regulate, monitor and report trading by their designated persons and immediate relative
of designated persons towards achieving compliance with these regulations, adopting the minimum
standards set out in Schedule C to these regulations, without diluting the provisions of these regulations
in any manner.
Explanation - Professional firms such as auditors, accountancy firms, law firms, analysts, insolvency
professional entities, consultants, banks etc., assisting or advising listed companies shall be collectively
referred to as fiduciaries for the purpose of these regulations.
(3) Every listed company, intermediary and other persons formulating a code of conduct shall identify and
designate a compliance officer to administer the code of conduct and other requirements under these
regulations.
(4) For the purpose of sub regulation (1) and (2), the board of directors or such other analogous authority
196 EP-GRMCE

shall in consultation with the compliance officer specify the designated persons to be covered by the
code of conduct on the basis of their role and function in the organisation and the access that such
role and function would provide to unpublished price sensitive information in addition to seniority and
professional designation and shall include:-
(i) Employees of such listed company, intermediary or fiduciary designated on the basis of their
functional role or access to unpublished price sensitive information in the organization by their
board of directors or analogous body;
(ii) Employees of material subsidiaries of such listed companies designated on the basis of their
functional role or access to unpublished price sensitive information in the organization by their
board of directors;
(iii) All promoters of listed companies and promoters who are individuals or investment companies for
intermediaries or fiduciaries;
(iv) Chief Executive Officer and employees upto two levels below Chief Executive Officer of such
listed company, intermediary, fiduciary and its material subsidiaries irrespective of their functional
role in the company or ability to have access to unpublished price sensitive information;
(v) Any support staff of listed company, intermediary or fiduciary such as IT staff or secretarial staff
who have access to unpublished price sensitive information.

Institutional Mechanism for Prevention of Insider trading (Regulation 9A)

The Chief Executive Officer, Managing Director or such other analogous person of a listed company, intermediary
or fiduciary shall put in place adequate and effective system of internal controls to ensure compliance with the
requirements given in these regulations to prevent insider trading.
Every listed company shall formulate written policies and procedures for inquiry in case of leak of unpublished
price sensitive information or suspected leak of unpublished price sensitive information, which shall be approved
by board of directors of the company and accordingly initiate appropriate inquiries on becoming aware of leak of
unpublished price sensitive information or suspected leak of unpublished price sensitive information and inform
the Board promptly of such leaks, inquiries and results of such inquiries.
The listed company shall have a whistle-blower policy and make employees aware of such policy to enable
employees to report instances of leak of unpublished price sensitive information.

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

LESSON ROUND UP
– Policies are an essential component of every organization and address important issues.
– The companies should provide easy access to policies and also publicly disclose.
– Corporate policies serve as important forms of internal control, it minimize cost and help in building a
learning culture.
 Lesson 6 n Corporate Policies and Disclosures 197

– Good corporate governance should ensure that timely and accurate disclosure is made regarding all
material matters concerning the corporation, including its financial situation and results.
– The following are the major legislations/regulations/guidelines on transparency and disclosure
requirements
 Companies Act, 2013
 SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009
 SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011
 SEBI (Prohibition of Insider Trading) Regulations, 2015
 SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015

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

LESSON OUTLINE
LEARNING OBJECTIVES
– Introduction
Corporate governance pertains to the system
– Regulatory Framework of rules businesses use to direct their decisions
– Strengthening Financial Reporting and justify their actions. It acts as the foundation
Standards through which corporations determine and go
after their goals within the social, legal and
– Improving Auditors effectiveness
market environment. Because the core function of
– Rotation of Auditors accounting tasks is to track the company’s financial
performance, these tasks play an important role in
– Compliance with Auditing Standards
determining how a company fulfils its corporate
– Internal Audit governance policies. Accounting and auditing
– Secretarial Audit practices are highly effective as an instrument of
corporate governance.
– Constitution of NFRA
Keeping this in view, this study lesson covers
– Related Party Transactions various good governance initiatives taken by the
– Vigil Mechanism/Whistle Blower government of our country for accounting and
audit related issues.
– Glossary
It also covers in brief various legal provisions as
– LESSON ROUND UP well as background to related party transactions,
– TEST YOURSELF meaning of related parties, transactions covered
under RPT and the procedure for approval etc.
At the end, lesson provides brief about vigil
mechanism, background of whistle blower concept
and various laws pertaining to it.

I have gone to great lengths, and in some cases beyond what is required by the reporting guidelines to
ensure all of my filings are beyond reproach, by hiring an independent third-party accounting firm to review
and audit all of my previous annual financial disclosures.
– Bob Corker
200 EP-GRMCE

INTRODUCTION
Many of the recent corporate failures like Maxwell in UK, Enron in US and Satyam in India could be
attributed to a lack of integrity on the part of management where individuals were involved in aggressive
accounting, earnings management or fraudulent financial reporting to manipulate share prices, borrowings
and bonus plans. In each of these cases executives were able to con investors by manipulating and
falsifying financial accounts of the company. The auditors of the companies were either negligent or an
accomplice in allowing incorrect and misleading financial statements to be issued. There is a clear need
to restore confidence in capital markets and elsewhere by enhancing corporate governance in order to
provide financial information of the highest quality. Confidence in financial reporting, and in audit, is a key
factor in ensuring confidence in capital markets.
The Cadbury Committee long back had recommended increasing auditors’ effectiveness, setting up an audit
committee to provide financial oversight and strengthen financial reporting standards for improved disclosures.
The Companies Act 2013 and SEBI LODR Regulations provide various provisions for the strengthening of
financial standards, auditing standards, mandatory internal audit and secretarial audit for certain class of
companies, rotation of auditors constitution of NFRA etc.

Regulatory Framework

Sl.No. Description
1 Rule 4 of the Companies (Indian Accounting Standard) Rules, 2015
2 Rule 5 of the Companies (Indian Accounting Standard) Rules, 2015
3 Section 129(5) of the Companies Act, 2013
4 Regulation 34(3) of SEBI (LODR) Regulations, 2015
5 Section 141(3) of the Companies Act, 2013
6 Section 144 of the Companies Act, 2013
7 Section 143(12) of the Companies Act, 2013
8 Section 139(2) of the Companies Act, 2013
9 Rule 5 of the Companies (Audit and Auditors) Rules, 2014
10 Section 138 of the Companies Act, 2013
11 Rule 13 of the Companies (Accounts) Rules, 2014
12 Section 204(1) of the Companies Act, 2013
13 Rule 9 of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014
14 Regulation 24A of the SEBI (LODR) Regulations, 2015
15 Rule 3 of the National Financial Reporting Authority Rules, 2018
16 Section 132(2) of the Companies Act, 2013
17 Rule 4 of the National Financial Reporting Authority Rules, 2018
18 Rule 7 of the National Financial Reporting Authority Rules, 2018
19 Rule 8 of the National Financial Reporting Authority Rules, 2018
20 Rule 9 of the National Financial Reporting Authority Rules, 2018
 Lesson 7 n Accounting and Audit related issues, RPTs and Vigil Mechanism 201

21 Rule 10 of the National Financial Reporting Authority Rules, 2018

22 Section 132(4) of the Companies Act, 2013
23 Section 2(76) of the Companies Act, 2013
24 Section 2(77) of the Companies Act, 2013
25 Regulation 2(1)(zb) and (zc) of the SEBI (LODR) Regulations, 2015
26 Ind AS 24 – Related Party Disclosures
27 Section 188(1) of the Companies Act, 2013
28 Rule 15 of the Companies (Meetings of Board and its Powers) Rules, 2014
29 Regulation 23 of SEBI (LODR) Regulations, 2015
30 Section 302 of Sarbanes Oxley Act of 2002
31 Section 177(9) of the Companies Act, 2013
32 Section 177(10) of the Companies Act, 2013
33 Rule 7 of the Companies (Meetings of Board and its Powers) Rules, 2014
34 Regulation 22 of SEBI (LODR) Regulations, 2015

STRENGTHENING FINANCIAL REPORTING STANDARDS

Better financial standards are required to reduce scope for management and auditor’s discretion in preparing
financial statements. To improve financial reporting standards India has revised its accounting standards in line
with the International Financial Reporting Standards.
In tune with the global trend of adopting International Financial Reporting Standards (IFRS) as reporting
language, India has facilitated the convergence of the Accounting Standards of India with IFRS. All the existing
Indian Accounting Standards were revised and converged with corresponding International Accounting
Standards/International Financial Reporting Standards. These converged Accounting Standards are called
“Indian Accounting Standards (Ind AS)”.
Under Companies Act, 2013, Section 2(2) defines accounting standards as below:
“Accounting Standards” means the standards of accounting or any addendum thereto for companies or class of
companies referred to in section 133.
Section 133 contains that the Central Government may prescribe the standards of accounting or any addendum
thereto, as recommended by the Institute of Chartered Accountants of India, constituted under section 3 of the
Chartered Accountants Act, 1949 in consultation with and after examination of the recommendations made
by the National Financial Reporting Authority. However, until the National Financial Reporting Authority is
constituted under section 132 of the Companies Act, 2013, the Central Government may prescribe the standards
of accounting or any addendum thereto, as recommended by the Institute of Chartered Accountants of India,
constituted under section 3 of the Chartered Accountants Act, 1949, in consultation with and after examination
of the recommendations made by National Advisory Committee on Accounting Standards constituted under
section 210 A of the Companies Act, 1956.
The Indian Accounting Standards (Ind AS), as notified under section 133 of the Companies Act 2013, have been
formulated keeping the Indian economic & legal environment in view and with a view to converge with IFRS
Standards, as issued by and copyright of which is held by the IFRS Foundation.
The Companies Act, 2013, in several sections, has given cognizance to the Indian Accounting Standards, which
202 EP-GRMCE

are standards converged with International Financial Reporting Standards. More disclosures are required under
Ind-AS as compared to Accounting Standards. The new standards emphasize fair value and transparency and
will go a long way in better financial reporting.
The Central Government, in consultation with the National Advisory Committee on Accounting Standards
(NACAS), had notified the Companies (Indian Accounting Standards) Rules, 2015 in exercise of the powers
conferred by section 133 and section 469 of the Companies Act, 2013 and sub-section (1) of section 210A of
the Companies Act, 1956. These rules came into force on 1st April 2015. There are now two separate sets of
Accounting Standards in India –
1) Indian accounting Standards (Ind AS) as specified in the Annexure to Companies (Indian
Accounting Standards) Rules, 2015
Indian Accounting Standards (Ind AS) are the accounting standards prescribed under Section 133
of the Companies Act, 2013 which are specified in the Annexure to Companies (Indian Accounting
Standards) Rules, 2015. These accounting standards are converged with corresponding International
Financial Reporting Standards. The list of Ind AS (as on 01.04.2020) is given in Annexure A, at the end
of this chapter.
2) Accounting standards as specified in Annexure to the Companies (Accounting Standards)
Rules, 2006
The Central Government in consultation with NACAS, has notified Companies (Accounting Standards)
Rules, 2006 in exercise of the powers conferred by clause (a) of sub-section (1) of section 642 and
sub-section (3C) of section 211 and sub-section (1) of section 210A of the Companies Act, 1956. Under
these rules, 28 Accounting Standards as recommended by the Institute of Chartered Accountants
of India are prescribed. These Accounting Standards are as per the Generally Accepted Accounting
Principles (GAAP) of India and not converged with International Financial Reporting Standards.
Regulation 48 of SEBI (LODR) Regulations, 2015 also provides that the listed entity shall comply with all the
applicable and notified Accounting Standards from time to time.
Obligation to comply with Indian Accounting Standards (Ind AS): Rule 4 of the Companies (Indian
Accounting Standards) Rules, 2015, deals with the obligation to comply with Indian Accounting
Standards, which is as under:
(1) The Companies and their auditors shall comply with the Indian Accounting Standards (Ind AS) specified
in Annexure to these rules in preparation of their Financial statements and audit respectively, in the following
manner, namely:-
(i) any company and its holding, subsidiary, joint venture or associate company may comply with the
Indian Accounting Standards (Ind AS) for financial statements for accounting periods beginning on or
after 1st April, 2015, with the comparatives for the periods ending on 31st March, 2015, or thereafter;
Phase I: (ii) the following companies shall comply with the Indian Accounting Standards (Ind AS) for the
accounting periods beginning on or after 1st April, 2016, with the comparatives for the periods ending
on 31st March, 2016, or thereafter, namely:-
(a) companies whose equity or debt securities are listed or are in the process of being listed on any
stock exchange in India or outside India and having Net worth of rupees five hundred crore or
more;
(b) companies other than those covered by sub-clause (a) of clause (ii) of sub- rule (1) and having net
worth of rupees five hundred crore or more;
(c) holding, subsidiary, joint venture or associate companies of companies covered by sub-clause (a)
 Lesson 7 n Accounting and Audit related issues, RPTs and Vigil Mechanism 203

of clause (ii) of sub- rule (1) and sub-clause (b) Of clause (ii) of sub- rule (1) as the case may be;
and
Phase II: (iii) the following companies shall comply with the Indian Accounting Standards (Ind AS)
for the accounting periods beginning on or after 1st April, 2017, with the comparatives for the periods
pending on 31st March, 2017, or thereafter, namely:-
(a) companies whose equity or debt securities are listed or are in the process of being listed on any
stock exchange in India or outside India and having net worth of less than rupees five hundred
crore;
(b) companies other than those covered in clause (ii) of sub- rule (1) and sub-clause (a) of clause (iii)
of sub-rule (1), that is, unlisted companies having net worth of rupees two hundred and fifty crore
or more but less than rupees five hundred crore.
(c) holding, subsidiary, joint venture or associate companies of companies covered under sub-clause
(a) of clause (iii) of sub- rule (1) and sub-clause(b) of clause (iii) of sub- rule (1), as the case may
be:
Provided that nothing in this sub-rule, except clause (i), shall apply to companies whose securities are
listed or are in the process of being listed on SME exchange as referred to in Chapter XB or on the
Institutional Trading Platform without initial public offering in accordance with the provisions of Chapter
XC of the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements)
Regulations, 2009.
Phase III : (iv) Notwithstanding the requirement of clauses (i) to (iii), Non-Banking Financial Companies
(NBFCs) shall comply with the Indian Accounting Standards (Ind ASs) in preparation of their financial
statements and audit respectively, in the following manner, namely:-
(a) The following NBFCs shall comply with the Indian Accounting Standards (Ind AS) for accounting
periods beginning on or after the 1st April, 2018, with comparatives for the periods ending on 31st
March, 2018, or thereafter –
(A) NBFCs having net worth of rupees five hundred crore or more;
(B) holding, subsidiary, joint venture or associate companies of companies covered under item
(A), other than those already covered under clauses (i), (ii) and (iii) of sub-rule (1) of rule 4.
Phase IV: (b) The following NBFCs shall comply with the Indian Accounting Standards (Ind AS) for
accounting periods beginning on or after the 1st April, 2019, with comparatives for the periods ending
on 31st March, 2019, or thereafter –
(A) NBFCs whose equity or debt securities are listed or in the process of listing on any stock exchange
in India or outside India and having net worth less than rupees five hundred crore;
(B) NBFCs, that are unlisted companies, having net worth of rupees two-hundred and fifty crore or
more but less than rupees five hundred crore; and
(C) holding, subsidiary, joint venture or associate companies of companies covered under item (A) or
item (B) of sub-clause (b), other than those already covered in clauses (i), (ii) and (iii) of sub-rule
(1) or item (B) of sub-clause (a) of clause (iv).
Explanation.- For the purposes of clause (iv), if in a group of Companies, some entities apply Accounting
Standards specified in the Annexure to the Companies (Accounting Standards) Rules, 2006 and others
apply accounting standards as specified in the Annexure to these rules, in such cases, for the purpose
of individual financial statements, the entities should apply respective standards applicable to them. For
preparation of consolidated financial statements, the following conditions are to be followed, namely:-
204 EP-GRMCE

(i) where an NBFC is a parent (at ultimate level or at intermediate level), and prepares consolidated
financial statements as per Accounting Standards specified in the Annexure to the Companies
(Accounting Standards) Rules, 2006, and its subsidiaries, associates and joint ventures, if
covered by clause (i), (ii) and (iii) of sub-rule (1) has to provide the relevant financial statement
data in accordance with the accounting policies followed by the parent company for consolidation
purposes (until the NBFC is covered under clause (iv) of sub-rule (1);
(ii) where a parent is a company covered under clause (i), (ii) and (iii) of sub-rule (1) and has an NBFC
subsidiary, associate or a joint venture, the parent has to prepare Ind AS-compliant consolidated
financial statements and the NBFC subsidiary, associate and a joint venture has to provide the
relevant financial statement data in accordance with the accounting policies followed by the parent
company for consolidation purposes (until the NBFC is covered under clause (iv) of sub-rule (1).
(v) Notwithstanding clauses (i) to (iv), the holding, subsidiary, joint venture or associate companies of
Scheduled commercial banks (excluding RRBs) would be required to prepare Ind AS based financial
statements for accounting periods beginning from 1st April, 2018 onwards, with comparatives for the
periods ending 31st March, 2018 or thereafter:
Explanation 1. – SME Exchange shall have the same meaning as assigned to it in Chapter XB of the
Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2009.
Explanation 2. – “Comparatives” shall mean comparative figures for the preceding accounting period.
Calculation of Net worth - Rule 4(2): For the purposes of calculation of net worth of companies under
clause (i), (ii) and (iii) of sub-rule (1), the following principles shall apply, namely:-
(a) the net worth shall be calculated in accordance with the stand-alone financial statements of the
company as on 31st March, 2014 or the first audited financial statements for accounting period
which ends after that date;
(b) for companies which are not in existence on 31st March, 2014 or an existing company falling
under any of thresholds specified in c[clause (i), (ii) and (iii) of sub-rule (1)] for thefirst time after
31st March, 2014, the net worth shall be calculated on the basis of the first audited financial
statements ending after that date in respect of which it meets the thresholds specified in c[clause
(i), (ii) and (iii) of sub-rule (1).
Explanation. - For the purposes of sub-clause (b), the companies meeting the specified thresholds
given in clause (i), (ii) and (iii) of sub-rule (1) for the first time at the end of an accounting year shall
apply Indian Accounting Standards (Ind AS) from the immediate next accounting year in the manner
specified in c[clause (i), (ii) and (iii) of sub-rule (1).
Illustration.- (i) The companies meeting threshold for the first time as on 31st March, 2017 shall apply
Ind AS for the financial year 2017-18 onwards.
(ii) The companies meeting threshold for the first time as on 31st March, 2018 shall apply Ind AS for the
financial year 2018-19 onwards and so on.
(2A) For the purposes of calculation of net worth of Non-Banking Financial Companies covered under
clause (iv) of sub-rule (1), the following principles shall apply, namely:-
(a) the net worth shall be calculated in accordance with the stand-alone financial statements of the
NBFCs as on 31st March, 2016 or the first audited financial statements for accounting period
which ends after that date;
(b) for NBFCs which are not in existence on 31st March, 2016 or an existing NBFC falling first time,
after 31st March, 2016, the net worth shall be calculated on the basis of the first audited stand-
 Lesson 7 n Accounting and Audit related issues, RPTs and Vigil Mechanism 205

alone financial statements ending after that date, in respect of which it meets the thresholds.
Explanation.- For the purposes of sub-clause (b), the NBFCs meeting the specified thresholds given
in subclause (b) of clause (iv) of sub-rule (1) for the first time at the end of an accounting year shall
apply Indian Accounting Standards (Ind ASs) from the immediate next accounting year in the manner
specified in subclause (b) of clause (iv) of sub-rule (1).
Illustration - (i) The NBFCs meeting threshold for the first time as on 31st March, 2019 shall apply Ind
AS for the financial year 2019-20 onwards.
(ii) The NBFCs meeting threshold for the first time as on 31st March, 2020 shall apply Ind AS for the
financial year 2020-21 onwards and so on.
(3) Standards in Annexure to these rules once required to be complied with in accordance with these rules, shall
apply to both stand-alone financial statements and consolidated financial statements.
(4) Companies to which Indian Accounting Standards (Ind AS) are applicable as specified in these rules shall
prepare their first set of financial statements in accordance with the Indian Accounting Standards (Ind AS)
effective at the end of its first Indian Accounting Standards (Ind AS) reporting period.
Explanation.- For the removal of doubts, it is hereby clarified that the companies preparing financial statements
applying the Indian Accounting Standards (Ind AS) for the accounting period beginning on 1st April, 2016 [or 1st
April, 2018, as the case may be] shall apply the Indian Accounting Standards (Ind AS) effective for the financial
year ending on 31st March, 2017 or 31st March, 2019, as the case may be.
(5) Overseas subsidiary, associate, joint venture and other similar entities of an Indian company may prepare
its standalone financial statements in accordance with the requirements of the specific jurisdiction:
Provided that such Indian company shall prepare its consolidated financial statements in accordance with the
Indian Accounting Standards (Ind AS) if it meets the criteria as specified in sub-rule (1).
(6) Indian company which is a subsidiary, associate, joint venture and other similar entities of a foreign company
shall prepare its financial statements in accordance with the Indian Accounting Standards (Ind AS) if it meets
the criteria as specified in sub-rule (1).
(7) Any company opting to apply the Indian Accounting Standards (Ind AS) voluntarily as specified in sub-rule(1)
for its financial statements shall prepare its financial statements as per the Indian Accounting Standards(Ind
AS) consistently.
(8) Once the Indian Accounting Standards (Ind AS) are applied voluntarily, it shall be irrevocable and such
companies shall not be required to prepare another set of financial statements in accordance with Accounting
Standards specified in Annexure to Companies (Accounting Standards) Rules, 2006.
(9) Once a company starts following the Indian Accounting Standards (Ind AS) on the basis of criteria specified
in sub-rule (1), it shall be required to follow the Indian Accounting Standards (Ind AS) for all the subsequent
financial statements even if any of the criteria specified in this rule does not subsequently apply to it.
Exemptions - Rule 5: The Banking Companies and Insurance Companies shall apply the Ind ASs as notified
by the Reserve Bank of India (RBI) and Insurance Regulatory Development Authority (IRDA) respectively.
An insurer or insurance company shall however, provide Ind AS compliant financial statement data for the
purposes of preparation of consolidated financial statements by its parent or investor or venturer, as required
by the parent or investor or venturer to comply with the requirements of these rules.
206 EP-GRMCE

Disclosure requirements pertaining to Accounting Standards

Section 129(5) of the Companies Act 2013 provides- Regulation 34(3) read with Schedule V of
SEBI (LODR) Regulations, 2015 provides –
Where the financial statements of a company do not
comply with the accounting standards, the company shall Where in the preparation of financial statements,
disclose in its financial statements, the deviation from the a treatment different from that prescribed in an
accounting standards, the reasons for such deviation and Accounting Standard has been followed, the fact
the financial effects, if any, arising out of such deviation. shall be disclosed in the financial statements,
together with the management’s explanation
as to why it believes such alternative treatment
is more representative of the true and fair view
of the underlying business transaction in the
Corporate Governance Report.

IMPROVING AUDITORS’ EFFECTIVENESS

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

Auditor’s Independence
To maintain independence of the auditors the following persons/entity cannot be appointed as Auditors
[Section 141(3)] :
1. An officer or employee of the company.
2. A person who is partner or who in the employment, of an officer or employee of the company.
3. A person who or his relative or partner
(a) is holding any security of or interest in the company or its subsidiary, or of its holding or associate
company or a subsidiary of such holding company However, the relative may hold security or
interest in the company of face value not exceeding one thousand rupees or such sum as may be
prescribed.
(b) is indebted to the company, or its subsidiary, or its holding or associate company or a subsidiary
of such holding company, in excess of such amount as may be prescribed.
(c) has given a guarantee or provided any security in connection with the indebtedness of any third
person to the company, or its subsidiary, or its holding or associate company or a subsidiary of
such holding company, for such amount as may be prescribed.
4. A person or a firm who, whether directly or indirectly, has business relationship with the company, or
its subsidiary, or its holding or associate company or subsidiary of such holding company or associate
company of such nature as may be prescribed.
5. A person whose relative is a director or is in the employment of the company as a director or any other
key managerial personnel.
 Lesson 7 n Accounting and Audit related issues, RPTs and Vigil Mechanism 207

6. A person who is in full time employment elsewhere or a person or a partner of a firm holding employment
as its auditor, if such person or partner is at the date of such appointment, holding appointment as
auditor of more than 20 companies.
7. A person who has been convicted by the court of an offence involving fraud and a period of 10 years
has not elapsed from the date of such conviction.
8. A person who, directly or indirectly, renders any service referred to in section 144 to the company or its
holding company or its subsidiary company.
9. A body corporate other than a limited liability partnership registered under the Limited Liability
Partnership Act, 2008.
Auditor’s Remuneration and Non-Audit Services: Though Companies Act, 2013 does not specify any
restrictions on auditor’s remuneration it should be reasonable, adequate but not excess, keeping the scope of
the audit and auditors capabilities in mind. Excess Remuneration is an incentive to retain the client and reduces
their objectivity.
Non – audit services may affect the independence of the auditor hence the provision of following
services by Statutory Auditors are prohibited under Section 144.
(a) accounting and book keeping services;
(b) internal audit;
(c) design and implementation of any financial information system;
(d) actuarial services;
(e) investment advisory services;
(f) investment banking services;
(g) rendering of outsourced financial services;
(h) management services; and
(i) any other kind of services as may be prescribed.
Oversight of Auditors: To ensure independence and effectiveness of statutory auditors, the audit committee
will review and monitor the auditor’s independence, the audit scope and process, and performance of the audit
team and accordingly recommend appointment, remuneration and terms of appointment of auditors of the
company.
Reporting of Fraud by Auditors : Section 143 (12) of the Companies Act, 2013 read with Companies (Audit
and Auditors) rules, 2015 provides that If an auditor of a company, in the course of the performance of his duties
as statutory auditor, has reason to believe that an offence of fraud, which involves or is expected to involve
individually an amount of rupees one crore or above, is being or has been committed against the company by
its officers or employees, the auditor shall report the matter to the Central Government.
In case of a fraud involving lesser than the amount specified in sub-rule (1), the auditor shall report the matter
to Audit Committee constituted under section 177 or to the Board immediately but not later than two days of his
knowledge of the fraud and he shall report the matter specifying the following:-
l Nature of Fraud with description;
l Approximate amount involved; and
l Parties involved.
The following details of each of the fraud reported to the Audit Committee or the Board under sub-rule (3) during
208 EP-GRMCE

the year shall be disclosed in the Board’s Report:-

l Nature of Fraud with description;
l Approximate Amount involved;
l Parties involved, if remedial action not taken; and
l Remedial actions taken.

MANDATORY ROTATION OF AUDITORS

The concept of mandatory audit rotation is not new. There has been considerable interest in mandatory auditor
rotation as a means of strengthening auditor independence, reducing the incidence of audit failure, improving the
quality of audit and protecting investors and other users of financial statements. Mandatory audit firm rotation
sets a limit on the number of years a public accounting firm may audit a company’s financial statements. After a
predetermined period, an accounting firm is no longer eligible to serve as the company’s auditor for a set time
interval and a rotation of firms is required. A mandatory audit rotation rule which sets a limit on the maximum
number of years an audit firm can audit a given company’s financial statements has been proposed as a means
to preserve auditor independence and possibly to increase investors’ confidence in financial reports. Mandatory
audit firm rotation is defined in the Sarbanes-Oxley (SOX) Act as the imposition of a limit on the period of years
during which an accounting firm may be the auditor of record. Mandatory audit firm rotation is often discussed
as a potential way to improve audit quality – typically gaining attention when public confidence in the audit
function has been eroded by events such as corporate scandals or audit failures
When the same auditors continue in the same company for years and years, it results in a close relationship
between management and auditors which increases the chances of fraud. Both Enron and Satyam saw this
happen. Hence section 139 of the Companies Act was introduced for mandatory rotation of auditors.
Section 139(2) read with Rule 5 of the Companies (Audit and Auditors) Rules, 2014 –
 No listed company or a company belonging to the following classes of companies excluding one person
companies and small companies:-
a) all unlisted public companies having paid up share capital of rupees 10 crore or more;
b) all private limited companies having paid up share capital of rupees 50 crore or more;
c) all companies having paid up share capital of below threshold limit mentioned in (a) and (b)
above, but having public borrowings from financial institutions, banks or public deposits of rupees
50 crore or more.
shall appoint or re-appoint –
(a) an individual as auditor for more than one term of five consecutive years; and
(b) an audit firm as auditor for more than two terms of five consecutive years.
 Also, an individual auditor who has completed his term of five consecutive years shall not be eligible for
re-appointment as auditor in the same company for five years from the completion of his term.
 An audit firm which has completed two terms of five consecutive years, shall not be eligible for re-
appointment as auditor in the same company for five years from the completion of such term.
 Provided further that as on the date of appointment no audit firm having a common partner or partners
to the other audit firm, whose tenure has expired in a company immediately preceding the financial
year, shall be appointed as auditor of the same company for a period of five years.
The provisions for rotation of auditors can be summarised as under –
 Lesson 7 n Accounting and Audit related issues, RPTs and Vigil Mechanism 209

In case of an individual as auditor:

(a) No individual shall be appointed or re-appointed as auditor for more than 1 term of 5 consecutive years.
(b) An individual auditor, who has completed his term of 5 consecutive years, shall not be eligible for re-
appointment as auditor in the same company for 5 years from the date of completion.
In case of a firm as an auditor:
(a) No audit firm shall be appointed or re-appointed as auditor for more than 2 terms of 5 consecutive
years.
(b) An audit firm which has completed its 2 terms of 5 consecutive years, shall not be eligible for re-
appointment as auditor in the same company for 5 years from the completion of such terms.
(c) If any firm/LLP which has one or more partners who are also partners in the outgoing audit firm/LLP
cannot be appointed as auditors during the 5 year period. In other words, if two or more audit firms
have common partner(s), and one of these firms has completed its 2 terms of 5 consecutive years,
none of such audit firms shall be eligible for re-appointment as auditor in the same company for 5
years.
The aforementioned provisions can be explained by the following illustration in a better manner.
If ABC & Co. is auditor of M/S XYZ Ltd. and the balance sheet of M/S XYZ Ltd. is being signed by Mr. A who
is also a partner in other firm PQR & Co. If the original tenure of appointment of ABC & Co. is expiring on 20th
August, 2020. The firm PQR & Co. can’t take the appointment of auditor of M/S XYZ Ltd. for the period of five
years starting from 21st August, 2020 and up to 20th August, 2025.
In the above example, PQR & Co. can take the advantage of being appointed as auditor on a date starting after
the expiry of financial year 2020-2021. In simple words, PQR & Co. is being eligible for appointment of auditor of
M/S XYZ Ltd. after the start of new financial year from the expiry of original tenure of ABC & Co., as the proviso
mentions only of one preceding financial year.

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

INTERNAL AUDIT
“Internal auditing is an independent, objective assurance and consulting activity designed to add value and
improve an organization’s operations. It helps an organisation accomplish its objectives by bringing a systematic,
disciplined approach to evaluate and improve the effectiveness of risk management, control, and governance
processes. ”
The Institute of Internal Auditors
The demand for auditing both external and internal is sourced in the need to have some means of
independent verification to reduce record-keeping errors, asset misappropriation, and fraud within business
and non-business organizations. The concept of internal auditing evolved as an extension to external audit
in testing the reliability of accounting records that contribute to published financial statements. International
financial scandals and recent events including global financial crises have emphasised need for internal
auditing within corporate governance structures of organisations. As organisations and the world they operate
in are becoming more and more complex, internal audit is considered good practice & advisable as part of
underlying internal control & risk management framework of an organisation.
Internal Audit is an independent management function, which involves a continuous and critical appraisal of the
functioning of an entity with a view to suggest improvements thereto and add value to and strengthen the overall
governance mechanism of the entity including entity’s strategic risk management and internal control system.
An effective internal audit function can play a significant role within the corporate governance framework of
a company. Over the last decade internal audit has developed and grown in importance. Efficient internal
audit functions provide objective assurance/assessments to the board (and to the audit committee) about the
adequacy and effectiveness of the processes by which risks are identified and prioritised; managed, controlled,
and mitigated.
In most countries and business sectors internal auditor or reports professionally to an audit committee and
managerially to the chief executive or chief financial officer. Internal audit is an independent and objective
appraisal function; it supports senior management and the (management) board. Internal audit activities are
performed in diverse legal and cultural environments; within organisations that vary in size and structure.
Internal audit functions should comply with the relevant professional standards.
Internal Audit is an independent appraisal activity within an organization for the review of systems, procedures,
practices, compliance with policies for accounting, financial and other operations as a basis for service to
management. It is a tool of control -
l To measure and evaluate the effectiveness of the working of an organization
l To ensure that all the laws, rules and regulations governing the operations of the organization are
adhered to
l To identify risks and also suggests remedial measures, thereby acting as a catalyst for change and
action.
Section 138 of the Companies Act, 2013 read with Rule 13 of the Companies (Accounts) Rules, 2014, provides
for the mandatory appointment of an internal auditor who shall either be a chartered accountant or a cost
accountant, or such other professional as may be decided by the Board to conduct internal audit of the functions
and activities for classes of company as specified in the below chart.
 Lesson 7 n Accounting and Audit related issues, RPTs and Vigil Mechanism 211

every listed company,

every unlisted public company having –

•paid up share capital of fifty crore rupees or more during the preceding financial
year; or
•turnover of two hundred crore rupees or more during the preceding financial
year; or
•outstanding loans or borrowings from banks or public financial institutions
exceeding one hundred crore rupees or more at any point of time during the
preceding financial year; or
•outstanding deposits of twenty five crore rupees or more at any point of time
during the preceding financial year; and

every private company having –

•turnover of two hundred crore rupees or more during the preceding financial
year; or
•outstanding loans or borrowings from banks or public financial institutions
exceeding one hundred crore rupees or more at any point of time during the
preceding financial year.

The internal auditor may or may not be an employee of the company. The Audit Committee of the company
or the Board shall, in consultation with the Internal Auditor, formulate the scope, functioning, periodicity and
methodology for conducting the internal audit.

SECRETARIAL AUDIT
Secretarial Audit is an audit to check compliance of various legislations including the Companies Act and other
corporate and economic laws applicable to the company. The Secretarial Auditor expresses an opinion as
to whether there exist adequate systems and processes in the company commensurate with the size and
operations of the company to monitor and ensure compliance with applicable laws, rules, regulations and
guidelines. Secretarial Audit helps to detect the instances of non-compliance and facilitates taking corrective
measures. It audits the adherence of good corporate practices by the company. It is therefore an independent and
objective assurance intended to add value and improve operations of the Company. It helps to accomplish the
organisation’s objectives by bringing a systematic, disciplined approach to evaluate and improve effectiveness
of risk management, control, and governance processes. Secretarial Audit thus provides necessary comfort to
the management, regulators and the stakeholders, as to the statutory compliance, good governance and the
existence of proper and adequate systems and processes.
Secretarial Audit facilitates monitoring compliances with the requirements of law through a formal compliance
management programme which can produce positive results to the stakeholders of a company. The Secretarial
Audit provides an in-built mechanism for enhancing corporate compliance generally and helps to restore the
confidence of investors in the capital market through greater transparency in corporate functioning.
Only a member of the Institute of Company Secretaries of India holding certificate of practice (Company
secretary in practice) can conduct Secretarial Audit and furnish the Secretarial Audit Report to the company.
[Section 204(1) of Companies Act, 2013]
As per section 204(1) of Companies Act, 2013 read with rule 9 of the Companies (Appointment and Remuneration
of Managerial Personnel) Rules, 2014, the following companies are required to obtain Secretarial Audit Report:
212 EP-GRMCE

– Every listed company;

– Every public company having a paid-up share capital of fifty crore rupees or more; or
– Every public company having a turnover of two hundred fifty crore rupees or more.
– Every company having outstanding loans or borrowings from banks or public financial institutions of
one hundred crore rupees or more.
For the purposes of this sub-rule, it is hereby clarified that the paid-up share capital, turnover, or outstanding
loans or borrowings as the case may be, existing on the last date of latest audited financial statement shall be
taken into account.
“Turnover” means the aggregate value of the realisation of amount made from the sale, supply or distribution
of goods or on account of services rendered, or both, by the company during a financial year. [Section 2(91)]
Regulation 24A of SEBI (LODR) regulations, 2015 provides that, every listed entity and its material unlisted
subsidiaries incorporated in India shall undertake secretarial audit and shall annex with its annual report, a
secretarial audit report, given by a company secretary in practice, in such form as may be specified with effect
from the year ended March 31, 2019.
Further, Circular No. CIR/CFD/CMD1/27/2019 dated February 08,2019 contains that while the annual secretarial
audit shall cover a broad check on compliance with all laws applicable to the entity, listed entities shall additionally,
on an annual basis, require a check by the PCS on compliance of all applicable SEBI Regulations and circulars
/ guidelines issued thereunder, consequent to which, the PCS shall submit a report to the listed entity in the
manner specified in this circular.
The format for the annual secretarial compliance report is placed at Annex – A to the circular. The annual
secretarial compliance report in the aforesaid format shall be submitted by the listed entity to the stock exchanges
within 60 days of the end of the financial year.

CONSTITUTION OF NATIONAL FINANCIAL REPORTING AUTHORITY (NFRA)

The National Financial Reporting Authority (NFRA) was constituted on 1st October,2018 by the Government
of India under Sub Section (1) of section 132 of the Companies Act, 2013. NFRA is an independent regulator
established to oversee the auditing profession. It is similar to the Public Company Accounting Oversight Body
set by in the USA by the Sarbanes Oxley Act 2002.
The need for establishing NFRA has arisen on account of the need felt across various jurisdictions in the world,
in the wake of accounting scams, to establish independent regulators, independent from those it regulates,
for enforcement of auditing standards and ensuring the quality of audits to strengthen the independence of
audit firms, quality of audits and, therefore enhance investor and public confidence in financial disclosures of
companies.
Classes of companies and bodies corporate governed by the Authority : Rule 3 of the National Financial
Reporting Authority Rules, 2018 (NFRA Rules) provides that:
(1) Authority shall have power to monitor and enforce compliance with accounting standards and auditing
standards, oversee the quality of service under sub-section (2) of section 132 or undertake investigation under
sub-section (4) of such section of the auditors of the following class of companies and bodies corporate, namely:-
(a) companies whose securities are listed on any stock exchange in India or outside lndia;
(b) unlisted public companies having paid-up capital of not less than rupees five hundred crores or having
annual turnover of not less than rupees one thousand crores or having, in aggregate, outstanding
loans, debentures and deposits of not less than rupees five hundred crores as on the 31st March of
immediately preceding financial year;
 Lesson 7 n Accounting and Audit related issues, RPTs and Vigil Mechanism 213

(c) insurance companies, banking companies, companies engaged in the generation or supply of
electricity, companies governed by any special Act for the time being in force or bodies corporate
incorporated by an Act in accordance with clauses (b), (c), (d), (e) and (f) of sub-section (4) of
section 1 of the Act;
Explanation. – For the purpose of this clause, “banking company” includes ‘corresponding new bank’ as
defined in clause (d) of section 2 of the Banking Companies (Acquisition and Transfer of Undertakings)
Act, 1970 (5 of 1970) and clause (b) of section 2 of the Banking Companies (Acquisition and Transfer
of Undertakings) Act, 1980 (40 of 1980) and ‘subsidiary bank’ as defined in clause (k) of section 2 of the
Stat Bank of India (Subsidiary Bank) Act, 1959 (38 of 1959).
(d) any body corporate or company or person, or any class of bodies corporate or companies or persons,
on a reference made to the Authority by the Central Government in public interest; and
(e) a body corporate incorporated or registered outside India, which is a subsidiary or associate company
of any company or body corporate incorporated or registered in India as referred to in clauses (a) to
(d), if the income or net worth of such subsidiary or associate company exceeds twenty per cent. of the
consolidated income or consolidated net worth of such company or the body corporate, as the case
may be, referred to in clauses (a) to (d).
(2) Every existing body corporate other than a company governed by these rules, shall inform the Authority
within thirty days of the commencement of these rules, in *Form NFRA-1, the particulars of the auditor as on
the date of commencement of these rules.
(3) Every body corporate, other than a company as defined in clause (20) of section 2, formed in India and
governed under this rule shall, within fifteen days of appointment of an auditor under sub-section (1) of section
139, inform the Authority in *Form NFRA-1, the particulars of the auditor appointed by such body corporate:
Provided that a body corporate governed under clause (e) of sub-rule (1) shall provide details of appointment
of its auditor in *Form NFRA-1.
(4) A company or a body corporate other than a company governed under this rule shall continue to be governed
by the Authority for a period of three years after it ceases to be listed or its paid-up capital or turnover or
aggregate of loans, debentures and deposits falls below the limit stated therein.
Functions and duties of the Authority : As per Sub Section (2) of Section 132 of the Companies Act, 2013,
the duties of the NFRA are to:
• Recommend accounting and auditing policies and standards to be adopted by companies for approval
by the Central Government;
• Monitor and enforce compliance with accounting standards and auditing standards;
• Oversee the quality of service of the professions associated with ensuring compliance with such
standards and suggest measures for improvement in the quality of service;
• Perform such other functions and duties as may be necessary or incidental to the aforesaid functions
and duties.
Further Rule 4 of the (NFRA Rules) provides that :
(1) The Authority shall protect the public interest and the interests of investors, creditors and others associated
with the companies or bodies corporate governed under rule 3 by establishing high quality standards of
accounting and auditing and exercising effective oversight of accounting functions performed by the companies
and bodies corporate and auditing functions performed by auditors.
214 EP-GRMCE

(2) In particular, and without prejudice to the generality of the foregoing, the Authority shall :–
(a) maintain details of particulars of auditors appointed in the companies and bodies corporate specified in
rule 3;
(b) recommend accounting standards and auditing standards for approval by the Central Government;
(c) monitor and enforce compliance with accounting standards and auditing standards;
(d) oversee the quality of service of the professions associated with ensuring compliance with such
standards and suggest measures for improvement in the quality of service;
(e) promote awareness in relation to the compliance of accounting standards and auditing standards;
(f) co-operate with national and international organisations of independent audit regulators in establishing
and overseeing adherence to accounting standards and auditing standards; and
(g) perform such other functions and duties as may be necessary or incidental to the aforesaid functions
and duties.
(3) The Central Government may, by notification, and subject to such conditions, limitations and restrictions as
may be specified therein delegate any of its powers or functions under the Act, other than the power to make
rules, to the Authority.
Monitoring and enforcing compliance with accounting standards – Rule 7 of the NFRA Rules provides
that:
1. For the purpose of monitoring and enforcing compliance with accounting standards, the Authority may
review the financial statements of such company or body corporate, as the case may be, and if so
required, direct such company or body corporate or its auditor by a written notice, to provide further
information or explanation or any relevant documents relating to such company or body corporate,
within such reasonable time as may be specified in the notice.
2. The Authority may require the personal presence of the officers of the company or body corporate and
its auditor for seeking additional information or explanation in connection with the review of the financial
statements of such company or body corporate.
3. The Authority shall publish its findings relating to non-compliances on its website and in such other
manner as it considers fit, unless it has reasons not to do so in the public interest and it records the
reasons in writing.
4. Where the Authority finds or has reason to believe that any accounting standard has or may have
been violated, it may decide on the further course of investigation or enforcement action through its
concerned Division.
Monitoring and enforcing compliance with auditing standards – Rule 8 of the NFRA Rules provides that:
(1) For the purpose of monitoring and enforcing compliance with auditing standards under the Act by a
company or a body corporate governed under rule 3, the Authority may:
(a) review working papers (including audit plan and other audit documents) and communications
related to the audit;
(b) evaluate the sufficiency of the quality control system of the auditor and the manner of documentation
of the system by the auditor; and
(c) perform such other testing of the audit, supervisory, and quality control procedures of the auditor
as may be considered necessary or appropriate.
(2) The Authority may require an auditor to report on its governance practices and internal processes
 Lesson 7 n Accounting and Audit related issues, RPTs and Vigil Mechanism 215

designed to promote audit quality, protect its reputation and reduce risks including risk of failure of the
auditor and may take such action on the report as may be necessary.
(3) The Authority may seek additional information or may require the personal presence of the auditor for
seeking additional information or explanation in connection with the conduct of an audit.
(4) The Authority shall perform its monitoring and enforcement activities through its officers or experts with
sufficient experience in audit of the relevant industry.
(5) The Authority shall publish its findings relating to non-compliances on its website and in such other
manner as it considers fit, unless it has reasons not to do so in the public interest and it records the
reasons in writing.
(6) The Authority shall not publish proprietary or confidential information, unless it has reasons to do so in
the public interest and it records the reasons in writing.
(7) The Authority may send a separate report containing proprietary or confidential information to the
Central Government for its information.
(8) Where the Authority finds or has reason to believe that any law or professional or other standard
has or may have been violated by an auditor, it may decide on the further course of investigation or
enforcement action through its concerned Division.
Overseeing the quality of service and suggesting measures for improvement – Rule 9 of the NFRA
Rules provides that:
(1) On the basis of its review, the Authority may direct an auditor to take measures for improvement of
audit quality including changes in their audit processes, quality control, and audit reports and specify a
detailed plan with time-limits.
(2) It shall be the duty of the auditor to make the required improvements and send a report to the Authority
explaining how it has complied with the directions made by the Authority.
(3) The Authority shall monitor the improvements made by the auditor and take such action as it deems fit
depending on the progress made by the auditor.
(4) The Authority may refer cases with regard to overseeing the quality of service of auditors of companies
or bodies corporate referred to in rule 3 to the Quality Review Board constituted under the Chartered
Accountants Act, 1949 (38 of 1949) or call for any report or information in respect of such auditors or
companies or bodies corporate from such Board as it may deem appropriate.
(5) The Authority may take the assistance of experts for its oversight and monitoring activities.
Power to investigate – Rule 10 of the NFRA Rules states that:
(1) Where the Authority has –
(a) received any reference from the Central Government for investigation into any matter of professional or
other misconduct under sub-section (4) of section 132 of the Act;
(b) decided to undertake investigation into any matter on the basis of its compliance or oversight activities;
or
(c) decided to undertake suo motu investigation into any matter of professional or other misconduct, after
recording reasons in writing for this purpose,
it shall forward the matter to its Division dealing with enforcement for carrying out investigation and other
action.
(2) If, during the investigation, the Authority has evidence to believe that any company or body corporate has not
216 EP-GRMCE

complied with the requirements under the Act or rules which involves or may involve fraud amounting to rupees
one crore or more, it shall report its findings to the Central Government.
(3) On the commencement of these rules-
(a) the action in respect of cases of professional or other misconduct against auditors of companies
referred to in rule 3 shall be initiated by Authority and no other institute or body shall initiate any such
proceedings against such auditors:
Provided that no other institute or body shall initiate or continue any proceedings in such matters of
misconduct where the Authority has initiated an investigation under this rule;
(b) the action in respect of cases of professional or other misconduct against auditors of companies or
bodies corporate other than those referred to in rule 3 shall continue to be proceeded with by the
Institute of Chartered Accountants of India as per provisions of the Chartered Accountants Act, 1949
and the regulations made thereunder.
Powers of NFRA – Section 132(4) of Companies Act, 2013 states that notwithstanding anything contained in
any other law for the time being in force, the National Financial Reporting Authority shall –
(a) have the power to investigate, either suo moto or on a reference made to it by the Central Government,
for such class of bodies corporate or persons, in such manner as may be prescribed into the matters of
professional or other misconduct committed by any member or firm of chartered accountants, registered
under the Chartered Accountants Act, 1949:
Provided that no other institute or body shall initiate or continue any proceedings in such matters of
misconduct where the National Financial Reporting Authority has initiated an investigation under this
section;
(b) have the same powers as are vested in a civil court under the Code of Civil Procedure, 1908, while
trying a suit, in respect of the following matters, namely: –
(i) discovery and production of books of account and other documents, at such place and at such
time as may be specified by the National Financial Reporting Authority;
(ii) summoning and enforcing the attendance of persons and examining them on oath;
(iii) inspection of any books, registers and other documents of any person referred to in clause (b) at
any place;
(iv) issuing commissions for examination of witnesses or documents;
(c) where professional or other misconduct is proved, have the power to make order for –
(A) imposing penalty of –
(I) not less than one lakh rupees, but which may extend to five times of the fees received, in
case of individuals; and
(II) not less than five lakh rupees, but which may extend to ten times of the fees received, in
case of firms;
(B) debarring the member or the firm from –
I. being appointed as an auditor or internal auditor or undertaking any audit in respect of
financial statements or internal audit of the functions and activities of any company or body
corporate; or
II. performing any valuation as provided under section 247,
 Lesson 7 n Accounting and Audit related issues, RPTs and Vigil Mechanism 217

for a minimum period of six months or such higher period not exceeding ten years as may be determined by the
National Financial Reporting Authority.
Explanation. – For the purposes of his sub-section, the expression “professional or other misconduct” shall
have the same meaning assigned to it under section 22 of the Chartered Accountants Act, 1949.

RELATED PARTY TRANSACTIONS

A related party transaction can present a potential or actual conflict of interest and might not be aligned with the
best interests of the company and its shareholders, especially minority shareholders. It can result in situations
where such transactions are used as a conduit to channel funds out of the company into another entity which is
a “related party.” These transactions can also be considered as a business opportunity that is lost to a related
party to the detriment of the interests of the company and its shareholders. Thus, these conflicts of interest
are inherently linked to the governance structure of a company, which can either enhance or limit the board’s
effectiveness. The board carries the main responsibility for reviewing and guiding corporate strategy and for
effectively monitoring management, and is accountable to the company and its shareholders.
Not all RPTs are detrimental to the interest of the company or its shareholders. Some transactions can be legitimate
and serve practical, commercial purposes. If companies are prohibited from entering into such transactions,
their ability to maximise shareholder value can suffer. Some related party transactions are conducted for the
purpose of exchanging products or services, which should occur at an arm’s length basis. Some products or
services do not have comparable benchmarks in the marketplace, however, as they are available only within a
closed group. For example, a pharmaceutical conglomerate holds all of its patents with one company. If other
companies have to manufacture those products, they might have no choice but to transact with the related party
for using such rights. In that case, there might not be any transaction available in the marketplace that can serve
as a useful benchmark to assess whether the transactions was conducted at arm’s length.
The various types of RPTs that are commonly observed are:
l Financial assistance through provisions of loans, guarantees and collateral
l Asset sales and purchases between related parties
l The sale, purchase or supply of any goods, materials or services in the ordinary course of business
l Bailouts
The law in India does not prohibit RPTs. Instead, the law puts into place a system of checks and balances, such
as requirements for approval from the board of directors/shareholders, timely disclosures and prior statutory
approvals, to ensure that the transactions are conducted within appropriate boundaries. RPTs are required to
be managed transparently, so as not to impose a heavy burden on a company’s resources, affect the optimum
allocation of resources, distort competition or siphon off public resources.
The requirements concerning related party transactions under Companies Act 2013 and SEBI (LODR)
Regulations, 2015 may be divided into four key parts, viz.,
l Identification of Related Parties
l Identification of Related Party Transactions
l Approval Process
l Disclosure requirements

Identification of Related Parties

According to Section 2(76) of Companies Act 2013, “related party”, with reference to a company, means—
218 EP-GRMCE

(i) a director or his relative;

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

l Daughter’s husband
l Brother : Provided that the term “Brother” includes the step-brother;
l Sister : Provided that the term “Sister” includes the step-sister.
 Lesson 7 n Accounting and Audit related issues, RPTs and Vigil Mechanism 219

Provisions under the SEBI (LODR) Regulations, 2015:

Relative : The definition of relative is harmonised under Regulation 2(1)(zd) of Listing Regulations. It provides
that Relative means relative as defined under sub-section (77) of section 2 of the Companies Act, 2013 and
rules prescribed there under.
Related Party : Regulation 2(1) (zb) of Listing Regulations defines that “related party” means a related party
as defined under sub-section (76) of section 2 of the Companies Act, 2013 or under the applicable accounting
standards. Provided that any person or entity belonging to the promoter or promoter group of the listed entity
and holding 20% or more of shareholding in the listed entity shall be deemed to be a related party.
Provided that this definition shall not be applicable for the units issued by mutual funds which are listed on a
recognised stock exchange(s).
Related Party Disclosure under Ind AS : As per Ind AS 24: A related party is a person or entity that is related
to the entity that is preparing its financial statements (i.e. the ‘reporting entity’)
(a) A person or a close member of that person’s family is related to a reporting entity if that person:
(i) has control or joint control over the reporting entity;
(ii) has significant influence over the reporting entity; or
(iii) is a member of the key management personnel of the reporting entity or of a parent of the reporting
entity.
(b) An entity is related to a reporting entity if any of the following conditions applies:
(i) The entity and the reporting entity are members of the same group (which means that each
parent, subsidiary and fellow subsidiary is related to the others).
(ii) One entity is an associate or joint venture of the other entity (or an associate or joint venture of a
member of a group of which the other entity is a member).
(iii) Both entities are joint ventures of the same third party.
(iv) One entity is a joint venture of a third entity and the other entity is an associate of the third entity.
(v) The entity is a post-employment benefit plan for the benefit of employees of either the reporting
entity or an entity related to the reporting entity. If the reporting entity is itself such a plan, the
sponsoring employers are also related to the reporting entity.
(vi) The entity is controlled or jointly controlled by a person identified in (a).
(vii) A person identified in (a)(i) has significant influence over the entity or is a member of the key
management personnel of the entity (or of a parent of the entity)
(viii) The entity, or any member of a group of which it is a part, provides key management personnel
services to the reporting entity or to the parent of the reporting entity.
A related party transaction is a transfer of resources, services or obligations between a reporting entity and a
related party, regardless of whether a price is charged.
Thus, the term ‘related party’ is broader under listing regulations. The definition includes all related parties
under the Act and under Ind AS 24. The definition of ‘related party’ under listing regulations is likely to result
in identification of significantly higher number of related parties vis-à-vis those under the Act. LODR is likely to
result in identification of much higher number of related parties and identification on a more consistent basis.

Identification of Related Party Transaction

Section 188 (1) of the Companies Act 2013 deals with the related party transactions with respect to:
220 EP-GRMCE

(a) Sale, purchase or supply of any goods or materials

(b) Selling or otherwise disposing of, or buying, property of any kind
(c) Leasing of property of any kind
(d) Availing or rendering of any services
(e) Appointment of any agent for purchase or sale of goods, materials, services or property
(f) Related party’s appointment to any office or place of profit in the company, its subsidiary company or
associate company, and
(g) Underwriting the subscription of any securities or derivatives thereof, of the company.
Provided that no contract or arrangement, in the case of a company having a paid-up share capital of not less
than such amount, or transactions not exceeding such sums, as may be prescribed, shall be entered into except
with the prior approval of the company by a resolution:
Provided further that no member of the company shall vote on such resolution, to approve any contract or
arrangement which may be entered into by the company, if such member is a related party:
Provided also that nothing contained in the second proviso shall apply to a company in which ninety per cent.
or more members, in number, are relatives of promoters or are related parties:
Provided also that nothing in this sub-section shall apply to any transactions entered into by the company in its
ordinary course of business other than transactions which are not on an arm’s length basis.
Provided also that the requirement of passing the resolution under first proviso shall not be applicable for
transactions entered into between a holding company and its wholly owned subsidiary whose accounts are
consolidated with such holding company and placed before the shareholders at the general meeting for approval:

RPT under SEBI (LODR) Regulations, 2015 :

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

Approval process
Section 188(1) of the Companies Act 2013 provides that a company shall enter into any contract or arrangement
with a related party with respect to Related party transactions only with the consent of the Board of Directors
given by a resolution at a meeting of the Board and subject to certain conditions as prescribed under Rule 15
of the Companies (Meetings of board and its Powers) Rules, 2014, which is as under :
(1) The agenda of the Board meeting at which the resolution is proposed to be moved shall disclose-
(a) the name of the related party and nature of relationship;
(b) the nature, duration of the contract and particulars of the contract or arrangement;
 Lesson 7 n Accounting and Audit related issues, RPTs and Vigil Mechanism 221

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

section 101 shall contain the following particulars, namely:-

(a) name of the related party;
(b) name of the director or key managerial personnel who is related, if any;
(c) nature of relationship;
(d) nature, material terms, monetary value and particulars of the contract or arrangements;
(e) any other information relevant or important for the members to take a decision on the proposed
resolution.
l In case of wholly owned subsidiary, the resolution passed by the holding company shall be sufficient
for the purpose of entering into the transaction between the wholly owned subsidiary and the holding
company.
l Where any contract or arrangement is entered into by a director or any other employee, without
obtaining the consent of the Board or approval by a resolution in the general meeting and if it is not
ratified by the Board or, as the case may be, by the shareholders at a meeting within three months from
the date on which such contract or arrangement was entered into, such contract or arrangement shall
be voidable at the option of the Board or, as the case may be, of the shareholders] and if the contract or
arrangement is with a related party to any director, or is authorised by any other director, the directors
concerned shall indemnify the company against any loss incurred by it.

Provisions under SEBI (LODR) Regulations, 2015

Policy on materiality of related party transactions : Regulation 23(1)- The listed entity shall formulate a
policy on materiality of related party transactions and on dealing with related party transactions including clear
threshold limits duly approved by the board of directors and such policy shall be reviewed by the board of
directors at least once every three years and updated accordingly.

When will a transaction with a related party be material?

Regulation 23(1) and (1A)- A transaction with a related party shall be considered material if the transaction(s)
to be entered into individually or taken together with previous transactions during a financial year, exceeds 10%
of the annual consolidated turnover of the listed entity as per the last audited financial statements of the listed
entity. With effect from July 01, 2019, a transaction involving payments made to a related party with respect to
brand usage or royalty shall be considered material if the transaction(s) to be entered into individually or taken
together with previous transactions during a financial year, exceed five percent of the annual consolidated
turnover of the listed entity as per the last audited financial statements of the listed entity.

Approval of Audit Committee

Regulation 23(2)- All related party transactions shall require prior approval of the audit committee.

Omnibus Approval :
Regulation 23(3) - Audit committee may grant omnibus approval for related party transactions proposed to be
entered into by the listed entity subject to the following conditions, namely-
(a) the audit committee shall lay down the criteria for granting the omnibus approval in line with the policy
on related party transactions of the listed entity and such approval shall be applicable in respect of
transactions which are repetitive in nature;
(b) the audit committee shall satisfy itself regarding the need for such omnibus approval and that such
approval is in the interest of the listed entity;
 Lesson 7 n Accounting and Audit related issues, RPTs and Vigil Mechanism 223

(c) the omnibus approval shall specify:

(i) the name(s) of the related party, nature of transaction, period of transaction, maximum amount of
transactions that shall be entered into,
(ii) the indicative base price / current contracted price and the formula for variation in the price if any; and
(iii) such other conditions as the audit committee may deem fit:
Provided that where the need for related party transaction cannot be foreseen and aforesaid details are
not available, audit committee may grant omnibus approval for such transactions subject to their value
not exceeding rupees one crore per transaction.
(d) the audit committee shall review, at least on a quarterly basis, the details of related party transactions
entered into by the listed entity pursuant to each of the omnibus approvals given.
(e) Such omnibus approvals shall be valid for a period not exceeding one year and shall require fresh
approvals after the expiry of one year:

Approval of the shareholders

Regulation 23(4) - All material related party transactions shall require approval of the shareholders through
resolution and no related party shall vote to approve such resolutions whether the entity is a related party to the
particular transaction or not:
Provided that the requirements specified under this sub-regulation shall not apply in respect of a resolution plan
approved under section 31 of the Insolvency Code, subject to the event being disclosed to the recognized stock
exchanges within one day of the resolution plan being approved;

Exemptions
Regulation 23 (5) - The provisions of Regulation 23 (2), (3) and (4) shall not be applicable in the following cases:
(a) transactions entered into between two government companies;
(b) transactions entered into between a holding company and its wholly owned subsidiary whose accounts
are consolidated with such holding company and placed before the shareholders at the general meeting
for approval.
Explanation. - For the purpose of clause (a), “government company(ies)” means Government company as
defined in sub-section (45) of section 2 of the Companies Act, 2013.
Other provisions
l Regulation 23 (6) The provisions of this regulation shall be applicable to all prospective transactions.
l Regulation 23 (7) For the purpose of this regulation, all entities falling under the definition of related
parties shall not vote to approve the relevant transaction irrespective of whether the entity is a party to
the particular transaction or not.
l Regulation 23 (8) All existing material related party contracts or arrangements entered into prior to the
date of notification of these regulations and which may continue beyond such date shall be placed
for approval of the shareholders in the first General Meeting subsequent to notification of these
regulations.
l Regulation 23 (9) The listed entity shall submit within 30 days from the date of publication of its
standalone and consolidated financial results for the half year, disclosures of related party transactions
on a consolidated basis, in the format specified in the relevant accounting standards for annual results
to the stock exchanges and publish the same on its website.
224 EP-GRMCE

The relevant disclosures to be made under Related Party transactions have already been covered in the
previous chapter.

VIGIL MECHANISM / WHISTLE BLOWER

Meaning and Definition

The term “whistle-blowing” originates from the practice of British policemen who blew their whistles whenever
they observed commission of a crime. The term ‘whistle-blowing’ is a relatively recent entry into the vocabulary
of public and corporate affairs although the phenomenon itself is not new.

The concept of a Whistleblower was in existence even in Ancient India, Kautilya had proposed- “Any informant
(súchaka) who supplies information about embezzlement just under perpetration shall, if he succeeds in proving
it, get as reward one-sixth of the amount in question; if he happens to be a government servant (bhritaka), he
shall get for the same act one-twelfth of the amount.”

The term whistle blowing probably arises by analogy with the referee or umpire who draws public attention to
a foul in a game by blowing of the whistle which would alert both the law enforcement officers and the general
public of danger.

Whistle blowers are individuals who expose corruption and fraud in organizations by filing a law suit or a
complaint with Government authorities that prompts a criminal investigation in to the organizations alleged
behavior.

Whistle blowing means calling the attention of the top management to some wrongdoing occurring within
an organization. A whistleblower may be an employee, former employee or member of an organisation, a
government agency, who have willingness to take corrective action on the misconduct.

A whistleblower is a person who publicly complains concealed misconduct on the part of an organization or a
body of people, usually from within that same organisation. This misconduct may be classified in many ways:
for example, a violation of a law, rule, regulation and/or a direct threat to the public interest, such as fraud,
health/safety violations, and corruption. Whistleblowers frequently the face retaliation - sometimes at the hands
of the organisation or the group which they have accused, unless a system is in place that would ensure
confidentiality. In addition, people are more likely to take action with respect to unacceptable behavior within an
organization, if there are complaint systems that ensure confidentiality and indemnity.

US civic activist Ralph Nader coined the phrase in the early 1970s to avoid the negative connotations found in
other words such as “informers” and “snitches”.

Some important Definitions of whistle blowing are:

l R.M Green (1994) defines a whistleblower as an Employee who, perceiving an organizational practice
that he believes to be illegal or unethical, seeks to stop this practice by alerting top management or
failing that by notifying authorities outside the organization.

l Sekhar (2002) defines whistleblowing as an attempt by an employee or a former employee of an

organization to disclose what he proclaims to be wrong doing in or by that organization.

l Koehn (2003) whistle blowing occurs when an employee informs the public of inappropriate activities
going on inside the organization.

l Boatright (2003) whistle blowing is the release of information by a member or former member of an
organization this is evidence of illegal and/or immoral conduct in the organization that is not in the public
interest.
 Lesson 7 n Accounting and Audit related issues, RPTs and Vigil Mechanism 225

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

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

Section 302 of Sarbanes Oxley Act of 2002, an Act enacted by U.S. congress to protect investors by improving
the accuracy and reliability of corporate disclosures made pursuant to the securities laws, and for other purposes
contains following provisions for whistle-blowers:
l Make it illegal to “discharge, demote, suspend, threaten, harass or in any manner discriminate against”
whistleblowers
l Establish criminal penalties of up to 10 years for executives who retaliate against whistleblowers
l Require board audit committees to establish procedures for hearing whistleblower complaints
l Allow the secretary of labour to order a company to rehire a terminated employee with no court hearing.
l Give a whistleblower the right to a jury trial, bypassing months or years of administrative hearings

Vigil Mechanism under Companies Act, 2013

1. Every listed company and the companies belonging to the following class or classes shall establish a
vigil mechanism for their directors and employees to report their genuine concerns or grievances-
(a) the Companies which accept deposits from the public;
(b) the Companies which have borrowed money from banks and public financial institutions in excess
of fifty crore rupees.
(Section 177(9) and Rule 7(1) of Companies (Meetings of Board and its Powers) Rules, 2014)
2. The vigil mechanism under sub-section (9) shall provide for adequate safeguards against victimisation
of persons who use such mechanism and make provision for direct access to the chairperson of the
Audit Committee in appropriate or exceptional cases. [Section 177(10)]
3. The details of establishment of such mechanism shall be disclosed by the company on its website, if
any, and in the Board’s report. [proviso to Section 177(10)]
226 EP-GRMCE

4. The companies which are required to constitute an audit committee shall oversee the vigil mechanism
through the committee and if any of the members of the committee have a conflict of interest in a given
case, they should recuse themselves and the others on the committee would deal with the matter on
hand. [Rule 7(2) of Companies (Meetings of Board and its Powers) Rules, 2014)]
5. In case of other companies, the Board of directors shall nominate a director to play the role of audit
committee for the purpose of vigil mechanism to whom other directors and employees may report their
concerns. [Rule 7(3) of Companies (Meetings of Board and its Powers) Rules, 2014)]
6. The vigil mechanism shall provide for adequate safeguards against victimisation of employees and
directors who avail of the vigil mechanism and also provide for direct access to the Chairperson of the
Audit Committee or the director nominated to play the role of Audit Committee, as the case may be, in
exceptional cases. [Rule 7(4) of Companies (Meetings of Board and its Powers) Rules, 2014)]
7. In case of repeated frivolous complaints being filed by a director or an employee, the audit committee
or the director nominated to play the role of audit committee may take suitable action against the
concerned director or employee including reprimand. [Rule 7(5) of Companies (Meetings of Board and
its Powers) Rules, 2014)]

Vigil mechanism under SEBI Listing Obligations and Disclosure Requirements, 2015
1. The listed entity shall formulate a vigil mechanism for directors and employees to report genuine
concerns. [Regulation 22(1)]
2. The vigil mechanism shall provide for adequate safeguards against victimization of director(s) or
employee(s) or any other person who avail the mechanism and also provide for direct access to the
chairperson of the audit committee in appropriate or exceptional cases. [Regulation 22(2)]
3. The listed entity shall disseminate the details of establishment of vigil mechanism/ Whistle Blower
policy.
4. The disclosure regarding the details of establishment of vigil mechanism, whistle blower policy, and
affirmation that no personnel has been denied access to the audit committee shall be made in the
section on the corporate governance of the annual report.
Case Example: Enron, a Houston-based energy company founded by a brilliant entrepreneur, Kenneth Lay.
The company was created in 1985 by a merger of two American gas pipeline companies in Nabraska and
Texas. Lay assumed the role of chairperson and CEO, a position he held through most of the next 16
years, until the company’s downfall in 2001. In a period of 16 years the company was transformed from a
relatively small concern, involved in gas pipelines, oil and gas exploration, to the world’s largest energy
trading company. In 2001 Enron became a household name-and probably in most households in most
countries around the world. On 2 December, 2001 Enron, one of the 10 largest companies in the US, filed
for bankruptcy.
During the boom years of the late 1990s the company positioned itself as a trader of virtually any type of asset:
pulp and paper, weather derivatives, commodities, credits, and so on. It also expanded into areas that it thought
would benefit from rapid growth, including water (following deregulation measures), fiber optic capacity/ Internet
bandwidth, and so on. At the end of 1999, Enron launched its Internet based trading platform—Enron online. In
February 2001, the company’s stock market value was USD 4.60 billion.
In early 2001, as Lay handed the CEO role to Skilling, Enron reached an apex: the company reported revenues
of US $ 100 billion and ranked seventh on the Fortune500 list of largest global companies.
In early 2001, however, the company’s problems started mounting: the expensive expansion into the broadband
sector became questionable. Enron’s stock prices started falling. In August 2001 the chief executive Jeffery
 Lesson 7 n Accounting and Audit related issues, RPTs and Vigil Mechanism 227

Skilling, left the company following concerns about the company’s management. Former CEO Lay returned to
his old role (retaining the board chair as well).
Whistleblowers within the firm – aware of widespread financial improprieties—were attempting to convey
information to the board of directors; one employee, Sherron Watkins, Enron’s vice president of corporate
development, was finally successful in alerting certain board members that all was not well. In November 2001,
it became clear that Enron was facing serious financial problems.

Annexure A
The list of Ind AS are as under:

Ind AS Number Title

Ind AS 1 Presentation of Financial Statements

Ind AS 2 Inventories

Ind AS 7 Statement of Cash Flows

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

Ind AS 10 Events after Reporting Period

Ind AS 12 Income Taxes

Ind AS 16 Property, Plant and Equipment

Ind AS 17 Leases

Ind AS 19 Employee Benefits

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

Ind AS 21 The Effects of Changes in Foreign Exchange Rates

Ind AS 23 Borrowing Costs

Ind AS 24 Related Party Disclosures

Ind AS 27 Separate Financial Statements

Ind AS 28 Investments in Associates and Joint Ventures

Ind AS 29 Financial Reporting in Hyperinflationary Economies

Ind AS 32 Financial Instruments: Presentation

Ind AS 33 Earnings per Share

Ind AS 34 Interim Financial Reporting

Ind AS 36 Impairment of Assets

Ind AS 37 Provisions, Contingent Liabilities and Contingent Assets

Ind AS 38 Intangible Assets

Ind AS 40 Investment Property

Ind AS 41 Agriculture

Ind AS 101 First-time adoption of Ind AS

228 EP-GRMCE

Ind AS 102 Share Based payments

Ind AS 103 Business Combination

Ind AS 104 Insurance Contracts

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

Ind AS 106 Exploration for and Evaluation of Mineral Resources

Ind AS 107 Financial Instruments: Disclosures

Ind AS 108 Operating Segments

Ind AS 109 Financial Instruments

Ind AS 110 Consolidated Financial Statements

Ind AS 111 Joint Arrangements

Ind AS 112 Disclosure of Interests in Other Entities

Ind AS 113 Fair Value Measurement

Ind AS 114 Regulatory Deferral Accounts

Ind AS 115 Revenue from Contracts with Customers

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

LESSON ROUND UP
– Corporate Scams created the need to increasing auditors’ effectiveness, setting up an audit committee
and strengthen financial reporting standards.
– Auditors are professional accountants who assure shareholders reliability of financial statements.
– Auditors’ effectiveness is enhance through –
– Encouraging Professional Objectivity
– Maintaining Independence
– Rotation of Auditors
– Appropriate Remuneration
– Restriction on Non- Audit Services
– To improve financial reporting standards India has revised its accounting standards. The new Ind-AS
is in line with the International Financial Reporting standard.
 Lesson 7 n Accounting and Audit related issues, RPTs and Vigil Mechanism 229

– Section 139 requires mandatory rotation of auditors. An individual cannot act as an auditor for more
than five consecutive years and an audit firm can be appointed as auditor for not more than two
terms of five consecutive years each. Once the term is ended they cannot be reappointed a
period of five years.
– The National Financial Reporting Authority is an independent regulator established under Section 132
of the Act to oversee the auditing profession, improve the quality of audit and ensure independence of
audit firms.
– Whistle blowers are individuals who expose corruption and fraud in organizations by filing a law suit or
a complaint with Government authorities that prompts a criminal investigation in to the organizations
alleged behavior.

TEST YOURSELF
(These are meant for recapitulation only. Answers to these questions are not to be submitted for evaluation)
1. Can you suggest some measures to increase auditors’ effectiveness?
2. As a company secretary briefly explain the powers and functions of NFRA?
3. Are there is any provision in the legislature for mandatory rotation of auditors in India? Explain
4. Does having an independent audit prevent scams? Justify your answer.
5. Write a short note on Internal Audit.
6. Explain in brief the provisions and importance of secretarial audit.
230 EP-GRMCE
 Lesson 8
Corporate Governance and
Shareholders Rights
LESSON OUTLINE
LEARNING OBJECTIVES
– Introduction
The objective of this study lesson is to enable
– Regulatory Framework
the students to understand what the rights of the
– Rights of Shareholders shareholders are and how it is important from
– Promoter / Controlling Shareholder corporate governance perspective.
– Role and Liabilities of Promoters In this study lesson, the rights of shareholders and
– Majority and Minority Shareholders the provisions in the Companies Act, 2013 and
– Protection of rights of shareholders/ SEBI Regulations which deals with shareholder
investors in India rights have been covered. The challenges in
– IEPF exercising the shareholders rights have also been
discussed.
– Investor Associations
– Protection of Rights of Minority Shareholders The Study covers how the interests of minority
shareholders may be protected in light of related
– Oppression and Mismanagement
party transactions; the study explains about the
– Class Action Suits role that institutional shareholders can play in
– Others prompting good corporate governance.
– Institutional Investors To enable student to understand the global
– UK Stewardship Code trends on the subject, international codes like UK
– Principles for Responsible Investment Stewardship Code, UN Principles on Responsible
(PRI) Investment, The Code for Responsible Investing
in South Africa (CRISA), CalPERS corporate
– Code for Responsible Investing in
South Africa (CRISA) engagement process have been covered.

– California Public Employees’ Also the role of proxy advisors, and corporate
Retirement System governance in subsidiaries and family owned
– Role of Proxy Advisors enterprises have been discussed.
– Governance of Group Entities/ Subsidiaries
– Corporate Governance in Family owned
enterprises
– Glossary
– LESSON ROUND UP
– TEST YOURSELF

Shareholders have the right and obligation to set the parameters of corporate behavior within which
management pursues profit.
– Eliot Spitzer
232 EP-GRMCE

INTRODUCTION
Protection of shareholder rights is sacrosanct for good corporate governance. It is one of the pillars of corporate
governance. For the efficient functioning of the capital market, the fundamental requirement is that the investor
rights are well protected. The Preamble to Securities and Exchange Board of India Act, 1992 reads as under:
“An Act to provide for the establishment of a Board to protect the interests of investors in securities and to
promote the development of, and to regulate the securities market and for matters connected there with or
incidental thereto.”
The central element in corporate governance is the challenges arising out of separation of ownership and control.
The shareholders are the true owners of a corporate and the governance function controls the operations of the
corporate. There is a strong likelihood that there is a mismatch between the expectations of the shareholders
and the actions of the management. Therefore there is a need to lay down clearly the rights of the shareholders
and that of the management.
In the Indian context, the SEBI Act, 1992, the various SEBI Regulations and Guidelines and the Companies Act,
2013 enables the empowerment of shareholder rights.

Regulatory Framework

Sl.No. Description
1 Section 2 (69) of the Companies Act, 2013
2 Regulation 2(1)(oo) of SEBI (ICDR) Regulations, 2018
3 Regulation 2(1)(pp) of SEBI (ICDR) Regulations, 2018
4 Section 125(2) of the Companies Act, 2013
5 Section 125(3) of the Companies Act, 2013
6 Section 241(1) of the Companies Act, 2013
7 Section 241(2) of the Companies Act, 2013
8 Section 242 of the Companies Act, 2013
9 Section 245 of the Companies Act, 2013
10 Section 151 of the Companies Act, 2013
11 Section 408 of the Companies Act, 2013
12 Principles for Responsible Investment (PRI)
13 Code for Responsible Investing in South Africa (CRISA)
14 The California Public Employees’ Retirement System (CalPERS)

RIGHTS OF SHAREHOLDERS

Under the Companies Act, 2013

S. No. Section Rights of Shareholder

1. Right to receive copies of the following documents:

 Lesson 8 n Corporate Governance and Shareholders Rights 233

(a) Right of Member to   A copy of the financial statements, including consolidated financial
Copies of Audited statements, if any, auditor’s report and every other document required
Financial Statement: by law to be annexed or attached to the financial statements, which are
Section -136(1) to be laid before a company in its general meeting, shall be sent to every
member of the company, to every trustee for the debenture-holder of any
debentures issued by the company, and to all persons other than such
member or trustee, being the person so entitled, not less than 21 days
before the date of the meeting.

(b) Contract of The copies of the contract of service with the managing or whole time
Employment with director in writing or where the contract is not in writing, a written
Managing or Whole- memorandum setting out its terms shall be open to inspection by any
Time Directors: member of the company without payment of fee.
Section -190(2)

(c) Notice of Meeting: (1) A general meeting of a company may be called by giving not less than
Section-101(1) & 3(a) clear 21 days notice either in writing or through electronic mode.
(3)(a) The notice of every meeting of the company shall be given to every
member of the company, legal representative of any deceased member or
the assignee of an insolvent member.

2. Right to inspect statutory registers/returns and get copies thereof on payment of prescribed
fees.

(a) Debentures: 71(6): A debenture trustee shall take steps to protect the interests of the
debenture-holders and redress their grievances in accordance with such
Section-71, 71(13)
rules as may be prescribed.
71(13): he Central Government may prescribe the procedure, for securing
the issue of debentures, the form of debenture trust deed, the procedure
for the debenture-holders to inspect the trust deed and to obtain copies
thereof, quantum of debenture redemption reserve required to be created
and such other matters.

(b) Rectification by The Central Government on being satisfied that —

Central Government in
(a) the omission to give intimation to the Registrar of the payment or
Register of Charges
satisfaction of a charge, within the time required under this Chapter; or
Section-87
(b) the omission or misstatement of any particulars,in any filing previously
made to the Registrar with respect to any such charge or modification
thereof or with respect to any memorandum of satisfaction or other entry
made in pursuance of section 82 or section 83,
was accidental or due to inadvertence or some other sufficient cause or
it is not of a nature to prejudice the position of creditors or shareholders
of the company, it may, on the application of the company or any person
interested and on such terms and conditions as it deems just and
expedient, direct that the time for the giving of intimation of payment
or satisfaction shall be extended or, as the case may require, that the
omission or misstatement shall be rectified.
234 EP-GRMCE

(c) Place of keeping (2) The registers and their indices, except when they are closed under
and Inspection of the provisions of this Act, and the copies of all the returns shall be open
Registers, Returns, for inspection by any member, debenture-holder, other security holder or
etc. beneficial owner, during business hours without payment of any fees and
by any other person on payment of such fees as may be prescribed.
Section- 94(2)

(d) Inspection of Minute- (1) The books containing the minutes of the proceedings of any general
Books of General meeting of a company or of a resolution passed by postal ballot, shall—
Meeting
(a) be kept at the registered office of the company; and
Section - 119
(b) be open, during business hours, to the inspection by any member
without charge, subject to such reasonable restrictions as the company
may, by its articles or in general meeting, impose, so, however, that not
less than two hours in each business day are allowed for inspection.

(e) Register of Contracts (3) The register of contracts or arrangements shall be kept at the
or Arrangements in registered office of the company and it shall be open for inspection at
Which Directors are such office during business hours and extracts may be taken therefrom,
Interested and copies thereof as may be required by any member of the company
shall be furnished by the company to such extent, in such manner, and on
Section - 189
payment of such fees as may be prescribed.

(f) Register of Directors (1) Every company shall keep at its registered office a register containing
and key Managerial such particulars of its directors and key managerial personnel as may be
Personnel and their prescribed, which shall include the details of securities held by each of
Shareholding them in the company or its holding, subsidiary, subsidiary of company’s
holding company or associate companies.
Section-170

Contract of (1) Every company shall keep at its registered office,—

Employment with
(a) where a contract of service with a managing or whole-time director is
Managing or Whole-
in writing, a copy of the contract; or
Time Directors
(b) where such a contract is not in writing, a written memorandum setting
Section-190
out its terms.
(2) The copies of the contract or the memorandum kept under sub-section
(1) shall be open to inspection by any member of the company without
payment of fee.

3. Right to attend Meetings of the Shareholders and exercise voting rights at these meetings
either personally or through proxy.

(a) Annual General Section 96(1): (1) Every company other than a One Person Company
Meeting : Section -96. shall in each year hold in addition to any other meetings, a general
meeting as its annual general meeting and shall specify the meeting
as such in the notices calling it, and not more than fifteen months shall
elapse between the date of one annual general meeting of a company
and that of the next.
 Lesson 8 n Corporate Governance and Shareholders Rights 235

Calling of Section 100(2): The Board shall, at the requisition made by,—
Extraordinary General
(a) in the case of a company having a share capital, such number of
Meeting.
members who hold, on the date of the receipt of the requisition, not less
Section-100. than one-tenth of such of the paid-up share capital of the company as on
that date carries the right of voting;
(b) in the case of a company not having a share capital, such number of
members who have, on the date of receipt of the requisition, not less than
one-tenth of the total voting power of all the members having on the said
date a right to vote,
call an extraordinary general meeting of the company within the period
specified in sub-section (4).
Proxies; Section-105 Section 105: (1) Any member of a company entitled to attend and vote at
a meeting of the company shall be entitled to appoint another person as a
proxy to attend and vote at the meeting on his behalf.

Voting by Show of Section 107(1): At any general meeting, a resolution put to the vote of the
Hands Section-107 meeting shall, unless a poll is demanded under section 109 or the voting
is carried out electronically, be decided on a show of hands.

4. Other Rights

(a) Certificate of Shares Section 46(1): 1) A certificate, 1[issued under the common seal, if any, of
the company or signed by two directors or by a director and the Company
Section- 46
Secretary, wherever the company has appointed a Company Secretary],
specifying the shares held by any person, shall be prima facie evidence of
the title of the person to such shares.
(4) Where a share is held in depository form, the record of the depository
is the prima facie evidence of the interest of the beneficial owner.

(b) Nature of Shares or Section 44: The shares or debentures or other interest of any member in
Debentures: a company shall be movable property transferable in the manner provided
by the articles of the company.
Section-44
Section 56(1):  A company shall not register a transfer of securities of
Transfer and
the company, or the interest of a member in the company in the case
Transmission of
of a company having no share capital, other than the transfer between
Securities: Section- 56
persons both of whose names are entered as holders of beneficial interest
in the records of a depository, unless a proper instrument of transfer, in
such form as may be prescribed, duly stamped, dated and executed by
or on behalf of the transferor and the transferee and specifying the name,
address and occupation, if any, of the transferee has been delivered to
the company by the transferor or the transferee within a period of sixty
days from the date of execution, along with the certificate relating to the
securities, or if no such certificate is in existence, along with the letter of
allotment of securities.
236 EP-GRMCE

(c) Further issue of share Section 62: (1) Where at any time, a company having a share capital
capital: Section-62 proposes to increase its subscribed capital by the issue of further shares,
such shares shall be offered–
(a) to persons who, at the date of the offer, are holders of equity shares of
the company in proportion, as nearly as circumstances admit, to the paid-
up share capital on those shares by sending a letter of offer.

(d) Removal, Resignation Section 140(1):The auditor appointed under section 139 may be removed
of Auditor and Giving from his office before the expiry of his term only by a special resolution
of Special Notice: of the company, after obtaining the previous approval of the Central
Section- 140 Government in that behalf in the prescribed manner:

(e) Variation of Section 48:(1) Where a share capital of the company is divided into
Shareholders' Rights: different classes of shares, the rights attached to the shares of any class
Section-48 may be varied with the consent in writing of the holders of not less than
three-fourths of the issued shares of that class or by means of a special
resolution passed at a separate meeting of the holders of the issued
shares of that class,–
(a) if provision with respect to such variation is contained in the
memorandum or articles of the company; or
(b) in the absence of any such provision in the memorandum or articles, if
such variation is not prohibited by the terms of issue of the shares of that
class:

(f) Investigation into Section 210: (1) Where the Central Government is of the opinion,
Affairs of Company: that it is necessary to investigate into the affairs of a company,—
(a) on the receipt of a report of the Registrar or inspector under section 208;
Section -210
(b) on intimation of a special resolution passed by a company
that the affairs of the company ought to be investigated; or
(c) in public interest, it may order an investigation into the affairs of the
company.

(g) Application to Section 241(1): Any member of a company who complains that –
Tribunal for Relief in
(a) the affairs of the company have been or are being conducted in a
Cases of Oppression, manner prejudicial to public interest or in a manner prejudicial or oppressive
etc: Section 241 to him or any other member or members or in a manner prejudicial to the
interests of the company; or
(b) the material change, not being a change brought about by, or in the
interests of, any creditors, including debenture holders or any class of
shareholders of the company, has taken place in the management or
control of the company, whether by an alteration in the Board of Directors,
or manager, or in the ownership of the company’s shares, or if it has no
share capital, in its membership, or in any other manner whatsoever, and
that by reason of such change, it is likely that the affairs of the company
will be conducted in a manner prejudicial to its interests or its members or
any class of members,
may apply to the Tribunal, provided such member has a right to apply
under section 244, for an order under this Chapter.
 Lesson 8 n Corporate Governance and Shareholders Rights 237

Power of the Section 242: (1) If, on any application made under section 241, the
Tribunal:Section-242 Tribunal is of the opinion–
(a) that the company’s affairs have been or are being conducted in a manner
prejudicial or oppressive to any member or members or prejudicial to public
interest or in a manner prejudicial to the interests of the company; and
*(b) that to wind up the company would unfairly prejudice such member
or members, but that otherwise the facts would justify the making of a
winding-up order on the ground that it was just and equitable that the
company should be wound up,
the Tribunal may, with a view to bringing to an end the matters complained
of, make such order as it thinks fit.

(h) Power to Nominate: (1) Every holder of securities of a company may, at any time, nominate, in
Section-72 the prescribed manner, any person to whom his securities shall vest in the
event of his death.

(i) Voting Rights: Section 47(1): Subject to the provisions of section 43, sub-section (2) of
Section-47 section 50 and sub-section (1) of section 188,—
(a) every member of a company limited by shares and holding equity
share capital therein, shall have a right to vote on every resolution placed
before the company; and
(b) his voting right on a poll shall be in proportion to his share in the paid-
up equity share capital of the company.

(j) Certificate of Shares: Section 46(1): 1) A certificate, 1[issued under the common seal, if any, of
Section -46 the company or signed by two directors or by a director and the Company
Secretary, wherever the company has appointed a Company Secretary],
specifying the shares held by any person, shall be prima facie evidence of
the title of the person to such shares.
(4) Where a share is held in depository form, the record of the depository
is the prima facie evidence of the interest of the beneficial owner.

Variation of Section 48:(1) Where a share capital of the company is divided into
Shareholders' Rights: different classes of shares, the rights attached to the shares of any class
Section-48 may be varied with the consent in writing of the holders of not less than
three-fourths of the issued shares of that class or by means of a special
resolution passed at a separate meeting of the holders of the issued
shares of that class,—
(a) if provision with respect to such variation is contained in the
memorandum or articles of the company; or
(b) in the absence of any such provision in the memorandum or articles, if
such variation is not prohibited by the terms of issue of the shares of that
class:
238 EP-GRMCE

5. Winding up of a company in case of oppression and mismanagement

(a) Application to Section 241(1): Any member of a company who complains that–
Tribunal for Relief in
(a) the affairs of the company have been or are being conducted in a
Cases of Oppression,
manner prejudicial to public interest or in a manner prejudicial or oppressive
etc: Section 241
to him or any other member or members or in a manner prejudicial to the
interests of the company; or
(b) the material change, not being a change brought about by, or in the
interests of, any creditors, including debenture holders or any class of
shareholders of the company, has taken place in the management or
control of the company, whether by an alteration in the Board of Directors,
or manager, or in the ownership of the company’s shares, or if it has no
share capital, in its membership, or in any other manner whatsoever, and
that by reason of such change, it is likely that the affairs of the company
will be conducted in a manner prejudicial to its interests or its members or
any class of members,
may apply to the Tribunal, provided such member has a right to apply
under section 244, for an order under this Chapter.
Power of the Section 242: (1) If, on any application made under section 241, the
Tribunal:Section-242 Tribunal is of the opinion—
(a) that the company’s affairs have been or are being conducted in a manner
prejudicial or oppressive to any member or members or prejudicial to public
interest or in a manner prejudicial to the interests of the company; and
*(b) that to wind up the company would unfairly prejudice such member
or members, but that otherwise the facts would justify the making of a
winding-up order on the ground that it was just and equitable that the
company should be wound up,
the Tribunal may, with a view to bringing to an end the matters complained
of, make such order as it thinks fit.

Rights of shareholders under SEBI (LODR) Regulations, 2015

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

PROMOTER / CONTROLLING SHAREHOLDER

A promoter is a person, firm or company who does the preliminary work for the formation of a company,
including framing its memorandum and articles of association, its incorporation process and initial raising of
capital for business. US Securities Exchange Commission defines the word ‘Promoter’ under Rule 405 of the
Securities Act, 1933. As per Rule 405 Promoter includes: (i) Any person who, acting alone or in conjunction
with one or more other persons, directly or indirectly takes initiative in founding and organizing the business or
enterprise of an issuer; or (ii) Any person who, in connection with the founding and organizing of the business
or enterprise of an issuer, directly or indirectly receives in consideration of services or property, or both services
and property, 10 percent or more of any class of securities of the issuer or 10 percent or more of the proceeds
from the sale of any class of such securities. However, a person who receives such securities or proceeds
 Lesson 8 n Corporate Governance and Shareholders Rights 239

either solely as underwriting commissions or solely in consideration of property shall not be deemed a promoter
within the meaning of this paragraph if such person does not otherwise take part in founding and organizing
the enterprise.
A promoter is neither a trustee nor an agent of the company but he has a fiduciary relationship with the company.
Fiduciary relation means a relation of trust and confidence.

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

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

SEBI (ICDR) 2018

The Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations,
2018, has defined the word(s) ‘promoter’ and ‘promoter groups’ as under;
In terms of Regulation 2(1)(oo), “promoter” shall include a person:
i) who has been named as such in a draft offer document or offer document or is identified by the issuer
in the annual return referred to in section 92 of the Companies Act, 2013; or
240 EP-GRMCE

ii) who has control over the affairs of the issuer, directly or indirectly whether as a shareholder, director or
otherwise; or
iii) in accordance with whose advice, directions or instructions the board of directors of the issuer is
accustomed to act:
Provided that nothing in sub-clause (iii) shall apply to a person who is acting merely in a professional capacity;
Provided further that a financial institution, scheduled commercial bank, [foreign portfolio investor other than
individuals, corporate bodies and family offices], mutual fund, venture capital fund, alternative investment fund,
foreign venture capital investor, insurance company registered with the Insurance Regulatory and Development
Authority of India or any other category as specified by the Board from time to time, shall not be deemed to be
a promoter merely by virtue of the fact that twenty per cent. or more of the equity share capital of the issuer is
held by such person unless such person satisfy other requirements prescribed under these regulations;
Further in terms of Regulation 2(1)(pp), ‘promoter group’ includes:
i) the promoter;
ii) an immediate relative of the promoter (i.e. any spouse of that person, or any parent, brother, sister or
child of the person or of the spouse); and
iii) in case promoter is a body corporate:
A) a subsidiary or holding company of such body corporate;
B) anybody corporate in which the promoter holds twenty per cent. or more of the equity share
capital; and/or anybody corporate which holds twenty per cent. or more of the equity share capital
of the promoter;
C) anybody corporate in which a group of individuals or companies or combinations thereof acting
in concert, which hold twenty per cent or more of the equity share capital in that body corporate
and such group of individuals or companies or combinations thereof also holds twenty per cent.
or more of the equity share capital of the issuer and are also acting in concert; and
iv) in case the promoter is an individual:
A) anybody corporate in which twenty per cent. or more of the equity share capital is held by the
promoter or an immediate relative of the promoter or a firm or Hindu Undivided Family in which
the promoter or any one or more of their relative is a member;
B) anybody corporate in which a body corporate as provided in (A) above holds twenty per cent. or
more, of the equity share capital; and
C) any Hindu Undivided Family or firm in which the aggregate share of the promoter and their
relatives is equal to or more than twenty per cent. of the total capital;
v) all persons whose shareholding is aggregated under the heading “shareholding of the promoter group”:
Provided that a financial institution, scheduled bank, foreign portfolio investor other than individuals, corporate
bodies and family offices, mutual fund, venture capital fund, alternative investment fund, foreign venture capital
investor, insurance company registered with the Insurance Regulatory and Development Authority of India or
any other category as specified by the Board from time to time, shall not be deemed to be promoter group
merely by virtue of the fact that twenty per cent. or more of the equity share capital of the promoter is held by
such person or entity:
Provided further that such financial institution, scheduled bank, foreign portfolio investor other than individuals,
corporate bodies and family offices, mutual fund, venture capital fund, alternative investment fund and foreign
 Lesson 8 n Corporate Governance and Shareholders Rights 241

venture capital investor insurance company registered with the Insurance Regulatory and Development
Authority of India or any other category as specified by the Board from time to time shall be treated as promoter
group for the subsidiaries or companies promoted by them or for the mutual fund sponsored by them.

Role and Liabilities of Promoters

The general role of promoters as discussed is applicable anywhere including in India. Companies Act, 2013
(Act) does not lay down specific duties of the promoter. However various sections impose liabilities on promoters
under certain conditions even when they are not directors or employees of the company.
l Officer who is in Default : Section 2(60) of the Act provides that an officer of the company who is in
default shall be liable to any penalty or punishment by way of imprisonment, fine or otherwise, means
any of the following officers of a company namely: (i) whole-time director; (ii) key managerial personnel;
(iii) where there is no key managerial personnel, such director or directors as specified by the Board in
this behalf and who has or have given his or their consent in writing to the Board to such specification,
or all the all the director, if no direction is so specified; (iv) any person who, under the immediate
authority of the Board or any key managerial personnel, is charged with any responsibility including
maintenance, filing or distribution of accounts or records, authorises, actively participates in, knowingly
permits, or knowingly fails to take active steps to prevent, any default; (v) any person in accordance
with whose advice, directions or instructions the Board of Directors of the company is accustomed to
act, other than a person who gives advice to the Board in a professional capacity; (vi) every director,
in respect of a contravention of any of the provisions of this Act, who is aware of such contravention by
virtue of the receipt by him of any proceedings of the Board or participation in such proceedings without
objecting to the same, or where such contravention had taken place with his consent or connivance;
(vii) in respect of the issue or transfer of any shares of a company, the share transfer agents, registrars
and merchant bankers to the issue or transfer.
The word ‘Officer has been explained in section 2(59) which " includes any director, manager or key
managerial personnel or any person in accordance with whose directions or instructions the Board of
Directors or any one or more of the directors is or are accustomed to act. Thus promoter if found in
default of provisions of the act may be penalised with fine or punished by imprisonment.
l Incorrect information during incorporation : Section 7(6) provides that without prejudice to the
provisions of sub-section (5) where, at any time after the incorporation of a company, it is proved that the
company has been got incorporated by furnishing any false or incorrect information or representation
or by suppressing any material fact or information in any of the documents or declaration filed or made
for incorporating such company, or by any fraudulent action, the promoters, the persons named as the
first directors of the company and the persons making declaration under clause (b) of sub-section (1)
shall each be liable for action under section 447.
l False or misleading Prospectus: Promoters who authorise a prospectus which is untrue or misleading
are subject to criminal liability (Sec 34) and civil liability and are required to pay compensation to every
person who has sustained loss or damage because of such prospectus. (Sec 35)
l Criminal Liability for Mis-statements in Prospectus: Section 34 provides that where a prospectus,
issued, circulated or distributed under this Chapter, includes any statement which is untrue or misleading
in form or context in which it is included or where any inclusion or omission of any matter is likely to
mislead, every person who authorizes the issue of such prospectus shall be liable under section 447:
Provided that nothing in this section shall apply to a person if he proves that such statement or omission
was immaterial or that he had reasonable grounds to believe, and did up to the time of issue of the
prospectus believe, that the statement was true or the inclusion or omission was necessary.
l Civil Liability for Mis-statements in Prospectus: Section 35(1) provides that where a person has
242 EP-GRMCE

subscribed for securities of a company acting on any statement included, or the inclusion or omission
of any matter, in the prospectus which is misleading and has sustained any loss or damage as a
consequence thereof, the company and every person who –
(a) is a director of the company at the time of the issue of the prospectus;
(b) has authorised himself to be named and is named in the prospectus as a director of the company,
or has agreed to become such director, either immediately or after an interval of time;
(c) is a promoter of the company;
(d) has authorised the issue of the prospectus; and
(e) is an expert referred to in sub-section (5) of section 26,
shall, without prejudice to any punishment to which any person may be liable under section 36, be liable
to pay compensation to every person who has sustained such loss or damage.
l Contravention of Provisions of Raising Equity Capital: Similarly if the promoters contravene any
provisions of the act while issuing prospectus or during private placement they may be penalised
or imprisoned. (Sec 26 and Sec 42) Section 26(9) which deals with the ‘Matters to be stated in the
prospectus’ states that if a prospectus is issued in contravention of the provisions of this section, the
company shall be punishable with fine which shall not be less than fifty thousand rupees but which may
extend to three lakh rupees and every person who is knowingly a party to the issue of such prospectus
shall be punishable with imprisonment for a term which may extend to three years or with fine which
shall not be less than fifty thousand rupees but which may extend to three lakh rupees or with both.
Section 42(10) which deals with the ‘Issue of shares on private placement basis’, provides that if a
company makes an offer or accepts monies in contravention of this section, the company, its promoters
and directors shall be liable for a penalty which may extend to the amount raised through the private
placement or two crore rupees, whichever is lower, and the company shall also refund all monies with
interest as specified in sub-section (6) to subscribers within a period of thirty days of the order imposing
the penalty.
l Improper Notice of General Meeting: Section 102 deals with the matters relating to “Statement to be
annexed to notice”. Its sub-section (5) states that if any default is made in complying with the provisions
of this section, every promoter, director, manager or other key managerial personnel who is in default
shall be punishable with fine which may extend to fifty thousand rupees or five times the amount of
benefit accruing to the promoter, director, manager or other key managerial personnel or any of his
relatives, whichever is higher.
l Co-operate with Official Liquidator: Section 284 deals in the matters relating to “Promoters, directors,
etc., to cooperate with Company Liquidator”. Its sub-section (2) provides that where any person, without
reasonable cause, fails to discharge his obligations under sub-section (1), he shall be punishable with
imprisonment which may extend to six months or with fine which may extend to fifty thousand rupees,
or with both.
l Fraudulent conduct of business: Section 339 deals with the matters relating to ‘Liability for fraudulent
conduct of business’. At the time of winding up if it is found that promoters conducted business of the
company with intent to defraud creditors of the company or any other persons or for any fraudulent
purpose the tribunal can hold the promoters personally liable, without any limitation for all or any of the
debts of the company. . Its sub-section (3) provides that where any business of a company is carried
on with such intent or for such purpose as is mentioned in sub-section (1), every person who was
knowingly a party to the carrying on of the business in the manner aforesaid, shall be liable for action
under section 447.
 Lesson 8 n Corporate Governance and Shareholders Rights 243

l Vacation of the office of director [Section 167(3)] and Resignation of director [Section 168(3)]:
Besides the first directors, if all directors resign or their offices are vacated the promoters may appoint
the required directors till the next general meeting. (Sec 167 and Sec 168)

MAJORITY AND MINORITY SHAREHOLDERS

When an individual, organization or group of shareholders together hold or control more than 50% shares of the
company they are known as majority shareholders. This gives them absolute control over the operations of the
company particularly selection of board by deciding who will be appointed as directors.
If a company has a majority shareholder then all other shareholders become minority shareholders as they hold
less than 50% shares. Let’s say company Y has two shareholders A with 51% and B with 49%, than A is the
majority shareholder and B the minority shareholder. On the other hand company X has shareholder C with
51% and 49 more shareholders with 1% shareholding each. Then C is the majority shareholder and all other
are minority shareholders.
Typically in Indian family firms promoters along with their family members control majority shares with other
shareholders holding small percentage of shares. India has a large number of family-owned listed companies
with promoter group holding 51% or more in most cases. They thus dominate and run the company in a way
that best protects their own interest.
Also, more often small shareholders don’t exercise their rights either due to unaware of their rights or inability to
participate in meetings. Small shareholders are dispersed across the country and travelling to the meeting venue
is time consuming and costly. Those with short term investment horizons are only looking at an opportunity of
making quick profits on their investment and thus have no desire to get involved in the affairs of the company.
Sometimes small shareholders do not bother to participate as they are of view that the cost of voting is more
than the benefit or their vote won’t matter as majority shareholder’s decision prevails.
As a result promoter group can have effective control or ‘controlling interest’ of the company with a small block
holding of only 15% to 30% and need not hold on to the entire 50% shares of the company.
The interests, goals, and investment horizons of majority shareholders may vary from minority shareholders.
Majority shareholder may decide on investing company surplus in a new risky venture whereas minority
shareholders may prefer return in the form of dividends. A proper balance of the rights of majority and minority
shareholders enables efficient functioning of the company.

PROTECTION OF RIGHTS OF SHAREHOLDERS/INVESTORS IN INDIA

Securities and Exchange Board of India (SEBI) is the capital market regulator and nodal agency in India who
regulates the security market. One of the objectives of the SEBI is to provide a degree of protection to the
investors and to safeguard their rights, steady flow of savings into market and to promote the development of
and regulate the securities market.

Investors should be safeguarded not only against frauds and cheating but also against the losses arising out of
unfair practices. Such practices may include:

l Deliberate misstatement in offer statements to investors

l Price manipulations

l Insider trading.

SEBI has issued many guidelines and regulations to regulate the capital market and to protect the investors.
Some of the guidelines are:

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

244 EP-GRMCE

l SEBI (Ombudsman) Regulation, 2003 – designed to redress the investor’s grievance against listed
companies or intermediaries or both for amicable settlement;

l SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations
2003 – to prohibit any fraudulent and unfair Trade Practices relating to securities market;

l SEBI (Prohibition of Insider Trading) Regulations, 2015 – The basic objective is to prohibit persons who
have more access to company’s information which can be used to benefit the individual or group of
individual or agency.

l In addition to the above, SEBI has set up a separate cell to address the grievances of investors - SEBI
Complaints Redressal System (SCORES).
l SEBI (Investor Protection and Education Fund) Regulations, 2009 to establish a Fund to be called the
Investor Protection and Education Fund.

INVESTOR EDUCATION & PROTECTION FUND

Investor Education and Protection Fund (IEPF) is established for promotion of investors’ awareness and
protection of the interests of investors under the provisions of section 125 of the Companies Act, 2013.

The IEPF Authority is entrusted with the responsibility of administration of the Investor Education Protection
Fund (IEPF), make refunds of shares, unclaimed dividends, matured deposits/debentures etc. to investors and
to promote awareness among investors.
As per Section 125(2) of the Companies Act 2013, following shall be credited to the Fund
(a) the amount given by the Central Government by way of grants after due appropriation made by
Parliament by law in this behalf for being utilised for the purposes of the Fund;
(b) donations given to the Fund by the Central Government, State Governments, companies or any other
institution for the purposes of the Fund;
(c) the amount in the Unpaid Dividend Account of companies transferred to the Fund under sub-section (5)
of section 124;
(d) the amount in the general revenue account of the Central Government which had been transferred to
that account under sub-section (5) of section 205A of the Companies Act, 1956, as it stood immediately
before the commencement of the Companies (Amendment) Act, 1999, and remaining unpaid or
unclaimed on the commencement of this Act;
(e) the amount lying in the Investor Education and Protection Fund under section 205C of the Companies
Act, 1956;
(f) the interest or other income received out of investments made from the Fund;
(g) the amount received under sub-section (4) of section 38;
(h) the application money received by companies for allotment of any securities and due for refund;
(i) matured deposits with companies other than banking companies;
(j) matured debentures with companies;
(k) interest accrued on the amounts referred to in clauses (h) to (j);
(l) sale proceeds of fractional shares arising out of issuance of bonus shares, merger and amalgamation
for seven or more years;
(m) redemption amount of preference shares remaining unpaid or unclaimed for seven or more years; and
 Lesson 8 n Corporate Governance and Shareholders Rights 245

(n) such other amount as may be prescribed:

Provided that no such amount referred to in clauses (h) to (j) shall form part of the Fund unless such
amount has remained unclaimed and unpaid for a period of seven years from the date it became due
for payment.
Section 125(3) -the Fund shall be utilised for –
(a) The refund in respect of unclaimed dividends, matured deposits, matured debentures, the application
money due for refund and interest thereon;
(b) Promotion of investors’ education, awareness and protection;
(c) Distribution of any disgorged amount among eligible and identifiable applicants for shares or debentures,
shareholders, debenture-holders or depositors who have suffered losses due to wrong actions by any
person, in accordance with the orders made by the Court which had ordered disgorgement;
(d) Reimbursement of legal expenses incurred in pursuing class action suits under sections 37 and 245 by
members, debenture-holders or depositors as may be sanctioned by the Tribunal; and
(e) Any other purpose incidental thereto,
in accordance with such rules as may be prescribed.

INVESTOR ASSOCIATIONS
SEBI as a part of undertaking various investor awareness and education activities, has recognised organisations
working in the area of investor education / awareness, conducting awareness workshops and rendering
assistance to individuals/investors in the area of grievance redressal as “Investors’ Associations”.
The recognized Investors’ Associations supplements SEBI’s initiatives in the area of Investor Education and
Protection. SEBI has issued “Operational Guidelines (Investors’ Associations), 2019” to facilitate and regulate
the functioning of SEBI recognised Investors’ Associations which came into force from February 1, 2019.
“Recognised Investors’ Association” means an entity rendering services in the area of investor education
and awareness, conducting awareness workshops and assisting individuals/investors in redressal of
their grievances and recognized by SEBI as an Investors’ Association. The Investors’ Association shall
conduct workshops under SEBI IEPF in the state in which their registered office is located subject to
prior approval from the respective SEBI office at least 5 working days prior to date of the workshop. The
Investors’ Associations are eligible to claim reimbursement of the expenses incurred from SEBI subject to
the conditions specified.

PROTECTION OF RIGHTS OF MINORITY SHAREHOLDERS

The OECD Principles are presented in six different chapters:
(I) Ensuring the basis for an effective corporate governance framework;
(II) The rights and equitable treatment of shareholders and key ownership functions;
(III) Institutional investors, stock markets, and other intermediaries;
(IV) The role of stakeholders;
(V) Disclosure and transparency; and
(VI) The responsibilities of the board.
According to OECD principles (OECD, 2015) ‘the corporate governance framework should protect and facilitate
the exercise of shareholders’ rights and ensure the equitable treatment of all shareholders, including minority
246 EP-GRMCE

and foreign shareholders. All shareholders should have the opportunity to obtain effective redress for violation
of their rights.” As an equity shareholder, minority have the right to:
l participate in the profits of the company
l information about the company
l participation in general shareholder meetings and influence corporate actions through voting on
proposals
Companies Act, 2013 provides for some measures to protect the interest of minority shareholders which are
discussed below-
1) Oppression and Mismanagement : Part XVI consisting of Sections from 241 to 246 of Companies
Act, 2013 deals with prevention of Oppression and Mismanagement. When a shareholder’s rights are
violated it can be termed as oppression. Oppression occurs when the majority shareholders misuse
their rights and take company’s business as their personal property resulting in loss to the minority
shareholders.
Conditions for Oppression and Mismanagement: Section 241(1) provides that any member of a
company who complains that:
(a) the affairs of the company have been or are being conducted in a manner
● prejudicial to public interest or
● prejudicial or oppressive to any member or members or
● prejudicial to the interests of the company;
OR
(b) material change, not being a change brought about by, or in the interests of, any creditors,
including debenture holders or any class of shareholders of the company, has taken place in the
management or control of the company whether by
● an alteration in the Board of Directors, or manager, or
● in the ownership of the company’s shares, or if it has no share capital, in its membership, or
● in any other manner whatsoever, and that by reason of such change, it is likely that the affairs
of the company will be conducted in a manner prejudicial to its interests or its members or
any class of members,
may apply to the Tribunal, provided such member has a right to apply under section 244, for an order
under this Chapter.
(2) The Central Government, if it is of the opinion that the affairs of the company are being conducted in
a manner prejudicial to public interest, it may itself apply to the Tribunal for an order under this Chapter.
(3) Where in the opinion of the Central Government there exist circumstances suggesting that–
(a) any person concerned in the conduct and management of the affairs of a company is or has
been in connection therewith guilty of fraud, misfeasance, persistent negligence or default in
carrying out his obligations and functions under the law or of breach of trust;
(b) the business of a company is not or has not been conducted and managed by such person
in accordance with sound business principles or prudent commercial practices;
(c) a company is or has been conducted and managed by such person in a manner which is
likely to cause, or has caused, serious injury or damage to the interest of the trade, industry
 Lesson 8 n Corporate Governance and Shareholders Rights 247

or business to which such company pertains; or

(d) the business of a company is or has been conducted and managed by such person with
intent to defraud its creditors, members or any other person or otherwise for a fraudulent or
unlawful purpose or in a manner prejudicial to public interest,
the Central Government may initiate a case against such person and refer the same to the Tribunal
with a request that the Tribunal may inquire into the case and record a decision as to whether or not
such person is a fit and proper person to hold the office of director or any other office connected with
the conduct and management of any company.
(4) The person against whom a case is referred to the Tribunal under sub-section (3), shall be joined as
a respondent to the application.
(5) Every application under sub-section (3) –
(a) shall contain a concise statement of such circumstances and materials as the Central
Government may consider necessary for the purposes of the inquiry; and
(b) shall be signed and verified in the manner laid down in the Code of Civil Procedure, 1908,
for the signature and verification of a plaint in a suit by the Central Government.
Relief Measures : Section 242 provides that if, on any application made under section 241, the Tribunal
is of the opinion –
(a) that the company’s affairs have been or are being conducted in a manner prejudicial or oppressive
to any member or members or prejudicial to public interest or in a manner prejudicial to the
interests of the company; and
(b) that to wind up the company would unfairly prejudice such member or members, but that otherwise
the facts would justify the making of a winding up order on the ground that it was just and equitable
that the company should be wound up,
The Tribunal may, with a view to bringing to an end the matters complained of, make such order as it
thinks fit.
(2) Without prejudice to the generality of the powers under sub-section (1), an order under that sub-
section may provide for –
(a) the regulation of conduct of affairs of the company in future;
(b) the purchase of shares or interests of any members of the company by other members thereof or
by the company;
(c) in the case of a purchase of its shares by the company as aforesaid, the consequent reduction of
its share capital;
(d) restrictions on the transfer or allotment of the shares of the company;
(e) the termination, setting aside or modification, of any agreement, howsoever arrived at, between the
company and the managing director, any other director or manager, upon such terms and conditions
as may, in the opinion of the Tribunal, be just and equitable in the circumstances of the case;
(f) the termination, setting aside or modification of any agreement between the company and any
person other than those referred to in clause (e):
Provided that no such agreement shall be terminated, set aside or modified except after due
notice and after obtaining the consent of the party concerned.
(g) the setting aside of any transfer, delivery of goods, payment, execution or other act relating
248 EP-GRMCE

to property made or done by or against the company within three months before the date of
the application under this section, which would, if made or done by or against an individual, be
deemed in his insolvency to be a fraudulent preference;
(h) removal of the managing director, manager or any of the directors of the company;
(i) recovery of undue gains made by any managing director, manager or director during the period of
his appointment as such and the manner of utilisation of the recovery including transfer to Investor
Education and Protection Fund or repayment to identifiable victims;
(j) the manner in which the managing director or manager of the company may be appointed
subsequent to an order removing the existing managing director or manager of the company
made under clause (h);
(k) appointment of such number of persons as directors, who may be required by the Tribunal to
report to the Tribunal on such matters as the Tribunal may direct;
(l) imposition of costs as may be deemed fit by the Tribunal;
(m) any other matter for which, in the opinion of the Tribunal, it is just and equitable that provision
should be made.
2) Class Action Suit : American depositors of Satyam were able to receive $125 million in settlement
because of strong framework of class action in USA while Indian investors lost all their money.
Hence Companies Act, 2013 vide Section 245 has introduced the new concept of class action suit.
This section gives additional rights to minorities in case of oppression and mismanagement. A
class action is a legal proceeding in which shareholders bring suit as a group against the company
or its directors or officers and the judgment or settlement received from the suit covers all the
shareholders equally.
Section 245. (1) Such number of member or members, depositor or depositors or any class of them, as
the case may be, as are indicated in sub-section (2) may, if they are of the opinion that the management
or conduct of the affairs of the company are being conducted in a manner prejudicial to the interests
of the company or its members or depositors, file an application before the Tribunal on behalf of the
members or depositors for seeking all or any of the following orders, namely: –
(a) to restrain the company from committing an act which is ultra vires the articles or memorandum of
the company;
(b) to restrain the company from committing breach of any provision of the company’s memorandum
or articles;
(c) to declare a resolution altering the memorandum or articles of the company as void if the resolution
was passed by suppression of material facts or obtained by mis-statement to the members or
depositors;
(d) to restrain the company and its directors from acting on such resolution;
(e) to restrain the company from doing an act which is contrary to the provisions of this Act or any
other law for the time being in force;
(f) to restrain the company from taking action contrary to any resolution passed by the members;
(g) to claim damages or compensation or demand any other suitable action from or against;
(i) the company or its directors for any fraudulent, unlawful or wrongful act or omission or
conduct or any likely act or omission or conduct on its or their part;
(ii) the auditor including audit firm of the company for any improper or misleading statement
 Lesson 8 n Corporate Governance and Shareholders Rights 249

of particulars made in his audit report or for any fraudulent, unlawful or wrongful act or
conduct; or
(iii) any expert or advisor or consultant or any other person for any incorrect or misleading
statement made to the company or for any fraudulent, unlawful or wrongful act or conduct or
any likely act or conduct on his part;
(h) to seek any other remedy as the Tribunal may deem fit.
(2) Where the members or depositors seek any damages or compensation or demand any other
suitable action from or against an audit firm, the liability shall be of the firm as well as of each partner
who was involved in making any improper or misleading statement of particulars in the audit report or
who acted in a fraudulent, unlawful or wrongful manner.
(3)(i)The requisite number of members provided in sub-section (1) shall be as under:—
(a) in the case of a company having a share capital, not less than one hundred members of the
company or not less than such percentage of the total number of its members as may be
prescribed, whichever is less, or any member or members holding not less than such percentage
of the issued share capital of the company as may be prescribed, subject to the condition that the
applicant or applicants has or have paid all calls and other sums due on his or their shares;
(b) in the case of a company not having a share capital, not less than one-fifth of the total number of
its members.
(ii) The requisite number of depositors provided in sub-section (1) shall not be less than one hundred
depositors or not less than such percentage of the total number of depositors as may be prescribed,
whichever is less, or any depositor or depositors to whom the company owes such percentage of total
deposits of the company as may be prescribed.
With section 245, hopefully, in genuine cases of oppression minority shareholders will be empowered
and will be able to come together to institute suits to protect their rights and will be able to claim
damages as well from the company, directors, auditors, experts and advisors. An individual shareholder
may find it difficult to file a suit against the company and even if he does so, may not be able to enforce
his rights but may have a much better chance when filling a combined suit with similarly aggrieved
shareholders.
The National Company Law Tribunal (NCLT) — in its order in the Cyrus Mistry versus Tata Sons case,
which was released on July 12, 2018 while upholding the removal of Mistry as chairman has observed
that:
“Whoever invested more shall have his say over the affairs of the company. ... It is obvious that minority
sailing along with majority is bound by the rule of majority. Otherwise, it will become curtailment of the
rights of major shareholders.”
A balance is to be struck between the rule of the majority and the rights of the minority. The fundamental
principle on which shareholders democracy is based is that the rule of majority shall prevail. However,
it is also necessary to ensure that this power of the majority is placed within reasonable bounds and
does not result in oppression of the minority and mismanagement of the company. Therefore special
provisions have been provided in the Companies Act for minority shareholders to voice their opinions
and protect their interests.
3) Special Rights: As ‘the will of the majority prevails’ the decision of majority shareholders in a company
binds the minority. They exercise their rights without considering the interests of minority. They may
misuse their power to exploit the rights of minority. Hence Companies Act, 2013 provides some special
powers to small shareholders to prevent exploitation of their rights.
250 EP-GRMCE

4) Representation on Board: Section 151 read with Rule 7 of the Companies (Appointment and
Qualification of Directors) Rules, 2014, allows ‘small shareholders’ (Explanation to section 151 provides
that “small shareholders” means a shareholder holding shares of nominal value of not more than twenty
thousand rupees or such other sum as may be prescribed) which means a shareholder holding shares
of nominal value of not more than twenty thousand rupees) of listed companies to appoint one director
elected by such small shareholders. Rule 7(1) provides that a listed company, may upon notice of not
less than 1000 small shareholders or 1/10th of total number of shareholders, whichever is lower have
a small shareholder’s directed elected by the small shareholders.
5) E-Voting: Voting by electronic means is a facility given to the members of a company with more
than 1000 shareholders to cast their votes on the resolutions through electronic mode. It provides an
opportunity to shareholders residing in far-flung area to take part in the decision making process of the
company. Shareholders can therefore exercise their voting rights even when they cannot be physically
present for meetings and without spending too much time or money.
6) Exit Rights: In the event of an acquirer, or a person acting in concert with such acquirer, becoming
registered holder of 90% or more of the issued equity share capital of a company, or in the event of
any person or group of persons becoming ninety per cent. majority or holding 90% of the issued equity
share capital of a company, by virtue of an amalgamation, share exchange, conversion of securities or
for any other reason, such acquirer, person or group of persons, as the case may be, shall notify the
company of their intention to buy the remaining equity shares [Section 236(1)].
7) Related Party Transactions: If the company is entering into a contract or agreement with majority
shareholder group, it will be deemed as related party transaction and if the transaction is not at arm’s
length, minority shareholders through a special resolution can approve or disapprove the transaction.
Majority Shareholders being interested party will not be able to vote so the minority shareholders will
have the final say. (Sec 188)
8) Application for Relief: Not less than 100 shareholders or one-tenth of the shareholders in case of a
company having share capital or one-fifth members when the company has no share capital can apply
to the National Company Law Tribunal for relief, if they are of the opinion that they are being oppressed
or company is being mismanaged. National Company Law tribunal (NCLT) is a quasi-judicial body set
up by the government of India under Section 408 of Companies Act 2013 to adjudicate issues relating
to Indian companies.

INSTITUTIONAL INVESTORS AND THEIR ROLE IN PROMOTING GOOD CORPORATE

GOVERNANCE
Institutional investors are those financial institutions which accept funds from other parties for investment by the
institution in its own name but on their clients/beneficiaries behalf. The different kinds of institutional investors
are banks, development financial institutions, insurance companies, mutual funds, foreign institutional investor,
provident funds and proposed private fund managers. They are now significant players in the global economy.
Institutional investors are entrusted with funds from the public and most of the household income is with these
institutional investors. They are safe keepers of public money and act in a fiduciary capacity. They are obligated
to take decisions which best serve the companies’ interests and steer the company to function in an ethical
manner.
There is a mutual relationship between institutional investors and the corporate governance of a company.
The corporate governance practices followed by a company are very important to determine the number of
institutional investors who would like to invest in the firm and the extent to which they would like to invest.
Most governance sensitive institutional investors would like to invest in firms which already have their governance
mechanisms in place. Institutions with corporate governance mechanisms in place are better to invest in as this
 Lesson 8 n Corporate Governance and Shareholders Rights 251

would mean decreased monitoring costs. The institutional investors would not have to play a proactive role in
monitoring the practices followed by the company.
The Institutional Investors use different tools to assess the health of Company before investing resources in it.
Some of the important tools are discussed as under:
 One-to-one meetings: The meetings between institutional investors and companies are extremely
important as a means of communication between the two parties. This is one clear example of the way
that individual investors are at a disadvantage to institutional investors as corporate management will
usually only arrange such meetings with large investors who are overwhelmingly institutional investors.
A company will usually arrange to meet with its largest institutional investors on a one-to-one basis
during the course of the year.
 Voting: The right to vote which is attached to voting shares (as opposed to non-voting shares) is a
basic prerogative of share ownership, and is particularly important given the division of ownership
(shareholders) and control (directors) in the modern corporation. The right to vote can be seen as
fundamental tools for some element of control by shareholders. The institutional investors can register
their views by postal voting, or, vote electronically where this facility is available. Most of the large
institutional investors now have a policy of trying to vote on all issues which may be raised at their
investee company’s AGM. Some may vote directly on all resolutions, others may appoint a proxy (which
may be a board member). Generally, an institutional investor will try to sort out any contentious issues
with management ‘behind the scenes’, however if this fails, then they may abstain from voting on a
particular issue (rather than voting with incumbent management as they generally would) or they may
actually vote against a resolution. In this case, they would generally inform the firm of their intention
to vote against. Corporate governance issues tend to be the most contentious, particularly directors’
remuneration and lengths of contract.
 Focus lists: A number of institutional investors have established ‘focus lists’ whereby they target
underperforming companies and include them on a list of companies which have underperformed a
main index, such as Standard and Poor’s. Under performing index would be a first point of identification,
other factors would include not responding appropriately to the institutional investor’s inquiries regarding
underperformance, and not taking account of the institutional investor’s views. After being put on the
focus list, the companies often receive unwanted, attention of the institutional investors who may seek
to change various directors on the board.
 Corporate governance rating systems: With the increasing emphasis on corporate governance
across the globe, it is perhaps not surprising that a number of corporate governance rating systems have
been developed. Examples of such firms which have developed corporate governance rating systems
are Deminor, Standard and Poor’s, and Governance Metrics International (GMI). The rating system
cover several markets, for example, Deminor has tended to concentrate on European companies whilst
Standard and Poor’s have used their corporate governance rating system in quite different markets,
for example, Russia. GMI ratings cover a range of countries including the US, various countries in the
Asia-Pacific region and Europe. These corporate governance rating systems should be of benefit to
investors, both potential and those presently invested, and to the companies themselves.
In turn, the ratings will also be useful to governments in identifying perceived levels of corporate governance
in their country compared to other countries in their region, or outside it, whose companies may be competing
for limited foreign investment. In emerging market countries in particular, those companies with a corporate
governance infrastructure will, ceteris paribus, be less subject to cronyism and its attendant effects on corporate
wealth. These companies would tend to be more transparent and accountable, and hence more attractive to
foreign investors.
A corporate governance rating could be a powerful indicator of the extent to which a company currently is
252 EP-GRMCE

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

UK Stewardship Code
The Stewardship Code is a part of UK company law concerning principles that institutional investors are
expected to follow. Stewardship aims to promote the long term success of companies in such a way that the
ultimate providers of capital also prosper.
In publicly listed companies responsibility for stewardship is shared. The primary responsibility rests with the
board of the company, which oversees the actions of its management. Investors in the company also play an
important role in holding the board to account for the fulfilment of its responsibilities.
The UK Corporate Governance Code identifies the principles that underlie an effective board. The UK
Stewardship Code sets out the principles of effective stewardship by investors. In so doing, the Code assists
institutional investors better to exercise their stewardship responsibilities, which in turn gives force to the
“comply or explain” system.
For investors, stewardship is more than just voting. Activities may include monitoring and engaging with
companies on matters such as strategy, performance, risk, capital structure, and corporate governance,
 Lesson 8 n Corporate Governance and Shareholders Rights 253

including culture and remuneration. Engagement is purposeful dialogue with companies on these matters as
well as on issues that are the immediate subject of votes at general meetings.
The UK Stewardship Code 2020 is a substantial and ambitious revision to the 2012 edition of the Code which
takes effect from 1 January 2020.
The new Code sets high expectations of those investing money on behalf of UK savers and pensioners.
In particular, the new Code establishes a clear benchmark for stewardship as the responsible allocation,
management and oversight of capital to create long-term value for clients and beneficiaries leading to sustainable
benefits for the economy, the environment and society.
There is a strong focus on the activities and outcomes of stewardship, not just policy statements. There are
new expectations about how investment and stewardship is integrated, including environmental, social and
governance (ESG) issues. The Code asks investors to explain how they have exercised stewardship across
asset classes. For example, for listed equity, fixed income, private equity, infrastructure investments, and in
investments outside the UK.
The Code consists of 12 Principles for asset managers and asset owners, and six Principles for service
providers. These are supported by reporting expectations which indicate the information that should be publicly
reported in order to become a signatory.
UK Stewardship Code 2020: Twelve Principles for asset managers and asset owners:
Asset owners and asset managers cannot delegate their responsibility and are accountable for effective
stewardship. Stewardship activities include investment decision-making, monitoring assets and service
providers, engaging with issuers and holding them to account on material issues, collaborating with others, and
exercising rights and responsibilities. Capital is invested in a range of asset classes over which investors have
different terms and investment periods, rights and levels of influence. Signatories should use the resources,
rights and influence available to them to exercise stewardship, no matter how capital is invested.

Principle 1 Signatories’ purpose, investment beliefs, strategy, and culture enable stewardship that
creates longterm value for clients and beneficiaries leading to sustainable benefits for the
economy, the environment and society.

Principle 2 Signatories’ governance, resources and incentives support stewardship.

Principle 3 Signatories manage conflicts of interest to put the best interests of clients and beneficiaries
first.

Principle 4 Signatories identify and respond to market-wide and systemic risks to promote a well-
functioning financial system.

Principle 5 Signatories review their policies, assure their processes and assess the effectiveness of
their activities.

Principle 6 Signatories take account of client and beneficiary needs and communicate the activities and
outcomes of their stewardship and investment to them.

Principle 7 Signatories systematically integrate stewardship and investment, including material

environmental, social and governance issues, and climate change, to fulfil their responsibilities.

Principle 8 Signatories monitor and hold to account managers and/or service providers.

Principle 9 Signatories engage with issuers to maintain or enhance the value of assets.

Principle 10 Signatories, where necessary, participate in collaborative engagement to influence issuers.

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Principle 11 Signatories, where necessary, escalate stewardship activities to influence issuers.

Principle 12 Signatories actively exercise their rights and responsibilities.

UK Stewardship Code 2020:Six Principles for service providers:

Service providers play a key role in the investment community as they provide services that support clients to
fulfil their stewardship responsibilities. Service providers applying these Principles include, but are not limited to,
investment consultants, proxy advisors, and data and research providers. Activities service providers undertake
to support their clients’ stewardship may include, but are not limited to, engagement, voting recommendations
and execution, data and research provision, advice, and provision of reporting frameworks and standards.

Principle 1 Signatories’ purpose, strategy and culture enable them to promote effective stewardship.

Principle 2 Signatories’ governance, workforce, resources and incentives enable them to promote
effective stewardship.

Principle 3 Signatories identify and manage conflicts of interest and put the best interests of clients first.

Principle 4 Signatories identify and respond to market-wide and systemic risks to promote a well-
functioning financial system.

Principle 5 Signatories support clients’ integration of stewardship and investment, taking into account,
material environmental, social and governance issues, and communicating what activities
they have undertaken.

Principle 6 Signatories review their policies and assure their processes.

Principles for Responsible Investment (PRI)

Responsible investment is an approach to investing that aims to incorporate environmental, social and
governance (ESG) factors into investment decisions, to better manage risk and generate sustainable, long-term
returns. The PRI is the world’s leading proponent of responsible investment.
It works to understand the investment implications of environmental, social and governance (ESG) factors and
to support its international network of investor signatories in incorporating these factors into their investment
and ownership decisions. The PRI acts in the long-term interests of its signatories, of the financial markets and
economies in which they operate and ultimately of the environment and society as a whole.
The PRI is truly independent. It encourages investors to use responsible investment to enhance returns and
better manage risks, but  does not operate  for its own profit; it engages with global policymakers  but is not
associated with any government; it is supported by, but not part of, the United Nations.
The six Principles for Responsible Investment are a voluntary and aspirational set of investment principles that
offer a menu of possible actions for incorporating ESG issues into investment practice.
The Principles were developed by investors, for investors. In implementing them, signatories contribute to
developing a more sustainable global financial system.
Principle 1: We will incorporate ESG issues into investment analysis and decision-making processes.
Possible actions:
l Address ESG issues in investment policy statements.
l Support development of ESG-related tools, metrics, and analyses.
l Assess the capabilities of internal investment managers to incorporate ESG issues.
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l Assess the capabilities of external investment managers to incorporate ESG issues.

l Ask investment service providers (such as financial analysts, consultants, brokers, research firms, or
rating companies) to integrate ESG factors into evolving research and analysis.

l Encourage academic and other research on this theme.

l Advocate ESG training for investment professionals.

Principle 2: We will be active owners and incorporate ESG issues into ownership policies and practices.

Possible actions:

l Develop and disclose an active ownership policy consistent with the Principles.

l Exercise voting rights or monitor compliance with voting policy (if outsourced).

l Develop an engagement capability (either directly or through outsourcing).

l Participate in the development of policy, regulation, and standard setting (such as promoting and
protecting shareholder rights).

l File shareholder resolutions consistent with long-term ESG considerations.

l Engage with companies on ESG issues.

l Participate in collaborative engagement initiatives.

l Ask investment managers to undertake and report on ESG-related engagement.

Principle 3: We will seek appropriate disclosure on ESG issues by the entities in which they invest.

Possible actions:

l Ask for standardised reporting on ESG issues (using tools such as the Global Reporting Initiative).

l Ask for ESG issues to be integrated within annual financial reports.

l Ask for information from companies regarding adoption of/adherence to relevant norms, standards,
codes of conduct or international initiatives (such as the UN Global Compact).

l Support shareholder initiatives and resolutions promoting ESG disclosure.

Principle 4: We will promote acceptance and implementation of the Principles within the investment industry.

Possible actions:

l Include Principles-related requirements in requests for proposals (RFPs).

l Align investment mandates, monitoring procedures, performance indicators and incentive structures
accordingly (for example, ensure investment management processes reflect long-term time horizons
when appropriate).

l Communicate ESG expectations to investment service providers.

l Revisit relationships with service providers that fail to meet ESG expectations.

l Support the development of tools for benchmarking ESG integration.

l Support regulatory or policy developments that enable implementation of the Principles.

Principle 5: We will work together to enhance effectiveness in implementing the Principles.

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Possible actions:

l Support/participate in networks and information platforms to share tools, pool resources, and make use
of investor reporting as a source of learning.

l Collectively address relevant emerging issues.

l Develop or support appropriate collaborative initiatives.

Principle 6: We will each report on their activities and progress towards implementing the Principles.

Possible actions:

l Disclose how ESG issues are integrated within investment practices.

l Disclose active ownership activities (voting, engagement, and/or policy dialogue).

l Disclose what is required from service providers in relation to the Principles.

l Communicate with beneficiaries about ESG issues and the Principles.

l Report on progress and/or achievements relating to the Principles using a comply-or-explain approach.

l Seek to determine the impact of the Principles.

l Make use of reporting to raise awareness among a broader group of stakeholders

Code for Responsible Investing in South Africa (CRISA)

The Code for Responsible Investing in South Africa (CRISA) became effective on 1st February, 2012. The
Code is endorsed by the Institute of Directors in Southern Africa, The Principal Officers Association, The
Association for Savings and Investment South Africa, The Financial Services Board and The Johannesburg
Stock Exchange.

The Code is intended to give guidance on how the institutional investor should execute investment analysis and
investment activities and exercise rights so as to promote sound governance.

The purpose of CRISA is to form part of an effective governance framework in South Africa. CRISA applies to:

l Institutional investors as asset owners, for example, pension funds and insurance companies.

l Service providers of institutional investors, for example, asset and fund managers and consultants.

Principles of CRISA1 :

Principle 1: An institutional investor should incorporate sustainability considerations, including ESG, into its
investment analysis and investment activities as part of the delivery of superior risk-adjusted returns to the
ultimate beneficiaries.

1. An institutional investor should develop a policy on how it incorporates sustainability considerations,

including ESG, into its investment analysis and activities. The matters to be dealt with in the policy
should include, but not necessarily be limited to, an assessment of :

(a) the sum of tangible and intangible assets of a company;

(b) the quality of the company’s integrated reporting dealing with the long-term sustainability of the
company’s strategy and operations. If integrated reporting has not been applied, due enquiry
should be made on the reasons for this;

1. https://cdn.ymaws.com/www.iodsa.co.za/resource/resmgr/crisa/crisa_19_july_2011.pdf
 Lesson 8 n Corporate Governance and Shareholders Rights 257

(c) the manner in which the business of the company is being conducted based on, for example,
alignment with targeted investment strategies of the institutional investor and the code of conduct
and supply chain code of conduct of the company.

2. An institutional investor should ensure implementation of the policy on sustainability considerations,

including ESG, and establish processes to monitor compliance with the policy.

Principle 2: An institutional investor should demonstrate its acceptance of ownership responsibilities in its
investment arrangements and investment activities

3. An institutional investor should develop a policy dealing with ownership responsibilities. The policy
should include, but not necessarily be limited to the following:

(a) guidelines to be applied (e.g. King III) for the identification of sustainability concerns, including
ESG, at a company.

(b) mechanisms of intervention and engagement with the company when concerns have been
identified and the means of escalation of activities as a shareholder if these concerns cannot be
resolved.

(c) voting at shareholder meetings, including the criteria that are used to reach voting decisions and
for public disclosure of full voting records

4. Even if passive investment strategies are followed, active voting policies incorporating sustainability
considerations, including ESG, should still be followed.

5. An institutional investor should ensure implementation of the policy on ownership responsibilities and
establish processes to monitor compliance with the policy.

6. Where the institutional investor outsources to third party service providers, the onus is on the institutional
investor as owner to ensure that the mandate deals with sustainability concerns, including ESG, and
that there are processes to oversee that the service providers apply the provisions of CRISA when
executing their mandate.

7. The institutional investor should introduce controls that prevent it from receiving price sensitive
information regarding a company or acting on such information in a manner that makes it an ‘insider’ in
terms of the Securities Services Act No 36 of 2004. These controls should be applied when engaging
with the company, and when seeking any information it requires, whether this is to fulfil its duties or to
act within the guidelines of CRISA.

Principle 3: Where appropriate, institutional investors should consider a collaborative approach to promote
acceptance and implementation of the principles of CRISA and other codes and standards applicable to
institutional investors.

8. An institutional investor should consider a collaborative approach to work jointly with other shareholders,
service providers, regulators, investee companies and ultimate beneficiaries to, where appropriate,
promote acceptance and implementation of CRISA and sound governance. Parties should be aware of
the consequences of acting in concert in terms of applicable legislation.

Principle 4: An institutional investor should recognise the circumstances and relationships that hold a potential
for conflicts of interest and should pro-actively manage these when they occur.

9. All of the circumstances and relationships that could potentially lead to a conflict of interest should be
identified by the institutional investor and a policy for preventing and managing these conflicts should
be developed.
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10. An institutional investor should ensure implementation of the policy on prevention and management of
conflicts of interests and establish processes to monitor compliance with this policy.

Principle 5: Institutional investors should be transparent about the content of their policies, how the policies are
implemented and how CRISA is applied to enable stakeholders to make informed assessments.
11. An institutional investor should regularly engage with its stakeholder groupings, including investee
companies and the ultimate beneficiaries, in order to, inter alia, identify and understand information
requirements and, at least once a year, fully and publicly disclose to what extent it applies to CRISA.
12. If an institutional investor does not apply some or any of the principles or recommendations in CRISA
or applies them differently from how they are set out, it should in a transparent manner explain the
reasons for this and the alternative measures employed.
13. The disclosure by institutional investors should be made public in order that it is readily accessible by
all stakeholders, including investee companies and the ultimate beneficiaries.
14. The following policies should be disclosed publicly upon CRISA becoming effective and subsequently
in the event of changes to the policies:
(a) policy on incorporation of sustainability considerations, including ESG, into investment analysis
and investment activities with reference to the matters as set out under Principle 1.
(b) policy in regard to ownership responsibilities, including voting as set out under Principle 2.
(c) policy on identification, prevention and management of conflicts of interests as set out under
Principle 4.
15. Non-disclosure of voting records by an institutional investor and its service providers precludes the
investee company the opportunity to engage with the institutional investor or its service providers
regarding the vote exercised. Therefore an institutional investor and its service providers should,
before agreeing to a proxy or other instruction to keep voting records confidential, carefully consider
the reasons put forward to justify confidentiality.
16. Disclosure of policies should be reinforced by clear explanation of how the commitments made in the
policies were practically implemented and monitored during the reporting period. 17. There should be
disclosure by an institutional investor of processes to ensure that its service providers apply CRISA as
well as the requirements of the institutional investor’s policies.

California Public Employees’ Retirement System (CalPERS)

Established in 1932, The California Public Employees’ Retirement System (CalPERS) is the largest U.S. public
pension fund, with fund market value of $372.6 billion and has paid $24.2 billion in benefits during 2018-19.
Its mission is to deliver retirement and health care benefits to members and their beneficiaries. The pension
fund serves more than 1.9 million members in the CalPERS retirement system and administers benefits for 1.5
million members and their families in their health program.
The CalPERS Board of Administration is guided by the CalPERS Board’s Investment Committee, Investment
Beliefs and Core Values: Quality, Respect, Accountability, Integrity, Openness, and Balance. CalPERS
management and more than 380 Investment Office staff carry out the daily activities of the investment program.
Our goal is to efficiently and effectively manage investments to achieve the highest possible return at an
acceptable level of risk. In doing so, CalPERS has generated strong long- term returns.
CalPERS Global Governance Program has evolved since the mid-80’s when it was solely reactionary: reacting
to the anti-takeover actions of corporate managers that struck a dissonant chord with owners of the corporate
entity concerned with accountability and fair play. The late 1980s and early 1990s represented a period in
 Lesson 8 n Corporate Governance and Shareholders Rights 259

which CalPERS learned a great deal about the “rules of the game” – how to influence corporate managers,
what issues were likely to elicit fellow shareowner support, and where the traditional modes of shareowner/
corporation communication were at odds with current reality. Beginning in 1993, CalPERS turned its focus
toward companies considered by virtually every measure to be “poor” financial performers. By centering its
attention and resources in this way, CalPERS could demonstrate very specific and tangible results to those who
questioned the value of corporate governance.
In 2011, CalPERS Global Governance Program transitioned into an Investment Office-wide role to support
the Total Fund; and, the CalPERS Board approved the adoption of a Total Fund process for integrating
environmental, social, and governance (ESG) issues across the investment portfolio as a strategic priority.
This transition recognizes CalPERS’ ongoing effort to integrate ESG factors into investment decision making
across asset classes, grounded in the three forms of economic capital – financial, human, and physical –
that are needed for long-term value creation. This work has also been integrated into CalPERS Investment
Beliefs which address sustainable investment, risk management, and CalPERS engagement with companies,
regulators, managers, and stakeholders.
The CalPERS Board, through its Investment Committee, has adopted the Global Governance Principles
(Global Principles). The Global Principles are broken down into three areas – Core, Domestic, and International
Principles. Adopting the Global Principles in its entirety may not be appropriate for every company in the
global capital marketplace due to differing developmental stages, competitive environment, regulatory or legal
constraints. However, CalPERS does believe the criteria contained in the Core Principles should be adopted by
companies across all markets - from developed to emerging – in order to establish the foundation for achieving
long-term sustainable investment returns through accountable corporate governance structures.
For companies in the United States or listed on U.S. stock exchanges, CalPERS advocates the expansion of
the Core Principles into the Domestic Principles. For companies outside the United States or listed on non-U.S.
stock exchanges, CalPERS advocates the expansion of the Core Principles into the International Principles.
CalPERS expects all internal and external managers of CalPERS capital to integrate the Global Principles
into investment decision making including proxy voting, consistent with fiduciary duty. CalPERS recognizes
that countries and companies are in different developmental stages and that CalPERS investment managers
will need to exercise their best judgment after taking all relevant factors, principles, and trends into account.
CalPERS requires internal and external managers across the total fund to consider these Global Principles
among the decision factors employed in the investment process.
Principles:
There are many features that are important considerations in the continuing evolution of corporate governance
best practices. However, the underlying tenet for CalPERS Core Principles is that fully accountable governance
structures produce, over the long term, the best returns to shareowners. CalPERS believes the following
Core Principles should be adopted by companies and markets – from developed to emerging – in order to
establish the foundation for achieving long-term sustainable investment returns through accountable corporate
governance structures.
1. Sustainability : Companies and external managers in which CalPERS invests are expected to optimize
operating performance, profitability and investment returns in a risk-aware manner while conducting
themselves with propriety and with a view toward responsible conduct. Anchored by CalPERS
Investment Beliefs, CalPERS believes long-term value creation requires the effective management of
three forms of capital described as follows:
Financial Capital (Governance) : Governance is the primary tool to align interests between
a.
CalPERS and the managers of our financial capital – including companies and external managers.
Good governance enhances a company’s long-term value and protects investor interests.
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Physical Capital (Environment) : Encouraging external managers, portfolio companies, and

b.
policy makers to engage in responsible environmental practices is important to identifying
opportunities and risk management. This means making wise use of scarce resources, considering
impact, and addressing systemic risks, such as climate change.
Human Capital (Social) : The success and long-term value of the companies we invest in will be
c.
impacted by their management of human capital. This includes fair labor practices, responsible
contracting, workplace and board diversity, and protecting the safety of employees directly and
through the supply chain.
2. Director Accountability : Directors should be accountable to shareowners, and management
accountable to directors. To ensure this accountability, directors must be accessible to shareowner
inquiry concerning their key decisions affecting the company’s strategic direction.
3. Transparency : Operating, financial, and governance information about companies must be readily
transparent to permit accurate market comparisons; this includes disclosure and transparency of
objective globally accepted minimum accounting standards, such as the International Financial
Reporting Standards (“IFRS”).
4. One-share/One-vote : All investors must be treated equitably and upon the principle of one-share/one-
vote.
5. Proxy Materials : Proxy materials should be written in a manner designed to provide shareowners
with the information necessary to make informed voting decisions. Similarly, proxy materials should
be distributed in a manner designed to encourage shareowner participation. All shareowner votes,
whether cast in person or by proxy, should be formally counted with vote outcomes formally announced.
6. Code of Best Practices: Each capital market in which shares are issued and traded should adopt
its own Code of Best Practices to promote transparency of information, prevention of harmful labor
practices, investor protection, and corporate social responsibility. Where such a code is adopted,
companies should disclose to their shareowners whether they are in compliance.
7. Long-term Vision: Corporate directors and management should have a long-term strategic vision
that, at its core, emphasizes sustained shareowner value and effective management of both risk
and opportunities in the oversight of financial, physical, and human capital. In turn, despite differing
investment strategies and tactics, shareowners should encourage corporate management to resist
short-term behavior by supporting and rewarding long-term superior returns.
8. Access to Director Nominations: Shareowners should have effective access to the director nomination
process.
9. Political Stability: Progress toward the development of basic democratic institutions and principles,
including such things as: a strong and impartial legal system; and, respect and enforcement of property
and shareowner rights.
10. Transparency: Financial transparency, including elements of a free press, is necessary for investors to
have truthful, accurate and relevant information.
11. Productive Labor Practices: No harmful labor practices or use of child labor. In compliance, or moving
toward compliance, with the International Labor Organization (ILO) Declaration on the Fundamental
Principles and Rights at Work.
12. Corporate Social Responsibility : Eliminating Human Rights Violations: Corporations should adopt
maximum progressive practices toward the elimination of human rights violations in all countries or
environments in which the company operates. Additionally, these practices should emphasize and
focus on preventing discrimination and/or violence based on race, color, religion, national origin, age,
 Lesson 8 n Corporate Governance and Shareholders Rights 261

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

DEALING WITH INSTITUTIONAL INVESTORS

Companies should consider implementing the following practices, while dealing with institutional investors:
l Preparing (in advance) materials articulating positions vis-à-vis significant issues to be submitted to
a shareholder vote, addressing major rationales supporting a view contrary to the views the public
company intends to espouse;
l Consistent with disseminating or otherwise making materials addressing shareholder voting issues
available to proxy services firms, current investors, company social media outlets, various media outlet
representatives covering the companies;
l Formally seeking opportunities to meet with proxy services firms on issues subject to shareholder
votes—in advance of proxy services firm issuance of recommendations (if possible), and immediately
after recommendations are made—to ensure that predicates for recommendations are accurate and up
to date;
l Contemporaneously documenting proxy services firm responses to meeting requests, as well as
substantive discussions at any meetings;
l Formally requesting that proxy services firms provide previews of recommendations they anticipate
making vis-à-vis issues to be submitted to public company shareholders for a vote;
l Contemporaneously documenting proxy services firm responses to preview requests (and any
substantive discussions about ensuing proxy services firm recommendations); and
l Monitoring proxy services firm recommendations for accuracy or reliance on outdated information.
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The relationship between companies and their investors both individual and institutional is very crucial. The
companies should:
l encourage investors to communicate directly their preferences, expectations and policies to the
company;
l provide meaningful communications about strategy, long-term objectives and governance, and
encourage investors to actively listen to companies and review these communications;
l establish and maintain meaningful, direct long-term relationships with significant investors and
encourage those investors to have the appropriate policies, personnel and procedures for meaningful
reciprocity in the relationship; and
l where companies are pursuing subpar strategies that are unlikely to bring long-term success, encourage
investors to use behind-the-scenes, direct engagement with the companies as a first line of action.
Companies should continue to engage in year-round, regular communications with institutional investors, to
develop and maintain a relationship of trust and confidence, and also provide companies with an opportunity to
bring concerns about the actions (or inaction) of proxy services firms to the attention of investors.
Companies can serve their shareholders by maintaining a continuous dialogue with proxy services firms in
order to correct erroneous or stale information, or to address any troublesome recommendations that do not
advance the best interests of the shareholders.

ROLE OF PROXY ADVISORY FIRMS

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

GOVERNANCE OF GROUP ENTITIES/ SUBSIDIARIES

A corporate group or group of companies is a collection of holding and subsidiary corporations that function
as a single economic entity through a common source of control. In India most big family businesses
operate through a group of companies such as Tata group and Aditya Birla Group. Controlling a company
means having the power to appoint the majority of its directors or significantly influence its decisions. The
group may have a single holding company or be a network of companies through cross holdings. The
control of company S by company H may be direct i.e. company H directly holds the majority of voting
rights of company S or indirect i.e. H controls intermediate companies A, B, C, etc, which it can ask to
vote the same way as the board of H, thereby obtaining a majority of rights in S. According to Sec 2(27)
of the Companies Act 2013 (Act) “control shall include the right to appoint majority of the directors or to
control the management or policy decisions exercisable by a person or persons acting individually or in
concert, directly or indirectly, including by virtue of their shareholding or management rights or shareholders
agreements or voting agreements or in any other manner”. In the above case H is the holding company and
S the subsidiary company.
Group companies create a complex organizational structure resulting in a complicated governance environment.
Boards have a fiduciary duty to work in the best interest of the company. For the board of a holding company
the question is to what extent should it be involved in the governance of its subsidiaries? To properly carry out
its fiduciary role, the board must act independently and objectively. The holding company often nominates its
director or officers as directors on the subsidiary company. It is difficult for the board of the subsidiary to act in
its own interest alone. If directors of subsidiaries act against wishes of the controlling authority the risk being
removed from the board. As a result the interest of the group or holding company gets priority over that of the
subsidiary.
The board of the holding company needs to determine whether all companies will have a single governance
structure or each subsidiary can determine their own governance systems. And how the parent board will monitor
governance of the subsidiaries and what will be the extent of oversight. Subsidiaries may be categories in terms
of level of investment, strategic importance and risk to the group and appropriate governance mechanism
established.
In multinational groups with companies incorporated in different countries there is an additional problem of
difference in laws and regulations. While local governance regulations are to be compiled by the subsidiary, its
governance system must be aligned with the holding company for smooth functioning.
To protect the interest of shareholders of holding company and minority shareholders of subsidiary certain
provisions have been put in place both by the Companies Act, 2013 and SEBI (LODR).
264 EP-GRMCE

 Board: At least one independent director on the board of directors of the listed company shall be a
director on the board of directors of any unlisted material subsidiaries including foreign companies.
The minutes of the meetings of the board of directors of the unlisted subsidiary shall be placed
at the meeting of the board of directors of the listed company. The management of the unlisted
subsidiary shall periodically bring to the notice of the board of directors of the listed company, a
statement of all significant transactions and arrangements entered into by the unlisted subsidiary.
Significant transaction or arrangement” shall mean any individual transaction or arrangement that
exceeds or is likely to exceed ten percent (10%) of the total revenues or total expenses or total
assets or total liabilities, as the case may be, of the unlisted material subsidiary for the immediately
preceding accounting year. (Regulation 24).
 Consolidated Financial Statements: If a company has one or more subsidiaries, associate companies
or Joint Ventures, it shall prepare a consolidated financial statement of the company and of all the
subsidiaries, associate companies and joint venture in the same form and manner as that of its own.
In addition to the stand alone financial statements of the holding company, a consolidated financial
Statement of holding company is to be published to disclose details about subsidiary, associate
Companies and Joint ventures. (Sec 129) The Balance sheet of holding company shall specifically
disclose investments in the subsidiaries. The Profit and Loss account of Holding company shall disclose
(a) Dividends from subsidiary Companies and (b) Provisions for losses of subsidiary Companies.
(Schedule III) The holding Company is required to:
(a) Place separate audited accounts in respect of each of its subsidiary on its website and (b)
Provide a copy of separate audited financial statements in respect of each of its subsidiary, to any
shareholder of the Company who ask for it. (Section 136)
On the other hand the balance sheet of subsidiary company should disclose shares held by its holding
company or its ultimate holding Company, or subsidiaries and associates of the holding company and
the ultimate holding Company. (Schedule III)
 Audit and Audit Committee: The statutory auditor of a listed entity shall undertake a limited review
of the audit of all the entities/ companies whose accounts are to be consolidated with the listed entity.
Besides audited annual consolidated statements, at least eighty percent of the quarterly consolidated
financial results, of each of the consolidated revenue, assets and profits, respectively, shall have been
audited or subjected to limited review. (Regulation 33)
The audit committee of the listed company shall also review the financial statements, of subsidiaries
in particular, the investments made by the unlisted subsidiary. (Regulation 24) The board of a holding
company can authorize anyone to Inspection of books of account of any subsidiary company. (Section
128)
 Material Subsidiary: The listed company shall not dispose of shares in its material subsidiary which
would reduce its shareholding (either on its own or together with other subsidiaries) to less than 50%
or cease the exercise of control over the subsidiary without passing a special resolution in its General
Meeting. Exception has been granted for divestment under a scheme of arrangement duly approved by
a court/ tribunal (Regulation 24).
Selling, disposing and leasing of assets amounting to more than twenty percent (20%) of the assets of the
material subsidiary on an aggregate basis during a financial year shall require prior approval of shareholders
by way of special resolution, unless the sale/ disposal/ lease is made under a scheme of arrangement duly
approved by a Court/ Tribunal (Regulation 24).
Every listed entity’s material unlisted subsidiaries incorporated in India shall undertake secretarial audit and
shall annex the report with its annual report. (Regulation 24A) This will help improve compliance of group as a
whole.
 Lesson 8 n Corporate Governance and Shareholders Rights 265

The policy on material subsidiary shall be disclosed in the company’s web site and in the annual report of the
company or a web link provided in the annual report. These regulations ensure that shareholders of the holding
company can monitor subsidiaries whose performance affects the performance of their company even if they
are unlisted.

CORPORATE GOVERNANCE IN FAMILY OWNED ENTERPRISES

India enjoys a rich and glorious history of family-owned business. A family business may be company, partnership
firm, HUF or any other form of business owned, controlled and operated by members of a family. In India the
majority of businesses are controlled by families.
Family businesses are the major form of enterprise in India and across the world, viz. Corporation houses
like Aditya Birla Group, Bajaj Auto, Eicher Motors, Emami, GMR Infrastructure, Godrej Group, GVK Power &
Infrastrcture,HCL Technologies, Hero MotoCorp., Marico, Reliance Industries, Tata Group, are some of the
family owned companies in India. Arcelor Mittal, Berskire Hathway, BMW, Cargill, Comcast, Continental,Ford
Motor, Hyundai, Koch Industries, LG, Maersk, News Corporations, Peugeot, Roche, Samsung, Volkswagen,
Walmart, are companies owned / controlled by family. Several studies indicate that family business carry the
weight of economic wealth creation in all economies.
Most family businesses do not survive beyond two or three generations. One of the main reasons for the
short life span of family businesses is due to the lack of governance mechanisms in the family. With better
family governance, business development reaches next level and ensures continuity of the business across
generations. Strong governance measures in a family owned business can effectively act as a prevention
mechanism against a lot of tensions that may arise between family members at a later stage. It is also imperative
for family businesses to adopt effective corporate governance measures in order to give tough competition to
other players in the global market.
The most glaring characteristic of a family owned business is that all the key managerial positions in
such businesses are held by family members. Non-family members may of course be employees of the
company, but the decision-making power usually vests with the members of the family. Professionalisation
of a family business is of supreme importance for its long-term sustainability. In absence of professionalism,
a family business may get frequently weighed down with conflicts due to lack of clarity and systematic work
processes, role confusion and informal organisation structure. Poor accountability and improper operations
control severely interrupts efficiency of business. The business also fails to attract and retain good external
talent.
Family businesses are generally operated with the ethos of “Family First”. Business decisions are taken
while keeping the family’s wellbeing in focus. With changing preferences of the next-generation successors,
it is possible to balance the family’s philosophy, culture and personal needs with business performance,
profit and transparency. However, a visible change can be observed in the family businesses in India. Old
family business houses are changing to “professionally managed” companies. The younger successors
have a broad vision and global aspirations. They prefer working with modern management techniques,
build competent teams, and create transparent systems and processes. Instead of getting stalled in family
conflicts, disputes, and non-productive practices, the younger generation prefers to create a professional
work culture.
Certain provisions of Corporate Governance in a Family Owned Companies have been incorporated in the
Companies Act, 2013 such as:
l Independent Directors and Women Directors : To build up the transparency and accountability of
the Board of Directors, the Act now requires at least 1/3rd of the total directors of a listed company to
be Independent Directors and have no material or pecuniary relationship with the company or related
persons. Unlisted Public companies with paid up share capital of Rs. 10 Crores or more; turnover of Rs.
266 EP-GRMCE

100 crore or more; aggregate outstanding loans, debentures, and deposits, of Rs. 50 crore or more are
statutorily required to have at least 2 directors as Independent Directors.
To ensure diversity on the board, all listed companies and non-listed public companies having paid up
share capital more than Rs.100 Crores or more and turn over exceeding Rs.300 Crores or more are
required to have atleast one woman director on the board.
l Corporate Social Responsibility : Every company having net worth of Rs. 500 Crores or more,
turnover exceeding Rs. 1000 Crores or net profit of more than Rs. 5 Crore is required to constitute
a Corporate Social Responsibility Committee under Section 135 of the Companies Act, 2013
constituting 3 or more directors with at least 1 Independent Director to formulate policies and
recommend activities that the company may undertake for promotion of education, gender equality,
health, poverty eradication, environment, employment etc. Again, this measure puts responsibility
on the company for the social wellbeing not just of its workforce, but also makes it publicly
accountable.
l Audit Committee : The Act provides for the setting up of an Audit Committee comprising of at least
3 directors by all listed companies, majority of which have to be independent directors. The members
of such a committee have to be persons who can read and understand financial statements and the
task entrusted to such a committee is recommending remuneration and appointments of auditors and
reviewing their independence.
l Nomination and Remuneration Committee : The Nomination and Remuneration committee shall
comprise of 3 or more non-executive directors out of which at least half shall be Independent Directors.
Such committee shall identify persons qualified to become directors of the company and make
recommendations to the board of directors regarding their appointment and approval.
l Serious Fraud Investigation Office : Section 211 of the Act provides for the establishment of a Serious
Fraud Investigation Office to look into the affairs of the company and investigate incidences of fraud
upon receipt of report of the Registrar or inspector or generally in the public interest or request from any
Department of Central or State Government.
Some Unique challenges/ Governance issues of family businesses:
l Managing the diverse opinions of family members in the business, solving internal issues and disputes,
etc., is a challenge.
l Investors – both shareholders and creditors – may look with distrust on family-controlled companies,
because of the risk that the controlling family may abuse the rights of other shareholders. So investors
shall scrutinize such companies with care before taking the plunge and investing.
l There are also challenges of multiple stakeholders for the leadership position. Very often, there is lack
of communication between the incumbent and incoming generations. The incumbents do not know how
to handle the succession challenge, while the incoming generation does not know how to raise it. The
families should choose their most competent member(s) to manage the business, disregarding age,
gender or bloodline. However, post-succession role of the incumbent is not often planned leading to
complications.
l Hiring external staff which may perceive that career advancement, freedom and decision-making are
solely the purview of family.
l Although ownership and management succession are the key concerns of a large number of business
families, they do not devote enough attention to the process involved. Succession dilemma is also
closely related to the family policy on entry of new generation, retirement of incumbents and mechanisms
for resolving conflicts. Entry of new members from the family depends also on the ‘space’ available in
 Lesson 8 n Corporate Governance and Shareholders Rights 267

the organization, which in turn depends on the success of the business. The younger generation may
face difficulties in proving themselves to the former generation.
l Change in mind-set: Differing views between the older generation and the newer generation
l Lack of Competitiveness: Another source of challenge is in the nature of competitiveness. For instance,
when the Indian economy was opened up in 1991, most Indian companies, of which a huge majority
were family owned, were put under competitive pressures for the first time. Many firms, particularly
those that grew under government protection did not have a strategy to respond and took it as a
threat rather than opportunity for a variety of reasons. This created huge tensions in business families,
sometimes leading to division of assets.

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

GLOSSARY OF TECHNICAL WORDS

– IEPF : Investor Education and Protection Fund (IEPF) is for promotion of investors’ awareness and
protection of the interests of investors. This website is an information providing platform to promote
awareness, and it does not offer any investment advice or evaluation.

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

– As a strategy CalPERS invest in sick and ailing companies where it employs good governance
practices to improvise company’s overall performance.
– The Institutional Investors use different tools like One-to-one meetings, focus lists, Corporate
governance rating systems, etc. to assess the health of Company before investing resources in it.

TEST YOURSELF
(These are meant for recapitulation only. Answers to these questions are not to be submitted for evaluation)
1. Can you discuss about the provisions for protection of shareholder rights?
2. Do you know what are the tools that an institutional investor can use to assess the health of a company?
Explain.
3. Briefly write a short note on IEPF.
4. Throw some light on Oppression and mismanagement.
 Lesson 9 Corporate Governance and Other Stakeholders 269
Lesson 9
n

Corporate Governance and Other

Stakeholders
LESSON OUTLINE
LEARNING OBJECTIVES
– Introduction
The objective of the study lesson is to enable
– Regulatory Framework
the students to understand the changed concept
– Definition and Evolution of Stakeholder from shareholder to the stakeholder. It also
Theory provides link between good corporate governance
and importance of various stakeholders in the
– Recognition of Stakeholder Concept in Law
governance structure of an organization.
– Stakeholder Engagement
The study discuss the Stakeholders Concept
– Stakeholder Analysis which is well recognized by the law and highlights
– Better Stakeholder Engagement ensures the important government/regulatory initiative to
Good Governance channelize the corporate sector growth as well
as ensuring good governance for the benefits
– Types of Stakeholders of society at large. The study discuss about the
– The Caux Round Table role of employees, customer, lenders, vendors,
government and society in ensuring good corporate
– The Clarkson Principles of Stakeholder governance in the corporate sector.
Management
This chapter may be useful in performing the
– Governance Paradigm and various advisory role in practical areas of work.
Stakeholders
– Conclusion
– Glossary
– LESSON ROUND UP
– TEST YOURSELF

Creating a strong company culture isn’t just good business. It’s the right thing to do, and it makes your
company better for all stakeholders - employees, management, and customers.
– Julia Hartz
270 EP-GRMCE

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

Regulatory Framework

Sl. No. Description

1 Section 172 of the U.K Companies Act, 2006

2 U.K Corporate Governance Code, 2018

3 Article 43 of UAE Corporate Governance Rules, 2016
4 South Africa, King IV Report on Corporate Governance, 2016
5 Chapter 6 of Code of Corporate Governance for Listed Companies in China
6 Japan Corporate Governance Code, 2018
7 Section 135(1) of the Companies Act, 2013
8 Section 166(2) of the Companies Act, 2013
 Lesson 9 n Corporate Governance and Other Stakeholders 271

9 Regulation 4(2)(d) of SEBI (LODR) Regulations, 2015

10 The CAUX Round Table
11 The Clarkson Principles of Stakeholder Management

DEFINITION AND EVOLUTION OF STAKEHOLDER THEORY

In a business context, customers, investors, shareholders, employees, suppliers, government agencies,
communities and many others who have a ‘stake’ or claim in some aspect of a company’s products, operations,
markets, industry and outcomes are known as stakeholders.
Stakeholder theory suggests that the purpose of a business is to create as much value as possible for
stakeholders. In order to succeed and be sustainable over time, executives must keep the interests of customers,
suppliers, employees, communities and shareholders aligned and going in the same direction.
Innovation to keep these interests aligned is more important than the easy strategy of trading off the interests of
stakeholders against each other. Hence, by managing stakeholders, executives will also create as much value
as possible for shareholders and other financiers.
The stakeholder theory was first proposed in the book Strategic Management: A Stakeholder Approach by R.
Edward Freeman and outlines how management can satisfy the interests of stakeholders in a business.
R. Edward Freeman’s view on Stakeholder Theory : One very broad definition of a stakeholder is any group or
individual which can affect or is affected by an organization.” Such a broad conception would include suppliers,
customers, stockholders, employees, the media, political action groups, communities, and governments. A
more narrow view of stakeholder would include employees, suppliers, customers, financial institutions, and local
communities where the corporation does its business. But in either case, the claims on corporate conscience
are considerably greater than the imperatives of maximizing financial return to stockholders.
Stakeholder theories have grown in number and type since the term stakeholder was first coined in 1963.
According to R. Edward Freeman1, whose work in stakeholder theory is well known, the stakeholder concept
was originally defined as including “those groups without whose support the organization would cease to exist.”
In some of the literature review, the same definition has been modified as “those groups who are vital to the
survival and success of the organization”. As a part of management theory and practice, stakeholder theory
takes a number of forms. Descriptively, some research on stakeholder theory assumes that managers who wish
to maximize their firm’s potential will take broader stakeholder interests into account. This gives rise to a number
of studies on how managers, firms, and stakeholders do in fact interact. Normatively, other management studies
and theories will discuss how corporations ought to interact with various stakeholders.
From an analytical perspective, a stakeholder approach can assist managers by promoting analysis of how the
company fits into its larger environment, how its standard operating procedures affect stakeholders within the
company (employees, managers, stockholders) and immediately beyond the company (customers, suppliers,
financiers). Friedman (2006) divides the stakeholders in two groups. One immediate group consisting of
customers, employees, local communities, suppliers and distributors, and shareholders and an additional group
which consists of the media, public in general, business partners, future generations, academics, competitors,
financiers, NGOs or activists, Government, regulators, policy makers, etc.
Freeman suggests, for example, that each firm should fill in a “generic stakeholder map” with specific
stakeholders. General categories such as owners, financial community, activist groups, suppliers, government,
political groups, customers, unions, employees, trade associations, and competitors would be filled in with more

1 R. Edward Freeman is a professor at the Darden School of the University of Virginia. He is the author of several books on
Stakeholder Management including the influential Strategic Management: A Stakeholder Approach.
272 EP-GRMCE

specific stakeholders. In turn, the rational manager would not make major decisions for the organization without
considering the impact on each of these specific stakeholders. As the organization changes over time, and as
the issues for decision change, the specific stakeholder map will vary.
Freeman suggest a stakeholder mapping to be done by the organization and their managers by asking few
fundamental questions, such as: Who are our current and potential stakeholders? What are their interests/
rights? How does each stakeholder affect us? How do we affect each stakeholder? What assumption does our
current strategy make about each important stakeholder?
Again, the contrast with Friedman’s view [Milton Friedman(1912) believed that the only social responsibility
of corporations is to provide a profit for its owners] should be evident: if the corporate manager looks only to
maximize stockholder wealth, other corporate constituencies (stakeholders) can easily be overlooked.
In a normative sense, stakeholder theory strongly suggests that overlooking these other stakeholders is (a)
unwise or imprudent and/or (b) ethically unjustified. To this extent, stakeholder theory participates in a broader
debate about business and ethics: will an ethical company be more profitable in the long run than a company
that looks only to the “bottom line” in any given quarter or year? Those who claim that corporate managers
are imprudent or unwise in ignoring various non-stockholder constituencies would answer “yes.” Others would
claim that overlooking these other constituencies is not ethically justified, regardless of either the short-term or
long-term results for the corporation.
Inevitably, fundamental questions are raised, such as “What is a corporation, and what is the purpose of a
corporation?” Many stakeholder theorists visualize the corporation not as a truly separate entity, but as part of
a much larger social enterprise. The corporation is not so much a “natural” individual, in this view, but is rather
constructed legally and politically as an entity that creates social goods.

A Stakeholder model of Company

 Lesson 9 n Corporate Governance and Other Stakeholders 273

RECOGNITION OF STAKEHOLDER CONCEPT IN LAW

Under the UK Companies Act, 2006:

Chapter 2 of the said Act provides the general duties of directors.
Section 170: Scope and nature of general duties
(1) The general duties specified in sections 171 to 177 are owed by a director of a company to the company.
(2) A person who ceases to be a director continues to be subject— (a) to the duty in section 175 (duty
to avoid conflicts of interest) as regards the exploitation of any property, information or opportunity of
which he became aware at a time when he was a director, and (b) to the duty in section 176 (duty not
to accept benefits from third parties) as regards things done or omitted by him before he ceased to be a
director. To that extent those duties apply to a former director as to a director, subject to any necessary
adaptations.
(3) The general duties are based on certain common law rules and equitable principles as they apply in
relation to directors and have effect in place of those rules and principles as regards the duties owed to
a company by a director.
(4) The general duties shall be interpreted and applied in the same way as common law rules or equitable
principles, and regard shall be had to the corresponding common law rules and equitable principles in
interpreting and applying the general duties.
(5) The general duties apply to shadow directors where, and to the extent that, the corresponding common
law rules or equitable principles so apply.
Section 172: Duty to promote the success of the company
1. A director of a company must act in the way he considers, in good faith, would be most likely to promote
the success of the company for the benefit of its members as a whole, and in doing so have regard
(amongst other matters) to –
(a) the likely consequences of any decision in the long term,
(b) the interests of the company’s employees,
(c) the need to foster the company’s business relationships with suppliers, customers and others,
(d) the impact of the company’s operations on the community and the environment,
(e) the desirability of the company maintaining a reputation for high standards of business conduct,
and
(f) the need to act fairly as between members of the company.
2. Where or to the extent that the purposes of the company consist of or include purposes other than the
benefit of its members, subsection (1) has effect as if the reference to promoting the success of the
company for the benefit of its members were to achieving those purposes.
3. The duty imposed by this section has effect subject to any enactment or rule of law requiring directors,
in certain circumstances, to consider or act in the interests of creditors of the company.
Section 173: Duty to exercise independent judgment
(1) A director of a company must exercise independent judgment.
(2) This duty is not infringed by his acting –
(a) in accordance with an agreement duly entered into by the company that restricts the future
274 EP-GRMCE

exercise of discretion by its directors, or

(b) in a way authorised by the company’s constitution
Section 174: Duty to exercise reasonable care, skill and diligence
(1) A director of a company must exercise reasonable care, skill and diligence.
(2) This means the care, skill and diligence that would be exercised by a reasonably diligent person with—
(a) the general knowledge, skill and experience that may reasonably be expected of a person carrying
out the functions carried out by the director in relation to the company, and
(b) the general knowledge, skill and experience that the director has.
Section 175: Duty to avoid conflicts of interest
(1) A director of a company must avoid a situation in which he has, or can have, a direct or indirect interest
that conflicts, or possibly may conflict, with the interests of the company.
(2) This applies in particular to the exploitation of any property, information or opportunity (and it is
immaterial whether the company could take advantage of the property, information or opportunity).
(3) This duty does not apply to a conflict of interest arising in relation to a transaction or arrangement with
the company.
(4) This duty is not infringed –
(a) if the situation cannot reasonably be regarded as likely to give rise to a conflict of interest; or
(b) if the matter has been authorised by the directors.
(5) Authorisation may be given by the directors –
(a) here the company is a private company and nothing in the company’s constitution invalidates
such authorized on, by the matter being proposed to and authorized by the directors; or
(b) where the company is a public company and its constitution includes provision enabling the
directors to authorise the matter, by the matter being proposed to and authorised by them in
accordance with the constitution.
(6) The authorisation is effective only if –
(a) any requirement as to the quorum at the meeting at which the matter is considered is met without
counting the director in question or any other interested director, and
(b) the matter was agreed to without their voting or would have been agreed to if their votes had not
been counted.
(7) Any reference in this section to a conflict of interest includes a conflict of interest and duty and a conflict
of duties.
Section 176: Duty not to accept benefits from third parties:
(1) A director of a company must not accept a benefit from a third party conferred by reason of –
(a) his being a director, or
(b) his doing (or not doing) anything as director.
(2) A “third party” means a person other than the company, an associated body corporate or a person
acting on behalf of the company or an associated body corporate.
 Lesson 9 n Corporate Governance and Other Stakeholders 275

(3) Benefits received by a director from a person by whom his services (as a director or otherwise) are
provided to the company are not regarded as conferred by a third party.
(4) This duty is not infringed if the acceptance of the benefit cannot reasonably be regarded as likely to give
rise to a conflict of interest.
(5) Any reference in this section to a conflict of interest includes a conflict of interest and duty and a conflict
of duties.
Section 177 Duty to declare interest in proposed transaction or arrangement:
(1) If a director of a company is in any way, directly or indirectly, interested in a proposed transaction or
arrangement with the company, he must declare the nature and extent of that interest to the other
directors.
(2) The declaration may (but need not) be made –
(a) at a meeting of the directors, or
(b) by notice to the directors in accordance with –
(i) section 184 (notice in writing), or
(ii) section 185 (general notice).
(3) If a declaration of interest under this section proves to be, or becomes, inaccurate or incomplete, a
further declaration must be made.
(4) Any declaration required by this section must be made before the company enters into the transaction
or arrangement.
(5) This section does not require a declaration of an interest of which the director is not aware or where the
director is not aware of the transaction or arrangement in question. For this purpose a director is treated
as being aware of matters of which he ought reasonably to be aware.
(6) A director need not declare an interest –
(a) if it cannot reasonably be regarded as likely to give rise to a conflict of interest;
(b) if, or to the extent that, the other directors are already aware of it (and for this purpose the other
directors are treated as aware of anything of which they ought reasonably to be aware); or
(c) if, or to the extent that, it concerns terms of his service contract that have been or are to be
considered –
(i) by a meeting of the directors, or
(ii) by a committee of the directors appointed for the purpose under the company’s constitution.

Under the UK Corporate Governance Code, 2018

The first version of the UK Corporate Governance Code (the Code) was published in 1992 by the Cadbury
Committee. It defined corporate governance as ‘the system by which companies are directed and controlled.
Boards of directors are responsible for the governance of their companies. The shareholders’ role in governance
is to appoint the directors and the auditors and to satisfy themselves that an appropriate governance structure
is in place.’ This remains true today, but the environment in which companies, their shareholders and wider
stakeholders operate continues to develop rapidly.
Over the years the Code has been revised and expanded to take account of the increasing demands on the
UK’s corporate governance framework. The 2018 Code focuses on the application of the Principles. The Listing
276 EP-GRMCE

Rules require companies to make a statement of how they have applied the Principles, in a manner that would
enable shareholders to evaluate how the Principles have been applied. The ability of investors to evaluate the
approach to governance is important. Reporting should cover the application of the Principles in the context of
the particular circumstances of the company and how the board has set the company’s purpose and strategy,
met objectives and achieved outcomes through the decisions it has taken.
Corporate governance reporting should also relate coherently to other parts of the annual report – particularly
the Strategic Report and other complementary information – so that shareholders can effectively assess the
quality of the company’s governance arrangements, and the board’s activities and contributions. This should
include providing information that enables shareholders to assess how the directors have performed their duty
under section 172 of the Companies Act 2006 (the Act) to promote the success of the company. Nothing in this
Code overrides or is intended as an interpretation of the statutory statement of directors’ duties in the Act.
The Code is applicable to all companies with a premium listing, whether incorporated in the UK or elsewhere.
The new Code applies to accounting periods beginning on or after 1 January 2019.
1. BOARD LEADERSHIP AND COMPANY PURPOSE
Principles
A. A successful company is led by an effective and entrepreneurial board, whose role is to promote the
long-term sustainable success of the company, generating value for shareholders and contributing to
wider society.
B. The board should establish the company’s purpose, values and strategy, and satisfy itself that these
and its culture are aligned. All directors must act with integrity, lead by example and promote the
desired culture.
C. The board should ensure that the necessary resources are in place for the company to meet its
objectives and measure performance against them. The board should also establish a framework of
prudent and effective controls, which enable risk to be assessed and managed.
D. In order for the company to meet its responsibilities to shareholders and stakeholders, the board should
ensure effective engagement with, and encourage participation from, these parties.
E. The board should ensure that workforce policies and practices are consistent with the company’s values
and support its long-term sustainable success. The workforce should be able to raise any matters of
concern.
2. DIVISION OF RESPONSIBILITIES
Principles
F. The chair leads the board and is responsible for its overall effectiveness in directing the company. They
should demonstrate objective judgement throughout their tenure and promote a culture of openness
and debate. In addition, the chair facilitates constructive board relations and the effective contribution
of all non-executive directors, and ensures that directors receive accurate, timely and clear information.
G. The board should include an appropriate combination of executive and non-executive (and, in particular,
independent non-executive) directors, such that no one individual or small group of individuals dominates
the board’s decision-making. There should be a clear division of responsibilities between the leadership
of the board and the executive leadership of the company’s business.
H. Non-executive directors should have sufficient time to meet their board responsibilities. They should
provide constructive challenge, strategic guidance, offer specialist advice and hold management to
account.
 Lesson 9 n Corporate Governance and Other Stakeholders 277

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

Under the UAE Corporate Governance Rules, 2016

The Securities and Commodities Authority of the United Arab Emirates (UAE) is the UAE federal regulator responsible
for regulating companies listed on the Dubai Financial Market exchange and the Abu Dhabi Securities Exchange. On
28 April 2016, the UAE Securities and Commodities Authority issued Decree No. 7 R M of 2016 which set out UAE
corporate governance rules, and came into force on 1 May 2016, repealing the old governance rules issued under
Decree No. 518 of 2009. This new set of UAE corporate governance rules applies to public joint stock companies
that are listed on the Dubai Financial Market or Abu Dhabi Securities Exchange.
278 EP-GRMCE

CORPORATE LEADERSHIP
i. Board membership
The articles of association of the listed company shall decide on the method of formation, number of members
and tenure of membership of the board of directors. Members of the board of directors are elected through
secret, cumulative voting by the members of the general assembly of the listed company. The chairperson and
a majority of the members of the board of directors must be UAE nationals. At least one-third of the members
of the board must be independent, and a majority must be non-executive board members (a board member
will lack independence if such board member or any of his or her relatives work or has worked in the senior
executive management of the listed company or any of its subsidiaries during the two years preceding the date
of becoming a board member candidate). A minimum of 20 per cent of the members of the board of directors
must be female. If a listed joint stock company is unable to meet this requirement, it must disclose the reason
why to the UAE Securities and Commodities Authority. The chairperson may not hold the position of manager,
executive manager or any other executive function in the listed company. If a government owns 5 per cent
or more of a listed company’s shares, the said government may then appoint a representative in the listed
company’s board of directors pro rata to its shareholding or at least one board member if the shareholding
percentage required to elect such member is less than the shareholding of the said government.
ii. Board meetings and votes
Resolutions of the board of directors are passed by the majority of votes of those members and representatives
present at the meeting. In the case of a tie, the chairperson shall have a casting vote. Only a majority of directors
are required to hold board meetings in person. Board meetings may be held using electronic communication
methods, such as video conferencing, subject to the articles of association of the listed company.
iii. Board member candidacy and responsibilities
Candidates for board membership must not have been dismissed from their position on the board of directors of
another publicly listed joint stock company in the 12 months prior to the date of nomination. Candidates for board
membership must not be board members in more than five companies or be chairperson or vice chairperson
in more than two companies or be the managing director of more than one company. Board members must:
(1) not have been convicted of a crime of ‘honour’ or honesty unless pardoned;
(2) have at least five years’ experience in the activity carried out by the listed company;
(3) hold a clean record before the UAE Securities and Commodities Authority with no disciplinary action
having been taken against him or her, no court order issued to dismiss or remove him or her from his
or her position as a board member and no outstanding proceedings before the public prosecution office
in relation to honesty and integrity;
(4) preserve the listed company’s rights and act as a prudent person;
(5) act with honesty and integrity and in accordance with the applicable laws and regulations and the listed
company’s articles of association;
(6) disclose being a chairman, board member or a member of the senior executive management of any
other company; and
(7) dedicate sufficient time for his or her duties and obligations toward the listed company.
iv. Board remuneration
Under the UAE governance rules, if the listed company generates net profits for a given year, the board
members’ remuneration is not subject to the distribution of a minimum percentage of dividends (i.e., even if
no dividends are distributed to shareholders, the general assembly of a listed company may resolve to pay
 Lesson 9 n Corporate Governance and Other Stakeholders 279

board members’ remuneration for such financial year). If a board member contributes to the listed company
beyond his or her ordinary duties (e.g., through serving on special committees, performing special works, etc.),
the listed company may compensate such board member for relevant fees and expenses, or pay a monthly
salary to such board member, to the extent determined appropriate by the board of directors. If, owing to the
negligence of the board of directors, the listed company is fined for violating the listed company’s articles of
association or applicable laws, such fine amounts shall be deducted from the board of directors’ remuneration.
III DISCLOSURE
A relevant topic relating to corporate disclosure in the UAE is the restriction on related-party transactions for
public joint stock companies. The UAE corporate governance rules contain a broad definition of ‘related party’.
When deciding if a counterparty to a transaction is a related party, consideration must be given to whether the
counterparty is:
(1) a director, chair, board member, employee or senior executive of the listed company (each a ‘related
person’); or
(2) any company in which any related person has a 30 per cent (or greater) interest, and any affiliate,
subsidiary or parent of any such company (each a ‘related company’, together with each related person,
a ‘related party’).
Listed companies are required to maintain up-todate lists of related companies and details of any transactions
with related parties. The UAE corporate governance rules are silent as to whether the 30 per cent share
ownership threshold applies to indirect, or only direct, ownership.
In relation to any transactions, contracts or agreements entered into between a public joint stock company and
a related party that:
(1) does not fall under the main activity of such listed company; or
(2) includes preferential terms not typically granted by the listed company to its clients, must be approved
by the listed company’s:
(1) board of directors if the value of the transaction, contract or agreement is 5 per cent or less than
the listed company’s capital; and
(2) general assembly, if the value of the transaction, contract or agreement is more than 5 per cent of
the listed company’s capital.
Furthermore, if a transaction, contract or agreement exceeds 5 per cent of the listed company’s capital, such
transaction must be evaluated by a valuator accredited by the UAE Securities and Commodities Authority before
obtaining the approval of the listed company’s general assembly, in order for such transaction to be concluded.
Details of any transaction between the listed company and a related party must be disclosed to the listed
company’s board of directors and general assembly, irrespective of the size or value of the transaction.
Additionally, any transaction between the listed company and a related party must be disclosed to the UAE
Securities and Commodities Authority by the listed company’s chairman. Such disclosure must include details
of the transaction, including details of the:
(1) transaction value and nature;
(2) related party; and
(3) nature and benefit of the involvement of the related party.
Such disclosure must also contain a written confirmation that the terms of the transaction are fair, reasonable,
and in favour of the listed company’s shareholders.
280 EP-GRMCE

The board of directors must set up a committee of non-executive board members responsible for reviewing
issues that may result in a conflict of interest for board members including verifying financials and the review
of transactions concluded with stakeholders. In addition, there are no squeeze-out or compulsory acquisition
provisions on the two main UAE exchanges.
A member of the board of directors must inform the board of directors of any conflict or joint interest and must
not participate in the voting in respect of such matter. In addition, if the director fails to inform the publicly
listed company of his or her conflict, the listed company can move before the competent court to invalidate the
contract or to order the director who acted in contravention of the corporate governance rules to account to the
listed company for any profit or benefit obtained as a result of entering into the conflicted transaction.
One additional disclosure consideration to take into account is that if a party reaches an ownership interest of 5
per cent or more of the shares of a listed company or 10 per cent or more of the shares of a parent company or
subsidiary to the listed company, the relevant party must inform the market on which the relevant public company
is listed. In addition, the relevant party must commit to declare to the UAE Securities and Commodities Authority
every additional 1 per cent interest that he or she acquires in the listed target and in accordance with the above.
IV. CORPORATE RESPONSIBILITY
A member of the board of directors of a listed company is specifically charged with the responsibility to:
1. preserve the listed company’s rights and act as a prudent person;
2. dedicate sufficient time for his or her duties and obligations toward the listed company; and
3. act with honesty and integrity in accordance with the applicable laws and regulations and the listed
company’s articles of association.
Integrity and ethical behaviour in the corporate context would generally qualify as a public policy concern, and
companies, directors, executives, and others are expected to behave ethically when transacting in the UAE.
Listed companies are also required to maintain registers of insiders, conflicts of interest and related party
matters (as detailed above). Transparency and the duty of care to the shareholders of public companies require
companies to maintain such registers in order to ensure effective compliance.
Companies are required to appoint a compliance officer who shall oversee the listed company and its
employees’ compliance with the listed company’s articles of association, applicable laws and regulations, and
the resolutions of the general assembly and board of directors of the listed company. The listed company’s
compliance officer may also be the director the listed company’s internal control department simultaneously.
The board must establish a strict internal control system to implement the UAE corporate governance code,
regulate risk management, ensure compliance with local laws and regulations, ensure compliance with internal
policies and procedures, and to review financial information used in drafting financial statements.
V. SHAREHOLDERS
i. General assembly
In the UAE, the corporate governance rules allow shareholders who own 10 per cent of the issued share
capital of a listed company to call for an urgent general assembly meeting to discuss urgent matters. The UAE
corporate governance rules also allow shareholders who own five per cent of the issued share capital to submit
a written request to the UAE Securities and Commodities Authority to include an additional item on the agenda
of a shareholders’ meeting, even if the invitation to the meeting has already been published. A board of directors
of a public company may also call a general assembly with less than 30 days’ notice only if approved by 95 per
cent of the shareholders. The notice convening the general assembly meeting must: (1) contain full details of
the purpose and agenda of the general assembly meeting; (2) be published on the relevant public company’s
website; and (3) be disclosed to the market on the relevant market’s regulatory news service. The rationale
behind these requirements is to assist shareholders with access and participation rights in relation to the public
 Lesson 9 n Corporate Governance and Other Stakeholders 281

company. The UAE Securities and Commodities Authority is required to approve a listed company’s general
assembly meeting, but the shareholders, through these rules, may maximise their participation in the public
company’s decision-making process. Each shareholder has the right to attend the meetings of the general
assembly of a listed company and shall have the votes equal to the number of shares in his or her possession.
ii. Dividends
Following a general assembly meeting of a public joint stock company where a distribution of dividends has
been approved, the listed company is mandated to deposit the cash dividends to the shareholders within 10
days of the general assembly meeting. If a delay is experienced for any reason, the delay may not extend
past 30 days from the listed company’s general assembly meeting. This rule in meant to enhance shareholder
economic protections.
iii. Lock-up periods
In relation to joint stock companies listed on the Dubai Financial Market or Abu Dhabi Securities Exchange,
following the statutory two-year lock-up period, founding shareholders would be permitted to sell-down their
interest in the listed company through a secondary offering. There are limitations to this approach as companies
that are listed on the Dubai Financial Market or Abu Dhabi Securities Exchange are only permitted to sell-down
up to 30 per cent of the total share capital through a secondary offering. A workaround to this limitation is to first
list on an overseas exchange, which permits a sell-down greater than 30 per cent and to, thereafter, list on the
Dubai Financial Market or Abu Dhabi Securities Exchange. Also worth exploring is the possibility of an indirect
sell-down of shares in the entity listed on the Dubai Financial Market or Abu Dhabi Securities Exchange.
iv. Share capital increase
In order to issue new shares in a listed company, the approval of the listed company’s shareholders is required,
in addition to the approval of the UAE Securities and Commodities Authority. In applicable cases, companies
subject to the supervision of the UAE Central Bank must also obtain its approval as well. The issuance of new
shares is also subject to the requirements of the UAE Commercial Companies Law.
v. Additional shareholder rights
Shareholders generally have the right to review the listed company’s financial statements and reports, records,
and documents, and also have the right to obtain their specific share of the listed company’s assets upon
liquidation. The corporate governance report which must be submitted in order to apply for convening the
annual general assembly meeting of a listed company must be made available to the shareholders of the listed
company prior to submission.
vi. Proxy battles and hostile takeovers
Proxy battles and hostile takeovers are rare in the UAE.
VI. OUTLOOK
The UAE continues to develop its corporate governance regime, and the latest updates in the law provide
a more comforting landscape for investor confidence. It is likely that the UAE Securities and Commodities
Exchange will continue to evolve and introduce further rules to safeguard the growth of corporate activity in the
UAE.

Under the South Africa, King IV Report on Corporate Governance, 2016:

King IV Code on Corporate Governance
It consists of 5 Parts, which are as under:
Part 5.1.: Leadership, ethics and corporate citizenship
282 EP-GRMCE

Part 5.2: Strategy, performance and reporting

Part 5.3.: Governing structures and delegation
Part 5.4.: Governance functional areas
Part 5.5.: Stakeholder relationships
Part 5.5 in the King IV Code contains the principles and practices that deal with relationships in accordance with
the stakeholder inclusive approach.
Principle 16: In the execution of its governance role and responsibilities, the governing body should adopt a
stakeholder inclusive approach that balances the needs, interests and expectations of material stakeholders in
the best interest of the organization over time.
It recommends the following practices:
Stakeholder Relationships
1. The governing body should assume responsibility for the governance of stakeholder relationships by
setting the direction for how stakeholder relationships should be approached and conducted in the
organization.
2. The governing body should approve policy that articulates and gives effects to its direction on stakeholder
relationships.
3. The governing body should delegate to management the responsibility for implementation and execution
of effective stakeholder relationship management.
4. The governing body should exercise ongoing oversight of stakeholder relationship management and,
in particular, oversee that it results in the following:
a. Methodologies for identifying individual stakeholders and stakeholders groupings.
b. Determinaton of material stakeholders based on the extent to which they affect, or are affected by,
the activities, outputs, and outcomes of the organization.
c. Management of stakeholders risk as an integral part of organization-wise risk management.
d. Formal mechanisms for engagement and communication with stakeholders, including the use of
dispute resolution mechanisms and associated processes.
e. Measurement of the quality of material stakeholder relationships, and appropriate responses to
the outcomes.
5. The following should be disclosed in relation to stakeholder relationships;
a. An overview of the arrangements for governing and managing stakeholder relations.
b. Key areas of focus during the reporting period.
c. Action taken to monitor the effectiveness of stakeholder management and how the outcomes
were addressed.
d. Future areas of focus.
Shareholder relationships (Applicable to companies only)
6. The board should oversee that the company encourages proactive engagement with shareholder,
including engagement at the annual general meeting (AGM) of the company.
7. All directors should be available at the AGM to respond to shareholder’s queries on how the board
 Lesson 9 n Corporate Governance and Other Stakeholders 283

executed its governance duties.

8. The board should ensure that the designated partner of the external audit firm attends the AGM.
9. The board should ensure that the shareholders are equitably treated, and that the interests of minority
shareholders are adequately protected.
10. The minutes of the AGMS of listed companies should be made publicly available.
Relationships within a group of companies:
11. The board of the holding company should assume responsibility for governance across the group
by setting the direction for how the relationships and exercise of power within the group should be
approached and conducted.
12. The board should approve a group governance framework that articulates and given effect to its
direction on relationships and the exercise of authority across the group.
13. The adoption and implementation of the policies, structures and procedures of the holding company
is a matter for consideration and approval by the board of the subsidiary company as a separate legal
entity. The board of the holding company should therefore ensure that the boards of its subsidiaries are
included in the development of the group governance framework.
14. The board of the holding company should ensure that the group governance frame work does not
conflict with the memorandum of incorporation, delegations, shareholders agreements, board charters
board committee terms of reference, and related policies and agreement within the group.
15. The board of the holding company should ensure that the group governance framework recognizes
each subsidiary within the group as a separate and independent juristic person to whom its directors
own fiduciary duties.
16. The board of the holding company should ensure that the group governance e framework addresses
governance matters as is appropriate for the group, including the following:
a. Delineation of the right and role of the holding company
b. If applicable, delegation of certain responsibilities by the board of a subsidiary to a board committee
of the holding company, without abdicating accountability, and subject to agree reporting and
information sharing arrangements.
c. The extent to which governance and operational policies of the holding company have been
adopted by subsidiary companies in the group.
d. Engagement by the holding company with the board of a subsidiary company before the holding
company exercises its rights to elect directors to the board of the subsidiary.
e. Arrangements to address the risk of breaching legal duty in relation to the use of information
obtained while acting as director of one company in the group for the purposes of another company
in the group.
17. The board of the holding company should ensure that the agree group governance framework is
implemented across the group.
18. The holding company should disclose an overview of the group governance that is implemented across
the group.
19. The subsidiary company should disclose what responsibilities it has delegated to board committees of
the holding company and the extent to which it has adopted the policies and procedures of the holding
company.
284 EP-GRMCE

Under the Code of Corporate Governance for Listed Companies in China

The Code of Corporate Governance for Listed Companies in China is divided in to Eight Chapters, viz;
Chapter 1 : Shareholders and Shareholders’ Meetings
Chapter 2 : Listed Company and Its Controlling Shareholders
Chapter 3 : Directors and Board of Directors
Chapter 4 : The Supervisors and the Supervisory Board
Chapter 5 : Performance Assessments and Incentive and Disciplinary Systems
Chapter 6 : Stakeholders
Chapter 7 : Information Disclosure and Transparency
Chapter 8 : Supplementary Article
Among the above Chapters, Chapter 6 which deals with the Stakeholders, prescribes the following points:
Chapter 6 of the code prescribes provisions pertaining to ‘Stakeholders’.
1. A listed company shall respect the legitimate rights of banks and other creditors, employees, consumers,
suppliers, the community and other stakeholders.
2. A listed company shall actively cooperate with its stakeholders and jointly advance the company’s
sustained and healthy development.
3. A company shall provide the necessary conditions to ensure the legitimate rights of stakeholders.
Stakeholders shall have opportunities and channels for redress for infringement of rights.
4. A company shall provide necessary information to banks and other creditors to enable them to make
judgments and decisions about the company’s operating and financial situation.
5. A company shall encourage employees’ feedback regarding the company’s operating and financial
situations and important decisions affecting employee’s benefits through direct communications with
the board of directors,the supervisory board and the management personnel.
6. While maintaining the listed company’s development and maximizing the benefits of shareholders,
the company shall be concerned with the welfare,environmental protection and public interests of the
community in which it resides, and shall pay attention to the company’s social responsibilities.
It further prescribes that the board of directors shall earnestly perform its duties as stipulated by laws, regulations
and the company’s articles of association, shall ensure that the company complies with laws, regulations and
its articles of association,shall treat all the shareholders equally and shall be concerned with the interests of
stakeholders.

Under the German Corporate Governance Code, 2019

The objective of the Code is to make the dual German corporate governance system transparent and
understandable. The Code includes principles, recommendations and suggestions governing the management
and monitoring of German listed companies that are accepted nationally and internationally as standards
of good and responsible governance. It aims to promote confidence in the management and supervision of
German listed companies by investors, customers, employees and the general public.
The principles reflect material legal requirements for responsible governance, and are used here to inform
investors and other stakeholders. Recommendations of the Code are indicated in the text by using the word
“shall”. Companies may depart from recommendations, but in this case they are obliged to disclose and explain
 Lesson 9 n Corporate Governance and Other Stakeholders 285

any departures each year (“comply or explain”). This enables companies to take into account sector- or company-
specific special characteristics. Welljustified departures from recommendations of the Code may be in the best
interests of good corporate governance. Finally, the Code contains suggestions from which companies may
depart without disclosure; suggestions are indicated in the text by using the word “should”.
Code stipulations covering not only the listed company itself but also its group entities use the word “enterprise”
rather than “company”. Shareholders generally exercise their membership rights before or at the General
Meeting. Institutional investors are of particular importance to enterprises. They are expected to exercise
their ownership rights actively and responsibly, in accordance with transparent principles that also respect the
concept of sustainability.
The Code is addressed to listed companies and companies with access to capital markets pursuant to section
161(1) sentence 2 of the German Stock Corporation Act. Companies which are not capital market oriented may
use the Code’s recommendations and suggestions as guidelines.
Listed credit institutions and insurance undertakings are subject to the applicable prudential requirements,
which are not reflected in the Code. Code recommendations apply to the extent that they do not contradict any
legal stipulations. The following principles have been laid down:
l Principle 1: The Management Board is responsible for managing the enterprise in its own best interests.
Its members are jointly accountable for managing the enterprise. The Chair or Spokesperson of the
Management Board coordinates the work of the Management Board members.
l Principle 2: The Management Board develops the enterprise strategy, coordinates it with the
Supervisory Board and ensures its implementation.
l Principle 3: The Management Board stipulates target values for the share of women in the two
management levels below the Board.
l Principle 4: A responsible management of risks arising from business activities requires an appropriate
and effective internal control and risk management system.
l Principle 5: The Management Board ensures that all provisions of law and internal policies are complied
with, and endeavours to achieve their compliance by the enterprise.
l Principle 6: The Supervisory Board appoints and discharges the members of the Management Board;
it supervises and advises the Management Board in the management of the enterprise and has to be
involved in decisions of fundamental importance to the enterprise. The Articles of Association and/or
the Supervisory Board stipulate that transactions of fundamental importance are subject to approval.
Furthermore, transactions with related parties* may be subject to prior approval by the Supervisory
Board according to the applicable legal regulations.
l Principle 7: The Supervisory Board chair is elected by the Supervisory Board from among its members.
The Chair coordinates the activities of the Supervisory Board and represents the interests of the
Supervisory Board externally.
l Principle 8: Shareholders regularly exercise their membership rights at the General Meeting. The
General Meeting adopts resolutions in particular on the appropriation of net profit, approves the actions
of the Management Board and the Supervisory Board by way of discharge, and elects the shareholder
representatives to the Supervisory Board as well as the external auditors. The General Meeting also
adopts resolutions on the company’s legal principles, including, but not limited to, amendments to
the Articles of Association, corporate actions, inter-company agreements and transformations. The
General Meeting generally adopts advisory resolutions on the approval of the remuneration system for
the Management Board members prepared by the Supervisory Board, on the actual remuneration of
the Supervisory Board, as well as proposing resolutions on the approval of the remuneration report for
the preceding financial year.
286 EP-GRMCE

l Principle 9: The Supervisory Board determines, within legal and statutory provisions, the number
of Management Board members, the required qualifications as well as the appointment of suitable
candidates to individual positions. The Supervisory Board defines the target percentage representation
of female Management Board members.
l Principle 10: The Supervisory Board consists of shareholder representatives, and of employee
representatives, if applicable. Shareholder representatives are usually elected by the General
Meeting. The applicable co-determination acts stipulate – depending on the number of employees
and the respective industry sector – if and how many Supervisory Board members must be elected by
employees. Shareholder representatives and employee representatives are obliged in equal measure
to act in the best interests of the enterprise.
l Principle 11: The composition of the Supervisory Board has to ensure that its members collectively
possess the knowledge, skills and professional expertise required to properly perform their duties;
furthermore, the legal gender quota must be considered.
l Principle 12: Each Supervisory Board member ensures that they have sufficient time available to
discharge their duties.
l Principle 13: The Management Board and the Supervisory Board cooperate on a trust basis to
the benefit of the enterprise. Good corporate governance requires an open dialogue between the
Management Board and Supervisory Board, as well as between the members of these individual
Boards. Comprehensive observance of confidentiality is of paramount importance in this regard.
l Principle 14: The establishment of committees generally supports the effectiveness of the Supervisory
Board’s work for larger companies.
l Principle 15: The Management Board is responsible for keeping the Supervisory Board informed.
Nevertheless, the Supervisory Board must itself ensure that it obtains sufficient information. The
Management Board informs the Supervisory Board regularly, without delay and comprehensively
about all issues that are relevant to the enterprise, in particular regarding strategy, planning, business
development, the risk situation, risk management and compliance. The Management Board addresses
departures in the current business development from its existing projections and agreed targets,
indicating the reasons for any such departures. The Supervisory Board may at any time require the
Management Board to provide additional information.
l Principle 16: The Management Board Chair or Spokesperson informs the Supervisory Board Chair
without undue delay of major events that are of material importance for the assessment of the
enterprise’s status and performance, and for the management of the enterprise. The Supervisory Board
Chair subsequently has to inform the Supervisory Board and, if required, convenes an extraordinary
Supervisory Board meeting.
l Principle 17: The external auditors support the Supervisory Board and – where applicable – the Audit
Committee in monitoring the management, particularly in relation to the review of the accounting and
the monitoring of the accounting-related control and risk management systems. The external auditors’
audit opinion informs the capital market about the compliance of financial reporting with generally
accepted accounting principles.
l Principle 18: The members of the Supervisory Board take responsibility for undertaking any training or
professional development measures necessary to fulfil their duties.
l Principle 19: The members of the Management Board and Supervisory Board are bound to observe the
enterprise’s best interests. In all their decisions, they must neither pursue personal interests nor exploit
for themselves business opportunities to which the enterprise is entitled. Management Board members
are subject to comprehensive non-compete clauses throughout the duration of their appointment.
 Lesson 9 n Corporate Governance and Other Stakeholders 287

l Principle 20: All other things being equal, the company will ensure equal treatment of all shareholders in
respect of information. Principle 21 Shareholders and third parties are kept informed by the consolidated
financial statements and the group management report (including CSR reporting), as well as by interim
financial information.
l Principle 22: Management Board and Supervisory Board provide information about the company’s
corporate governance in their Corporate Governance Statement, on an annual basis.
l Principle 23: The Supervisory Board decides upon a clear and understandable system for Management
Board remuneration, and on this basis determines the actual remuneration for each Management Board
member. The General Meeting generally adopts advisory resolutions concerning the approval of the
remuneration system for Management Board members, prepared by the Supervisory Board, as well
as proposing resolutions on the approval of the remuneration report for the preceding financial year.
The remuneration structure of listed companies is to be oriented towards the company’s sustainable
and long-term development. Management Board remuneration is to be set in a way that promotes the
corporate strategy and the company’s long-term development.
l Principle 24: Supervisory Board members receive remuneration appropriate to their tasks and the
situation of the company. Such remuneration is specified by resolution of the General Meeting, or in the
Articles of Association, if applicable.
l Principle 25: The Management Board and the Supervisory Board prepare an annual remuneration
report, in accordance with statutory provisions.

Under the Japan’s Corporate Governance Code, 2018

Tokyo Stock Exchange, Inc. (TSE) has partially revised the Securities Listing Regulations pertaining to the
revision of Japan’s Corporate Governance Code (the Code) with effect from June 1, 2018.
This revision is based on the proposals made by the Council of Experts Concerning the Follow-up of Japan’s
Stewardship Code and Japan’s Corporate Governance Code (hereinafter the “Council”). Jointly operated by
the Financial Services Agency and TSE, the Council made proposals to revise the Code in order to advance
governance reform not just in form but also in substance through dialogue between companies and investors.

General Principles:
1. Securing the Rights and Equal Treatment of Shareholders
Companies should take appropriate measures to fully secure shareholder rights and develop an
environment in which shareholders can exercise their rights appropriately and effectively. In addition,
companies should secure effective equal treatment of shareholders. Given their particular sensitivities,
adequate consideration should be given to the issues and concerns of minority shareholders and
foreign shareholders for the effective exercise of shareholder rights and effective equal treatment of
shareholders.
2. Appropriate Cooperation with Stakeholders Other Than Shareholders
Companies should fully recognize that their sustainable growth and the creation of mid- to long-term
corporate value are brought as a result of the provision of resources and contributions made by a range
of stakeholders, including employees, customers, business partners, creditors and local communities.
As such, companies should endeavor to appropriately cooperate with these stakeholders. The board
and the management should exercise their leadership in establishing a corporate culture where the
rights and positions of stakeholders are respected and sound business ethics are ensured.
3. Ensuring Appropriate Information Disclosure and Transparency
288 EP-GRMCE

Companies should appropriately make information disclosure in compliance with the relevant laws
and regulations, but should also strive to actively provide information beyond that required by law. This
includes both financial information, such as financial standing and operating results, and non-financial
information, such as business strategies and business issues, risk, and governance. The board should
recognize that disclosed information will serve as the basis for constructive dialogue with shareholders,
and therefore ensure that such information, particularly non-financial information, is accurate, clear and
useful.
4. Responsibilities of the Board
Given its fiduciary responsibility and accountability to shareholders, in order to promote sustainable
corporate growth and the increase of corporate value over the mid- to long-term and enhance earnings
power and capital efficiency, the board should appropriately fulfill its roles and responsibilities, including:
(1) Setting the broad direction of corporate strategy; (2) Establishing an environment where appropriate
risk-taking by the senior management is supported; and (3) Carrying out effective oversight of directors
and the management (including shikkoyaku and so-called shikkoyakuin) from an independent and
objective standpoint. Such roles and responsibilities should be equally and appropriately fulfilled
regardless of the form of corporate organization – i.e., Company with Kansayaku Board (where a part of
these roles and responsibilities are performed by kansayaku and the kansayaku board), Company with
Three Committees (Nomination, Audit and Remuneration), or Company with Supervisory Committee.
5. Dialogue with Shareholders
In order to contribute to sustainable growth and the increase of corporate value over the mid- to long-
term, companies should engage in constructive dialogue with shareholders even outside the general
shareholder meeting. During such dialogue, senior management and directors, including outside
directors, should listen to the views of shareholders and pay due attention to their interests and
concerns, clearly explain business policies to shareholders in an understandable manner so as to gain
their support, and work for developing a balanced understanding of the positions of shareholders and
other stakeholders and acting accordingly.
Section 1: Securing the Rights and Equal Treatment of Shareholders
General Principle 1:
Companies should take appropriate measures to fully secure shareholder rights and develop an environment in
which shareholders can exercise their rights appropriately and effectively. In addition, companies should secure
effective equal treatment of shareholders. Given their particular sensitivities, adequate consideration should be
given to the issues and concerns of minority shareholders and foreign shareholders for the effective exercise of
shareholder rights and effective equal treatment of shareholders.
l Principle 1.1. - Securing the Rights of Shareholders: Companies should take appropriate measures
to fully secure shareholder rights, including voting rights at the general shareholder meeting.
l Principle 1.2. - Exercise of Shareholder Rights at General Shareholder Meetings: Companies
should recognize that general shareholder meetings are an opportunity for constructive dialogue with
shareholders, and should therefore take appropriate measures to ensure the exercise of shareholder
rights at such meetings.
l Principle 1.3. - Basic Strategy for Capital Policy: Because capital policy may have a significant
effect on shareholder returns, companies should explain their basic strategy with respect to their capital
policy.
l Principle 1.4. - Cross-Shareholdings: When companies hold shares of other listed companies as
cross-shareholdings, they should disclose their policy with respect to doing so, including their policies
 Lesson 9 n Corporate Governance and Other Stakeholders 289

regarding the reduction of cross-shareholdings. In addition, the board should annually assess whether
or not to hold each individual cross-shareholding, specifically examining whether the purpose is
appropriate and whether the benefits and risks from each holding cover the company’s cost of capital.
The results of this assessment should be disclosed. Companies should establish and disclose specific
standards with respect to the voting rights as to their cross-shareholdings, and vote in accordance with
the standards.
l Principle 1.5. - Anti-Takeover Measures: Anti-takeover measures must not have any objective
associated with entrenchment of the management or the board. With respect to the adoption or
implementation of anti-takeover measures, the board and kansayaku3 should carefully examine their
necessity and rationale in light of their fiduciary responsibility to shareholders, ensure appropriate
procedures, and provide sufficient explanation to shareholders.
l Principle 1.6. - Capital Policy that May Harm Shareholder Interests: With respect to a company’s
capital policy that results in the change of control or in significant dilution, including share offerings
and management buyouts, the board and kansayaku should, in order not to unfairly harm the existing
shareholders’ interests, carefully examine the necessity and rationale from the perspective of their
fiduciary responsibility to shareholders, should ensure appropriate procedures, and provide sufficient
explanation to shareholders.
Section 2: Appropriate Cooperation with Stakeholders Other Than Shareholders
General Principle 2:
Companies should fully recognize that their sustainable growth and the creation of mid- to long-term corporate
value are brought about as a result of the provision of resources and contributions made by a range of
stakeholders, including employees, customers, business partners, creditors and local communities. As
such, companies should endeavor to appropriately cooperate with these stakeholders. The board and the
management should exercise their leadership in establishing a corporate culture where the rights and positions
of stakeholders are respected and sound business ethics are ensured.
l Principle 2.1. - Business Principles as the Foundation of Corporate Value Creation: Over the Mid-
to Long-Term Guided by their position concerning social responsibility, companies should undertake
their businesses in order to create value for all stakeholders while increasing corporate value over
the mid- to long-term. To this end, companies should draft and maintain business principles that will
become the basis for such activities.
l Principle 2.2. - Code of Conduct: Companies should draft and implement a code of conduct for
employees in order to express their values with respect to appropriate cooperation with and serving
the interests of stakeholders and carrying out sound and ethical business activities. The board should
be responsible for drafting and revising the code of conduct, and should ensure its compliance broadly
across the organization, including the front line of domestic and global operations.
l Principle 2.3.- Sustainability Issues, Including Social and Environmental Matters: Companies
should take appropriate measures to address sustainability issues, including social and environmental
matters.
l Principle 2.4. Ensuring Diversity, Including Active Participation of Women: Companies should
recognize that the existence of diverse perspectives and values reflecting a variety of experiences,
skills and characteristics is a strength that supports their sustainable growth. As such, companies
should promote diversity of personnel, including the active participation of women.
l Principle 2.5. - Whistleblowing: Companies should establish an appropriate framework for
whistleblowing such that employees can report illegal or inappropriate behavior, disclosures, or any
other serious concerns without fear of suffering from disadvantageous treatment. Also, the framework
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should allow for an objective assessment and appropriate response to the reported issues, and the
board should be responsible for both establishing this framework, and ensuring and monitoring its
enforcement.
l Principle 2.6.- Roles of Corporate Pension Funds as Asset Owners: Because the management
of corporate pension funds impacts stable asset formation for employees and companies’ own
financial standing, companies should take and disclose measures to improve human resources and
operational practices, such as the recruitment or assignment of qualified persons, in order to increase
the investment management expertise of corporate pension funds (including stewardship activities
such as monitoring the asset managers of corporate pension funds), thus making sure that corporate
pension funds perform their roles as asset owners. Companies should ensure that conflicts of interest
which could arise between pension fund beneficiaries and companies are appropriately managed.
Section 3: Ensuring Appropriate Information Disclosure and Transparency
General Principle 3
Companies should appropriately make information disclosure in compliance with the relevant laws and
regulations, but should also strive to actively provide information beyond that required by law. This includes
both financial information, such as financial standing and operating results, and non-financial information, such
as business strategies and business issues, risk and governance. The board should recognize that disclosed
information will serve as the basis for constructive dialogue with shareholders, and therefore ensure that such
information, particularly non-financial information, is accurate, clear and useful.
l Principle 3.1- Full Disclosure: In addition to making information disclosure in compliance with relevant
laws and regulations, companies should disclose and proactively provide the information listed below
(along with the disclosures specified by the principles of the Code) in order to enhance transparency
and fairness in decision-making and ensure effective corporate governance: i) Company objectives
(e.g., business principles), business strategies and business plans; ii) Basic views and guidelines on
corporate governance based on each of the principles of the Code; iii) Board policies and procedures
in determining the remuneration of the senior management and directors; iv) Board policies and
procedures in the appointment/dismissal of the senior management and the nomination of directors
and kansayaku candidates; and v) Explanations with respect to the individual appointments/dismissals
and nominations based on iv).
l Principle 3.2. - External Auditors: External auditors and companies should recognize the responsibility
that external auditors owe toward shareholders and investors, and take appropriate steps to secure the
proper execution of audits.
Section 4: Responsibilities of the Board
General Principle 4:
Given its fiduciary responsibility and accountability to shareholders, in order to promote sustainable corporate
growth and the increase of corporate value over the midto long-term and enhance earnings power and capital
efficiency, the board should appropriately fulfill its roles and responsibilities, including: (1) Setting the broad
direction of corporate strategy; (2) Establishing an environment where appropriate risk-taking by the senior
management is supported; and (3) Carrying out effective oversight of directors and the management (including
shikkoyaku7 and so-called shikkoyakuin8 ) from an independent and objective standpoint. Such roles and
responsibilities should be equally and appropriately fulfilled regardless of the form of corporate organization
– i.e., Company with Kansayaku Board (where a part of these roles and responsibilities are performed by
kansayaku and the kansayaku board), Company with Three Committees (Nomination, Audit and Remuneration)
or Company with Supervisory Committee.
 Lesson 9 n Corporate Governance and Other Stakeholders 291

l Principle 4.1. - Roles and Responsibilities of the Board: The board should view the establishment
of corporate goals (business principles, etc.) and the setting of strategic direction as one major aspect
of its roles and responsibilities. It should engage in constructive discussion with respect to specific
business strategies and business plans, and ensure that major operational decisions are based on the
company’s strategic direction.
l Principle 4.2 Roles and Responsibilities of the Board: The board should view the establishment
of an environment that supports appropriate risk-taking by the senior management as a major aspect
of its roles and responsibilities. It should welcome proposals from the management based on healthy
entrepreneurship, fully examine such proposals from an independent and objective standpoint with
the aim of securing accountability, and support timely and decisive decision-making by the senior
management when approved plans are implemented. Also, the remuneration of the management
should include incentives such that it reflects mid- to long-term business results and potential risks, as
well as promotes healthy entrepreneurship.
l Principle 4.3 Roles and Responsibilities of the Board: The board should view the effective oversight
of the management and directors from an independent and objective standpoint as a major aspect
of its roles and responsibilities. It should appropriately evaluate company performance and reflect
the evaluation in its assessment of the senior management. In addition, the board should engage in
oversight activities in order to ensure timely and accurate information disclosure, and should establish
appropriate internal control and risk management systems. Also, the board should appropriately deal
with any conflict of interests that may arise between the company and its related parties, including the
management and controlling shareholders.
l Principle 4.4. - Roles and Responsibilities of Kansayaku and the Kansayaku Board: Kansayaku
and the kansayaku board should bear in mind their fiduciary responsibilities to shareholders and make
decisions from an independent and objective standpoint when executing their roles and responsibilities
including the audit of the performance of directors’ duties, appointment and dismissal of external
auditors and the determination of auditor remuneration. Although so-called “defensive functions,” such
as business and accounting audits, are part of the roles and responsibilities expected of kansayaku and
the kansayaku board, in order to fully perform their duties, it would not be appropriate for kansayaku
and the kansayaku board to interpret the scope of their function too narrowly, and they should positively
and proactively exercise their rights and express their views at board meetings and to the management.
l Principle 4.5.- Fiduciary Responsibilities of Directors and Kansayaku: With due attention to their
fiduciary responsibilities to shareholders, the directors, kansayaku and the management of companies
should secure the appropriate cooperation with stakeholders and act in the interest of the company and
the common interests of its shareholders.
l Principle 4.6. - Business Execution and Oversight of the Management: In order to ensure
effective, independent and objective oversight of the management by the board, companies should
consider utilizing directors who are neither involved in business execution nor have close ties with the
management.
l Principle 4.7. - Roles and Responsibilities of Independent Directors: Companies should make
effective use of independent directors 9 , taking into consideration the expectations listed below with
respect to their roles and responsibilities: i) Provision of advice on business policies and business
improvement based on their knowledge and experience with the aim to promote sustainable corporate
growth and increase corporate value over the mid- to long-term; ii) Monitoring of the management
through important decision-making at the board including the appointment and dismissal of the senior
management; iii) Monitoring of conflicts of interest between the company and the management or
controlling shareholders; and iv) Appropriately representing the views of minority shareholders and
292 EP-GRMCE

other stakeholders in the boardroom from a standpoint independent of the management and controlling
shareholders.
l Principle 4.8. - Effective Use of Independent Directors: Independent directors should fulfill their
roles and responsibilities with the aim of contributing to sustainable growth of companies and increasing
corporate value over the mid- to long-term. Companies should therefore appoint at least two independent
directors that sufficiently have such qualities. Irrespective of the above, if a company believes it needs
to appoint at least one-third of directors as independent directors based on a broad consideration
of factors such as the industry, company size, business characteristics, organizational structure and
circumstances surrounding the company, it should appoint a sufficient number of independent directors.
l Principle 4.9- Independence Standards and Qualification for Independent Directors: Boards
should establish and disclose independence standards aimed at securing effective independence of
independent directors, taking into consideration the independence criteria set by securities exchanges.
The board should endeavor to select independent director candidates who are expected to contribute
to frank, active and constructive discussions at board meetings.
l Principle 4.10. - Use of Optional Approach: In adopting the most appropriate organizational structure
(as stipulated by the Companies Act) that is suitable for a company’s specific characteristics, companies
should employ optional approaches, as necessary, to further enhance governance functions.
l Principle 4.11. - Preconditions for Board and Kansayaku Board Effectiveness: The board should
be well balanced in knowledge, experience and skills in order to fulfill its roles and responsibilities,
and it should be constituted in a manner to achieve both diversity, including gender and international
experience, and appropriate size. In addition, persons with appropriate experience and skills as well
as necessary knowledge on finance, accounting, and the law should be appointed as kansayaku.
In particular, at least one person who has sufficient expertise on finance and accounting should be
appointed as kansayaku. The board should endeavor to improve its function by analyzing and evaluating
effectiveness of the board as a whole.
l Principle 4.12. - Active Board Deliberations: The board should endeavor to foster a climate where
free, open and constructive discussions and exchanges of views take place, including the raising of
concerns by outside directors.
l Principle 4.13. - Information Gathering and Support Structure: In order to fulfill their roles and
responsibilities, directors and kansayaku should proactively collect information, and as necessary,
request the company to provide them with additional information. Also, companies should establish a
support structure for directors and kansayaku, including providing sufficient staff. The board and the
kansayaku board should verify whether information requested by directors and kansayaku is provided
smoothly.
l Principle 4.14. - Director and Kansayaku Training: New and incumbent directors and kansayaku
should deepen their understanding of their roles and responsibilities as a critical governance body at
a company, and should endeavor to acquire and update necessary knowledge and skills. Accordingly,
companies should provide and arrange training opportunities suitable to each director and kansayaku
along with financial support for associated expenses. The board should verify whether such opportunities
and support are appropriately provided.
Section 5: Dialogue with Shareholders
General Principle 5:
In order to contribute to sustainable growth and the increase of corporate value over the mid- to long-term,
companies should engage in constructive dialogue with shareholders even outside the general shareholder
meeting. During such dialogue, senior management and directors, including outside directors, should listen
 Lesson 9 n Corporate Governance and Other Stakeholders 293

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

Under the Indian Companies Act, 2013

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

of all stakeholders, particularly the minority shareholders and balance the conflicting interest of the
stakeholders.

Part II of Schedule IV:

II. Role and functions:
The independent directors shall:
(1) help in bringing an independent judgment to bear on the Board’s deliberations especially
on issues of strategy, performance, risk management, resources, key appointments and
standards of conduct;
(2) bring an objective view in the evaluation of the performance of board and management;
(3) scrutinise the performance of management in meeting agreed goals and objectives and
monitor the reporting of performance;
(4) satisfy themselves on the integrity of financial information and that financial controls and the
systems of risk management are robust and defensible;
(5) safeguard the interests of all stakeholders, particularly the minority shareholders;
(6) balance the conflicting interest of the stakeholders;
(7) determine appropriate levels of remuneration of executive directors, key managerial
personnel and senior management and have a prime role in appointing and where
necessary recommend removal of executive directors, key managerial personnel and
senior management;
(8) moderate and arbitrate in the interest of the company as a whole, in situations of conflict
between management and shareholder’s interest.
Part III of Schedule IV:
III. Duties:
The independent directors shall –
(1) undertake appropriate induction and regularly update and refresh their skills, knowledge
and familiarity with the company;
(2) seek appropriate clarification or amplification of information and, where necessary, take and
follow appropriate professional advice and opinion of outside experts at the expense of the
company;
(3) strive to attend all meetings of the Board of Directors and of the Board committees of which
he is a member;
(4) participate constructively and actively in the committees of the Board in which they are
chairpersons or members;
(5) strive to attend the general meetings of the company;
(6) where they have concerns about the running of the company or a proposed action, ensure
that these are addressed by the Board and, to the extent that they are not resolved, insist
that their concerns are recorded in the minutes of the Board meeting;
(7) keep themselves well informed about the company and the external environment in which
it operates;
 Lesson 9 n Corporate Governance and Other Stakeholders 295

(8) not to unfairly obstruct the functioning of an otherwise proper Board or committee of the Board;
(9) pay sufficient attention and ensure that adequate deliberations are held before approving related
party transactions and assure themselves that the same are in the interest of the company;
(10) ascertain and ensure that the company has an adequate and functional vigil mechanism and to
ensure that the interests of a person who uses such mechanism are not prejudicially affected on
account of such use;
(11) report concerns about unethical behaviour, actual or suspected fraud or violation of the company’s
code of conduct or ethics policy;
(12) “act within their authority”, assist in protecting the legitimate interests of the company, shareholders
and its employees;
(13) not disclose confidential information, including commercial secrets, technologies, advertising and
sales promotion plans, unpublished price sensitive information, unless such disclosure is expressly
approved by the Board or required by law.

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

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

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

1. Identify stakeholder
2. Establish the goals and objectives of the company for engagement.
3. Identify stakeholder needs and interests.
4. Determine the stakeholder engagement strategy.
5. Evaluate outcome and internalize learnings.
Corporations are often confronted with the difficulty of balancing competing or opposing stakeholder needs
or demands. The success of stakeholder engagement is initially dependent upon the quality of stakeholder
analysis.
Key principles of Stakeholder engagement
l Communicate: Interactions from the various stakeholders should be promoted. Example: for customers
there should be dedicated customer care center. The communication may be made through the print
media elaborating about the progress of the company, which is also a part of the transparency and
disclosure. Ensure intended message is understood and the desired response achieved.
l Consult, early and often: Always ask the right questions to get the useful information and ideas. To
engage their support ask them for advice and listen how they feel.
l Remember, they are human: Operate with an awareness of human feelings.
l Plan it: Time investment and careful planning against it, has a significant payoff.
l Relationship: Try to engender trust with the stakeholders. Seek out networking opportunity.
l Simple but not easy: Show your care. Be empathetic. Listen to the stakeholders.
l Managing risk: Stakeholders can be treated as risk and opportunities that have probabilities and
impact.
l Compromise: Compromise across a set of stakeholders’ diverging priorities.
l Understand what success is: Explore the value of the project to the stakeholder.
l Take responsibility: Project governance is the key of project success. It’s always the responsibility of
everyone to maintain an ongoing dialogue with stakeholders.
Benefits: Stakeholder engagement provides opportunities to further align business practices with societal needs
and expectations, helping to drive long-term sustainability and shareholder value. Stakeholder engagement is
intended to help the practitioners fully realise the benefits of stakeholder engagement in their organization, to
compete in an increasingly complex and ever-changing business environment, while at the same time bringing
about systemic change towards sustainable development.

STAKEHOLDER ANALYSIS
Stakeholder analysis is the identification of a project’s/activity’s key stakeholders, an assessment of their
interests, and the ways in which these interests affect project riskiness and viability. It is linked to both institutional
appraisal and social analysis: drawing on the information deriving from these approaches, but also contributing
to the combining of such data in a single framework. Stakeholder analysis contributes to project design/activity
design through the logical framework, and by helping to identify appropriate forms of stakeholder participation.
It is the process of identifying the individuals or groups that are likely to affect or be affected by a proposed
action, and sorting them according to their impact on the action and the impact the action will have on them.
This information is used to assess how the interests of those stakeholders should be addressed in a project
 Lesson 9 n Corporate Governance and Other Stakeholders 297

plan, policy, program, or other action.

Stakeholder analysis is a key part of stakeholder management. A stakeholder analysis of an issue consists of
weighing and balancing all of the competing demands on a firm by each of those who have a claim on it, in order
to arrive at the firm’s obligation in a particular case. A stakeholder analysis does not preclude the interests of
the stakeholders overriding the interests of the other stakeholders affected, but it ensures that all affected will
be considered.
Doing a stakeholder analysis can:
l draw out the interests of stakeholders in relation to the problems which the project is seeking to address
(at the identification stage) or the purpose of the project (once it has started)
l identify conflicts of interests between stakeholders
l help to identify relations between stakeholders which can be built upon, and may enable establish
synergies
l help to assess the appropriate type of participation by different stakeholders.
The underlining factor in the stakeholder concept is that every activity of an organization should be based taking
into account the interests of all the stakeholders. A holistic approach ensuring fairness to all the stakeholders is
completely necessary for the sustainability of an enterprise.
A major reason for increasing adoption of a Stakeholder Concept in setting business objectives is the recognition
that businesses are affected by the “environment” in which they operate. Businesses come into regular contact
with customers, suppliers, government agencies, families of employees, special interest groups. Decisions
made by a business are likely to affect one or more of these “stakeholder groups”.
The stakeholder concept suggests that the managers of a business should take into account their responsibilities
to other groups – “not just the shareholder group” - when making decisions. The concept suggests that
businesses can benefit significantly from cooperating with stakeholder groups, incorporating their needs in the
decision-making process.
Stakeholder analysis helps with the identification of Stakeholders’ interests, Mechanisms to influence other
stakeholders, Potential risks, Key people to be informed about the project during the execution phase and
Negative stakeholders as well as their adverse effects on the project.

BETTER STAKEHOLDER ENGAGEMENT ENSURES GOOD GOVERNANCE

Stakeholders are characterized by their relationship to the company and their needs, interests and concerns,
which will be foremost in their minds at the start of an engagement process. However, as the process unfolds
they will soon take a particular role with related tasks and responsibilities. The following are just some of the
different roles that stakeholders can play:
l Experts, such as academics, who have been invited to contribute knowledge and strategic advice to the
company’s board;
l Technical advisors with expertise on the social and environmental risks associated with particular
technological and scientific developments invited to sit on scientific and ethical panels in science-based
industries;
l Representatives of special interests, such as employees, local communities or the environment,
commonly invited to participate in stakeholder panels to review company performance and/or reporting
practices;
l Co-implementers, such as NGOs, who have partnered with the company to implement a joint solution
298 EP-GRMCE

or program to address a shared challenge.

Stakeholders can only be well informed and knowledgeable if companies are transparent and report on issues
that impact stakeholders. Both parties have an obligation to communicate sincerely and attempt to understand,
not just be understood.

TYPES OF STAKEHOLDERS
The concept of stakeholders may be classified into Primary and Secondary Stakeholders:
l Primary stakeholders are those whose continued association is absolutely necessary for a firm’s
survival; these include employees, customers, investors, and shareholders, as well as the governments
and communities that provide necessary infrastructure.
l Secondary stakeholders do not typically engage in transactions with a company and thus are not
essential for its survival; these include the media, trade associations, and special interest groups.
Both primary and secondary stakeholders embrace specific values and standards that dictate what constitutes
acceptable or unacceptable corporate behaviors. While primary groups may present more day-to- day concerns,
secondary groups cannot be ignored or given less consideration in the ethical decision- making process.

THE CAUX ROUND TABLE

The Caux Round Table (CRT) is an international network of business leaders working to promote a morally
and sustainable way of doing business. The CRT believes that its Principles for Responsible Business provide
necessary foundations for a fair, free and transparent global society.
The Caux Round Table was founded in1986 by Frits Philips Sr, former President of Philips Electronics, and
Olivier Giscard d’Estaing, former Vice-Chairman of INSEAD, as a means of reducing escalating international
trade tensions between Europe, Japan and the USA.
At the urging of Ryuzaburo Kaku, then Chairman of Canon, Inc, the CRT began to focus attention on the
importance of global corporate responsibility in reducing social and economic threats to world peace and
stability. This led to the development of the 1994 Caux Round Table Principles for Business around three ethical
foundations, namely: responsible stewardship; the Japanese concept of Kyosei - living and working for mutual
advantage; and respecting and protecting human dignity. These principles recognize that while laws and market
forces are necessary, they are insufficient guides for responsible business conduct.
The principles also have a risk management foundation - because good ethics is good risk management.
And they balance the interests of business with the aspirations of society to ensure sustainable and mutual
prosperity for all.
The CRT Principles for Responsible Business are supported by more detailed Stakeholder Management
Guidelines covering each key dimension of business success: customers, employees, shareholders, suppliers,
competitors, and communities. These Stakeholder Management Guidelines can be found at Attachment A
below.

PRINCIPLE 1 - RESPECT STAKEHOLDERS BEYOND SHAREHOLDERS

l A responsible business acknowledges its duty to contribute value to society through the wealth and
employment it creates and the products and services it provides to consumers.
l A responsible business maintains its economic health and viability not just for shareholders, but also for
other stakeholders.
l A responsible business respects the interests of, and acts with honesty and fairness towards, its
customers, employees, suppliers, competitors, and the broader community.
 Lesson 9 n Corporate Governance and Other Stakeholders 299

PRINCIPLE 2 – CONTRIBUTE TO ECONOMIC, SOCIAL AND ENVIRONMENTAL DEVELOPMENT

l A responsible business recognizes that business cannot sustainably prosper in societies that are failing
or lacking in economic development.
l A responsible business therefore contributes to the economic, social and environmental development
of the communities in which it operates, in order to sustain its essential ‘operating’ capital – financial,
social, environmental, and all forms of goodwill.
l A responsible business enhances society through effective and prudent use of resources, free and fair
competition, and innovation in technology and business practices.

PRINCIPLE 3 – BUILD TRUST BY GOING BEYOND THE LETTER OF THE LAW

l A responsible business recognizes that some business behaviors, although legal, can nevertheless
have adverse consequences for stakeholders.
l A responsible business therefore adheres to the spirit and intent behind the law, as well as the letter of
the law, which requires conduct that goes beyond minimum legal obligations.
l A responsible business always operates with candor, truthfulness, and transparency, and keeps its
promises.

PRINCIPLE 4 –RESPECT RULES AND CONVENTIONS

l A responsible business respects the local cultures and traditions in the communities in which it operates,
consistent with fundamental principles of fairness and equality.
l A responsible business, everywhere it operates, respects all applicable national and international laws,
regulations and conventions, while trading fairly and competitively.

PRINCIPLE 5 – SUPPORT RESPONSIBLE GLOBALISATION

l A responsible business, as a participant in the global marketplace, supports open and fair multilateral
trade.
l A responsible business supports reform of domestic rules and regulations where they unreasonably
hinder global commerce.

PRINCIPLE 6 – RESPECT THE ENVIRONMENT

l A responsible business protects and, where possible, improves the environment, and avoids wasteful
use of resources.
l A responsible business ensures that its operations comply with best environmental management
practices consistent with meeting the needs of today without compromising the needs of future
generations.

PRINCIPLE 7 – AVOID ILLICIT ACTIVITIES

l A responsible business does not participate in, or condone, corrupt practices, bribery, money laundering,
or other illicit activities.
l A responsible business does not participate in or facilitate transactions linked to or supporting terrorist
activities, drug trafficking or any other illicit activity.
l A responsible business actively supports the reduction and prevention of all such illegal and illicit
activities.
300 EP-GRMCE

CRT Stakeholder Management Guidelines

The Caux Round Table’s (CRT) Stakeholder Management Guidelines supplement the CRT Principles for
Responsible Business with more specific standards for engaging with key stakeholder constituencies.
The key stakeholder constituencies are those who contribute to the success and sustainability of business
enterprise. Customers provide cash flow by purchasing good and services; employees produce the goods and
services sold, owners and other investors provide funds for the business; suppliers provide vital resources;
competitors provide efficient markets; communities provide social capital and operational security for the
business; and the environment provides natural resources and other essential conditions.
In turn, key stakeholders are dependent on business for their well-being and prosperity. They are the beneficiaries
of ethical business practices.

1. Customers
A responsible business treats its customers with respect and dignity. Business therefore has a responsibility to:
a. Provide customers with the highest quality products and services consistent with their requirements.
b. Treat customers fairly in all aspects of business transactions, including providing a high level of service
and remedies for product or service problems or dissatisfaction.
c. Ensure that the health and safety of customers is protected.
d. Protect customers from harmful environmental impacts of products and services.
e. Respect the human rights, dignity and the culture of customers in the way products and services are
offered, marketed, and advertised.

2. Employees
A responsible business treats every employee with dignity and respects their interests. Business therefore has
a responsibility to:
a. Provide jobs and compensation that contribute to improved living standards
b. Provide working conditions that protect each employee’s health and safety.
c. Provide working conditions that enhance each employee’s well-being as citizens, family members, and
capable and caring individuals
d. Be open and honest with employees in sharing information, limited only by legal and competitive
constraints.
e. Listen to employees and act in good faith on employee complaints and issues.
f. Avoid discriminatory practices and provide equal treatment, opportunity and pay in areas such as
gender, age, race, and religion.
g. Support the employment of differently-abled people in places of work where they can be productive.
h. Encourage and assist all employees in developing relevant skills and knowledge.
i. Be sensitive to the impacts of unemployment and work with governments, employee groups and other
agencies in addressing any employee dislocations.
j. Ensure that all executive compensation and incentives further the achievement of long- term wealth
creation, reward prudent risk management, and discourage excessive risk taking.
k. Avoid illicit or abusive child labor practices.
 Lesson 9 n Corporate Governance and Other Stakeholders 301

3. Shareholders
A responsible business acts with care and loyalty towards its shareholders and in good faith for the best interests
of the corporation. Business therefore has a responsibility to:
a. Apply professional and diligent management in order to secure fair, sustainable and competitive returns
on shareholder investments.
b. Disclose relevant information to shareholders, subject only to legal requirements and competitive
constraints.
c. Conserve, protect, and increase shareholder wealth.
d. Respect shareholder views, complaints, and formal resolutions.

4. Suppliers
A responsible business treats its suppliers and subcontractors with fairness, truthfulness and mutual respect.
Business therefore has a responsibility to:
a. Pursue fairness and truthfulness in supplier and subcontractor relationships, including pricing, licensing,
and payment in accordance with agreed terms of trade.
b. Ensure that business supplier and subcontractor activities are free from coercion and threats.
c. Foster long-term stability in the supplier relationships in return for value, quality, competitiveness and
reliability.
d. Share information with suppliers and integrate them into business planning.
e. Seek, encourage and prefer suppliers and subcontractors whose employment practices respect human
rights and dignity.
f. Seek, encourage and prefer suppliers and subcontractors whose environmental practices meet best
practice standards.

5. Competitors
A responsible business engages in fair competition which is a basic requirement for increasing the wealth of
nations and ultimately for making possible the just distribution of goods and services. Business therefore has
a responsibility to:
a. Foster open markets for trade and investment.
b. Promote competitive behavior that is socially and environmentally responsible and demonstrates
mutual respect among competitors.
c. Not participate in anti-competitive or collusive arrangements or tolerate questionable payments or
favors to secure competitive advantage.
d. Respect both tangible and intellectual property rights.
e. Refuse to acquire commercial information through dishonest or unethical means, such as industrial
espionage.

6. Communities
As a global corporate citizen, a responsible business actively contributes to good public policy and to human
rights in the communities in which it operates. Business therefore has a responsibility to:
302 EP-GRMCE

a. Respect human rights and democratic institutions, and promote them wherever practicable.
b. Recognize government’s legitimate obligation to society at large and support public policies and
practices that promote social capital.
c. Promote harmonious relations between business and other segments of society.
d. Collaborate with community initiatives seeking to raise standards of health, education, workplace safety
and economic well-being.
e. Promote sustainable development in order to preserve and enhance the physical environment while
conserving the earth’s resources.
f. Support peace, security and the rule of law.
g. Respect social diversity including local cultures and minority communities.
h. Be a good corporate citizen through ongoing community investment and support for employee
participation in community and civic affairs.

THE CLARKSON PRINCIPLES OF STAKEHOLDER MANAGEMENT

The year after his retirement from the faculty of the University of Toronto in 1988, Max Clarkson (1922-1998)
founded the Centre for Corporate Social Performance and Ethics in the Faculty of Management, now the
Clarkson Centre for Business Ethics & Board Effectiveness, or CC(BE) 2 . Four conferences hosted by the
Centre between 1993 and 1998 brought together management scholars to share ideas on stakeholder theory,
an emerging field of study examining the relationships and responsibilities of a corporation to employees,
customers, suppliers, society, and the environment. The Alfred P. Sloan Foundation funded the project, from
which the Clarkson Principles emerged.
After an introduction to the stakeholder concept with comments on shareowners and the legal and moral
duty of managers, seven (7) principles of Stakeholder Management are set forth, each with a paragraph or
two expanding on its meaning. These principles represent an early stage general awareness of corporate
governance concerns that have been widely discussed in connection with the business scandals of 2002.
l Principle 1 : Managers should acknowledge and actively monitor the concerns of all legitimate
stakeholders, and should take their interests appropriately into account in decision-making and
operations.
l Principle 2: Managers should listen to and openly communicate with stakeholders about their respective
concerns and contributions, and about the risks that they assume because of their involvement with the
corporation.
l Principle 3: Managers should adopt processes and modes of behavior that are sensitive to the concerns
and capabilities of each stakeholder constituency.
l Principle 4: Managers should recognize the interdependence of efforts and rewards among
stakeholders, and should attempt to achieve a fair distribution of the benefits and burdens of corporate
activity among them, taking into account their respective risks and vulnerabilities.
l Principle 5: Manages should work cooperatively with other entities, both public and private, to insure
that risks and harms arising from corporate activities are minimized and, where they cannot be avoided,
appropriately compensated.
l Principle 6: Managers should avoid altogether activities that might jeopardize inalienable human rights
(e.g., the right to life) or give rise to risks which, if clearly understood, would be patently unacceptable
to relevant stakeholders.
 Lesson 9 n Corporate Governance and Other Stakeholders 303

l Principle 7: Managers should acknowledge the potential conflicts between (a) their own role as
corporate stakeholders, and (b) their legal and moral responsibilities for the interests of stakeholders,
and should address such conflicts through open communication, appropriate reporting and incentive
systems, and, where necessary, third party review.
In many ways, the Clarkson Principles are “meta-principles” that encourage management to embrace specific
stakeholder principles and then to implement them in accordance with the norms listed above. Their current use
seems largely hortatory, unlike principles or codes that call for formal adoption by managers or corporations.

GOVERNANCE PARADIGM AND VARIOUS STAKEHOLDERS

(a) Employees:
Earlier it was believed that shareholder’s primacy is supreme since they have contributed towards the capital
and it leaves out role of employees. However with the growing that capital alone cannot do miracle and labour
is also an equally important factor of the production.
Employee participation in corporate governance systems can be found in many countries and corporations
throughout the world. Following are the some important example for ensuring good governance by employees:
l Right to consultation - where employees must be consulted on certain management decisions. This
right increases transparency of management decisions and allows employee opinion to ameliorate the
asymmetry of information between management and the market.
l Right to nominate/vote for supervisory board members - In many cases employee participation on the
board is mandated. This right creates a check and balance system between management and the
supervisory board, which in turn creates the perception of greater fairness.
l Compensation/privatization programs that make employees holders of shares, thereby empowering
employees to elect the board members, which, in turn holds management responsible.
l Participation in the capital: Employees may be partner in the capital contribution. They may be given
the shares under the ESOP scheme. This will create the belongingness of the ownership concept
among the employees meaning there by owner as well as employee. This will lead to the Improved
employee commitment and buy-in to management’s goals side by side the alignment of interest
between employees and shareholders. It may support the emergence of more transparent and effective
corporate governance.
l Profit sharing: The profit-sharing plans should be broad-based (all or most employees) rather than
for executives only. This can be done in a variety of ways like: Cash-based sharing of annual profits,
Deferred profit-sharing. The advantages of it are Encourage employee involvement, improve motivation,
Improve distribution of wealth and Wage flexibility can improve firm performance.
l Whistle Blower Policy: A whistle blower is the one who exposes wrongdoing, fraud, corruption or
mismanagement in an organization. A whistle blower is a person who publicly complains/discloses
the concealed misconduct on the part of an organization or body of people, usually from within that
same organisation. Whistle blower may be an employee, former employee, vendor, customer or other
stakeholder. Whistle blowers are important stakeholders as they can work as a tool for authorities to get
information of deviant behaviour or practices in organizations.
l The big question is that in an organization where although lots of people are work, who will take chance
against the possible risk involved? Who would blow the whistle about the wrongdoing/malpractices
going on inside an organization? It’s not only about just raising alarm, it is more about the impartiality
and courage to start with.
304 EP-GRMCE

l Whistle blower needs protection against retaliation/misbehavior by superiors. At the corporate level, the
companies can provide protection to whistle blowers by establishing a well documented “Whistle Blower
Policy” and ensuring its effectiveness practically. Just making a documented policy is not sufficient
to develop confidence among the employees; examples should be set by taking action against the
wrongdoing reported.

(b) Customers:
The business activity runs around the customer. There is a maxim ‘Caveat Emptor’ means let the buyer beware.
However, to run the business in long term, the concept has to re-think else the competitor will take advantage
of it. Today the customer satisfaction is one of the most important aspects of firm’s performance.
In today’s global environment, customers have innumerable choices. Therefore, corporate need to establish a
differentiation. The differentiation is established in terms of quality and price of the product or service. Customers
are also driving corporate to consider environmental factors in designing the products and services.
Over and above this, the customers consider the reputation which a corporate builds. The trust and loyalty that
an organization earns is based on its successful delivery over a long period of time.
Governance plays a big role in improving the relation between the organization and the customer (building
customer trust and commitment) which eventually leads to better performance for the organization especially if
you take into consideration that the cost of new customer is five to six times more than maintaining the current
customer.

(c) Lenders:
Lenders normally are the banks and financial institutions. They provide the term loan as well as the working
capital. While giving the credit facilities to any concerns, apart from the financial strength, project viability,
income generation of the organization, lenders also like to ensure about the other aspects like market reputation,
compliance culture prevailing in the organization and adherence to the ethical standards and adoption of
corporate governance practices
When a company borrows money, a loan contract typically includes covenants or promises made by its
management that either guide or limit its actions. If a borrower violates a covenant, the creditor can opt to
demand immediate repayment even though the borrower has not defaulted. Lending institutions many times
places its nominee as a director on the Board of borrowing companies.
Lenders may include covenants relating to environment and sustainability. The Equator Principles is a
risk management framework, adopted by financial institutions, for determining, assessing and managing
environmental and social risk in projects and is primarily intended to provide a minimum standard for due
diligence to support responsible risk decision-making.

(d) Vendors:
Vendors play a key role in the success of an organisation. The organisation which builds a mutually strong
relationship with its vendors improves its overall performance in the marketplace. The time, money and energy
used to nurture a positive vendor relationship cannot be measured directly against the company’s bottom line.
However, a well managed vendor relationship will result in increased customer satisfaction, reduced costs,
better quality, and better service from the vendor. It ultimately contributes toward the good governance of an
organisation. A proper systematic approach of vendor management will benefits all the employees, organisation,
customer and vendors.

(e) Government:
Government is the largest stakeholder. Government policy and the legal environment set the tone for the
 Lesson 9 n Corporate Governance and Other Stakeholders 305

desired corporate governance practices by the corporate sector. Government in any country plays a key role in
setting the mandatory limit and recognition of voluntary efforts of corporate sector. Since, it is a well maintained
proposition that you can’t legislate good behavior, therefore, the Government role is to differentiate between the
voluntary and mandatory measures becomes more important so that in regulatory role, it should not burden the
corporate sector with the legal compliances.
The government role is to provide an ease environment for the corporate sector as well as to take care of the
interest of other stakeholders. The government acts as a major player between the Corporate and Stakeholders
by facilitating both of them.
Further beyond the law, government may directly influence the corporate governance practices of the corporate
sector by providing voluntary measure and recognition in the respect of Corporate Governance measures.

(f) Society:
What society wants from good governance in the aggregate is maximum production of economic well-being.
This requires innovation and experimentation as well as it also requires control, probity, and risk management
to seize the activities involving hazard to the local community. Now a day’s Companies are spending voluntarily
for the social and community development which is well recognized by the society and government as well.
Business was perceived to maximize profit by exploiting environmental and social systems. These
perceptions and attitude forced society to revalue their expectations from business. It was realized that
increased economic development at all costs would not be desirable. Only industrial development which
does not reduce the quality of life should be encouraged. Thus if businesses do not have in a socially
responsible manner, their activities will have a negative impact on the society and the society will have a
negative impact. As a result of change in society’s attitude towards business, relations between society
and business firms first became strained, and this change triggered a sense of frustration for corporate
management in the early stage of this awareness.
In today globalised world, the Corporate sector is growing day by day which combining the economic value
creation and development of wealth for its stakeholders including society. The society being an important
element for a company can’t be ignored to be part of this development. The society provides the desired climate
for successful operation of a company business. If society turns against the company, then business lose its
faith in the eyes of other stakeholders be it government or customer.
The good governed companies always value for the society in which they operate their business. The companies
need to understand the expectation of society form them and should strive to give maximum for the society
according to the need.
Society can ensure good governance of companies as they are one of the major stakeholders representing the
environmental and social concern apart from the government mandate to the companies.

CONCLUSION
Whose interest and for whose benefit the corporations are running? The answer to this question is certainly for
the Stakeholder (and not for shareholders alone). The every activity in the organization should be in the interest
of all the stakeholders since stakeholders provide resources that are more or less critical to a firm’s long-term
success.
Gone are the days when fundamental purpose was to maximise corporate profit with a view to increasing
shareholder wealth. It has been now realised that the ‘modern corporation by its nature creates interdependencies
with a variety of groups with whom the corporation has a legitimate concern, such as employees, customers,
suppliers and members of the communities in which the corporation operates.
306 EP-GRMCE

GLOSSARY OF TECHNICAL WORDS

– Analytical: This is a way of doing something that involves the use of logical reasoning.
– Capitalism: An economic system characterized by private or corporate ownership of capital goods, by
investments that are determined by private decision, and by prices, production, and the distribution of
goods that are determined mainly by competition in a free market.
– Normative: Relating to, or determining norms or standards / conforming to or based on norms.
– Coexist: To exist together or at the same time / to live in peace with each other especially as a matter
of policy.

LESSON ROUND UP
– "Stakeholder Theory is an idea about how business really works. It says that for any business to be
successful it has to create value for customers, suppliers, employees, communities and financiers,
shareholders, banks and others people with the money.
– R. Edward Freeman defined Stakeholder Theory in broad definition of a stakeholder is any group or
individual which can affect or is affected by an organization." Such a broad conception would include
suppliers, customers, stockholders, employees, the media, political action groups, communities, and
governments.
– A more narrow view of stakeholder would include employees, suppliers, customers, financial
institutions, and local communities where the corporation does its business. But in either case, the
claims on corporate conscience are considerably greater than the imperatives of maximizing financial
return to stockholders.
– Stakeholder engagement is the process by which an organisation involves people who may be
affected by the decisions it makes or can influence the implementation of its decisions.
– The concept of stakeholders may be classified into Primary and Secondary Stakeholders.
– The 2009 CRT Principles for Responsible Business comprise seven principles and more detailed
Stakeholder Management Guidelines covering each of the key stakeholder dimensions of ethical
business practices: customers, employees, shareholders, suppliers, competitors, and communities.
– The CRT Principles for Responsible Business are supported by more detailed Stakeholder
Management Guidelines covering each key dimension of business success: customers, employees,
shareholders, suppliers, competitors, and communities.
– Clarkson introduced seven Principles of Stakeholder Management.

REFERENCE FOR FURTHER READING

– http://www.stakeholdermap.com/stakeholder-theory.htm
– http://lexicon.ft.com/Term?term=stakeholder-theory
– http://www.businessdictionary.com/definition/stakeholder-theory.html
– http://www.referenceforbusiness.com/encyclopedia/Sel-Str/Stakeholder-Theory.htm
– https://www.thehindubusinessline.com/opinion/columns/slate/all-you-wanted-to-know-about-proxy-
advisory- services/article9395194.ece
 Lesson 9 n Corporate Governance and Other Stakeholders 307

TEST YOURSELF
(These are meant for recapitulation only. Answers to these questions are not to be submitted for evaluation)
1. Can you explain why the concept form shareholder to stakeholder changed and what are the benefits
of it?
2. Can you define the stakeholder theory and its principles.
3. Narrate the national and international provisions pertaining to ‘Stakeholders’ as prescribed under the
Code of Corporate Governance.
4. Explain the recommendations of the Caux Round Table (CRT)?
5. Can you write brief notes on (i) Stakeholder Engagement (ii) Stakeholder Analysis
308 EP-GRMCE
 Lesson 10
Governance and Compliance Risk

LESSON OUTLINE
LEARNING OBJECTIVES
– Introduction
Good governance and compliance practices are
– Regulatory Framework not an endpoint, but a path towards creating a
– Compliance Risk corporate environment of trust, transparency, and
accountability. This in turn promotes corporate
– Elements of effective compliance program
access to capital, increased investment, sustainable
– Consequences/ Risks of Non-Compliance growth and financial stability. The objective of this
study lesson is to enable the students to understand
– Compliance Risk Management
the concept of compliance risk and consequences
– Steps in Compliance Risk Management of non-compliance. This chapter also explains
– Compliance Risk Mitigation about compliance risk management, steps for
compliance risk management and mitigation of
– Essentials of a Successful Compliance-Risk compliance risks.
Management Program
It also deals about the new developments in
– New Developments- Governance and Risk Governance and Risk Compliances (GRC).
Compliance (GRC) This chapter provides working knowledge on
– Conclusion governance and compliance risks, which may be
useful in performing advisory role in practical areas
– Glossary of work.
– LESSON ROUND-UP
– TEST YOURSELF

“The risk management needs to lift up from risk control to risk intelligence which can identify the potential
business growth opportunities.”
– Pearl Zhu
310 EP-GRMCE

INTRODUCTION
“Governance is the culture, values, mission, structure, layers of policies, processes and measures by which
organizations are directed and controlled”.
Governance defines how the organization should perform, describing through policies what is acceptable and
unacceptable and compliance is the area responsible for inspecting and proving that they are adequate, being
implemented and followed.
Governance is also responsible for risk and compliance oversight, as well as evaluating performance
against enterprise objectives. The board acts as an active monitor for shareholders’ and stakeholders’
benefit, with the goal of Board oversight to make management accountable, and thus more effective.
Accordingly, governance should be able to understand and foresee the organization’s vulnerabilities and,
hence make decisions to reduce them. Also, governance should distribute power to provide insight and
intelligence, at the right time, so that the right people in the management can make risk-aware decisions
in accordance with key business objectives. Risk-awareness is possible through the close proximity that
governance should have with risk management, which may provide very useful information in strategy
setting and decision making.
Governance needs to touch every part of the organization. It needs to be at the heart of corporate culture when
in today’s complex global ecosystems, risks are becoming more interconnected.
In the current globalised world, economies and business networks are so deeply interconnected that a single
risk event can cause widespread disruption. Risks themselves are becoming more interconnected. The World
Economic Forum’s report on the top risks of 2017 emphasized how deep the links are between risks such
as unemployment and social instability. Even regulatory enforcement risks are crossing boundaries, as is
evident through corporations being fined by cross-jurisdictional regulators. Today, compliance risks are not just
compliance risks; they are also reputational risks, strategic risks, and financial risks. It is crucial to understand
these interconnections to build risk maturity.
With the advent of a younger workforce and technologies such as the cloud and mobility, the emphasis is
on the consumerisation. People want simple and contextual information and accessibility available to them
anywhere, anytime. Efficiency is also becoming important. Today, companies need to know less about what
happened, and more about what is happening, what is likely to happen, and what needs to be done – the
possible scenarios, decisions, and constraints. They also need to be able to tie all this information back to their
core business performance.
Today, corporations and government agencies are facing an unprecedented wave of regulatory obligations and
increased penalties for non-compliance. The financial services sector, as an example, needs to comply with a
myriad of prudential regulations, RBI laws, AML compliances, consumer credit and protection laws to name a
few. If companies want to move up the risk maturity curve, they need to find ways of tying various Governance
and Compliance elements together with risks.
Compliance with law and regulation must be managed as an integral part of any corporate strategy. The
board of directors and management must recognize the scope and implications of laws and regulations that
apply to the company. They must establish a compliance management system as a supporting system of
risk management system as it reduces compliance risk to a great extent. To ensure an effective approach to
compliance, the participation of senior management in the development and maintenance of a compliance
program is necessary. They should review the effectiveness of its compliance management system at periodic
intervals, so as to ensure that it remains updated and relevant in terms of modifications/ changes in regulatory
regime including acts, rules, regulations etc. and business environment.
Every organisation has a responsibility to identify existing and emerging legislation relevant to its business
and ensure that risks that may arise from the compliance requirements are well understood by the board and
 Lesson 10 n Governance and Compliance Risk 311

management. The risks that may stem from non-compliance with key legislative requirements can be very
costly and damaging to an organisation and the custodians of governance within the organisation.
The consequences of non-compliance range from penalties and fines, to imprisonment, withdrawal of licenses,
lawsuits and reputational risk which may individually and or collectively have a fundamental impact on the
organisation’s sustainability as a going concern; as well as the impact that a lack of good corporate governance
at board and business levels can have on the business. The impact and probability of the risks that the legislation
represents depend on the attention paid to the legislation and how well risk and compliance management is
entrenched within the organisation. It is therefore critical that an organisation implements relevant structures
and processes to effectively manage and monitor the compliance process to ensure that these are entrenched
in a way that compliance becomes “second nature”. The residual risk will also be high until the organisation
is able to implement measures or controls that effectively mitigate the new risks arising out of compliance
requirements for the new legislation.

REGULATORY FRAMEWORK

Sl. No. Description

1 Section 88 of the Companies Act, 2013

2 Section 92 of the Companies Act, 2013

3 Section 13 of Foreign Exchange Management Act, 1999

4 Section 21 of the Maternity Benefit Act, 1961

5 Section 22A of the Minimum Wages Act, 1948

6 Section 43A of the Competition Act, 2002

COMPLIANCE RISK
Compliance risk is exposure to legal penalties, financial forfeiture and material loss an organization faces
when it fails to act in accordance with industry laws and regulations, internal policies or prescribed best
practices. Compliance risk is also sometimes known as integrity risk. Many compliance regulations are
enacted to ensure that organizations operate fairly and ethically. For that reason, compliance risk is also
known as integrity risk.
The Basel Committee on Banking Supervision in its paper on ‘Compliance and the compliance function in
banks’ defined the “compliance risk” as the risk of legal or regulatory sanctions, material financial loss, or loss
to reputation a bank may suffer as a result of its failure to comply with laws, regulations, rules, related self-
regulatory organisation standards, and codes of conduct applicable to its banking activities.
This risk is closely interconnected with the operational risk, legal and reputation, so that from one follows the
other.
312 EP-GRMCE

Compliance risk is the threat posed to a company’s earnings or capital as a result of violation or non conformance
with laws, regulations, or prescribed practices. Companies that fail to comply with the necessary standards
may be subjected to fines, payment of damages, and voided contracts. This, in turn, can lead to diminished
reputation and limited business opportunities as the company finds its franchises reduced in value and its
potential for expansion curtailed. In extreme cases, the company may find it is no longer capable of enforcing
its contracts. Compliance should be part of the culture of the organization, it is not just the responsibility of
specialist compliance staff.

ELEMENTS OF EFFECTIVE COMPLIANCE PROGRAM

According to the U.S. Federal Sentencing Guidelines §8B2.1(a)(2), in order to have an effective compliance
program, an organization must establish and maintain an organizational culture that “encourages ethical
conduct and a commitment to compliance with the law.”

The elements of an Effective Compliance Program may be listed as under:

1. High level company personnel who exercise effective oversight : The organization’s governing
body should be knowledgeable about the effective compliance program and should have oversight
of it. The governing body should have the overall responsibility for the compliance program and shall
ensure the effectiveness of it. Specific individuals shall have overall responsibility for the day to day
operations of the compliance program. A Compliance Officer shall be designated by the organization’s
governing body, who shall periodically report to the higher level management/ governing body. The
Compliance Officer should be given adequate resources with appropriate authority and direct access
to the governing body.
2. Written policies and procedures : The employees of the organization should be made known the legal
requirements so that employees understand their obligations. The employees should be encouraged to
report suspected fraud and other irregularities without fear.
3. Training and education : The employees of the organization should be provided reasonable training
to understand the organization’s compliance programe and its policies and process.
4. Lines of communication : Information about the compliance program must be widely communicated
at all levels of an organization. To enhance the effectiveness of the compliance program, the program
must establish lines of communication whereby, employees and agents may seek guidance and report
concerns, including the opportunity to report anonymously (such as a compliance hot line); There are
assurances that there will be no retaliation for good faith reporting.
5. Standards enforced through well-publicized disciplinary guidelines : The organization’s
compliance and ethics program should be promoted and enforced consistently through well-publicized
guidelines that provide, incentives to support the compliance and ethics program, disciplinary measures
 Lesson 10 n Governance and Compliance Risk 313

for disobeying the law, the organization’s policies, or the requirements of the compliance and ethics
program.
6. Internal compliance monitoring : The organization shall take reasonable steps, including monitoring
and auditing, to, ensure that the organization’s compliance and ethics program is followed, periodically
evaluate the effectiveness of the organization’s compliance program.
7. Response to detected offenses and corrective action plans : After monitoring and auditing of the
compliance program, the organization shall take reasonable steps to, respond appropriately to any
violations of the law or policies to prevent future misconduct, modify and improve the organization’s
compliance and ethics program.

CONSEQUENCES/ RISKS OF NON-COMPLIANCE

Failing to comply with rules, regulations, and specifications could have costly consequences. In the famous
Sahara case, the Group was accused of failing to refund over 200 billion rupees to its more than 30 million
small investors that it had collected through two unlisted companies of Sahara. In 2011, SEBI ordered Sahara
to refund this amount with interest to the investors, as the issue was not in compliance with the requirements
applicable to the public offerings of securities. Later in 2014, Mr Subrata Roy, the chairman of Sahara was
arrested for the said fraud. His proposal to settle the matter was rejected by the court and SEBI.
Thus non-compliance with the laws of the land can have multi-faceted consequences, ranging from penalties,
additional fines to prosecution. Following are some of the risks of non compliance.

Penalties
and Fines

Roadblock in Criminal
Funding Charges

Risks of
Non
compliance

Access to
Markets and Reputational
Product Damage
Delays

1. Penalties and Fines: Penalties include financial fines, limitations on activities, additional barriers to
approval and even imprisonment. Even if the organization sometimes is not given an actual penalty,
an investigation by a government body costs many hours of work and costs in form of potential legal
and contractor fees. Penalties for non compliance can lead to the organization’s loss of reputation
and business opportunities, as well as the devaluation of its franchises. Below are a few examples of
penalties imposed under the laws and regulations in India-
Under the Companies Act, 2013:
l Memorandum- Section 4(5)(ii)(a): Where after reservation of name under clause (i), it is found
that name was applied by furnishing wrong or incorrect information, then,— (a) if the company has
314 EP-GRMCE

not been incorporated, the reserved name shall be cancelled and the person making application
under sub-section (4) shall be liable to a penalty which may extend to one lakh rupees;
l Registered Office of the Company - Section 12(8): If any default is made in complying with
the requirements of this section, the company and every officer who is in default shall be liable
to a penalty of one thousand rupees for every day during which the default continues but not
exceeding one lakh rupees.
l Alteration of memorandum or articles to be noted in every copy – Section 15(2): If a company
makes any default in complying with the provisions of sub-section (1), the company and every
officer who is in default shall be liable to a penalty of one thousand rupees for every copy of the
memorandum or articles issued without such alteration.
l Copies of memorandum, articles etc to be given to members-Section 17(2): If a company
makes any default in complying with the provisions of this section, the company and every officer
of the company who is in default shall be liable for each default, to a penalty of one thousand
rupees for each day during which such default continues or one lakh rupees, whichever is less.
l Issue of application forms for securities – Section 33(3): If a company makes any default in
complying with the provisions of this section, it shall be liable to a penalty of fifty thousand rupees
for each default.
l Allotment of securities by company – Section 39(5): In case of any default under sub-section
(3) or sub-section (4), the company and its officer who is in default shall be liable to a penalty, for
each default, of one thousand rupees for each day during which such default continues or one
lakh rupees, whichever is less.
l Offer or invitation of subscription of securities on private placement – Section 42(10): If
a company makes an offer or accepts monies in contravention of this section, the company, its
promoters and directors shall be liable for a penalty which may extend to the amount involved in
the offer or invitation or two crore rupees, whichever is higher, and the company shall also refund
all monies to subscribers within a period of thirty days of the order imposing the penalty.
l Publication of authorised, subscribed and paid-up capital – Section 60(2): If any default is
made in complying with the requirements of sub-section (1), the company shall be liable to pay a
penalty of ten thousand rupees and every officer of the company who is in default shall be liable
to pay a penalty of five thousand rupees, for each default.
l As per section 88 of the Companies Act, 2013, if a company fails to maintain a register of members,
the company and every officer of the company in default shall be punishable with a fine ranging
from 50,000 rupees to 300,000 rupees and where the failure is continuing one , with a further fine
which may extend to rupees 1000 for everyday, after the first during which the failure continues.
Further, as per section 92 of the Act, if a company fails to file a copy of annual return within the
prescribed timeline, the company shall be punishable with a fine ranging from 50,000 rupees to
500,000 rupees.
l Power to close register of members or debenture-holders or other security holders- Section
91(2): If the register of members or of debenture-holders or of other security holders is closed
without giving the notice as provided in sub-section (1), or after giving shorter notice than that so
provided, or for a continuous or an aggregate period in excess of the limits specified in that sub-
section, the company and every officer of the company who is in default shall be liable to a penalty
of five thousand rupees for every day subject to a maximum of one lakh rupees during which the
register is kept closed.
l Annual Return- Section 92(1)(h): penalty or punishment imposed on the company, its directors
 Lesson 10 n Governance and Compliance Risk 315

or officers and details of compounding of offences and appeals made against such penalty or
punishment.
l Place of keeping and inspection of registers, returns, etc. – section 94(4): If any inspection or
the making of any extract or copy required under this section is refused, the company and every
officer of the company who is in default shall be liable, for each such default, to a penalty of one
thousand rupees for every day subject to a maximum of one lakh rupees during which the refusal
or default continues.
l Circulation of members‘ resolution – Section 111(5): If any default is made in complying with
the provisions of this section, the company and every officer of the company who is in default shall
be liable to a penalty of twenty-five thousand rupees.
l Minutes of proceedings of general meeting, meeting of Board of Directors and other
meeting and resolutions passed by postal ballot – Section 118(11): If any default is made in
complying with the provisions of this section in respect of any meeting, the company shall be liable
to a penalty of twenty-five thousand rupees and every officer of the company who is in default
shall be liable to a penalty of five thousand rupees.
l Inspection of minute-books of general meeting – Section 119(3): If any inspection under sub-
section (1) is refused, or if any copy required under sub-section (2) is not furnished within the time
specified therein, the company shall be liable to a penalty of twenty-five thousand rupees and
every officer of the company who is in default shall be liable to a penalty of five thousand rupees
for each such refusal or default, as the case may be.
l Right of member to copies of audited financial statement – Section 136(3): If any default is
made in complying with the provisions of this section, the company shall be liable to a penalty of
twenty-five thousand rupees and every officer of the company who is in default shall be liable to a
penalty of five thousand rupees.
l Meetings of Board-Section 173(4): Every officer of the company whose duty is to give notice
under this section and who fails to do so shall be liable to a penalty of twenty-five thousand
rupees.
l Register of contracts or arrangements in which directors are interested-Section 189(6):
Every director who fails to comply with the provisions of this section and the rules made thereunder
shall be liable to a penalty of twenty-five thousand rupees.
l Contract of employment with managing or whole-time directions-Section 190(3): If any
default is made in complying with the provisions of sub-section (1) or sub-section (2), the company
shall be liable to a penalty of twenty-five thousand rupees and every officer of the company who
is in default shall be liable to a penalty of five thousand rupees for each default.
l Penalty for furnishing false statement, mutilation, destruction of documents – Section
(229): Where a person who is required to provide an explanation or make a statement during the
course of inspection, inquiry or investigation, or an officer or other employee of a company or other
body corporate which is also under investigation, – (a) destroys, mutilates or falsifies, or conceals
or tampers or unauthorisedly removes, or is a party to the destruction, mutilation or falsification or
concealment or tampering or unauthorised removal of, documents relating to the property, assets
or affairs of the company or the body corporate; (b) makes, or is a party to the making of, a false
entry in any document concerning the company or body corporate; or (c) provides an explanation
which is false or which he knows to be false, he shall be punishable for fraud in the manner as
provided in section 447.
l Penalty for frauds by officers- Section 337: If any person, being at the time of the commission
316 EP-GRMCE

of the alleged offence an officer of a company which is subsequently ordered to be wound up

by the Tribunal or which subsequently passes a resolution for voluntary winding up,– (a) has, by
false pretences or by means of any other fraud, induced any person to give credit to the company;
(b) with intent to defraud creditors of the company or any other person, has made or caused to
be made any gift or transfer of, or charge on, or has caused or connived at the levying of any
execution against, the property of the company; or (c) with intent to defraud creditors of the
company, has concealed or removed any part of the property of the company since the date of
any unsatisfied judgment or order for payment of money obtained against the company or within
two months before that date, he shall be punishable with imprisonment for a term which shall not
be less than one year but which may extend to three years.
l Fee for filing, etc.- Section 403(2): Where a company fails or commits any default to submit,
file, register or record any document, fact or information under sub-section (1) before the expiry
of the period specified in the first proviso to that sub-section with additional fee, the company and
the officers of the company who are in default, shall, without prejudice to the liability for payment
of fee and additional fee, be liable for the penalty or punishment provided under this Act for such
failure or default.
l Punishment where no specific penalty or punishment is provided – Section 450: If a company
or any officer of a company or any other person contravenes any of the provisions of this Act or
the rules made thereunder, or any condition, limitation or restriction subject to which any approval,
sanction, consent, confirmation, recognition, direction or exemption in relation to any matter has
been accorded, given or granted, and for which no penalty or punishment is provided elsewhere in
this Act, the company and every officer of the company who is in default or such other person shall
be punishable with fine which may extend to ten thousand rupees, and where the contravention
is continuing one, with a further fine which may extend to one thousand rupees for every day after
the first during which the contravention continues.
l Adjudication of penalties-Section 454:
(1) The Central Government may, by an order published in the Official Gazette, appoint as many
officers of the Central Government, not below the rank of Registrar, as adjudicating officers
for adjudging penalty under the provisions of this Act in the manner as may be prescribed.
(3) The adjudicating officer may, by an order impose the penalty on the company and the officer
who is in default stating any non-compliance or default under the relevant provision of the
Act.
l Adjudication of penalties-Section 454(8)(ii): Where an officer of a company who is in default
does not pay the penalty within a period of ninety days from the date of the receipt of the copy of
the order, such officer shall be punishable with imprisonment which may extend to six months or
with fine which shall not be less than twenty-five thousand rupees but which may extend to one
lakh rupees, or with both
l Section 13 of the Foreign Exchange Management Act 1999 imposes a penalty on every person
who contravenes any provision of this Act, or contravenes any rule, regulation, notification,
direction or order issued in exercise of the powers under this Act, or contravenes any condition
subject to which an authorisation is issued by the Reserve Bank. The said penalty can equal up
to three times the sum involved in such contravention where the amount is quantifiable, or up
to 200,000 rupees where the amount is not quantifiable. Where such contravention continues,
further penalties can be levied of up to 5,000 rupees for each day after the first day during which
the contravention continues.
 Lesson 10 n Governance and Compliance Risk 317

l Section 21 of the Maternity Benefit Act 1961 states that every employer who does not comply with
the provisions of the Act shall be punishable with imprisonment of up to three months which may
extend up to one year and with a fine which shall not be less than 2000 rupees but which may
extend up to 5000 rupees.
l Section 22A of the Minimum Wages Act 1948 imposes a penalty on every employer who
contravenes any provision of this Act or any rule or order made thereunder with a fine of up to
5000 rupees.
l Via its circular dated 15 June 2017, SEBI has imposed certain penalties for non-compliance with
certain provisions of the SEBI (Issue of Capital and Disclosure Requirements) Regulations 2009,
which includes inter alia a penalty of 20,000 rupees a day for delay in completion of bonus issue,
until the date of actual compliance.
l Section 43A of the Competition Act 2002 imposes penalties on any person or enterprise who fails
to give notice to the commission with respect to forming a combination. The penalty imposed may
extend to one per cent of either the total turnover or the assets, whichever is the higher amount.
l Penalty for non- filing of Income Tax Return attracts interest u/s 234A of the Income Tax Act, 1961
and i.e. if the assessee fails to file its income tax return within the time prescribed by section 139,
the he shall be liable to pay interest @ 1% per month or part of the month from the due date of
filing of return to the actual date of filing of its return. A further penalty can be levied up to Rs. 5,000
for non-filing of tax returns us 271F.
l Penalty for Non- Preparation of Financial Statements is punishable with imprisonment for a term
which may extend to one year or with fine which shall not be less than Rs. 50,000 but which may
extend to Rs. 500,000 or both under the Companies Act 2013.
l Additional fee is leviable for Non-filing of Annual RoC forms as per specified MCA slabs, which
may extend upto 12 times of original fees. Apart from this, provisions for striking off the company
and prosecution are also present.
2. Criminal Charges: Criminal charges are a potential consequence for certain regulatory non-compliance.
Failure to comply in areas pertaining to staff management, workplace safety, marketing, supply chain,
corporate governance, stock management and due diligence laws could result in jail time for director or
board member or other officials.
Criminal Liability for Mis-statements in Prospectus: In terms of section 34 of the Companies Act,
2013, where a prospectus, issued, circulated or distributed under Chapter III , includes any statement
which is untrue or misleading in form or context in which it is included or where any inclusion or omission
of any matter is likely to mislead, every person who authorizes the issue of such prospectus shall be
liable under section 447.
Search and Seizure- Section 209(3) : The provisions of the Code of Criminal Procedure, 1973 relating
to searches or seizures shall apply, mutatis mutandis, to every search and seizure made under this
section.
Investigation into affairs of Company by Serious Fraud Investigation Office – Section 212(6):
Notwithstanding anything contained in the Code of Criminal Procedure, 1973, offence covered under
section 447 of this Act shall be cognizable and no person accused of any offence under those sections
shall be released on bails or on his own bond unless (i) the Public Prosecutor has been given opportunity
to oppose the application for such release; and (ii) where the Public Prosecutor opposes the application,
the court is satisfied that there are reasonable grounds for believing that he is not guilty of such offence
and that he is not likely to commit any offence while on bail.
318 EP-GRMCE

3. Reputational Damage: A business’ public image is a key to its success. When a company is thrust
into the public eye for failing to comply with regulations, there are reputational repercussions, which
eventually lead to distrust. Once that happens, loyal customers may leave, new customers may be put
off and potentially beneficial partnerships may never develop.
Today because of the increased awareness and focus on good governance practices, all the stakeholders
want to do business with companies practicing legally and ethically. Compliance violations can turn
customers or suppliers away which damages the reputation of the company. The companies tend to
lose existing customer base and there are few to no new customers to vouch for the trustworthiness of
the company. The damage to brand reputation can often cost even more than those fines.
In the recent probe in the matter pertaining to allegations related to a $500 million loan to Videocon
Group by ICICI Bank has put a spotlight on corporate governance at the ICICI Bank and posed risks to
its reputation. An investigation into allegations that India’s ICICI Bank extended a loan with a potential
conflict of interest raises questions over the bank’s governance and created severe reputational risks.
In 2017, one of the top candies and chocolate makers Cadbury India (Mondelez India Foods) paid a
consultant who helped them to obtain a license by bribing government officials. This destroyed the
reputation of the companies and the company was imposed with sky touching fines.
4. Access to Markets and Product Delays: Every country has its own labor and employment laws, and
multinational companies are obligated to comply with local laws and regulations also. Also businesses
are required to meet a host of regulations if they wish to do business with government. Non-compliance
across enterprise and business network could result in exclusion from the tendering processes and
supplier databases. In addition, companies that place value on corporate compliance may avoid doing
business with companies which are non compliant as they would want to ensure that they meet their own
regulatory obligations. Non compliances may also result into financially damaging events like having
products/ services blocked at the border, forced to issue a recall or forced to destroy merchandise due
to compliance issues etc.
5. Roadblock in Funding: The pre-requisite of any funding exercise is the status of tax and regulatory
compliances. A company cannot get funded, even in the seed investment level, whose compliances
are not up to date. Banks also require compliance documents like audited financials, auditor’s report,
auditor’s certificate for the last 3 years or as the case may be. Chances of a non-compliant company
availing bank loans are next to zero per cent.

Other distinct areas that present risk for non-

compliance can also be stated as under

FINANCIAL PERSONAL OPERATIONAL REGULATORY

• Monetary fines • Increased personal • Expensive and time- • Greater regulatory
• End of a business or liability consuming remedial scrutiny
business line • Forced changes to actions including • More regulation, cost
• Increased capital, senior management redress and complexity for all
liquidity or solvency • Need for more highly- • Enforced changes to
requirements priced risk and business
• Impact on share price compliance skills • Expensive and time-
• Competitive • Claw-backs invoked on consuming use of third
disadvantages bonuses party or skilled persons
• Opportunity costs of • Inability to recruit and
non-compliance retain high quality
skilled resources
 Lesson 10 n Governance and Compliance Risk 319

ILLUSTRATIVE TABLE SHOWING POSSIBLE RISKS OF NON – COMPLIANCE (Area wise)

Compliance area (illustrative) Possible risk of Non-compliance

Direct tax compliance l Imposition of penalty Prosecution of directors

l Loss of reputation

Indirect tax compliance l Cancellation of licences Withdrawal of tax benefits

Stoppage of operations
l Loss of reputation

Labour law compliance l Imposition of penalty

l Prosecution of directors / occupier Loss of reputation
l Employee dissatisfaction

Environment, health & safety l Stoppage of operations

laws
l Loss of reputation
l Imposition of penalty

Corporate law compliance l Imposition of penalty

l Vacation / prosecution of directors or management
l Loss of reputation

COMPLIANCE RISK MANAGEMENT

Compliance risk management is the process of managing corporate compliance to meet regulations within
a workable timeframe and budget. Compliance Risk management is part of the collective governance, risk
management and compliance discipline. The three fields frequently overlap in the areas of incident management,
internal auditing, operational risk assessment, and compliance with various regulations.
In recent years, perception of compliance has undergone a sea change. The traditional and narrow outlook that
compliance is limited to statutory filings, required to run a business, has widened considerably. Compliance
practices are now a cross-functional responsibility. They need to be integrated in the policies and procedures of
various functions like HR, quality, risk, facilities, finance, delivery, sales, marketing, procurement, security and
more.
Further, laws and regulations in different countries at the national, state and local levels have made compliance
more complicated. Therefore, a culture must be instilled in an enterprise to ensure minimum statutory compliance
and compliance to other commitments such as social, industry, client consumer etc. This calls for a systematic
approach towards compliance management.
As compliance risk continues to be a focal point for regulators, compliance officers are encouraged to take steps
to ensure that compliance risk is adequately managed. Best practices for compliance management ensure that
compliance risk is adequately managed. On a periodic basis, management should identify and assess the
primary compliance risk issues applicable to all business activities including the related control mechanisms
utilized to identify measure, monitor and control the relevant risks as ccompliance challenges will only increase
with time.
320 EP-GRMCE

STEPS IN COMPLIANCE RISK MANAGEMENT

Understand
Evaluate
compliance
performance
obligations

Address all
Assess risks compliance
risks

1. Understand compliance obligations : The primary element to manage compliance is to understand

compliance obligation in the light of strategic goals and objectives. Compliance obligations stem from: Laws and
regulations, industry or generic standards, internal policies, processes and procedures and contracts executed
with clients and other stakeholders.
It is important to understand that obligations are either requirements or commitments. Obligations that an
enterprise has no control over are termed as compliance requirements, for example, one resulting from new
laws and regulations. While obligations that an enterprise may choose to abide by – for example certain industry
standards or best practices – are termed as compliance commitments.
Here, a mechanism to ensure compliance obligations are kept up-to-date must be established. An enterprise
may choose to restrict the scope of compliance management to compliance requirement but for a higher
assurance, it may include compliance commitments, too.
2. Assess risks : Once compliance obligations are established, a compliance risk assessment exercise
should be undertaken to identify risks, causes, the areas they impact and the consequences thereof. A risk
analysis to have better understanding of the risks should follow. Such an analysis should consider the factors
affecting the consequences and likelihood of these consequences occurring as well as the controls in place.
Looking at the level of risk arrived at from the analysis exercise, a compliance risk evaluation should be done
to take appropriate decisions on treatment. This exercise is to prioritise the treatment, it should be used as a
tool to accept compliance risks. Compliance risks analysed as low should also be monitored and subjected to
corrective action.
3. Address all compliance risks : An enterprise should ensure an effective action plan to address all
compliance risks with clear ownership, responsibility, accountability and closure timelines. This can be driven
with ease, if the enterprise ensures a documented compliance policy, objectives, processes and procedures.
Further, compliance responsibilities must be clearly identified, assigned and established as part of the job
descriptions at different levels.
To ensure risks are addressed effectively, the management should ensure that all employees with compliance
obligation are competent. Periodic training and awareness must be carried out and any other medium to
communicate assigned responsibilities should be explored. A continuous communication mechanism is required
to ensure all employees understand compliance and contribute to it by reporting risks and discharging their
responsibilities effectively.
4. Evaluate performance : A mechanism to measure and monitor the performance of the compliance practices
and its impact on strategic goals and objectives must be developed. Developing compliance performance
indicators is one of the tools. It can be as simple as the number of employees trained on compliance practices to
mature indicators such as risks of non-compliance and trends. Feedbacks from clients, stakeholders, suppliers,
 Lesson 10 n Governance and Compliance Risk 321

vendors, employees and government agencies are a good source of data to ascertain compliance performance.
Governance mechanisms in the form of management reviews, internal audits and periodic compliance reporting
give great insights on the performance of compliance practices.

COMPLIANCE RISK MITIGATION

New ethics, compliance, and reputational risks appear each day. At the same time, the recent global recession
has forced many organizational functions to closely examine their budgets and resources. Together, these
factors have created a tension between growing regulatory obligations and the pressure to do more with
less. To help resolve this situation and continue to add value to their organizations, ethics and compliance
professionals need to be sure they understand the full spectrum of compliance risks lurking in each part of the
organization. They then need to assess which risks have the greatest potential for legal, financial, operational,
or reputational damage and allocate limited resources to mitigate those risks. There are a number of critical
questions organizations should ask related to compliance risks and the program(s) in place to mitigate those
risks:
l What kinds of compliance failures would create significant brand risk or reputational damage? Could the
failures arise internally, in the supply chain, or with regard to third parties operating on the organization’s
behalf?
l What is the likely impact of that damage on the organization’s market value, sales, profit, customer
loyalty, or ability to operate?
l What kinds of compliance missteps could cause the organization to lose the ability to sell or deliver
products/services for a period of time?
l How should the compliance program design, technology, processes, and resource requirements
change in light of growth plans, acquisitions, or product/category/ service expansions?
l Is the organization doing enough to inform customers, investors, third parties, and other stakeholders
about its vision and values? Is it making the most of ethics, compliance, and risk management
investments as potential competitive differentiators?
l What are the total compliance costs—beyond salaries and benefits at the centralized level—and how
are costs aligned with the most significant compliance risks that could impact the brand or result in
significant fines, penalties, and/ o rlitigation?
l How well-positioned is the compliance function? Does it have a seat “at the table” in assessing and
influencing strategic decisions?
l What are the personal and professional exposures of executive management and the board of directors
with respect to compliance?
While it is impossible to eliminate all of an organization’s risk exposure, the risk framework and methodology
help the organization prioritize which risks it wants to more actively manage. Developing a framework and
methodology helps organizations determine the extent to which the organization’s existing risk-mitigation
activities (for example, testing and monitoring or employee training programs) are able to reduce risk.
Effective risk mitigation activities may reduce the likelihood of the risk event occurring, as well as the potential
severity of impact to the organization. When an organization evaluates inherent risk in light of its existing
control environment and activities, the degree of risk that results is known as the “residual risk.” If existing risk
mitigation strategies are insufficient at reducing residual risk to an acceptable level, this is an indication that
additional measures are in order.
Embedding compliance with all key legislation in the organisation is a function of certain critical activities and
stems from collaboration across key functions such as Legal, Compliance, Risk Management, Business and
322 EP-GRMCE

Internal Audit. These functions all form part of the “three lines of defence”. The success of any compliance
management and monitoring programme depends on the existence, functioning and integration of these lines
of defence in the performance of their duties.

Management Assurance l Assists in setting and executing strategies.

l Provides direction, guidance and oversight
l Promotes a strong risk culture & sustainable risk return thinking
l Promotes a strong compliance culture and management of risk
exposure.
l Ongoing monitoring and management of risks.

Risk Management, Legal l Formal, robust and effective risk management within which the
& Compliance organisation’s policies and minimum standards are set.
l Objective oversight and the ongoing challenge of risk mitigation,
management and performance while reporting is achieved across the
business units.
l Overarching risk oversight across all risk types.
l Compile and maintain a legislative universe for the organisation.
l Facilitate the risk prioritisation of all pieces of legislation in the regulatory
universe.
l Initiate new legislative requirements within the organisation.

l Analyse and send out alerts on the new law to inform the organisation
of the new requirements.
l Facilitate an executive review of the legislation by Legal analysts.
l Facilitate the completion of the Compliance Risk Management Plan
(“CRMP”)
l Update compliance monitoring plans on the CRMP.
l Escalate compliance matters to management.
l Undertake quarterly compliance reporting.

Internal Audit & other l Independent and objective assurance of overall adequacy and
Independent Assurance effectiveness of governance, risk management and internal controls
Providers within the organisation
l Ability to link business risks with established processes and provide
assurance on the effectiveness of mitigation plans to effectively
manage organisational risks.

The Risk Management function should support the Compliance Office with the risk rating of the relevant
legislation once such legislation becomes operational in the business. A compliance risk register for the
regulatory universe, showing both the inherent and residual ratings of each piece of legislation, based on
impact and likelihood, should be the product of this process. The penalties - financial, imprisonment, etc - and
other business risks associated with key provisions of the legislation should be identified and captured on the
compliance risk register for the regulatory universe as management should know if a piece of legislation will
 Lesson 10 n Governance and Compliance Risk 323

affect shareholder value.

Business should also have its own Business Operational Compliance Officer / Champion who, upon receipt
from the Legal / Compliance Officer, the information containing the executive review, compliance alert, CRMP
and presentation material, will commence the operational monitoring of the compliance of business processes
to the legislative requirements. Again, depending on the size and maturity of the organization, the roles of
Legal / Compliance Officer can be combined with that of the Business Operational Compliance Officer, even
that of the Risk Officer. This, of course, should be with due consideration of the nature and magnitude of
business operations, the risk profiles as well as the cost and benefits of combining or separating the functions.
Business should readily be able to provide Internal Audit with the legislative universe of the organisation for the
commencement of a compliance audit.
Internal Audit, as the assurance provider, is responsible for reviewing the adequacy and effectiveness of the
functioning of controls implemented by management to ensure compliance with legislative requirements.
In conducting a review of compliance within the organisation, Internal Audit should ask the following questions:
l What are the pieces of legislation that should be reviewed?
l What new processes are being put in place as a result of compliance requirements?
l What new systems are being put in place to support and monitor compliance?
The span of the internal audit review will be: Legislation – Policy – Procedures – Systems / Processes.
Internal Auditors should be able to map the legislation to the existence of a policy and a risk map. They need
to substantiate and audit compliance risk ratings that have changed, especially where residual ratings show
improved controls. For example, if the organisation has had many complaints escalated to an ombudsman, it is
a likely indication of non-compliance and hence the applicable residual rating cannot be acceptable (green); it
should probably be yellow or red.
From their review, Internal Auditors should be able to validate or provide the following inputs to the CRMP:
l Impacted Areas – processes, systems and policies
l Existing Controls
l Additional Controls – arising from amendments to, or new legislation
l Risk Exposure – High, Medium, Low
l Responsible Party – Affected Parties
l Monitoring Plan – Business Unit Compliance
Thus the compliance framework needs to be comprehensive, dynamic, and customizable, allowing the
organization to identify and assess the categories of compliance risk to which it may be exposed. Some
compliance risks are specific to an industry or organization—for example, worker safety regulations for
manufacturers or rules governing the behavior of sales representatives in the pharmaceutical industry. Other
compliance risks transcend industries or geographies, such as conflicts of interest, harassment, privacy, and
document retention.
324 EP-GRMCE

ESSENTIALS OF A SUCCESSFUL COMPLIANCE-RISK MANAGEMENT PROGRAM

Active board and senior • An effective board and senior management oversight is the cornerstone of
management oversight an effective compliance risk management process.

Effective policies and • Compliance risk management policies and procedures should be clearly
defined and consistent with the nature and complexity of an institution’s
procedures activities.

Compliance risk analysis • Organizations should use appropriate tools in compliance risk analysis like
and comprehensive self-assessment, risk maps, process flows, key indicators and audit
reports; which enables establishing an effective system of internal controls.
controls

Effective compliance • Organizations should ensure that they have adequate management
information systems that provide management with timely reports on
monitoring and reporting compliance like training, effective complaint system and certifications.

• Independent testing should be conducted to verify that compliance-risk

Testing mitigation activities are in place and functioning as intended throughout the
organization.

NEW DEVELOPMENTS- GOVERNANCE, RISK MANAGEMENT AND COMPLIANCE (GRC)

Until fairly recently, compliance was seen as a separate business practice, along with governance and risk
management. However, over the past decade, these three disciplines have developed a considerable number
of overlapping activities, such as internal audits, incident management, operational risk assessment, or
compliance with regulatory programs. Today, many companies take an integrated approach to these three
areas, referring to them collectively as Governance, Risk Management and Compliance (GRC).
Governance, risk management, and compliance are three related facets that aim to assure an organization
reliably achieves objectives, addresses uncertainty and acts with integrity:
l Governance is the combination of processes established and executed by the directors (or the
board of directors) that are reflected in the organization’s structure and how it is managed and led
toward achieving goals. Governance describes the overall management approach through which
senior executives direct and control the entire organization, using a combination of management
information and hierarchical management control structures. Governance activities ensure that critical
management information reaching the executive team is sufficiently complete, accurate and timely to
enable appropriate management decision making, and provide the control mechanisms to ensure that
strategies, directions and instructions from management are carried out systematically and effectively.
l Risk management is predicting and managing risks that could hinder the organization from reliably
achieving its objectives under uncertainty. Risk management is the set of processes through which
management identifies, analyzes, and, where necessary, responds appropriately to risks that might
adversely affect realization of the organization’s business objectives. The response to risks typically
depends on their perceived gravity, and involves controlling, avoiding, accepting or transferring them
to a third party, whereas organizations routinely manage a wide range of risks (e.g. technological risks,
commercial/financial risks, information security risks etc.)
l Compliance refers to adhering with the mandated boundaries (laws and regulations) and voluntary
 Lesson 10 n Governance and Compliance Risk 325

boundaries (company’s policies, procedures, etc.). Compliance means conforming with stated
requirements. At an organizational level, it is achieved through management processes which identify
the applicable requirements (defined for example in laws, regulations, contracts, strategies and policies),
assess the state of compliance, assess the risks and potential costs of non-compliance against the
projected expenses to achieve compliance, and hence prioritize, fund and initiate any corrective actions
deemed necessary.
GRC is the integrated collection of capabilities that enable an organization to reliably achieve objectives, address
uncertainty and act with integrity. Governance, risk and compliance (GRC) refers to a strategy for managing an
organization’s overall governance, enterprise risk management and compliance with regulations. GRC is a set
of processes and practices that runs across departments and functions. GRC might be enabled by a dedicated
platform and other tools, although this is not mandatory. While organizations generally don’t need to maintain
a separate GRC department, most organizations have a team in place to manage the GRC platform and tools.
The scope of GRC doesn’t end with just governance, risk, and compliance management, but also includes
assurance and performance management, information security management, quality management, ethics and
values management, and business continuity management.
Effective GRC implementation helps the organization to reduce risk and improve control effectiveness, security
and compliance through an integrated and unified approach that reduces the ill effects of organizational silos
and redundancies.
As the world becomes more complex, enterprises need a range of GRC skills and capabilities that may not all
be present with a single provider or a single business function. Some may lie with a consulting firm, others with
a data or content firm, and still others with a technology platform provider or a system integrator. Going forward,
the emphasis will be on how we can bring more of these companies and their capabilities together in a single,
comprehensive GRC community – one that fosters open and transparent communication, and enables people
to learn from each other’s best practices and mistakes.
GRC professionals are increasingly being given a seat at the company strategy table, the revenue generating
side. Decision-makers need them to interpret risk profiles and data, and provide intelligence on how to increase
revenue and sales.
Soon, operating controls will not only help mitigate operational risk, but also enable faster go-to-market
opportunities. Similarly, vendor risk management won’t just be about calculating vendor risks, but also tying
those metrics to vendor performance and charge backs. The emphasis, more and more, will be on linking GRC
to business performance.

CONCLUSION
The complexity of the risk landscape and the penalties for non-compliance make it essential for organizations to
conduct thorough assessments of their compliance risk exposure. This is particularly true for those organizations
that operate on a global scale.
A good ethics and compliance risk assessment includes both a comprehensive framework and a methodology
for evaluating and prioritizing risk. With this information in hand, organizations will be able to develop effective
mitigation strategies and reduce the likelihood of a major noncompliance event or ethics failure, setting
themselves apart in the marketplace from their competitors.
Thus, policy-makers best serve the public interest when they allow for flexibility in setting corporate governance
rules. Companies also have a responsibility to establish a corporate culture and tone at the top that promote
a values-based rather than compliance-based mindset to governance. Management, internal auditors, boards
of directors and external auditors share the responsibility of executing their respective roles with healthy
skepticism, transparency and robust communication.
326 EP-GRMCE

GLOSSARY OF TECHNICAL WORDS

– Corporate Compliance: A corporate compliance program is generally defined as a formal program
specifying an organization’s policies, procedures, and actions within a process to help prevent and
detect violations of laws and regulations

– Risk Assessment: Its a systematic process of evaluating the potential risks that may be involved in a
projected activity or undertaking

– Corporate Citizen: Corporate citizenship involves the social responsibility of businesses, and the
extent to which they meet legal, ethical and economic responsibilities, as established by shareholders.

– Compliance Risk: Compliance risk is exposure to legal penalties, financial forfeiture and material loss
an organization faces when it fails to act in accordance with industry laws and regulations, internal
policies or prescribed best practices

– Internal Audit: Internal audit is a dynamic profession involved in helping organisations achieve their
objectives. It is concerned with evaluating and improving the effectiveness of risk management,
control and governance processes in an organisation.

LESSON ROUND UP
– The risks that may stem from non-compliance with key legislative requirements can be very costly
and damaging to an organisation.
– The key to managing these risks is installing controls that confirm the organization is complying with
its internal and external requirements on a consistent and regular basis.
– A compliance management system is the method by which corporate manage the entire compliance
process. It includes the compliance program, compliance audit, compliance report etc.
– The Company Secretary is the professional who guides the Board and the company in all matters,
renders advice in terms of compliance and ensures that the Board procedures are duly followed,
best global practices are brought in and the organisation is taken forward towards good corporate
citizenship.
– Compliances, good governance and risk management in turn promotes corporate access to capital,
increased investment, sustainable growth and financial stability.

TEST YOURSELF
(These are meant for recapitulation only. Answers to these questions are not to be submitted for evaluation)
1. Do you know the Compliance risk. State briefly the need of compliance risk management in the
emerging scenario.

2. Can you explain the consequences/ risks of non-compliance.

3. Please advise some of the steps in effective compliance risk management?

4. Briefly explain the essentials of a successful compliance-risk management

Lesson 10 n Governance and Compliance Risk 327
328 EP-GRMCE
 Lesson 11
Corporate Governance Forums

LESSON OUTLINE
LEARNING OBJECTIVES
– Introduction
The objective of this study lesson is to enable the
– Regulatory Framework students gain knowledge about the forums which
– The Institute of Company Secretaries of are active in promoting the culture of creativity and
India compliance among corporate. The vision/mission/
objective of the corporate governance forum is
– National Foundation for Corporate
discussed in the chapter to provide student an
Governance
understanding of the purpose of forming such
– Organisation for Economic Cooperation and governance forum and their role in improving the
Development corporate governance.
– Institute of Directors, UK
– Commonwealth Association of Corporate
Governance
– International Corporate Governance
Network
– European Corporate Governance Institute
– Conference Board
– Asian Corporate Governance Association
– Corporate Secretaries International
Association
– Parameters of Better Governed Companies
– Glossary
– LESSON ROUND UP
– TEST YOURSELF

“You have to test your ideas in a public forum”

– Hillary Clinton
330 EP-GRMCE

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

REGULATORY FRAMEWORK

Sl. No. Description

1 Institute of Company Secretaries of India (ICSI)

2 National Foundation for Corporate Governance (NFCG)

3 Organization for Economic Co-operation and Development (OECD)

4 Institute of Directors (IOD), UK

5 International Corporate Governance Network (ICGN)

6 European Corporate Governance Institute (ECGI)

7 Conference Board

8 Asian Corporate Governance Association (ACGA)

9 Corporate Secretaries International Association Limited (CSIA)

10 International Integrated Reporting Council (IIRC)

A. INSTITUTE OF COMPANY SECRETARIES OF INDIA (ICSI)

Vision and Mission Statements

Recognising the fact that Corporate Governance is the key to development of corporate sector, the Institute has
adopted a farsighted vision, “To be a global leader in promoting Good Corporate Governance”
The Mission of the Institute is, “To develop the high calibre professionals facilitating good Corporate Governance”.

ICSI’s Philosophy on Corporate Governance

The ICSI, after extensive research, has taken a lead step in defining Corporate Governance as “the application
of best management practices, compliance of law in letter and spirit and adherence to ethical standards
for effective management and distribution of wealth and discharge of social responsibility for sustainable
development of all stakeholders.”

ICSI Initiatives
► Corporate Governance Research and Training - ICSI has set up the ICSI- Centre for Corporate
Governance Research and Training (CCGRT) with the objective of fostering and nurturing research
 Lesson 11 n Corporate Governance Forums 331

initiatives among members of the Company Secretaries profession and other researchers.
► ICSI National Award for Excellence in Corporate Governance was instituted by the ICSI in 2001 to
identify, foster and reward the culture of evolving global best practices of corporate governance among
Indian companies. Each year, the award is conferred upon two best governed companies and ICSI Life
Time Achievement Award for Translating Excellence in Corporate Governance into Reality is bestowed
on an eminent personality.
► Focus on Corporate Governance in the Course Curriculum - Considering corporate governance as
core competency of Company Secretaries, education and training for Company Secretary significantly
focuses on corporate governance. One full paper on Corporate Governance titled “Governance, Risk
Management, Compliances and Ethics” forms part of the syllabus in the Professional Programme.
► PMQ Course in Corporate Governance - ICSI has launched a Post Membership Qualification Course
in Corporate Governance to enable its members gain acumen, insight and thorough expertise in
corporate governance.
► Secretarial Standards – As a pioneering initiative, ICSI issues Secretarial Standards to integrate,
harmonise and standardise the diverse secretarial practices prevalent in the corporate sector. Two
Secretarial Standards issued by ICSI i.e. SS-1: Secretarial Standard on Meetings of the Board of
Directors and SS-2: Secretarial Standard on General Meetings have been notified in the Official
Gazette under Section 118 (10) of the Companies Act 2013 which provides that every company shall
observe Secretarial Standards with respect to General and Board Meetings specified by the Institute
of Company Secretaries of India and approved as such by the Central Government. They have been
effective from July 1, 2015. The introduction of Secretarial Standard has marked a new era of healthy
secretarial practices among professional.
► Corporate Governance Publications – The Institute regularly brings out publications of interest to
members and corporate sector to inculcate the culture of good governance.
► Directors Development and Capacity Building Programmes - Recognizing that leadership
development in boardroom is the key driver to better governance, the Institute organizes directors’
development programmes. The Institute also conducts extensive programmes throughout India and
abroad strengthening specialization in corporate governance.
► Investor Education and Awareness – Committed to the cause of investor education, ICSI is actively
engaged in activities relating to investor awareness and education. So far, the Institute has organised
more than 4500 such programmes. Booklets to educate investors have also been issued by the Institute
in English, Hindi as well as other regional languages.
► ICSI Recommendations to Strengthen Corporate Governance Framework – ICSI after a detailed
study of corporate governance standards, principles and practices across the world, made its
recommendations to strengthen the Corporate Governance Framework.
► Repository of Independent Directors – The Institute jointly with other professional statutory bodies
under the active encouragement of the Ministry of Corporate Affairs, maintains a Repository of
Independent Directors to facilitate the individuals who are eligible and willing to act as Independent
Directors and also to facilitate Companies to select the persons who are eligible and willing to act as
Independent Directors under provisions of the Companies Act, 2013.
► National Policy on Corporate Governance – The Ministry of Corporate Affairs had constituted a
Committee to formulate a Policy Document on Corporate Governance under the chairmanship of Mr.
Adi Godrej. The President, ICSI was the Member Secretary/Convener. The concept paper prepared by
ICSI was the base paper for discussion for this committee. The Committee submitted its report, which
is articulated in the form of Guiding Principles of Corporate Governance, to the Government of India on
332 EP-GRMCE

18th September, 2012.

► Customied Training Programme – As an initiative towards propagating and creating awareness on
good corporate governance, the Institute has been organising customised training programmes for
Regulatory bodies, Banks and Public sector companies on Corporate Laws and Governance.
► Founder member of National Foundation for Corporate Governance – The ICSI is one of the four
founder trustees of National Foundation for Corporate Governance, alongwith MCA, CII and ICAI. The
vision of NFCG is: Be A Catalyst In Making India The Best In Corporate Governance Practices.
► Founder member of Corporate Secretaries International Association (CSIA) – ICSI is a founder
member of Corporate Secretaries International Association, alongwith the Chartered Secretaries
Institutes of Australia, Hong Kong, Malaysia, Singapore, South Africa, UK and Zimbabwe. CSIA was
launched in March 2010 and has issued ‘Twenty Practical Steps to Better Corporate Governance’.
► Linkages of International Bodies – The Institute has linkages with various International bodies
involved in promoting Corporate Governance such as World Bank, Organisation for Economic Co-
operation and Development (OECD), International Corporate Governance Network (ICGN), Global
Corporate Governance Forum GCGF (IFC - Washington), Global Reporting Initiative (GRI), Asia
Corporate governance Association (ACGA). The Institute also holds various Joint programmes with,
these institutions and also with professional bodies like CASS Business School (London), ICSA
Singapore, ICSA Malaysia, etc.

ICSI’s Approach - Solution to Critical Development Issues

The ICSI’s approach to Corporate Governance provides the solution to the development issues. Wealth creation,
management and sharing are the objectives of Corporate Governance in broadest sense. Maximum creation
and effective management of wealth requires application of best management practices whereas sharing of
wealth requires compliance of law in letter and spirit along with adherence to ethical standards and discharging
corporate social responsibility so as to develop trust amongst all the stakeholders.

Members of ICSI are in Member of the institute are imparted wider knowledge of management
prominent positions in the functions, major laws applicable to a company as well as of good corporate
management of board affairs at governance practices and are subject to a strict Professional Code of
high levels. Conduct under the Company Secretaries Act, 1980, so as to ensure ethics
in dealing with all the stakeholders.

The ICSI National Awards for Excellence in Corporate Governance

In pursuit of excellence and to identify, foster and reward the culture of evolving globally acceptable standards
of corporate governance among Indian companies, the “ICSI National Award for Excellence in Corporate
Governance” was instituted by ICSI in the year 2001.The Awards comprising citation and trophy are based on
the outcome of concerted and comprehensive process of evaluation which enables the Jury to judge on the
basis of parameters,the practices of corporate governance as followed by Indian corporates and acknowledge
the best practices worthy of being exemplified. The underlying guideline for the Corporate Governance Award
is to identify the corporates, which follow the best corporate governance norms in letter and spirit.
The institution of the Award aims at promoting the cause of Corporate Governance by:
– Recognizing leadership efforts of corporate boards in practising good corporate governance principles
in their functioning;
 Lesson 11 n Corporate Governance Forums 333

– Recognizing implementation of innovative practices, programmes and projects that promote the cause
of corporate governance;
– Enthusing the corporates in focusing on corporate governance practices in corporate functioning;and
– Implementation of acknowledged corporate governance norms in letter and spirit.
The Institute annually bestows upon a corporate leader the “ICSI Lifetime Achievement Award for Translating
Excellence in Corporate Governance into Reality” keeping in view the attributes like:
– Outstanding contribution to social upliftment and institution building;
– Exemplary contribution in enhancement of stakeholders’ value;
– A visionary with innovative ideas;
– Long tradition of trusteeship, transparency and accountability;
– Qualities of leadership, team spirit, integrity and accountability;
– Proven track record of adherence of statutory obligations;and
– Social acceptance and approval.

B. NATIONAL FOUNDATION FOR CORPORATE GOVERNANCE (NFCG)

With the goal of promoting better corporate governance practices in India, the Ministry of Corporate Affairs,
Government of India, has set up National Foundation for Corporate Governance (NFCG) along with Confederation
of Indian Industry (CII), Institute of Company Secretaries of India (ICSI) and Institute of Chartered Accountants
of India (ICAI). In the year 2010, stakeholders in NFCG have been expanded with the inclusion of Institute of
Cost Accountants of India and the National Stock Exchange of India Ltd.
“The vision of NFCG is to be the Key Facilitator and Reference Point for highest standards of Corporate
Governance in India.”
The mission of NFCG is:
l To foster a culture of good corporate governance;
l To create a framework of best practices, structure, processes and ethics;
l To reduce the existing gap between Corporate Governance framework & actual compliance by
corporates;
l To facilitate effective participation of different stakeholders;
l To catalyse capacity building in new emerging areas of Corporate Governance.
NFCG endeavours to build capabilities in the area of research in corporate governance and to disseminate
quality and timely information to concerned stakeholders. It works to foster partnerships with national as well
as international organisations.
National Foundation for Corporate Governance (NFCG) was set up in the year 2003 by the Ministry of Corporate
Affairs (MCA), in partnership with Confederation of Indian Industry (CII), Institute of Company Secretaries of
India (ICSI) and Institute of Chartered Accountants of India (ICAI) to promote good Corporate Governance
practices both at the level of individual corporates and Industry as a whole. In the year 2010, Institute of Cost
Accountants of India (ICAI) and National Stock Exchange (NSE) and in 2013 Indian Institute of Corporate
Affairs (IICA) were included in NFCG as Trustees.
At the national level, NFCG works with premier management institutes as well as nationally reputed professional
334 EP-GRMCE

organisations to design and administer Directors Training Programmes. The Foundation provides accreditation
to these organisations based on their meeting the eligibility criteria designed along with continuing adherence
to the same. On obtaining the accreditation these organisations, with the support of NFCG, would set-up a
“National Center for Corporate Governance (NCCG)” to provide a training to Directors, conduct research and
build capability in the area of corporate governance.
NFCG also would work to have arrangements with globally reputed organisations with the aim of promoting
bilateral initiatives to improve regulatory framework and practices of corporate governance in a concerted and
coordinated manner.
The internal governance structure of NFCG consists:
– Governing Council
– Board of Trustees
– Executive Directorate
Governing Council
Governing Council of NFCG works at the apex level for policy making. It is chaired by Minister in-charge,
Ministry of Corporate Affairs, Government of India. The members of the Governing Council are: -
l Secretary, Ministry of Corporate Affairs, Government of India - Vice Chairman of the Governing Council;
l Second Vice Chairman of the Governing Council (Industry)
l President, Confederation of Indian Industry (CII);
l President, Institute of Chartered Accountants of India (ICAI);
l President, Institute of Company Secretaries of India (ICSI);
l President , The Institute of Cost Accountants of India (ICAI-CMA);
l Director General, Confederation of Indian Industry (CII);
l Secretary, Institute of Chartered Accountants of India (ICAI);
l Secretary, Institute of Company Secretaries of India (ICSI);
l Secretary, The Institute of Cost Accountants of India (ICAI-CMA);
l Chairman, Indian Banks Association;
l Chairman, Insurance Regulatory and Development Authority;
l Chairman, Securities and Exchange Board of India;
l Secretary, Banking Division, Ministry of Finance
l Secretary, Department of Pubic Enterprises.
l MD and CEO, National Stock Exchage (NSE)
l Director General & CEO, Indian Institute of Corporate Affairs (IICA)
l Eminent Industrialists (4)
Board of Trustees
Board of Trustees deal with the implementation of policies and programmes and laying down the procedure
for the smooth functioning. It is chaired by Secretary, Ministry of Corporate Affairs, Government of India. The
members of the Board of Trustees are: -
 Lesson 11 n Corporate Governance Forums 335

l Director General, Confederation of Indian Industry (CII);

l Secretary, Institute of Chartered Accountants of India (ICAI);
l Secretary, Institute of Company Secretaries of India (ICSI); and
l Secretary, The Institute of Cost Accountants of India (ICAI-CMA)
l Representative, National Stock Exchange (NSE)
l Director General & CEO, Indian Institute of Corporate Affairs (IICA)
Executive Directorate
The Executive Directorate provides the internal support to NFCG activities and implements the decisions of the
Board of Trustees. The Executive Director is the Chief Executive Officer of NFCG. The Executive Directorate
exercises such powers as may be delegated to it by the Board of Trustees to carry out such functions as may
be entrusted to it by the Board. The Executive Director also functions as the Secretary of the Council and the
Board and is supported by full time dedicated professional secretariat.

C. ORGANIZATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENT (OECD)

The Organisation for Economic Co-operation and Development (OECD) was established in 1961 when 18
European countries plus the United States and Canada joined forces to create an organisation dedicated to
economic development. It is one of the first non-government organizations to spell out the principles that should
govern corporates. The mission of the Organisation for Economic Co-operation and Development (OECD) is to
promote policies that will improve the economic and social well-being of people around the world.
The mission of the Organisation for Economic Co-operation and Development (OECD) is to promote policies
that will improve the economic and social well-being of people around the world.
The OECD provides a forum in which governments can work together to share experiences and seek solutions
to common problems.
The OECD had focused on helping governments around the world to:
l Restore confidence in markets and the institutions that make them function.
l Re-establish healthy public finances as a basis for future sustainable economic growth.
l Foster and support new sources of growth through innovation, environmentally friendly ‘green growth’
strategies and the development of emerging economies.
l Ensure that people of all ages can develop the skills to work productively and satisfyingly in the jobs of
tomorrow.
The OECD provides a forum in which governments can work together to share experiences and seek solutions
to common problems. OECD works with governments to understand what drives economic, social and
environmental change. OECD measures productivity and global flows of trade and investment analyse and
compare data to predict future trends, set international standards on a wide range of things, from agriculture
and tax to the safety of chemicals etc.
There are 37 member countries of OECD across the globe. They include many of the world’s most advanced
countries but also emerging countries. Currently following Countries are members of OECD - Australia, Austria,
Belgium, Canada, Chile, Czech Republic Colombia, Denmark, Estonia, Finland, France, Germany, Greece,
Hungary, Iceland, Ireland, Israël, Italy, Japan, Korea, Latvia, Lithuania, Luxembourg, Mexico, Netherlands,
New Zealand, Norway, Poland, Portugal, Slovak Republic,Slovenia,Spain,Sweden,Switzerland,Turkey,United
Kingdom and United States. The internal structure of OECD consists of Council, Committees and Secretariat.
336 EP-GRMCE

The OECD Principles of Corporate Governance were first published in 1999. Since then the Principles have
become an international benchmark for policy makers, investors, corporations and other stakeholders worldwide.
The original principles of OECD were revised and the revised principles were issued in 2004. The revision of
the original principles was done to take into account the developments and the corporate governance scandals
highlighted the need for improved standards. It was recognized that the integrity of the stock market was critical
and to the revised principles were designed to underpin this integrity. The 2004 version of the Principles were
again revised in 2015. OECD Corporate Governance Principles are divided in six different chapters, which are:
Principle 1: Ensuring the basis for an effective corporate governance framework
Principle 2: The rights and equitable treatment of shareholders and key ownership functions
Principle 3: Institutional investors, stock markets, and other intermediaries
Principle 4: The role of stakeholders in corporate governance
Principle 5: Disclosure and transparency
Principle 6: The responsibilities of the board

D. INSTITUTE OF DIRECTORS (IOD), UK

The IOD is a non party-political business organisation established in United Kingdom in 1903. The IOD is
charged with promoting good corporate governance for UK business. The board of IOD is responsible for the
overall leadership of the Institute of Directors (IOD) and setting its values, standards, aims and objectives and
delivering them in line with the objects of the Royal Charter. The board is composed of the chair, a majority of
non-executive directors, and the director general and executive directors. It acts as a unitary board and has the
following powers and responsibilities:
l to manage the affairs and long-term success of the institute
l to approve the strategy of the institute, business and financial planning, to hold the executive to account
and ensure financial and risk stewardship
l to approve the annual report and accounts
l to appoint, reappoint and remove (acting by the non-executive directors only) the director general and
other executive directors, as the board permits
l to ensure open and transparent engagement with all stakeholders when carrying out its duties
l to establish and dissolve committees and groups of the board
The council is the guardian of the IOD constitution, ensuring that the objects of the IOD’s Royal Charter are
delivered. It comprises 11 members of geographical areas, 13 elected members and the IOD chairman. The
council carries out the following responsibilities:
l to appoint, reappoint and remove the non-executive directors and to determine their independence,
having considered any recommendations of the nomination committee
l to hold the board to account for the delivery of the charter objects and adherence to the laws of the
institute
l to provide critique and opinion to the board on the overall progress of the institute
l to monitor the board’s engagement with membership and stakeholders
l to appoint and remove a senior independent council member who will act as deputy chair of the council
The IOD seeks to provide an environment conducive to business success.
 Lesson 11 n Corporate Governance Forums 337

Objects of IOD
(a) to promote for the public benefit high levels of skill, knowledge, professional competence and integrity
on the part of directors, and equivalent office holders however described, of companies and other
organisations;
(b) to promote the study, research and development of the law and practice of corporate governance,
and to publish, disseminate or otherwise make available the useful results of such study or research;
(c) to represent the interests of members and of the business community to government and in all public
forums, and to encourage and foster a climate favourable to entrepreneurial activity and wealth
creation; and
(d) to advance the interests of members of the Institute, and to provide facilities, services and benefits
for them.

E. INTERNATIONAL CORPORATE GOVERNANCE NETWORK (ICGN)

The International Corporate Governance Network (“ICGN”) is a not-for-profit company limited by guarantee and
not having share capital under the laws of England and Wales founded in 1995.
ICGN’s mission is to promote effective standards of corporate governance and investor stewardship to advance
efficient markets and sustainable economies world-wide.
ICGN’s positions are guided by the ICGN Global Governance Principles and Global Stewardship Principles,
which were first published in 2003, as a statement on shareholder stewardship responsibilities both of which
are implemented by:
l Influence policy by providing a reliable source of investor opinion on governance and stewardship;
l Connect peers at global events to enhance dialogue between companies and investors around long
term value creation; and
l Inform dialogue through education to enhance the professionalism of governance and stewardship
practices.
It has four primary purposes:
(i) to provide an investor-led network for the exchange of views and information about corporate governance
issues internationally;
(ii) to examine corporate governance principles and practices; and
(iii) to develop and encourage adherence to corporate governance standards and guidelines;
(iv) to generally promote good corporate governance.
The Network’s mission is to develop and encourage adherence to corporate governance standards and
guidelines, and to promote good corporate governance worldwide.
Membership of ICGN is open to those who are committed to the development of good corporate governance.
The Membership section explains the benefits of membership, the different types of membership and how to
join the ICGN.
The ICGN is governed by the ICGN Memorandum and Articles of Association.
The management and control of ICGN affairs are the responsibility of the Board of Governors. The Board in
turn appoints a number of committees to recommend policy positions, to implement approved projects and to
perform such functions that the Board may specify.
338 EP-GRMCE

The Institute of Company Secretaries of India is a member of ICGN and also the country correspondent from
India.
The ICGN Global Governance principles describe the responsibilities of board of directors and investors
respectively and aim to enhance dialogue between the two parties. They embody ICGN’s mission to
inspire effective standards of governance and to advance efficient markets worldwide. The combination of
responsibilities of boards of directors and investors in a single set of Principles emphasizes a mutual interest
in protecting and generating sustainable corporate value. These principles were first initiated in 1995. The fifth
edition of Principles was released in 2017.

F. EUROPEAN CORPORATE GOVERNANCE INSTITUTE (ECGI)

The European Corporate Governance Institute (ECGI) was founded in 2002 under Belgian law.It has been
established to improve corporate governance through fostering independent scientific research and related
activities.
The ECGI is an international scientific non-profit association. It provides a forum for debate and dialogue
between academics, legislators and practitioners, focusing on major corporate governance issues and thereby
promoting best practice.
Vision Statement of ECGI:
l Corporate governance lies at the heart of our capitalist systems. It is the interface between capital
markets and companies, between employees and executives, and between society and the corporate
sector. It is the driver of what companies do, how they do it and the effects they have on others. In other
words, it sits at the centre of the success and failure of our economic systems.
l As such it warrants knowledge, research and insights of the best thinkers, practitioners and policymakers
of our age. That is precisely what ECGI seeks to provide. It draws on the finest minds in academia from
all over the world to tackle some of the most important issues that confront business and governments
today. It uses the power of research to change ideas, influence practice and formulate policy to benefit
all of us.
l Corporate governance refers to the way in which private and public companies, enterprises,
entrepreneurship and financial institutions are governed and run in relation to their purpose, values,
ownership, representation, accountability, financing, investment, performance, leadership, direction,
management, employment, law, regulation and taxation.
Mission Statement of ECGI:
l The mission of ECGI is to assist the top academics in the field of corporate governance in bringing their
research to the attention of leading practitioners, policymakers and thought leaders by making state of
the art knowledge accessible and relevant to them. It promotes the development of new ideas through
research that extends the boundaries of our understanding of how corporate governance contributes to
the flourishing of business, economies and societies.
Its primary role is to undertake, commission and disseminate research on corporate governance. Based upon
impartial and objective research and the collective knowledge and wisdom of its members, it advises on the
formulation of corporate governance policy and development of best practice and undertake any other activity
that will improve understanding and exercise of corporate governance.
It acts as a focal point for academics working on corporate governance in Europe and elsewhere, encouraging
the interaction between the different disciplines, such as economics, law, finance and management.
The Institute articulates its work by expanding on the activities of the European Corporate Governance Network,
disseminating research results and other relevant material.
 Lesson 11 n Corporate Governance Forums 339

It draws on the expertise of scholars from numerous countries and brings together a critical mass of expertise
and interest to bear on this important subject.

G. CONFERENCE BOARD
The Conference Board was established in 1916 in the United States of America. The Conference Board is a
global, independent business membership and research association working in the public interest and is a not-
for-profit organization. The Conference Board creates and disseminates knowledge about management and
the marketplace to help businesses strengthen their performance and better serve society.
Mission: The Conference Board is dedicated to equipping the world’s leading corporations with the practical
knowledge they need to improve their performance and better serve society. We are an objective, independent
source of economic and business knowledge with only one agenda: to help our members understand and deal
with the most critical issues of our time.
It works as a global, independent membership organization in the public interest, it conducts research, convenes
conferences, makes forecasts, assesses trends, publishes information and analysis, and brings executives
together to learn from one another.
The Conference Board governance programs helps companies improve their processes, inspire public
confidence, and ensure they are complying with regulations.
The Conference Board Directors’ Institute is a premiere provider of governance education for directors. Through
the Directors’ Institute, the program provides corporate directors with a non academic, impartial forum for open
dialogue about the real-world business challenges they face.
The Corporate Governance program at The Conference Board has helped corporations develop strong core
principals by improving their governance processes through a variety of programs including director training
and global ethics education.
The Conference Board Global Corporate Governance Research Center brings together a distinguished group of
senior corporate executives from leading world-class companies and influential institutional investors in a non-
adversarial setting. In small groups of prominent senior executives, all discussions are confidential, enabling
a free-flowing exchange of ideas and effective networking. This highly unique forum allows industry leaders to
debate, develop, and advance innovative governance practices, and to drive landmark research in corporate
governance.

H. ASIAN CORPORATE GOVERNANCE ASSOCIATION (ACGA)

The Asian Corporate Governance Association (ACGA) is an independent, non-profit membership organisation
dedicated to working with investors, companies and regulators in the implementation of effective corporate
governance practices throughout Asia. ACGA was founded in 1999 from a belief that corporate governance is
fundamental to the long-term development of Asian economies and capital markets.
ACGA’s scope of work covers three areas:
1. Research:
Tracking corporate governance developments across 12 markets in Asia Pacific and producing
independent analysis of new laws and regulations, investor activism and corporate practices.
2. Advocacy:
Engaging in a constructive dialogue with financial regulators, stock exchanges, institutional investors
and companies on practical issues affecting the regulatory environment and the implementation of
better corporate governance practices in Asia.
340 EP-GRMCE

3. Education:
Organising conferences and seminars that foster a deeper understanding of the competitive benefits of
sound corporate governance and ways to implement it effectively.
ACGA is funded by a network of sponsors and corporate members, including leading pension and investment
funds, other financial institutions, listed companies, multinational corporations, professional firms and educational
institutions. It is incorporated under the laws of Hong Kong and is managed by a secretariat based there. Its
governing Council comprises directors from around Asia and other parts of the world.
ACGA’s membership comprises 113 different organisations operating or investing in Asia and with an interest in
corporate governance. ACGA members are from 19 markets across the world, including pension and sovereign
wealth funds, investment managers, listed and unlisted companies, insurance and insurance-related firms,
multilateral development banks, accounting firms, business associations, educational institutions.

I. CORPORATE SECRETARIES INTERNATIONAL ASSOCIATION LIMITED (CSIA)

Corporate Secretaries International Association Limited (CSIA) was established on February 10, 2017 as a
Company limited by Guarantee in Hong Kong . It is international federation of governance professional bodies
for corporate secretaries & governance professional and represents those who work as frontline practitioners of
governance throughout the world.
CSIA is governed by a council consisting of the honorary members (President, Vice-President, Secretary and
Treasurer as elected from the member bodies), past presidents, co-opted members and representatives of
each national member organisation. CSIA is an international association of 14 national professional bodies,
representing more than 100,000 corporate secretaries and governance professionals in more than 70 countries
throughout the world. CSIA has 10 full members which include Institute of Chartered Secretaries from South
Africa, Hong Kong, Kenya, Nigeria, Zimbabwe, UK, Bangladesh, India, Malaysia and Singapore.
Vision Statement: To be the Global Voice of Corporate Secretaries and Governance Professionals.
Mission Statement: To create a global profession that develops, grows and promotes best practice in corporate
secretarial, corporate governance and compliance services by improving professional standards, the quality of
governance practice and organizational performance.

Objectives:
l To promote the professional status of suitably qualified chartered secretaries, Corporate Secretaries,
Company Secretaries, board secretaries and other governance professionals.
l To establish and maintain good relations and exchanges between organisations dedicated to the
promotion and practice of secretaryship and/or the promotion of good governance.
l To develop and improve their services and professionalism of their members.
l To assist in the creation of such organisations in countries or regions in which they do not currently
exist.
l To promote the growth, development, study and practice of secretaryship and assist their members
develop and improve their services and professional standards.
l To advocate for good governance through carrying out research, developing standards and raising
awareness.
l To promote the recognition and influence in respect of secretaryship and its professional practitioners
to national governments and their supplementary/sponsored organisations, international organisations
and the global business community
 Lesson 11 n Corporate Governance Forums 341

International Integrated Reporting Council (IIRC)

The IIRC, is a powerful, international cross section of leaders from the corporate, investment, accounting,
securities, regulatory, academic and standard-setting sectors as well as civil society.
The IIRC was established in 2010 in recognition of the need to move to-wards an International Integrated
Reporting Framework that is fit-for-purpose for the 21st century.
Mission :
The IIRC’s mission is to establish integrated reporting and thinking within mainstream business practice as the
norm in the public and private sectors.
Vision :
The IIRC’s vision is to align capital allocation and corporate behaviour to wider goals of financial stability and
sustainable development through the cycle of integrated reporting and thinking.
The IIRC seeks to build upon, enhance and support the work that has been done to date, and is ongoing, to
achieve a reporting framework that:
♦ communicates the organization’s strategy, business model, performance and plans against the
background of the context in which it operates;
♦ provides a coherent framework within which market and regulatory driven reporting requirements can
be integrated;
♦ is internationally agreed, so as to encourage convergence of approach and hence more ready
understanding of information presented;
♦ reflects the use of and effect on all of the resources and relationships or “capitals” (human, natural and
social as well as financial, manufactured and intellectual) on which the organization and society depend
for prosperity; and
♦ reflects and communicates the interdependencies between the success of the organization and the
value it creates for investors, employees, customers and, more broadly, society.
The IIRC is developing an International Integrated Reporting Framework that will facilitate the development
of reporting over the coming decades. The core objective of the Framework is to guide organizations
on communicating the broad set of information needed by investors and other stakeholders to assess the
organization’s long-term prospects in a clear, concise, connected and comparable format. This will enable those
organizations, their investors and others to make better short-and long-term decisions.

CONCLUSION
Why do we need Corporate Governance forum? Does Corporate Governance forum really help the cause of
corporate governance? There is no doubt that more corporate governance forums are emerging in the national,
regional and international arena. Corporates, Institutions, regulators and other intermediaries are the members
of such forum, which help in spreading the awareness of good corporate governance. The forums are a platform
where debate and dialogue take place between researchers, companies, regulators, policy makers, activists,
practitioners on major issues of corporate governance, thereby promoting best practice. These forums also
undertake survey and research work, which helps in creation of knowledge and provide a guidance to the
regulatory bodies world over in incorporating changes in the corporate governance code.
342 EP-GRMCE

GLOSSARY OF TECHNICAL WORDS

– Capacity Building: Process by which organisations obtain, improve and retain the skills, knowledge
and other resources needed to do their jobs competently.
– Trustee: An individual person or member of the Board given control or powers of administration of
properties interest with a legal obligation to administer it solely for the specified purpose.
– Peer Reviews: Peer review process is a process through which the performance of individual countries
is monitored by their peers, all carried out at committee-level, are at the heart of our effectiveness.

LESSON ROUND UP
– The International Corporate Governance Network (“ICGN”) is a not-for-profit company limited by
guarantee under the laws of England and Wales. The Network’s mission is to develop and encourage
adherence to corporate governance standards and guidelines, and to promote good corporate
governance worldwide.
– The European Corporate Governance Institute (ECGI) was founded in 2002. It has been established to
improve corporate governance through fostering independent scientific research and related activities.
– The Conference Board was established in 1916 in the United States of America. The Conference
Board governance programs helps companies improve their processes, inspire public confidence,
and ensure they are complying with regulations.
– The Asian Corporate Governance Association (ACGA) is an independent, non-profit membership
organisation dedicated to working with investors, companies and regulators in the implementation of
effective corporate governance practices throughout Asia.
– CSIA is dedicated to promoting the values and practices of governance professionals in order to
create, foster or enhance the environment in which business can be conducted in a fair, profitable and
sustainable manner.

TEST YOURSELF
(These are meant for recapitulation only. Answers to these questions are not to be submitted for evaluation)
1. Can you explain in detail the initiatives of the Institute of Company Secretaries of India in the area of
Corporate Governance.
2. Do you know about the scope of work undertaken by the National Foundation for Corporate governance?
Explain.
3. Can you discuss about the Organisation for Economic Co-operation and Development?
4. Write notes on:
(a) Commonwealth Association for Corporate Governance
(b) Institute of Directors
(c) International Corporate Governance Network
(d) European Corporate Governance Institute
(e) Conference Board
(f) Asian Corporate Governance Association
(g) Corporate Secretaries International Association
 Lesson 11 n Corporate Governance Forums 343

REFERENCE FOR FURTHER READING

Publications : OECD publications are a prime vehicle for disseminating the Organisation’s intellectual output.
OECD publishes regular outlooks, annual overviews and comparative statistics. Among them:
– OECD Economic Outlook assesses prospects for member and major non-member economies.
– OECD Factbook is a key reference tool for everyone working on economic and policy issues.
– OECD Economic surveys provide individual national analyses and policy recommendations.
– Going for Growth 2017 presents comparative indicators and evaluations of national performance.
Following are the links of international forums, students may refer at the websites of these institutions
for latest updates and information.
– http://www.nfcgindia.org
– www.oecd.org/daf/corporateaffairs/principles/text
– http://www.iod.com
– http://www.icgn.org/
– www.ecgi.org/
– http://www.conference-board.org/
– http://www.acga-asia.org/
– www.csiaorg.com
– http://www.ecgi.org/codes/code.php?code_id=24
344 EP-GRMCE
 Lesson 12
Risk Management

LESSON OUTLINE
LEARNING OBJECTIVES
– Risk
– Classification of Risks This lesson makes an endeavour to focus on the
concepts, processes and merits of risk mitigation
– Risk Management
and its management for an organisation to
– Advantages of Risk Management overcome the challenges posed by various forms
– Steps in Risk Management Process of risks.
– Risk Identification
– Risk Analysis
– Risk Assessment
– Handling of Risk
– Risk Mitigation Strategy
– Formulation and Implementation of Risk
Strategy
– Risk Management : Fraud
– Reputation Risk Management
– Responsibility of Risk Management
– Role of Company Secretary in Risk
Management
– Risk Governance
– Risk Management Frameworks And
Standards
– Enterprise Risk Management –
Integrated Framework (2004)
–
ISO 31000: International Standard
for Risk Management
– Risk Management and Internal Controls
– Risk Matrix
– Model Risk Management Policy
– Glossary
– LESSON ROUND UP
– TEST YOURSELF

“Today’s fast-paced business environment encounters a complex and ever-changing risk landscape that
may negatively impact the organizational value. The only way to respond to it is by having a dynamic and
holistic perspective of risk management approach to ensure business continuity.”
– Jack Zahran, President, Pinkerton
346 EP-GRMCE

RISK
Managing risk has become a critical element within most companies. The management of risk, though, can be
structured differently within companies even for those within the same sector. So what is risk? In the business
world, the word risk has come to mean an impediment to the achievement of an organization’s objectives.
As per the Oxford Dictionary – “Risk is Exposure to the possibility of loss, injury, or other adverse or
unwelcome circumstance; a chance or situation involving such a possibility’.
It is to be noted that term Risk is used in many ways and is given different definitions depending on the field and
context. Commonly used terminologies for risks is uncertainty and undesirable outcomes. The other definitions
of risks from various perspectives are as under:
1. Generic: ‘A probability or threat of damage, injury, liability, loss, or any other negative occurrence that
is caused by external or internal vulnerabilities, and that may be avoided through preemptive action.’
2. Finance Perspective: ‘The probability that an actual return on an investment will be lower than the
expected return. Financial risk is divided into the following categories: Basic risk, Capital risk, Country
risk, Default risk, Delivery risk, Economic risk, Exchange rate risk, Interest rate risk, Liquidity risk,
Operations risk, Payment system risk, Political risk, Refinancing risk, Reinvestment risk, Settlement
risk, Sovereign risk, and Underwriting risk.’
3. Food industry: ‘The possibility that due to a certain hazard in food there will be an negative effect to a
certain magnitude.’
4. Insurance: A situation where the probability of a variable (such as burning down of a building) is known
but when a mode of occurrence or the actual value of the occurrence (whether the fire will occur at a
particular property) is not.
5. Securities trading: The probability of a loss or drop in value. Trading risk is divided into two general
categories: (1) Systemic risk affects all securities in the same class and is linked to the overall capital-
market system and therefore cannot be eliminated by diversification. Also called market risk. (2) Non-
systematic risk is any risk that isn’t market-related or is not systemic. Also called non-market risk, extra-
market risk, or unsystemic risk.

CLASSIFICATION OF RISKS
Risk may be classified according to controllability, i.e Controllable risk and Uncontrollable risk. In other words,
the Controllable risk is categorized as Unsystemic Risk and Uncontrollable risk is categorized as Systemic Risk.
The concept of controllable and uncontrollable risk may be further explained as under:

Systemic Risk Unsystemic Risk

l It is not fully uncontrollable by an organisation. l It is usually controllable by an organisation.
l It is not entirely predictable. l It is reasonably predictable.
l It is usually of a macro nature. l It is normally micro in nature.
l It usually affects a large number of organisations l If not managed it directly affects the individual
operating under a similar stream. organisation first.
l It cannot be fully assessed and anticipated in l It can be usually assessed well in advance with
advance in terms of timing and gravity. reasonable efforts and risk mitigation can be
l The example of such type of risks is Interest planned with proper understanding and risk
Rate Risk, Market Risk, Purchasing Power assessment techniques.
Risk. l The examples of such risk are Compliance
risk, Credit Risk, Operational Risk.
 Lesson 12 n Risk Management 347

Types of Risks on the basis of impact on finance

The risks may also be broadly segregated as Financial Risk and Non-financial Risk. These are not necessarily
mutually exclusive but it is good to understand the primary categorisation. Often both financial and non financial
risks are present in any situations which need to be managed and understood.

Financial Risk Non-Financial Risk

The risk which has some direct financial impact on This type of risks do not usually have direct and
the entity is treated as financial risk. This risk may immediate financial impact on the business, but the
be Market risk, Credit risk, Liquidity risk, Operational consequences are very serious and later do have
Risk, Legal Risk and Country Risk. The following significant financial impact if these risks are not
chart depicts some of the various types of financial controlled at the initial stage. This type of risk may
risks. include, Business/Industry & Service Risk, Strategic
Risk, Compliance Risk, Industry Fraud Risk,
Reputation Risk, Transaction risk, Disaster Risk.

Types of Financial Risks

(i) Market Risk This type of risk is associated with market ups and down. It refers to the risk of
loss arising from the change/volatility in the market prices or economic values
which are the deciding factors for the pricing of the product/financial assets. The
market risks may be Absolute Risk (when it can be measured in rupee/currency
term) and Relative Risk (relative to bench mark index). Hence the market risk
may be defined as the risk to a firm due to the adverse changes in interest rates,
currency rates, equity prices and commodity prices.
(a) Interest Rate Risk
The financial assets which are connected with interest factors such as bonds/
debentures, faces the interest rate risk. For example Interest rate risk adversely
affects value of fixed income securities. Any increase in the interest reduces the
price of bonds and debts instruments in debt market and vice - versa. So it can
be said that the changes in the interest rates have an inverse relationship with
the price of bonds.
(b) Currency Risk
The volatility in the currency rates is called the currency risk. These risks affect
the firms which have international operations of business and the quantum of the
risk depends on the nature and extent of transactions with the external market.
(c) Equity Risk
It means the depreciation in one’s investment due to the change in market index.
For example in the context of securities, Beta of a stock tells us the market risk
of that stock and it is associated with the day-to-day fluctuations in the market.
(d) Commodity Risk
This type of risk is associated with the absolute changes in the price of the
commodity. Since commodities are physical assets, hence the prices change on
account of the demand and supply factor.
348 EP-GRMCE

(ii) Credit Risk When a counter party is unable or unwilling to fulfil their contractual obligation,
the credit risk arises. This type of risk is related to the probability of default and
recovery date. Its effect is measured by cost of replacing cash flow if the other
party defaults. For example, in case of loan given by a bank to the borrower and
the borrower defaults in making payments of the installments or due interest on
the due date, is termed as credit risk.

(iii) Liquidity Risk The liquidity risk arises due to mis-matches in the cash flow i.e. absence of
adequate funds. Liquidity is altogether different from the word solvency. A firm
may be in sound position as per the balance sheet, but if the current assets are
not in the form of cash or near cash assets, the firm may not make payment to the
creditors which adversely affect the reputation of the firm. The liquidity risk may
be of two types, trading risk and funding risk.
(a) Trading Risk
It may mean the absence of the liquidity or enough products or securities etc to
actually undertake buy and sell activities. e.g. in the context of securities trading
inability to enter into derivative transactions with counter parties or make sales or
purchase of securities.
(b) Funding Risk
It refers to the inability to meet the obligations e.g. inability to manage funds
by either borrowing or the sale of assets/securities. It arises where the balance
sheet of a firm contains illiquid financial assets which cannot be turned in to cash
within a very short time.

(iv) Operational / It arises due to inadequate systems, system capacities, system failure, and
System/ Management obsolescence risk, management failure on account co-ordination, faulty control or
Risk human error. Some best practice against the operational risk includes clear separation
of responsibilities with strong internal control and regular contingency planning.

(iv) Obsolescence In the rapid changing world Obsolescence risk is fast emerging and unless the
Risk companies are able to cope up with this timely, the impact will be quite heavy and
may lead to closure of the units also. Nokia is the latest example on this.

(v) Legal Risk This risk arises when a counter party does not have the legal or regulatory authority
to engage in the transactions. It also includes the compliance and regulatory risk
like insider trading, market manipulations, defaults and mismanagement of legal
affairs etc.

(vi) Political/ Country Political risk may be on account of declaration of elections in the territory, area
Risk specific risk and political uncertainity. The Country risk arises where the firm
have its business operations abroad. This risk may arise due to out-break of war
between countries, imposition of the ban on the business transaction of particular
commodity/product. These can also be existing risks due a country’s legal or
political structure which drives other institutions like judiciary, legislative and
general environment for business.
 Lesson 12 n Risk Management 349

Types of Non Financial Risks

(i) Business/ Industry Business risks implies uncertainty in profits or danger of loss and the events that
& Services Risk could pose a risk due to some unforeseen events in future, which causes business
to fail. Business risk refers to the possibility of inadequate profits or even losses
due to uncertainties e.g., changes in tastes, preferences of consumers, strikes,
increased competition, change in government policy, obsolescence etc. Every
business organization contains various risk elements while doing the business.
Such type of risk may also arise due to business dynamics, competition risks
affecting tariff prices, customer relation risk etc.

(ii) Strategic Risk Business plans which have not been developed properly and comprehensively
since inception may lead to strategic risk. For example, strategic risk might
arise from making poor business decisions, from the substandard execution of
decisions, from inadequate resource allocation, or from a failure to respond well
to changes in the business environment.

(iii) Compliance Risk This risk arises on account of non-compliance or breaches of laws/ regulations
which the entity is supposed to adhere. It may result in deterioration of reputation
in public eye, penalty and penal provisions.

(iv) Fraud Risk Fraud is perpetrated through the abuse of systems, controls, procedures and
working practices. It may be perpetrated by an outsider or insider. Fraud may not
be usually detected immediately and thus the detection should be planned for on
a proactive basis rather than on a reactive basis.

(v) Reputation Risk This type of risk arises from the negative public opinion. Such type of risk may
arise from e.g. from the failure to assess and control compliance risk and can
result in harm to existing or potential business relationships.

(vi) Transaction Risk Transaction risk arises due to the failure or inadequacy of internal system,
information channels, employees integrity or operating processes.

(vii) Disaster Risk On account of natural calamities like floods, fire, earthquake, man-made risks
due to extensive exploitation of land for mines activity, land escalation, risk of
failure of disaster management plans formulated by the company etc.

(viii) Regulatory Risk On account of change in Government policies and perceptions. Especially
this type of risks is associated with Food and beverages and Pharmaceuticals
industries.

(ix) Technology Risk Failure of system caused due to tampering of data access to critical information,
non availability of data and lack of controls.

Audit Risk
Audit risk is the risk that financial statements are materially incorrect, even though the audit opinion states that
the financial reports are free of any material misstatements. The purpose of an audit is to reduce the audit risk
to an appropriately low level through adequate testing and sufficient evidence.
Over the course of an audit, an auditor makes inquiries and performs tests on the general ledger and supporting
350 EP-GRMCE

documentation. If any errors are caught during the testing, the auditor requests that management propose
correcting journal entries. At the conclusion of an audit, after any corrections are posted, an auditor provides
a written opinion as to whether the financial statements are free of material misstatement. Auditing firms carry
malpractice insurance to manage audit risk and the potential legal liability.

Types of Audit Risks

The two components of audit risk are the risk of material misstatement and detection risk. Assume, for example,
that a large sporting goods store needs an audit performed, and that a CPA firm is assessing the risk of auditing
the store’s inventory.

Risk of Material Misstatement

The risk of material misstatement is the risk that the financial reports are materially incorrect before the audit
is performed. In this case, the word “material” refers to a dollar amount that is large enough to change the
opinion of a financial statement reader, and the percentage or dollar amount is subjective. If the sporting goods
store’s inventory balance of $1 million is incorrect by $100,000, a stakeholder reading the financial statements
may consider that a material amount. The risk of material misstatement is even higher if there is believed to be
insufficient internal controls, which is also a fraud risk.

Detection Risk
Detection risk is the risk that the auditor’s procedures do not detect a material misstatement. For example, an
auditor needs to perform a physical count of inventory and compare the results to the accounting records. This
work is performed to prove the existence of inventory. If the auditor’s test sample for the inventory count is
insufficient to extrapolate out to the entire inventory, the detection risk is higher.

RISK MANAGEMENT
Different types of risk existing in the business are to be controlled, mitigated and managed. Risk management
has become the mechanism to manage risks so that the negative consequences are kept within acceptable
tolerances.
“Risk Management” is a term used to describe the processes which aim to assist organisations identify,
understand, evaluate and take action on their risks with a view to increasing the probability of their
success and reducing the impact and likelihood of failure. Effective risk management gives comfort to
shareholders, customers, employees, other stakeholders and society at large that a business is being
effectively managed and also helps the company or organisation confirm its compliance with corporate
governance requirements.
Risk management is relevant to all organisations large or small. Effective risk management practices support
accountability, performance measurement and reward and can enable efficiency at all levels through the
organisation. Risk management requires a detailed knowledge and understanding of the organization (both
internal and external) and the processes involved in the business.
To effectively manage risk, and seize the opportunity within every challenge, institutions must manage a
variety of business dimensions. In today’s world they must focus on maximizing digital capabilities, building
ongoing expertise, driving fluid collaboration, developing top-notch analytics and fostering a risk culture that
can withstand disruptive change.
Better risk management techniques provide early warning signals so that the same may addressed in time. In
traditional concept the natural calamities like fire, earthquake, flood, etc were only treated as risk and keeping
the safe guard equipments etc were assumed to have mitigated the risk. But due to rapid changes in the
technologies, business dimensions and complexities, regulatory changes and environmental concerns, new
 Lesson 12 n Risk Management 351

and various types of risks have emerged. So in the era of fast changing global economy, multiplicity of legal
compliances, cross border business transactions and to ensure the survival, viability and sustainability of
business, the management of various types of risks have gained utmost importance.
Risk management requires commitment from the top management. It is no longer a discretion. It is a tool
necessary to have for creating opportunities for the businesses as they develop during the risk management
process. Thus, Risk Management Process provides a framework to:
l Ensure that all the foreseeable risks involved are actually understood and accepted before important
decisions are taken.
l Monitor new projects and ongoing operations to ensure that they continue to develop satisfactorily and
no problems or new risks emerge.
It is desirable to have a holistic approach to risk management that avoids compartmentalization of risks.
Risk Management is part of the corporate strategy. It is a key management tool to safeguard the business assets
for its use for the productive purposes. Risk Management is a logical and systematic process of establishing
the context, identifying, analysing, evaluating, treating, monitoring and communicating risks associated with
any activity, function or process, in a way that enables an organisation to minimise losses and maximise
opportunities.

ADVANTAGES OF RISK MANAGEMENT

Risk management plays vital role in strategic planning. It is an integral part of project management. An effective
risk management plan focuses on identifying and assessing possible risks.
Some of the key advantages of having risk management are as under:
l Risk Management in the long run always results in significant cost savings and prevents wastage of
time and effort in firefighting. It develops robust contingency planning.
l It can help plan and prepare for the opportunities that unravel during the course of a project or
business.
l Risk Management improves strategic and business planning. It reduces costs by limiting legal action or
preventing breakages.
l It establishes improved reliability among the stake holders leading to an enhanced reputation.
l Sound Risk Management practices reassure key stakeholders throughout the organization.

STEPS IN RISK MANAGEMENT PROCESS

The process of risk management consists of the following logical and sequential steps:

Risk Identification

Risk Analysis

Risk Assessment

Handling of Risk
352 EP-GRMCE

I. RISK Identification
Risk identification is the first stage of the risk management strategy. The origin/source of the risk is identified.
For example a risk may be due to transport of hazardous raw material to the factory. So the source of the risk
origin is utmost important and from this point the journey start to manage the risks.
By risk identification the organization is able to study the activities and places where its resources are placed to
risk. Correct risk identification ensures effective risk management. If risk managers do not succeed in identifying
all possible losses or gains that challenge the organization, then these non-identified risks will become non
manageable. The first task of the risk management is to classify the corporate risks according to their different
types. The first step in organizing the implementation of the risk management function is to establish the crucial
observation areas inside and outside the corporation. Then, the departments and the employees must be
assigned with responsibilities to identify specific risks.
The results of risk identification are normally documented in a risk register, which includes a list of identified
risks along with their sources, potential risk responses and risk categories. This information is used for risk
analysis, which in turn will support creating risk responses. Identified risks can also be represented in a risk
breakdown structure - a hierarchical structure used to categorize potential project risks by source.
Though the major work on risk identification is usually done in the beginning of a project, it is important to
remember that risk identification is an iterative process; new risks can be identified throughout the project life
cycle as the result of internal or external changes to a project.
Objective : The objective of the risk identification process is to ensure that all potential project risks are identified.
The ultimate purpose of risk identification is to minimize the negative impact of project hiccups and threats,
and to maximize the positive impact of project opportunities. Awareness of potential project risks reduces the
number of surprises during the project delivery and, thus, improves the chances of project success, allowing the
team to meet the time, schedule and quality objectives of the project. Finally, the purpose of risk identification
is to provide information for the next step of the risk management process.
Process of Risk Identification : The process for risk identification starts by taking inventory of the potential
project risks that can affect the project delivery. This step is crucial for efficient risk management throughout the
project. The outputs of the risk identification are used as an input for risk analysis, and they reduce a project
manager’s uncertainty. It is an iterative process that needs to be continuously repeated throughout the duration
of a project. The process needs to be rigorous to make sure that all possible risks are identified. An effective
risk identification process should include the following steps:
1. Creating a systematic process - The risk identification process should begin with project objectives and
success factors.
2. Gathering information from various sources - Reliable and high quality information is essential for
effective risk management.
3. Applying risk identification tools and techniques - The choice of the best suitable techniques will depend
on the types of risks and activities, as well as organizational maturity.
4. Documenting the risks - Identified risks should be documented in a risk register and a risk breakdown
structure, along with its causes and consequences.
5. Documenting the risk identification process - To improve and ease the risk identification process for
future projects, the approach, participants, and scope of the process should be recorded.
6. Assessing the process’ effectiveness - To improve it for future use, the effectiveness of the chosen
process should be critically assessed after the project is completed.
 Lesson 12 n Risk Management 353

Seven Identification Essentials

Identification is a process of brainstorming. It isn’t an exact science and should involve continuous
implementation as new phases, experiences, and viewpoints are introduced. Being vital to the management
process, there are some essentials to risk identification that guarantee maximum results.

1. Team Participation: Face-to-face interactions between project managers and the team promise
better and more comprehensive communication. The team must feel comfortable to share and find
hidden or elusive risks.
2. Repetition: Information changes appear as the risk management process proceeds. Keeping
identified risks current and updated means the system is focused on mitigating the most prevalent
issues.
3. Approach: Certain objectives require distinct approaches to best combat identification failure. One
method is to identify all root causes, undesirable events and map their potential impacts. Another
is to identify essential performance functions the project must enact, then find possible issues with
each function or goal. Both methods work well, but the latter may be easier due to its defined scope.
4. Documentation: Consistent and exhaustive documentation leads to comprehensive and reliable
solutions for a specific project or future risk management team’s analysis. Most communication is
recorded by a project manager and data is copied, stored, and updated for continued risk prevention.
5. Roots and Symptoms: It is essential in the risk identification phase to find the root causes of a risk
instead of mistaking them with the symptoms. A symptom can be confused with the root cause,
making it critical to discover the origin of risks and denote what are their symptoms. Other essentials
of risk identification involve the analysis phase. This is where identified risks are further researched
and understood.
6. Project Definition Rating Index (PDRI): PDRI is a risk assessment tool that helps develop mitigation
programs for high-risk areas. It facilitates the team’s risk assessment within the defined project
scope, budget and deadlines. It also provides further detail of individual risks and their magnitude,
represented by a score. The summation of scores is statistically compared to the project performance
as a certainty level for the entire project
7. Event Trees: Commonly used in reliability studies and probabilistic risk assessments, event trees
represent an event followed by all factors and faults related to it. The top of the tree is the event and
it is supported by any condition that may lead to that event, helping with likelihood visibility.

II. RISK ANALYSIS

After identification of the risk parameters, the second stage is of analyzing the risk which helps to identify and
manage potential problems that could undermine key business initiatives or projects.
To carry out a Risk Analysis, first identify the possible threats and then estimate the likelihood that these
threats will materialize. The analysis should be objective and should be industry specific. Within the industry,
the scenario based analysis may be adopted taking into consideration of possible events that may occur and its
alternative ways to achieve the given target.
Risk Analysis can be complex, as it requires to draw on detailed information such as project plans, financial
data, security protocols, marketing forecasts and other relevant information. However, it’s an essential planning
tool, and one that could save time, money, and reputations.
Risk analysis is useful in many situations like:
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l While planning projects, to help in anticipating and neutralizing possible problems.

l While deciding whether or not to move forward with a project.
l While improving safety and managing potential risks in the workplace.
l While preparing for events such as equipment or technology failure, theft, staff sickness, or natural
disasters.
l While planning for changes in environment, such as new competitors coming into the market, or
changes to government policy.
l When all the permutations-combinations of possible events/ threats are listed while analyzing the risk
parameters and the steps taken to manage such risks, the risk matrix is designed / popped-up before
the decision making and implementing authority.

Process of Risk Analysis

a) Identify Threats: The first step in Risk Analysis is to identify the existing and possible threats that one
might face. These can come from many different sources. For instance, they could be:
l Human – Illness, death, injury, or other loss of a key individual.
l Operational – Disruption to supplies and operations, loss of access to essential assets, or failures
in distribution.
l Reputational – Loss of customer or employee confidence, or damage to market reputation.
l Procedural – Failures of accountability, internal systems, or controls, or from fraud.
l Project – Going over budget, taking too long on key tasks, or experiencing issues with product or
service quality.
l Financial – Business failure, stock market fluctuations, interest rate changes, or non-availability of
funding.
l Technical – Advances in technology, or from technical failure.
l Natural – Weather, natural disasters, or disease.
l Political – Changes in tax, public opinion, government policy, or foreign influence.
l Structural – Dangerous chemicals, poor lighting, falling boxes, or any situation where staff,
products, or technology can be harmed.
A number of different approaches can be used to carry out a thorough analysis:
l Run through a list such as the one above to see if any of these threats are relevant.
l Think about the systems, processes, or structures used and analyze risks to any part of these.
l Ask others who might have different perspectives. Ask for input from team members and consult
others in the organization, or those who run similar projects.
l Tools such as SWOT Analysis and Failure Mode and Effects Analysis can also help to uncover
threats, while Scenario Analysis helps to explore possible future threats.
b) Estimate Risk: Once the threats are identified, it is required to calculate both the likelihood of these
threats being realized, and their possible impact. One way of doing this is to make best estimate of the
probability of the event occurring, and then to multiply this by the amount it will cost to set things on the
right track. This gives a value for the risk:
Risk Value = Probability of Event × Cost of Event
 Lesson 12 n Risk Management 355

As a simple example, imagine that a risk has been identified that your rent may increase substantially.
You think that there’s 80 percent chance of this happening within the next year, because your landlord has
recently increased rents for other businesses. If this happens, it will cost your business an extra Rs. 500,000
over the next year. So the risk value of the rent increase is:
0.80 (Probability of Event) x Rs.500, 000 (Cost of Event) = Rs. 400,000 (Risk Value)
You can also use a Risk Impact/Probability Chart to assess risk. This will help you to identify which risks you
need to focus on.

III. RISK ASSESSMENT

Risk assessment is the way in which enterprises get a handle on how significant each risk is to the achievement
of their overall goals. To accomplish this, enterprises require a risk assessment process that is practical,
sustainable, and easy to understand. The process must proceed in a structured and disciplined fashion. It must
be correctly sized to the enterprise’s size, complexity, and geographic reach.
When assessing risks, it’s important to determine whether the risk is - inherent risk, residual risk, or both.
Inherent risk as the risk to an entity in the absence of any actions management might take to alter either the
risk’s likelihood or impact. Residual risk is the risk remaining after management’s response to the risk. Some
entities interpret:
l inherent risk to be level of risk assuming responses currently in place fail,and
l residual risk to be the level of risk assuming existing responses operate according to design.
Some other entities interpret inherent risk to be the current level of risk assuming existing responses operate
according to design and residual to be the estimated risk after responses under consideration are put into
place. The first approach is focused more on controls effectiveness of the current environment and the second
approach on evaluating risk response options. There is no one right answer and either approach may be useful
depending upon the purpose of the assessment and the nature of the risks being considered.

Process of Risk Analysis

1) Develop assessment criteria: The first activity within the risk assessment process is to develop a
common set of assessment criteria to be deployed across business units, corporate functions, and large
capital projects. Risks and opportunities are typically assessed in terms of impact and likelihood. Many
enterprises recognize the utility of evaluating risk along additional dimensions such as vulnerability and
speed of onset.
2) Assess risks: Assessing risks consists of assigning values to each risk and opportunity using the
defined criteria. An initial screening of the risks and opportunities is performed using qualitative
techniques followed by a more quantitative treatment of the most important risks and opportunities
lending themselves to quantification (not all risks are meaningfully quantifiable). Qualitative assessment
consists of assessing each risk and opportunity according to descriptive scales as described in the
previous section. Quantitative analysis requires numerical values for both impact and likelihood using
data from a variety of sources.
The quality of the analysis depends on the accuracy and completeness of the numerical values and the
validity of the models used. Model assumptions and uncertainty should be clearly communicated and
evaluated using techniques such as sensitivity analysis. Both qualitative and quantitative techniques
have advantages and disadvantages. Most enterprises begin with qualitative assessments and develop
quantitative capabilities over time as their decision-making needs dictate.
For qualitative assessments, the most commonly used assessment techniques are interviews, cross-
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functional workshops, surveys, benchmarking, and scenario analysis. Quantitative techniques range
from benchmarking and scenario analysis to generating forward looking point estimates (deterministic
models) and then to generating forward looking distributions (probabilistic models). Some of the most
powerful probabilistic models from an enterprise-wide standpoint include causal at-risk models used
to estimate gross profit margins, cash flows, or earnings over a given time horizon at given confidence
levels.
3) Assess risk interactions: Risks do not exist in isolation. Enterprises have come to recognize the
importance of managing risk interactions. Even seemingly insignificant risks on their own have the
potential, as they interact with other events and conditions, to cause great damage or create significant
opportunity. Therefore, enterprises are gravitating toward an integrated or holistic view of risks
using techniques such as risk interaction matrices, bow-tie diagrams, and aggregated probability
distributions.
4) Prioritize risks: Once the risks have been assessed and their interactions documented, it’s time to
view the risks as a comprehensive portfolio to enable the next step – prioritizing for risk response and
reporting to different stakeholders. Risk prioritization is the process of determining risk management
priorities by comparing the level of risk against predetermined target risk levels and tolerance thresholds.
While each risk captured may be important to management at the function and business unit level, the
prioritization helps provide focus to senior management and board in addressing and giving attention
to key risks. Ranking and prioritizing is often done in a two-step process.
l First, the risks are ranked according to one, two, or more criteria such as impact rating multiplied
by likelihood rating or impact multiplied by vulnerability.
l Second, the ranked risk order is reviewed in light of additional considerations such as impact
alone, speed of onset, or the size of the gap between current and desired risk level (risk tolerance
threshold). If the initial ranking is done by multiplying financial loss by likelihood, then the final
prioritization should take qualitative factors into consideration.
5) Response to Risks: The results of the risk assessment process then serve as the primary input to
risk responses whereby response options are examined (accept, reduce, share, or avoid), cost-benefit
analyses performed, a response strategy formulated, and risk response plans developed.
6) Effective and sustainable risk assessment process: To be effective and sustainable, the risk
assessment process needs to be simple, practical, and easy to understand. People aren’t enough. To
be efficient, they must be supported by the right technology.

IV. HANDLING OF RISK

The ownership of risk should be allocated. Responsibilities and accountabilities of the persons handling risks
need to be identified and assigned. The persons concerned when the risk arises, should document it and report
it to the higher ups in order to have the early measures to get it minimized. Risk may be handled in the following
ways:
1) Risk Avoidance: Risk Avoidance means to avoid taking or choosing of less risky business/project. For
example one may avoid investing in stock market due to price volatility in stock prices and may prefer
to invest in debt instruments.
2) Risk Retention/absorption: It is the handling the unavoidable risk internally and the firm bears/
absorbs it due to the fact that either because insurance cannot be purchased of such type of risk or it
may be of too expensive to cover the risk and much more cost-effective to handle the risk internally.
Usually, retained risks occur with greater frequency, but have a lower severity. An insurance deductible
is a common example of risk retention to save money, since a deductible is a limited risk that can save
 Lesson 12 n Risk Management 357

money on insurance premiums for larger. There are two types of retention methods for containing
losses as under:
– Active Risk Retention: Where the risk is retained as part of deliberate management strategy after
conscious evaluation of possible losses and causes.
– Passive Risk Retention: Where risk retention occurred through negligence. Such type of retaining
risk is unknown or because the risk taker either does not know the risk or considers it a lesser risk
than it actually is.
3) Risk Reduction: In many ways physical risk reduction (or loss prevention, as it is often called) is
the best way of dealing with any risk situation and usually it is possible to take steps to reduce the
probability of loss. The ideal time to think of risk reduction measures is at the planning stage of any
new project when considerable improvement can be achieved at little or no extra cost. The cautionary
note regarding risk reduction is that, as far as possible expenditure should be related to potential future
savings in losses and other risk costs; in other words, risk prevention generally should be evaluated in
the same way as other investment projects.
4) Risk Transfer: This refers to legal assignment of cost of certain potential losses to another. The
insurance of ‘risks’ is to occupy an important place, as it deals with those risks that could be transferred
to an organization that specialises in accepting them, at a price. Usually, there are 3 major means of
loss transfer viz.,
l By Tort,
l By contract other than insurance,
l By contract of insurance.
The main method of risk transfer is insurance. The value of the insurance lies in the financial security
that a firm can obtain by transferring to an insurer, in return for a premium for the risk of losses arising
from the occurrence of a specified peril. Thus, insurance substitutes certainty for uncertainty. Insurance
does not protect a firm against all perils but it offers restoration, atleast in part of any resultant economic
loss.

RISK MITIGATION STRATEGY

Risk mitigation is defined as taking steps to reduce adverse effects. Risk mitigation is the process by which
an organization introduces specific measures to minimize or eliminate unacceptable risks associated with its
operations. Risk mitigation measures can be directed towards reducing the severity of risk consequences,
reducing the probability of the risk materializing, or reducing the organizations exposure to the risk. The risk
mitigation step involves development of mitigation plans designed to manage, eliminate, or reduce risk to an
acceptable level. Once risks have been identified and assessed, the strategies to manage the risk fall into one
or more of the following categories:
(i) Transfer Risk: Normally in projects assignments or multifaceted exercises, execution is fought with
risks. Different agencies work together and these agencies take care to transfer risk in their areas to
another agency which is better equipped to take care of a risk for a consideration. Here the concept of
core competence curves in and whenever a particular agency, individual or a firm finds that it is dealing
in an area where it does not have the core competence to deal with it seeks the help of another agency
which has the specific core competence to transfer its own risk. The risk may be in the form of loss of
reputation or sub quality performance and this risk is taken care of through transfer.
(ii) Tolerate Risk or Risk Retention: It is retention of the risk. It is accepting the loss when it occurs. True
self insurance falls in this category. Risk retention is a viable strategy for small risks where the cost of
358 EP-GRMCE

insuring against the risk would be greater over time than the total losses sustained. All risks that are
not avoided, reduced or transferred are retained by default. This includes risks that are so large or
catastrophic that they either cannot be insured against or the premiums would be infeasible.
War is an example since most property and risks are not insured against war, so the loss attributed
by war is retained by the insured. Also any amount of potential loss (risk) over the amount insured is
retained risk. This may also be acceptable if the chance of a very large loss is small or if the cost to
insure for greater coverage amounts is so great it would hinder the goals of the organization too much.
(iii) Reduce Risk: By far the greater number of risks will belong to this category. The purpose of treatment
is not necessarily to obviate the risk, but more likely to contain the risk to an acceptable level. Internal
controls are actions instigated from within the organization (although their effects may be felt outside of
the organization) which are designed to contain risk to acceptable levels.
Outsourcing could be an example of risk reduction if the outsourcer can demonstrate higher capability
at managing or reducing risks. In this case companies outsource only some of their departmental
needs. For example, a company may outsource only its software development, the manufacturing of
hard goods, or customer support needs to another company, while handling the business management
itself. This way, the company can concentrate more on business development without having to worry
as much about the manufacturing process.
Modern software development methodologies reduce risk by developing and delivering software
incrementally. Early methodologies suffered from the fact that they only delivered software in the final
phase of development; any problems encountered in earlier phases meant costly rework and often
jeopardized the whole project.
(iv) Avoid Risk: This method results in complete elimination of exposure to loss due to a specific risk. It
can be established by either avoiding to undertake the risky project or discontinuance of an activity to
avoid risk. This means that no risky projects are undertaken. Alternatively, a project may be abandoned
midway to mitigate the risk while handling a project.
It is not performing an activity which could carry risk. An example would be not buying a property or
business in order to not take on the liability that comes with it. Another would be not flying in order to not
take the risk that the aeroplaneswere to be hijacked. Avoidance may seem the answer to all risks, but
avoiding risks also means losing out on the potential gain that accepting (retaining) the risk may have
allowed. Not entering a business to avoid the risk of loss also avoids the possibility of earning profits.
(v) Combine Risk: When the business faces two or three risks the overall risk is reduced by combination.
This strategy is suitable mainly in the areas of financial risk. Different financial instruments say, shares
and debentures are taken in a single portfolio to reduce the risk.
(vi) Sharing Risk: Insurance is a method of sharing risk for a consideration. For example by paying insurance
premium the company shares the risk with companies and the insurance companies themselves share
their risk by doing re-insurance.
(vii) Hedging Risk: Exposure of funds to fluctuations in foreign exchange rates, prices etc., bring about
financial risks resulting in losses or gain. The downside risk is often taken care.

MAINTAINING THE RISK STRATEGY

It has already been noted that the risk environment of any organization is constantly changing and developing,
and that the priorities of objectives and the consequent importance of risks will shift and change. The risk
management process is therefore a dynamic and ongoing one, not an issue for a one off exercise. The process
has to allow for periodic review of risks and for consequent adjustment of the control response.
 Lesson 12 n Risk Management 359

Whatever option is adopted, it is important that those charged with control of the risk management process
should regularly review it. One useful technique for doing this is to actively review the risks associated with each
of the key organizational objectives.
Suitable tools needs to be identified to assist with the task of keeping the risk strategy up to date. A key tool is
the use of ongoing Control and Risk Self Assessment (CRSA) procedures. This procedure embeds review of
risk and control into the organization at every level and uses the knowledge and experience of the staff that are
closest to each function to assess the movement in risks and the appropriateness of control.

FRAUD RISK MANAGEMENT

Fraud is a deliberate action to deceive another person with the intention of gaining some things. Fraud can
loosely be defined as “any behavior by which one person intends to gain a dishonest advantage over another”.
In other words, fraud is an act or omission which is intended to cause wrongful gain to one person and wrongful
loss to the other, either by way of concealment of facts or otherwise.
Section 25 of the Indian Penal Code, 1860 defines the word, “Fraudulently”, which means, a person is said to
do a thing fraudulently if he does that thing with intent to defraud but not otherwise.
Further according to section 17 of the Indian Contract Act, 1872, ‘fraud’ means and includes any of the following
acts committed by a party to a contract, or with his connivance (intentional active or passive acquiescence), or
by his agent with intent to deceive or to induce a person to enter into a contract.
1. The suggestion that a fact is true when it is not true and the persons making the suggestion does not
believe it to be true;
2. The active concealment of a fact by a person having knowledge or belief of the fact;
3. A promise made without any intention of performing it;
4. Any other act fitted to deceive;
5. Any such act or omission as the law specially declares to be fraudulent.
The Companies Act 2013 has also explained fraud. Explantion to Section 447 defines “fraud”, which reads as
under: “fraud” in relation to affairs of a company or anybody corporate, includes any act, omission, concealment
of any fact or abuse of position committed by any person or any other person with the connivance in any
manner, with intent to deceive, to gain undue advantage from, or to injure the interests of, the company or its
shareholders or its creditors or any other person, whether or not there is any wrongful gain or wrongful loss.
A definition of fraud has been suggested in the context of electronic banking in the Report of RBI Working Group
on Information Security, Electronic Banking, Technology Risk Management and Cyber Frauds, which reads
as under: “A deliberate act of omission or commission by any person, carried out in the course of a banking
transaction or in the books of accounts maintained manually or under computer system in banks, resulting into
wrongful gain to any person for a temporary period or otherwise, with or without any monetary loss to the bank”.
For prevention of the fraud, there should be in existence a robust internal check and control systems. For
example in banking there is a concept of ‘maker’ and ‘checker’. The day today transactions are entered by
the maker and another person validates the transactions. So it is a self balancing system. Further the internal/
concurrent audit also helps in early detection of the frauds. The management should be pro-active in fraud
related matter. A fraud is usually not detected until and unless it is unearthed.
Fraud Risk Management Policy should be incorporated, aligned to its internal control and risk management.
Such policy/plan protects the company from any kind of uncertain happening which leads the company to a
huge loss or damage (brand reputation, financial loss, assets). The Fraud Risk Management Policy will help to
strengthen the existing anti-fraud controls by raising the awareness across the Company and (i) Promote an
360 EP-GRMCE

open and transparent communication culture (ii) Promote zero tolerance to fraud/misconduct (iii) Encourage
employees to report suspicious cases of fraud/misconduct. (iv) Spread awareness amongst employees and
educate them on risks faced by the company. Such a policy may include the following:
l Defining fraud: This shall cover activities which the company would consider as fraudulent.
l Defining Role & responsibilities: The policy may define the responsibilities of the officers who shall be
involved in effective prevention, detection, monitoring & investigation of fraud. The company may also
consider constituting a committee or operational structure that shall ensure an effective implementation
of anti-fraud strategy of the company. This shall ensure effective investigation in fraud cases and prompt
as well as accurate reporting of fraud cases to appropriate regulatory and law enforcement authorities.
l Communication channel: Encourage employees to report suspicious cases of fraud/misconduct. Any
person with knowledge of suspected or confirmed incident of fraud/misconduct must report the case
immediately through effective and efficient communication channel or mechanism.
l Disciplinary action: After due investigations disciplinary action against the fraudster may be considered
as per the company’s policy.
l Reviewing the policy: The employees should educate their team members on the importance of
complying with Company’s policies & procedures and identifying/ reporting of suspicious activity, where
a situation arises. Based on the developments, the policy should be reviewed on periodical basis.

Reporting of fraud under Companies Act 2013

The Companies Act, 2013 has introduced many new reporting requirements for the statutory auditors of
companies. One of these requirements is given under the Section 143(12) of the Companies Act, 2013 which
requires the auditors to report to the Central Government about the fraud/suspected fraud committed against
the company by the officers or employees of the company.
Consequence of non-compliance: Sub-section 15 of section 143 states that if any auditor, cost accountant or
company secretary in practice do not comply with the provisions of sub-section (12), he shall be punishable with
fine which shall not be less than one lakh rupees but which may extend to twenty-five lakh rupees.
Section 143(12) includes only fraud by officers or employees of the company and does not include fraud by third
parties such as vendors and customers.

REPUTATION RISK MANAGEMENT

The Reserve Bank of India in its Master Circular number RBI/2015-16/85 DBR.No.BP.BC.4./21.06.001/2015-
16 July 1, 2015 has defined the Reputation Risk as the risk arising from negative perception on the part of
customers, counterparties, shareholders, investors, debt-holders, market analysts, other relevant parties or
regulators that can adversely affect a bank’s ability to maintain existing, or establish new, business relationships
and continued access to sources of funding (eg through the interbank or securitization markets). Reputational
risk is multidimensional and reflects the perception of other market participants. Furthermore, it exists throughout
the organisation and exposure to reputational risk is essentially a function of the adequacy of the bank’s internal
risk management processes, as well as the manner and efficiency with which management responds to external
influences on bank-related transactions.
Loss of Reputation has long lasting damages like:
l It destroys the Brand Value
l Steep downtrend in share value.
l Ruined of Strategic Relationship
 Lesson 12 n Risk Management 361

l Regulatory relationship is damaged which leads to stringent norms.

l Recruitment to fetch qualified staff as well the retention of the old employees becomes difficult.
For managing the reputation risk, the following principles are worth noting:
l Integration of risk while formulating business strategy.
l Effective board oversight.
l Image building through effective communication.
l Promoting compliance culture to have good governance.
l Persistently following up the Corporate Values.
l Due care, interaction and feedback from the stakeholders.
l Strong internal checks and controls
l Peer review and evaluating the company’s performance.
l Quality report/ newsletter publications
l Cultural alignments

RESPONSIBILITY OF RISK MANAGEMENT

l Section 134(3) (n) of the Companies Act, 2013 provides that a statement indicating development and
implementation of a risk management policy for the company including identification therein of elements
of risk, if any, which in the opinion of the Board may threaten the existence of the company.
l SEBI (LODR) Regulations, 2015 also provides that company shall lay down procedures to inform Board
members about the risk assessment and minimization procedures. The Board shall be responsible for
framing, implementing and monitoring the risk management plan for the company.
l The Risk Management Plan must include all elements of risks. The traditional elements of potential
likelihood and potential consequences of an event must be combined with other factors like the timing
of the risks, the correlation of the possibility of an event occurring with others, and the confidence in risk
estimates.
l Risk management policies should reflect the company’s risk profile and should clearly describe
all elements of the risk management and internal control system and any internal audit function. A
company’s risk management policies should clearly describe the roles and accountabilities of the board,
audit committee, or other appropriate board committee, management and any internal audit function.
l A company should have identified Chief Risk Officer manned by an individual with the vision and the
diplomatic skills to forge a new approach. He may be supported by “risk groups” to oversee the initial
assessment work and to continue the work till it is completed.
l Regulation 21 of SEBI (LODR) Regulations, 2015, requires that every listed company should have a
Risk Management Committee (details are provided undr the chapter of Board Committees)

ROLE OF COMPANY SECRETARY IN RISK MANAGEMENT

The company secretaries are governance professionals whose role is to enforce a compliance framework
to safeguard the integrity of the organization and to promote high standards of ethical behavior. He has a
significant role in assisting the board of the organization to achieve its vision and strategy. The activities of the
governance professional encompass legal and regulatory duties and obligations and additional responsibilities
assigned by the employer. However, in essence, the functions of a Governance Professional include:
362 EP-GRMCE

l Advising on best practice in governance, risk management and compliance.

l Championing the compliance framework to safeguard organizational integrity.
l Promoting and acting as a ‘sounding board’ on standards of ethical and corporate behavior.
l Balancing the interests of the Board or governing body, management and other stakeholders.
The listing agreement also provides for the establishment of the Risk Management Committee as per
Regulations. Since it is the part of the Corporate Governance norms and non-compliance of the same is to be
reported by the Company Secretary.
In terms of Section 203(1)(ii), a Company Secretary is a Key Managerial Person. Hence being a top level
officer and board confidante, a Company Secretary can pay a role in ensuring that a sound Enterprise wide
Risk Management [ERM] which is effective throughout the company is in place. The board of directors may
have a risk management sub-committee assisted by a Risk Management Officer. As an advisor to the board
in ensuring good governance, a Company Secretary shall ensure that there is an Integrated Framework
on which a strong system of internal control is built. Such a Framework will become a model for discussing
and evaluating risk management efforts in the organization. Risk and control consciousness should spread
throughout the organization. A Company Secretary can ensure that this happens so that the risk factor will
come into consideration at the every stage of formulation of a strategy. It will also create awareness about inter-
relationships of risks across business units and at every level of the organization. A Company Secretary can
ensure that the following questions [an illustrative list] are effectively addressed at the board level:
l What is the organization’s risk management philosophy?
l Is that philosophy clearly understood by all personnel?
l What are the relationships among ERM, performance, and value?
l How is ERM integrated within organizational initiatives?
l What is the desired risk culture of the organization and at what point has its risk appetite been set?
l What strategic objectives have been set for the organization and what strategies have been or will be
implemented to achieve those objectives?
l What related operational objectives have been set to add and preserve value?
l What internal and external factors and events might positively or negatively impact the organization’s
ability to implement its strategies and achieve its objectives?
l What is the organization’s level of risk tolerance?
l Is the chosen risk response appropriate for and in line with the risk tolerance level?
l Are appropriate control activities (i.e., approvals, authorizations, verifications, reconciliations, reviews
of operating performance, security of assets, segregation of duties) in place at every level throughout
the organization?
l Is communication effective – from the top down, across, and from the bottom up the organization?
l How effective is the process currently in place for exchanging information with external parties?
l What is the process for assessing the presence and performance quality of all eight ERM components
over time?

RISK GOVERNANCE
Risk governance includes the skills, infrastructure (i.e., organization structure, controls and information
 Lesson 12 n Risk Management 363

systems), and culture deployed as directors exercise their oversight. Good risk governance provides clearly
defined accountability, authority, and communication/reporting mechanisms.
A process for risk management cannot be initiated unless there is a perception and knowledge of risk surrounding
the business. Businesses evolve and are exposed to change dynamics of the external environment. Hence it
is important to have the risk oversight function, as one of the areas of responsibility of the board of directors
of any enterprise. The Board may form a separate committee to support the board function depending on the
complexities of the business enterprise and the complexities associated with its transactions and events.
The board shall have to identify the extent and type of risks it faces and the planning necessary to manage
and mitigate the same for ensuring growth for the benefit of all the stakeholders. Therefore, the Board has to
define a risk philosophy and the extent to which it is willing to accept any consequence of taking of risks by the
organisation and its functionaries in its day to day functioning.
A strengthened management information system (MIS) supported by robust information technology platform is a
necessary pre-requisite for enhancing Board efficiency in oversight and decision making. Similarly, augmented
skill sets and experience at the level of independent directors would go a long way in enhancing the Board
capacity. Strong MIS facilitates risk reporting to the boards in an effective and comprehensive manner, which
in turn enhances transparency and causes informed decision taking. Robust information technology systems
are a necessary condition for supporting the MIS framework as the quality of risk information that the Boards
and the top management receive depends largely on the quality and robustness of the information technology
systems.
In addition to prescribing the risk appetite for the company, the board also needs to lay down appropriate risk
strategy and ensure that this is institutionalised throughout the organization. This would entail, aligning risk
management processes with the overall business strategy, clearly defining the roles and responsibilities down
the hierarchy, establishing accountability and reinforcing change with communication and training. The Board
and the senior management oversight must be supplemented with effective leadership by the Chairman and the
chief executive officer (CEO), and informed non-executive directors. The Boards must get much more intimately
involved in risk matters and have a firmer understanding of the key risks faced by the business.
Effective risk governance also demands that each director is aware of the breadth of risks faced by the company.
Directors add value to the Board when they have financial expertise, are aware of risk fundamentals and
techniques, and are able to manage dynamics with executives.
Here, the risk management committees have an important role to play in the overall risk governance framework.
Apart from monitoring the company’s strategic-risk profile on an on-going basis, such committees would also be
responsible for defining the company’s overall risk appetite; approving major transactions above a company’s
risk threshold, and; establishing limit structures and risk policies for use within individual businesses.
Board members need to have a good understanding of risk management, even when they lack expertise in that
area. Boards may lean on the expertise of outside consultants to help them review company risk management
systems and analyze business specific risks. Boards should perform a formal review of risk management
systems, atleast once in a year.
As part of the annual review, boards should review risk oversight policies and procedures at the board and
committee levels and assess risk on an ongoing basis. It’s helpful to familiarize the board with expectations
within the industry or regulatory bodies that the organization operates in by arranging for a formal presentation
on risk management best practices. The annual risk management review should include communication from
management about lessons learned from past mistakes.
Risk oversight is the responsibility of the entire Board and the same can be achieved through a review
mechanism which inter-alia could include::
1. Developing policies and procedures around risk that are consistent with the organization’s strategy and
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risk appetite.
2. Taking steps to foster risk awareness.
3. Encourage an organizational culture of risk adjusting awareness
4. Maintenance of a Risk Register
5. A compliance certificate on the identification of risks and establishment of mitigation measures.

RISK MANAGEMENT FRAMEWORKS AND STANDARDS

Many standards and guidelines have been developed worldwide to help organisations implement risk
management systematically and effectively. These standards seek to establish a common view on frameworks,
processes and practice, and are generally set by recognised international standards bodies or by industry
groups. Risk management is a fast-moving discipline and standards are regularly supplemented and updated.
The different standards reflect the different motivations and technical focus of their developers, and are
appropriate for different organisations and situations. Standards are normally voluntary, although adherence to
a standard may be required by regulators or by contract.

1) Enterprise Risk Management – Integrated Framework (2004)

In response to a need for principles-based guidance to help entities design and implement effective enterprise-
wide approaches to risk management, Committee of Sponsoring Organizations of the Treadway Commission
(COSO) issued the Enterprise Risk Management – Integrated Framework in 2004. This framework defines
essential enterprise risk management components, discusses key ERM principles and concepts, suggests
a common ERM language, and provides clear direction and guidance for enterprise risk management. The
guidance introduces an enterprise-wide approach to risk management as well as concepts such as: risk
appetite, risk tolerance, portfolio view. This framework is now being used by organizations around the world to
design and implement effective ERM processes.
The Enterprise Risk Management – Integrated Framework which is one of the most widely recognized and
applied enterprise risk management frameworks in the world. It provides a principles-based approach to help
organizations design and implement enterprise-wide approaches to risk management.
Enterprise risk management deals with risks and opportunities affecting value creation or preservation, defined
as follows:
Enterprise risk management is a process, effected by an entity’s board of directors, management and other
personnel, applied in strategy setting and across the enterprise, designed to identify potential events that may
affect the entity, and manage risk to be within its risk appetite, to provide reasonable assurance regarding the
achievement of entity objectives.
This definition is purposefully broad. It captures key concepts fundamental to how companies and other
organizations manage risk, providing a basis for application across organizations, industries, and sectors. It
focuses directly on achievement of objectives established by a particular entity and provides a basis for defining
enterprise risk management effectiveness.
Value is maximized when management sets strategy and objectives to strike an optimal balance between
growth and return goals and related risks, and efficiently and effectively deploys resources in pursuit of the
entity’s objectives.
Enterprise risk management encompasses:
l Aligning risk appetite and strategy – Management considers the entity’s risk appetite in evaluating
strategic alternatives, setting related objectives, and developing mechanisms to manage related risks.
 Lesson 12 n Risk Management 365

l Enhancing risk response decisions – Enterprise risk management provides the rigor to identify and
select among alternative risk responses – risk avoidance, reduction, sharing, and acceptance.
l Reducing operational surprises and losses – Entities gain enhanced capability to identify potential
events and establish responses, reducing surprises and associated costs or losses.
l Identifying and managing multiple and cross-enterprise risks – Every enterprise faces a myriad of
risks affecting different parts of the organization, and enterprise risk management facilitates effective
response to the interrelated impacts, and integrated responses to multiple risks.
l Seizing opportunities – By considering a full range of potential events, management is positioned to
identify and proactively realize opportunities.
l Improving deployment of capital – Obtaining robust risk information allows management to effectively
assess overall capital needs and enhance capital allocation.

Components of Enterprise Risk Management

Enterprise risk management consists of eight interrelated components. These are derived from the way
management runs an enterprise and are integrated with the management process. These components are:
l Internal Environment – The internal environment encompasses the tone of an organization, and sets
the basis for how risk is viewed and addressed by an entity’s people, including risk management
philosophy and risk appetite, integrity and ethical values, and the environment in which they operate.
l Objective Setting – Objectives must exist before management can identify potential events affecting
their achievement. Enterprise risk management ensures that management has in place a process
to set objectives and that the chosen objectives support and align with the entity’s mission and are
consistent with its risk appetite.
l Event Identification – Internal and external events affecting achievement of an entity’s objectives must
be identified, distinguishing between risks and opportunities.
Opportunities are channeled back to management’s strategy or objective-setting processes.
l Risk Assessment – Risks are analyzed, considering likelihood and impact, as a basis for determining
how they should be managed. Risks are assessed on an inherent and a residual basis.
l Risk Response – Management selects risk responses – avoiding, accepting, reducing, or sharing risk
– developing a set of actions to align risks with the entity’s risk tolerances and risk appetite.
l Control Activities – Policies and procedures are established and implemented to help ensure the risk
responses are effectively carried out.
l Information and Communication – Relevant information is identified, captured, and communicated in a
form and timeframe that enable people to carry out their responsibilities. Effective communication also
occurs in a broader sense, flowing down, across, and up the entity.
l Monitoring – The entirety of enterprise risk management is monitored and modifications made as
necessary. Monitoring is accomplished through ongoing management activities, separate evaluations,
or both.
Enterprise risk management is not strictly a serial process, where one component affects only the next. It is a
multidirectional, iterative process in which almost any component can and does influence another.
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Case Study

Infosys: Mitigating water risk at India-based hubs

For over 15 years, Infosys - provider of business consulting, IT and outsourcing services - has maintained a plan
to mitigate its operational risks related to water supply. Collaboration between the enterprise risk management
(ERM) and sustainability functions enables Infosys to address risks at the facility-level while conducting overall
monitoring activities at the enterprise level. Implementing measures to save and monitor water availability
makes Infosys a steward of its environment while also delivering value to its business and its stakeholders.

Risk of water scarcity

Infosys employs more than 200,000 people at 116 global development centers, with 40 of its largest in India. The
rapidly growing Indian population and increased demand for water resources has created a growing concern
over water availability in the country. Because of its large campuses in major Indian cities, Infosys considers
water stress and scarcity a significant near-term risk to its business operations India.
Water supports the company’s human capital (i.e., cooking, cleaning, bathrooms and drinking) at their campuses
and is also necessary for landscaping and cooling towers.2 Water shortages during dry periods have the
potential to halt operations at affected campuses, which would negatively impact the company’s ability to fulfill
contractual obligations with customers and achieve performance goals.

Response to water risks

To address water risks, Infosys encourages collaboration between ERM and sustainability functions. The Infosys
sustainability team conducts detailed risk assessments at individual facility locations while ERM conducts
assessments at the corporate level. The company undertakes an iterative process: first assessing inherent risk
and subsequently applying control measures and assessing residual risk.
Infosys chooses among five risk response types in line with COSO’s ERM framework: accept, avoid, pursue,
reduce, escalate and share. In locations where water scarcity risk is high, avoiding or accepting the risk is
not an option. In these cases, the company chooses to “reduce” the risk. Infosys uses site-based water risk
assessments and root cause analyses to develop action plans for reducing risks to “low” or “moderate” levels.
If actions taken do not fully mitigate the risks, Infosys may decide to reduce the impact by temporarily moving
business operations or by reducing their footprint in the affected development center.
Infosys emphasizes the use of root cause analysis so that action plans focus on the underlying problem rather
than symptoms. In the case of water scarcity, this approach has helped them determine what is influencing
the water shortages: water access, lack of water storage or other issues. Following this analysis, the company
implements mitigation measures to address the root cause and reduce risks to acceptable levels. These
measures have included:
l Water conservation through reduce, recycle and reuse measures (e.g., water efficient fixtures,
wastewater treatment)
l Aquifer recharge through injection wells
l Rainwater harvesting and reuse
l Construction of underground reservoirs that hold water to last for at least five days across locations
l Efficiency programs led by smart water metering program that monitors water consumption and
encourages water use reduction
These measures are designed so that Indian campuses can sustain themselves for seven days using stored
rainwater and potable water in the case of extreme water shortages. The sustainability team monitors water
 Lesson 12 n Risk Management 367

resources at all campuses and develops tailored responses at each campus.

Monitoring water scarcity

Sustainability and ERM work together to monitor water scarcity across the enterprise.
Sustainability teams collect and use the following types of data to monitor and assess water risk at its campuses:
l Rainfall data over a 10-year period for each geographic area;
l Water table data for each geographic area;
l Storage capacity of rainwater on each campus;
l Availability and cost of water via water tankers for delivery;
l Freshwater usage from municipalities, private providers, ground water and rainwater
Corporate ERM monitors water scarcity as an emerging risk. It tracks an enterprise-wide metric of “per capita
water consumption” using information provided by sustainability teams. Per capita water consumption is
calculated by dividing the average monthly water consumption at Infosys locations by the average employee
count per month, which is the sum of the swipe counts for employees and support staff in the Infosys offices.
Corporate ERM actively tracks this metric to determine if water risk will become a higher corporate level priority
in future years.

Business outcomes of managing water risk

Infosys’ risk management approach to water scarcity at the site and regional levels has been critical for realizing
value for its customers, employees and communities. The company’s water risk management strategy in India
enables the company to:
l Open new campuses in locations where competitors may not be able to operate due to water shortages.
l Maintain continuity in operations using stored water in times of scarcity, which helps maintain customer
confidence and profitability.
The outcomes stem from Infosys’ organizational structure, which encourages sustainability to assess and
mitigate risk at the local level while ERM maintains an enterprise wide view. Further, root cause analysis of
local water issues empowered Infosys to develop effective responses and mitigation approaches at individual
campuses.

Limitations
While enterprise risk management provides important benefits, limitations exist. In addition to factors discussed
above, limitations result from the realities that human judgment in decision making can be faulty, decisions on
responding to risk and establishing controls need to consider the relative costs and benefits, breakdowns can
occur because of human failures such as simple errors or mistakes, controls can be circumvented by collusion
of two or more people, and management has the ability to override enterprise risk management decisions.
These limitations preclude a board and management from having absolute assurance as to achievement of the
entity’s objectives.

Roles and Responsibilities

Everyone in an entity has some responsibility for enterprise risk management. The chief executive officer is
ultimately responsible and should assume ownership. Other managers support the entity’s risk management
philosophy, promote compliance with its risk appetite, and manage risks within their spheres of responsibility
consistent with risk tolerances. A risk officer, financial officer, internal auditor, and others usually have key
368 EP-GRMCE

support responsibilities.
Other entity personnel are responsible for executing enterprise risk management in accordance with established
directives and protocols. The board of directors provides important oversight to enterprise risk management,
and is aware of and concurs with the entity’s risk appetite. A number of external parties, such as customers,
vendors, business partners, external auditors, regulators, and financial analysts often provide information useful
in effecting enterprise risk management, but they are not responsible for the effectiveness of, nor are they a part
of, the entity’s enterprise risk management.

2. ISO 31000: International Standard for Risk Management

ISO 31000 is the international standard for risk management. This standard is published on the 13th of November
2009. By providing comprehensive principles and guidelines, this standard helps organizations with their risk
analysis and risk assessments. ISO 31000 applies to most business activities including planning, management
operations and communication processes. Whilst all organizations manage risk to some extent, this international
standard’s best-practice recommendations were developed to improve management techniques and ensure
safety and security in the workplace at all times.
By implementing the principles and guidelines of ISO 31000 in organization, the organisation is able to improve
operational efficiency, governance and stakeholder confidence, while minimising losses. This international
standard also helps to boost health and safety performance, establish a strong foundation for decision making
and encourage proactive management in all areas.

Scope
ISO 31000:2009 provides generic guidelines for the design, implementation and maintenance of risk management
processes throughout an organization. This approach to formalizing risk management practices will facilitate
broader adoption by companies who require an enterprise risk management standard that accommodates
multiple ‘silo-centric’ management systems.
ISO 31000 is not developed for a particular industry group, management system or subject matter field in mind,
rather it provides best practice structure and guidance to all operations concerned with risk management. The
scope of this approach to risk management is to enable all strategic, management and operational tasks of an
organization throughout projects, functions, and processes be aligned to a common set of risk management
objectives.
Accordingly, ISO 31000:2009 is intended for a broad stakeholder group including:
 executive level stakeholders

 appointment holders in the enterprise risk management group

 risk analysts and management officers

 line managers and project managers

 compliance and internal auditors

 independent practitioners.

Benefits of ISO 31000

ISO 31000 contains 11 key principles that position risk management as a fundamental process in the success
of the organization.
ISO 31000 is designed to help organizations:
 Increase the likelihood of achieving objectives
 Lesson 12 n Risk Management 369

 Encourage proactive management

 Be aware of the need to identify and treat risk throughout the organization

 Improve the identification of opportunities and threats

 Comply with relevant legal and regulatory requirements and international norms

 Improve financial reporting

 Improve governance

 Improve stakeholder confidence and trust

 Establish a reliable basis for decision making and planning

 Improve controls

 Effectively allocate and use resources for risk treatment

 Improve operational effectiveness and efficiency

 Enhance health and safety performance, as well as environmental protection

 Improve loss prevention and incident management

 Minimize losses

 Improve organizational learning

 Improve organizational resilience.

 Proactively improve operational efficiency and governance

Managing risk
ISO 31000:2009 gives a list on how to deal with risk:
1. Avoiding the risk by deciding not to start or continue with the activity that gives rise to the risk
2. Accepting or increasing the risk in order to pursue an opportunity
3. Removing the risk source
4. Changing the likelihood
5. Changing the consequences
6. Sharing the risk with another party or parties (including contracts and risk financing)
7. Retaining the risk by informed decision

STRATEGIC RISK MANAGEMENT

Strategic risk management is a crucial but often overlooked aspect of enterprise risk management (ERM).
While ERM has traditionally focused on financial and, more recently, operational risk, the fact is that strategic
risk is far more consequential.
Studies of the largest public companies indicate that strategic risks account for approximately 60 percent of
major declines in market capitalization. Operational risks have just half that impact (about 30 percent), and
financial risks generate about 10 percent.
Why do many ERM programs seem to stand these priorities on their heads? Part of the reason is ERM’s roots
in corporate finance, but it is also true that until recently, strategic risks were difficult to measure, not to mention
370 EP-GRMCE

evaluate, against one another on an apples-to-apples basis.

Meaning of Strategic Risk

It may be easiest to describe strategic risk by what it is often confused with—operational risk. Good operations
mean doing things right, while good strategy means doing the right things. Strategic risk arises when a company
fails to anticipate the market’s needs in time to meet them.
A company that has unmatched manufacturing processes will still fail if consumers no longer want its products.
That was the lesson even the most efficient buggy whip makers learned once Henry Ford introduced the Model
T in 1908. Cellphone handset makers faced a similar existential crisis when the Apple® iPhone® arrived on the
scene.
Strategic risk management is the process of identifying, quantifying, and mitigating any risk  that affects or is
inherent in a company’s business strategy, strategic objectives, and strategy execution. These risks may include:
 Shifts in consumer demand and preferences

 Legal and regulatory change

 Competitive pressure

 Merger integration

 Technological changes

 Senior management turnover

 Stakeholder pressure

Strategic risk is a bell curve

 Lesson 12 n Risk Management 371

Like any risk, strategic risk falls along a classic bell curve, with results along the x-axis and likelihood along the
y-axis. The expected result of a given strategy would represent the peak of this curve. Most strategic planning
considers only this peak while ignoring the slopes to either side.
But imagine two strategic initiatives, each with a similar expected result. One falls along a narrow, steep
curve, indicating a low risk of failure and little upside opportunity. The other is represented by a wider bell, with
greater chances of both under- and over-performance. Which to choose? The answer depends on an individual
company’s appetite for risk.

Strategic risk management: shifting the curve

Now imagine a third curve with that same expected result. This one rises steeply from the left but slopes more
gently downward on the right. Here, downside risk has been minimized, and upside opportunity increased. That
is the goal of strategic risk management: to shape the curve in a way that favors success.

Measuring and managing strategic risk

As the saying goes, you can’t manage what you can’t measure. So, in order to understand how to manage
strategic risk, we will begin by examining how to measure it. A key tenet of ERM is measuring risk with the same
yardsticks used to measure results. In this way, companies can calculate how much inherent risk their initiatives
contain.
Strategic risk can be measured with two key metrics:
1. Economic capital is the amount of equity required to cover unexpected losses based on a predetermined
solvency standard. Typically, this standard is derived from the company’s target debt rating. Economic
capital is a common currency with which any risk can be quantified. Importantly, it applies the same
methodology and assumptions used in determining enterprise value, making it ideal for strategic risk.
2. Risk-adjusted return on capital (RAROC) is the anticipated after-tax return on an initiative divided by its
economic capital. If RAROC exceeds the company’s cost of capital, the initiative is viable and will add
value. If RAROC is less than the cost of capital, it will destroy value.
Managing strategic risk involves five steps which must be integrated within the strategic planning and
execution process in order to be effective:
1. Define business strategy and objectives.There are several frameworks that companies commonly use
to plan out strategy, from simple SWOT analysis to the more nuanced and holistic Balanced Scorecard.
The one thing that these frameworks have in common, however, is their failure to address risk. It is
crucial, then, that companies take additional steps to integrate risk at the planning stage.
2. Establish key performance indicators (KPIs) to measure results. The best KPIs offer hints as to the
levers the company can pull to improve them. Thus, overall sales makes a poor KPI, while sales per
customer lets the company drill down for answers.
3. Identify risks that can drive variability in performance. These are the unknowns, such as future customer
demand, that will determine results.
4. Establish key risk indicators (KRIs) and tolerance levels for critical risks. Whereas KPIs measure
historical performance, KRIs are forward-looking leading indicators intended to anticipate potential
roadblocks. Tolerance levels serve as triggers for action.
5. Provide integrated reporting and monitoring. Finally, companies must monitor results and KRIs on a
continuous basis in order to mitigate risks or grasp unexpected opportunities as they arise.
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RISK MANAGEMENT AND INTERNAL CONTROLS

Risk management focuses on identifying threats and opportunities, while internal control helps counter threats
and take advantage of opportunities. Proper risk management and internal control assist organizations in
making informed decisions about the level of risk that they want to take and implementing the necessary
controls to effectively pursue their objectives.
Successful organizations integrate effective governance structures and processes with performance-focused
risk management and internal control at every level of an organization and across all operations.
The risk profile of a company may be represented through a Risk Register, a suggestive template of which is
illustrated below:

Sl.No Risk Area Key risks Root cause Mitigation measures

1. Business Risk Decreasing market Lack of innovation, market Keeping a vigil on latest
share survey etc., developments and
continuous monitoring

2. Financial risk Leveraging capital Inability to assess the Adoptiong a Resource

structure and the appropriate funding planning policy
cash flows requirements

3. Regulatory and Non compliance of Not keeping abreast of Knowledge updation &
Compliance applicable laws the latest changes in the maintenance of a robust
Risk Regulatory environment compliance check list

RISK MATRIX
Risk Matrix is a matrix that is used during Risk & Control Self Assessment (RCSA) activity to define the various
levels of risk at each stage, activity, process and sub-process. Risk Matrix comprises of :
1) Impact analysis
2) Likelihood
3) Operating Effectiveness
4) Design Effectiveness
Ratings are assigned to all above categories, pre and post control environment. Based on the ratings a Gross/
Inherent Risk Level and Residual Risk level is determined (HIGH/MEDIUM/LOW), respectively.
In the event where Residual Risk level is HIGH and/ or a particular control environment is weak, these are
mitigated with additional controls.
The Inherent and Residual Risks follow the RED-AMBER-GREEN color coding mapped to HIGH-MEDIUM-
LOW Risks, respectively.
 Lesson 12 n Risk Management 373

MODEL RISK MANAGEMENT POLICY

A risk management policy serves two main purposes: to identify, reduce and prevent undesirable incidents
or outcomes and to review past incidents and implement changes to prevent or reduce future incidents. A
risk management policy should include the following sections:
 Risk management and internal control objectives (governance)

 Statement of the attitude of the organisation to risk (risk strategy)

 Description of the risk aware culture or control environment

 Level and nature of risk that is acceptable (risk appetite)

 Risk management organisation and arrangements (risk architecture)

 Details of procedures for risk recognition and ranking (risk assessment)

 List of documentation for analysing and reporting risk (risk protocols)

 Risk mitigation requirements and control mechanisms (risk response)

 Allocation of risk management roles and responsibilities

 Risk management training topics and priorities

 Criteria for monitoring and benchmarking of risks

 Allocation of appropriate resources to risk management

 Risk activities and risk priorities for the coming year

GLOSSARY OF TECHNICAL WORDS

– Risk Management : Risk management is the identification, evaluation, and prioritization of risks
followed by coordinated and economical application of resources to minimize, monitor, and control the
probability or impact of unfortunate events or to maximize the realization of opportunities..
– Fraud Risk : A fraud risk assessment is a tool used by management to identify and understand risks to
its business and weaknesses in controls that present a fraud risk to the organization
– Secretarial Audit : Secretarial Audit is an audit to check compliance of various legislations including
the Companies Act and other corporate and economic laws applicable to the company. It provides
necessary comfort to the management, regulators and the stakeholders, as to the statutory compliance,
good governance and the existence of proper and adequate systems and processes.

LESSON ROUND UP
– Risk is inherent in the business. Different types of risk exist in the business according to the nature of
the business and they are to be controlled and managed.
– In traditional concept the natural calamities like fire, earthquake, flood, etc were only treated as risk
and keeping the safe guard equipments etc were assumed to have mitigated the risk. But due to
rapid changes, the various types of risks have emerged viz. Compliance risk, legal risk, country risk,
operational risk.
– Risk may be controllable or uncontrollable. In other words, the systematic risk which stands at macro
level is not controllable, but the unsystematic risk which is at micro level is controllable with the risk
mitigation techniques.
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– The risk may broadly be segregate as Financial Risk and Non-financial Risk.

– Financial Risk includes market risk, credit risk Liquidity risk, Operational Risk, Legal Risk and Country
Risk. Non-financial risk does not have immediate financial impact on the business, but its consequence
is serious.

– Non-Financial Risk do not have immediate financial impact on the business, but its consequence
are very serious and later may have the financial impact. This type of risk may include, Business/
Industry & Service Risk, Strategic Risk, Compliance Risk, Fraud Risk, Reputation Risk, Transaction
risk, Disaster Risk.

– To mitigate the various types of risks, which a business entity faces, a proper risk management
process should be in force. It is a continuous process and is applied across the organisation. It
is basically the identification of risk areas, assessment thereof, evaluating the impact of such risk,
develop the risk mitigation techniques, establishing the sound internal control process and continuous
monitoring thereof, setting of standards for each process and abnormal variances to be vetted.

– Risk management plays vital role in strategic planning. It is an integral part of project management.
An effective risk management focuses on identifying and assessing possible risks.

– The process of risk management consists of the following logical and sequential steps, Identification
of risk, Assessment of risk, Analysing and evaluating the risk, Handling of risk (Risk may be handled
through the Risk Avoidance, Risk Retention/ absorption, Risk Reduction, Risk Transfer) and
Implementation of risk management decision.

– ISO 31000 published as a standard on the 13th of November 2009, provides a standard on the
implementation of risk management. ISO 31000 contains 11 key principles that position risk
management as a fundamental process in the success of the organization.

– Fraud has been defined as, ‘A deliberate act of omission or commission by any person, carried out
in the course of a banking transaction or in the books of accounts maintained manually or under
computer system in banks, resulting into wrongful gain to any person for a temporary period or
otherwise, with or without any monetary loss to the bank”.

– Reputation Risk as the risk arising from negative perception on the part of customers, counterparties,
shareholders, investors, debt-holders, market analysts, other relevant parties or regulators that can
adversely affect a bank’s ability to maintain existing, or establish new, business relationships and
continued access to sources of funding (e.g. through the interbank or securitisation markets).

– SEBI (LODR) Regulations, requires that every listed company should have a Risk Management
Committee.

– Secretarial Audit is a process to check compliance with the provisions of all applicable laws and
rules/regulations/procedures; adherence to good governance practices with regard to the systems
and processes of seeking and obtaining approvals of the Board and/or shareholders, as may be
necessary, for the business and activities of the company, carrying out activities in a lawful manner and
the maintenance of minutes and records relating to such approvals or decisions and implementation.

– Secretarial Audit helps the companies to build their corporate image. Secretarial Audit facilitates
monitoring compliances with the requirements of law through a formal compliance management
programme which can produce positive results to the stakeholders of a company.
 Lesson 12 n Risk Management 375

TEST YOURSELF
(These are meant for recapitulation only. Answers to these questions are not to be submitted for evaluation)
1. What do you mean by Risk Management?
2. Discuss about the Controllable and Un-controllable Risks.
3. Elaborate on different types of Financial and Non-financial Risk.
4. Describe the Risk Management Process and its advantages?
5. What do you understand by Fraud risk? What strategy can adopt to mitigate such a risk?
6. Write short notes on:
a) ISO 31000:2009 relating to the Risk Management.
b) Fraud Risk Management.
c) Reputation Risk Management.
d) Reporting of fraud by Statutory Auditor.
376 EP-GRMCE
 Lesson 13
Internal Control

LESSON OUTLINE
LEARNING OBJECTIVES
– Introduction
The objective of this study lesson is to enable
– Regulatory Framework
the students to understand the concept of
– Objectives of Internal Control Internal Control, explaining the adequacy and
– Nature of Internal Control effectiveness of the compliance system, internal
compliance reporting mechanism and ensuring the
– Classification of Internal Control best practices available for the good governance
– Elements of Internal Control principles for compliance issues.
– Components of Internal Control The concept of internal control, elements of
internal control and its efficacy are discussed in
– Limitations of Internal Control
this chapter.
– Considerations Specific to Smaller Entities
This chapter provides working knowledge for
– Division of Internal Control into Components application of principles, theory and concepts of
– Techniques of Internal Control System internal control. This chapter may also be useful
in performing the advisory role and in managing
– Internal Audit
internal control in practical areas of work.
– Steps for Internal Control
– COSO’s Internal Control Framework
– Difference between Internal Control, Internal
Check and Internal Audit
– Components of Internal Control as defined
by COSO
– Table of % Components and 17 Principles of
Internal Control
– Role and Responsibilities with Regard to
Internal Control
– Glossary
– LESSON ROUNDUP
– TEST YOURSELF

“Information is a significant component of most organizations’ competitive strategy either by the direct
collection, management, and interpretation of business information or the retention of information for day-
to-day business processing. Some of the more obvious results of IS failures include reputational damage,
placing the organization at a competitive disadvantage, and contractual noncompliance. These impacts
should not be underestimated.”
– The IIA Research Foundation
378 EP-GRMCE

INTRODUCTION
Internal control, as defined in accounting and auditing, is a process for assuring achievement of an organization’s
objectives in operational effectiveness and efficiency, reliable financial reporting, and compliance with laws,
regulations and policies. It is a means by which an organization’s resources are directed, monitored, and
measured. It plays an important role in detecting and preventing fraud and protecting the organization’s
resources, both physical (e.g., machinery and property) and intangible (e.g., reputation or intellectual property
such as trademarks).
Merriam-Webster defines Internal Control as “a system or plan of accounting and financial organization within
a business comprising all the methods and measures necessary for safeguarding its assets, checking the
accuracy of its accounting data or otherwise substantiating its financial statements, and policing previously
adopted rules, procedures, and policies as to compliance and effectiveness”.It is to be mentioned here that
internal control is not necessarily a control over finance only. Its scope is wider. It covers the control of the whole
management system.
It is to be mentioned here that internal control is not necessarily a control over finance only. Its scope is wider.
It covers the control of the whole management system.
At the organizational level, internal control objectives relate to the reliability of financial reporting, timely feedback
on the achievement of operational or strategic goals, and compliance with laws and regulations.
At the specific transaction level, internal controls refers to the actions taken to achieve a specific objective (e.g.,
how to ensure the organization’s payments to third parties are for valid services rendered.) Internal control
procedures reduce process variation, leading to more predictable outcomes.
Investopedia describes that the “Internal controls are the mechanisms, rules, and procedures implemented
by a company to ensure the integrity of financial and accounting information, promote accountability and
prevent fraud. Besides complying with laws and regulations, and preventing employees from stealing assets
or committing fraud, internal controls can help improve operational efficiency by improving the accuracy and
timeliness of financial reporting”.
The Standard on Auditing 315 (SA 315) defines internal control. According to SA 315 the internal control is “the process
designed, implemented and maintained by those charged with governance, management and other personnel to
provide reasonable assurance about the achievement of an entity’s objectives with regard to reliability of financial
reporting, effectiveness and efficiency of operations, and compliance with applicable laws and regulations. The term
“controls” refers to any aspects of one or more of the components of internal control.”

REGULATORY FRAMEWORK

Sl. No. Description

1. Standard on Auditing 315 (SA 315)

2. The Institute of Internal Auditors

3. The Committee of Sponsoring Organizations of the Treadway Commission (COSO)

4. Regulation 17(8) of SEBI (LODR) Regulations, 2015

5. Part B of Schedule II of SEBI (LODR) Regulations, 2015

6. Regulation 18(3) of SEBI (LODR) Regulations, 2015

7. Part C of Schedule II of SEBI (LODR) Regulations, 2015

8. Section 134(3)© of the Companies Act, 2013 deals with Director’s responsibility statement
 Lesson 13 n Internal Control 379

OBJECTIVES OF INTERNAL CONTROL

From the various definitions of the internal control, the objective behind the establishment of the internal control
may be list out as under:
l Internal Control is a policy matter, designed and implemented by the company concerned.
l The Internal Control describes the rules and procedures to ensure the integrity of the financial
statements.
l The Internal Control provides the mechanism of work flow in such a manner that no single person may
carry out the process from the beginning to end.
l It takes care and ensures that work is segregated in small parts and is checked and processed by an
independent person.
l Internal controls improves operational efficiency by improving the accuracy and timeliness of financial
reporting.
l It gives a reasonable assurance about the achievement of an entity’s objectives with regard to reliability
of financial reporting, effectiveness and efficiency of operations, and compliance with applicable laws
and regulations.
l It plays an important role in detecting and preventing fraud and protecting the organization’s resources.
l It reduces the process variations and arbitrary intervention in the work flow process.

NATURE OF INTERNAL CONTROL

The nature of internal control is to establish preventing measures in the organization. It follows the principle
that key activities in the organisations should be processed by one person and be checked by the independent
person so that mistake at one stage may be checked by another independent person. This prevents the
occurrence of the fraud and so of deliberate attempts made any insider may be withheld at once. Thus the
nature of the internal control is preventive.
From the definition provided by the SA 315 the nature of the internal control depicts the following points:
l Internal control is a process designed, implemented and maintained by those charged with the
governance, management and other personnel.
l It provides reasonable assurance about the achievement of an entity’s objectives in the categories of
financial reporting, effectiveness and efficiency of operations, safeguarding of assets and compliance
with applicable laws and regulations.

CLASSIFICATION OF INTERNAL CONTROL

Internal control can broadly be classified into two categories viz.:
1. Accounting controls/financial controls, and
2. Administrative controls.
(1) Accounting controls
Accounting controls comprise the plan of organisation and all methods and procedures that are concerned
mainly with and relate to, the safeguarding of assets and the reliability of the financial information. They generally
include such controls as the system of authorisation and approval, separation of duties concerned with record
keeping and accounting reports from those concerned with operations of assets custody, physical controls over
assets and internal auditing e.g. budgetary controls.
380 EP-GRMCE

Examples of each are (i) maintaining inventory is an accounting control whereas (ii) recording of visits by a
salesman is the administrative control.
Internal control relating to accounting system aims at ensuring that:
– the transactions are executed in accordance with the management’s authorisation;
– all transactions are promptly recorded in an appropriate manner to permit the preparation of financial
information and to maintain accountability for assets;
– the access to assets is permitted only in accordance with the management authorisation;
– the assets are reviewed and verified at reasonable intervals and appropriate action is taken with regard
to the variances.
It can safely be said that scope of internal control is much wider than that of accounting controls. Thus, internal
checks, internal audit, quantitative controls, budgetary controls etc. can be said to be a part of the accounting
controls, in so far as they deal with quantitative aspects. On a wider footing, accounting controls, operational
controls, policy planning/review, reporting etc. can be said to be a part of internal control.
(2) Administrative Controls
A number of controls falling under operational controls can also be administrative controls. Examples of
operational controls are: quality control, works standards, periodic reporting, policy appraisal etc. Administrative
controls are very wide in their scope. They include all other managerial controls concerned with decision-
making process. They are concerned with the authorisation of transactions and include anything from plan of
organisation to procedures, record keeping, distribution of authority and the process of decision-making. They
include controls such as time and motion studies, quality control through inspection, performance budgeting,
responsibility accounting and performance evaluation etc. Administrative controls have an indirect relationship
with financial records and the auditor may evaluate only those administrative controls which have a bearing on
the financial records.
However, for the purposes of understanding the internal control we may study it in four parts as:
1. Accounting controls
2. Operational controls
3. Internal checks
4. Internal audit.
These are explained below summarily for a better comprehension of the subject, even though at the cost of
repetition.
1. Accounting controls pertain purely to the accounting system which enter finally in the preparation of
financial statements and information which are subject to the expression of opinion by the auditors.
2. Operational controls are those which help in improving the efficiency, productivity and not necessarily
enter the accounting systems. Works standards, quality control, methods study and motion study,
critical path method etc. may be many examples of operational controls.
3. Internal check is a built in device in the day to day working by separating the duties and functions of
the staff in such a way that the work of one is automatically checked by the other e.g. posting of cash
transactions in the ledger is done by a person other than who handles the cash and writes the cash
book – the cashier. This part shall be dealt with subsequently in detail.
4. Internal audit is an appraisal function to be performed on the principles and practices of audit. The
scope of this extends to all the quantifiable information.
 Lesson 13 n Internal Control 381

ELEMENTS OF INTERNAL CONTROL

The essential requirements for the success of a business are the implementation of organisational objectives,
plans and philosophy. With this end in view the following may be considered as the elements of internal control.
(i) Segregation of duties
The division of an operation into a series of sub-operations undertaken by different people, allows for
internal checks to take place. Such a control merely reduces the chance of error or irregularity occurring,
but it does not eliminate the risk. It reduces the risk of intentional manipulation and error and increases
the element of checking. Function which should be separated includes those of authorisation, execution,
custody, recording and in the case of a computer based accounting system- systems development and
daily operations.
(ii) Organisational structure
The structure or pattern of an organisation will mean system of arrangements and relations as between
various levels of personnel for carrying out of plans and policies towards achievement of objectives
for which the business stands. Enterprises should have a plan of their organisation, defining and
allocating responsibilities and identifying lines of reporting for all aspects of the enterprise’s operations,
including the controls. The delegation of authority and responsibility should be clearly specified. It is
important that critical operations are provided with the appropriate status and communications within
the organisations. A common cause of irregularity is imbalance between responsibility, status and
remuneration.
(iii) Objectives and Policy Statements
Objectives are the aims, goals, purposes or accomplishments which the top management lay down
and expect the staff members to achieve. The functional segments of the company should comply with
the policies, plans, procedures, external laws and regulations and the work should be performed in a
coordinated manner.
Policies and procedures give an indication as to the nature of personnel behaviour in their functioning
and reflect the attitude of management. Functions of different staff members should be integrated in a
manner that is complementary and each acts as check on the other. For instance, wage sheets should
be prepared and checked by different set of staff and their disbursement should be in the presence of
a responsible official.
(iv) Authorisation and approval
All transactions should require authorisation or approval by an appropriate responsible person. The
limits of these authorisations should be specified. While designing procedures, provision should be
made for proper authorization, to establish full accountability for the actions taken.
(v) Personnel
There should be procedures to ensure that personnel have capabilities commensurate with their
responsibilities. In fact, the proper functioning of any system depends on the competence and
integrity of those operating it. The qualifications, selection and training as well as the innate personal
characteristics of the personnel involved are important features to be considered in setting up any
control system.
(vi) Management
Management is responsible for establishing, monitoring and reviewing the systems of internal control.
In practice, management may delegate the reviewing function to internal auditor. It is, thus the duty of
internal auditor to provide management with reassurance concerning the efficiency and effectiveness
382 EP-GRMCE

of internal controls.
(vii) Records and Reports
The accounting and other records should be maintained accurately and adequately so as to assist the
management in formulating present and future events in decision making and planning.
In order to make reporting effective, it should be timely, tailor-made and present all facts concerning
problem areas, assessments etc.
(viii) Accounting Controls
These are the controls within the recording function which check that the transactions to be recorded
and processed have been authorised, and that they are all included and that they are correctly recorded
and accurately processed. Such controls include checking the arithmetical accuracy of the records, the
maintenance and checking of totals, reconciliations, control accounts and trial balances, and accounting
for documents.
(ix) Protection of assets
These are concerned mainly with the custody of assets and involve procedures and security measures
designed to ensure that access to assets is limited to authorised personnel. These include both direct
access and indirect access via documentation. These controls assume importance in the case of
valuable, portable, exchangeable or desirable assets.
(x) Supervision
Any system of internal control should include the supervision by responsible officials of day-to-day
transactions and the recording thereof. The supervisory role undertaken by staff should be allocated to
those with proper training and suitability to such a function.

COMPONENTS OF INTERNAL CONTROL

The internal control system may involve the following points to support the achievement of an entity’s mission,
strategies and related business objectives. The Appendix 1 of SA 315 provides the Internal Control Components.
These are described as under:
1. Control Environment:
The control environment encompasses the following elements:
(a) Communication and enforcement of integrity and ethical values. The effectiveness of controls
cannot rise above the integrity and ethical values of the people who create, administer, and monitor
them. Integrity and ethical behavior are the product of the entity’s ethical and behavioral standards,
how they are communicated, and how they are reinforced in practice. The enforcement of integrity
and ethical values includes, for example, management actions to eliminate or mitigate incentives
or temptations that might prompt personnel to engage in dishonest, illegal, or unethical acts. The
communication of entity policies on integrity and ethical values may include the communication
of behavioral standards to personnel through policy statements and codes of conduct and by
example.
(b) Commitment to competence. Competence is the knowledge and skills necessary to accomplish tasks
that define the individual’s job.
(c) Participation by those charged with governance. An entity’s control consciousness is influenced
significantly by those charged with governance. The importance of the responsibilities of those charged
with governance is recognized in codes of practice and other laws and regulations or guidance
 Lesson 13 n Internal Control 383

produced for the benefit of those charged with governance. Other responsibilities of those charged with
governance include oversight of the design and effective operation of whistle blower procedures and
the process for reviewing the effectiveness of the entity’s internal control.
(d) Management’s philosophy and operating style. Management’s philosophy and operating style
encompass a broad range of characteristics. For example, management’s attitudes and actions
toward financial reporting may manifest themselves through conservative or aggressive selection
from available alternative accounting principles, or conscientiousness and conservatism with which
accounting estimates are developed.
(e) Organizational structure. Establishing a relevant organizational structure includes considering key
areas of authority and responsibility and appropriate lines of reporting. The appropriateness of an
entity’s organizational structure depends, in part, on its size and the nature of its activities.
(f) Assignment of authority and responsibility. The assignment of authority and responsibility may include
policies relating to appropriate business practices, knowledge and experience of key personnel, and
resources provided for carrying out duties. In addition, it may include policies and communications directed
at ensuring that all personnel understand the entity’s objectives, know how their individual actions interrelate
and contribute to those objectives, and recognize how and for what they will be held accountable.
(g) Human resource policies and practices. Human resource policies and practices often demonstrate
important matters in relation to the control consciousness of an entity. For example, standards for
recruiting the most qualified individuals – with emphasis on educational background, prior work
experience, past accomplishments, and evidence of integrity and ethical behavior – demonstrate
an entity’s commitment to competent and trustworthy people. Training policies that communicate
prospective roles and responsibilities and include practices such as training schools and seminars
illustrate expected levels of performance and behavior. Promotions driven by periodic performance
appraisals demonstrate the entity’s commitment to the advancement of qualified personnel to higher
levels of responsibility.
2. Entity’s Risk Assessment Process
For financial reporting purposes, the entity’s risk assessment process includes how management identifies
business risks relevant to the preparation of financial statements in accordance with the entity’s applicable
financial reporting framework, estimates their significance, assesses the likelihood of their occurrence, and
decides upon actions to respond to and manage them and the results thereof. For example, the entity’s risk
assessment process may address how the entity considers the possibility of unrecorded transactions or identifies
and analyzes significant estimates recorded in the financial statements. Risks relevant to reliable financial
reporting include external and internal events, transactions or circumstances that may occur and adversely
affect an entity’s ability to initiate, record, process, and report financial data consistent with the assertions of
management in the financial statements. Management may initiate plans, programs, or actions to address
specific risks or it may decide to accept a risk because of cost or other considerations. Risks can arise or
change due to circumstances such as the following:
l Changes in operating environment: Changes in the regulatory or operating environment can result
in changes in competitive pressures and significantly different risks.
l New personnel: New personnel may have a different focus on or understanding of internal control. New
or revamped information systems: Significant and rapid changes in information systems can change
the risk relating to internal control.
l New or revamped information systems: Significant and rapid changes in information systems can
change the risk relating to internal control.
l Rapid growth: Significant and rapid expansion of operations can strain controls and increase the risk
384 EP-GRMCE

of a breakdown in controls.
l New technology: Incorporating new technologies into production processes or information systems
may change the risk associated with internal control.
l New business models, products, or activities: Entering into business areas or transactions with
which an entity has little experience may introduce new risks associated with internal control.
l Corporate restructurings: Restructurings may be accompanied by staff reductions and changes in
supervision and segregation of duties that may change the risk associated with internal control.
l Expanded foreign operations: The expansion or acquisition of foreign operations carries new and often
unique risks that may affect internal control, for example, additional or changed risks from foreign
currency transactions.
l New accounting pronouncements: Adoption of new accounting principles or changing accounting
principles may affect risks in preparing financial statements.
3. Information System, Including the Related Business Processes, Relevant to Financial Reporting, and
Communication:
An information system consists of infrastructure (physical and hardware components), software, people,
procedures, and data. Many information systems make extensive use of information technology (IT).
The information system relevant to financial reporting objectives, which includes the financial reporting system,
encompasses methods and records that:
l Identify and record all valid transactions.
l Describe on a timely basis the transactions in sufficient detail to permit proper classification of
transactions for financial reporting.
l Measure the value of transactions in a manner that permits recording their proper monetary value in the
financial statements.
l Determine the time period in which transactions occurred to permit recording of transactions in the
proper accounting period.
l Present properly the transactions and related disclosures in the financial statements.
The quality of system-generated information affects management’s ability to make appropriate decisions in
managing and controlling the entity’s activities and to prepare reliable financial reports.
Communication, which involves providing an understanding of individual roles and responsibilities pertaining
to internal control over financial reporting, may take such forms as policy manuals, accounting and financial
reporting manuals, and memoranda. Communication also can be made electronically, orally, and through the
actions of management.
4. Control Activities:
Generally, control activities that may be relevant to an audit may be categorized as policies and procedures that
pertain to the following:
l Performance reviews: These control activities include reviews and analyses of actual performance
versus budgets, forecasts, and prior period performance; relating different sets of data – operating or
financial – to one another, together with analyses of the relationships and investigative and corrective
actions; comparing internal data with external sources of information; and review of functional or activity
performance.
l Information processing: The two broad groupings of information systems control activities are
 Lesson 13 n Internal Control 385

application controls, which apply to the processing of individual applications, and general IT controls,
which are policies and procedures that relate to many applications and support the effective functioning
of application controls by helping to ensure the continued proper operation of information systems.
Examples of application controls include checking the arithmetical accuracy of records, maintaining
and reviewing accounts and trial balances, automated controls such as edit checks of input data
and numerical sequence checks, and manual follow-up of exception reports. Examples of general
IT controls are program change controls, controls that restrict access to programs or data, controls
over the implementation of new releases of packaged software applications, and controls over system
software that restrict access to or monitor the use of system utilities that could change financial data or
records without leaving an audit trail.
l Physical controls: Controls that encompass:
– The physical security of assets, including adequate safeguards such as secured facilities over
access to assets and records.
– The authorization for access to computer programs and data files.
The periodic counting and comparison with amounts shown on control records (for example, comparing the
results of cash, security and inventory counts with accounting records).
l The extent to which physical controls intended to prevent theft of assets are relevant to the reliability
of financial statement preparation, and therefore the audit, depends on circumstances such as when
assets are highly susceptible to misappropriation
l Segregation of duties: Assigning different people the responsibilities of authorizing transactions,
recording transactions, and maintaining custody of assets. Segregation of duties is intended to reduce
the opportunities to allow any person to be in a position to both perpetrate and conceal errors or fraud
in the normal course of the person’s duties.
l Certain control activities may depend on the existence of appropriate higher level policies established by
management or those charged with governance. For example, authorization controls may be delegated
under established guidelines, such as investment criteria set by those charged with governance;
alternatively, non-routine transactions such as major acquisitions or divestments may require specific
high level approval, including in some cases that of shareholders.
5. Monitoring of Controls:
An important management responsibility is to establish and maintain internal control on an on-going basis.
Management’s monitoring of controls includes considering whether they are operating as intended and that
they are modified as appropriate for changes in conditions. Monitoring of controls may include activities such as
management’s review of whether bank reconciliations are being prepared on a timely basis, internal auditors’
evaluation of sales personnel’s compliance with the entity’s policies on terms of sales contracts, and a legal
department’s oversight of compliance with the entity’s ethical or business practice policies. Monitoring is done
also to ensure that controls continue to operate effectively over time. For example, if the timeliness and accuracy
of bank reconciliations are not monitored, personnel are likely to stop preparing them.
Internal auditors or personnel performing similar functions may contribute to the monitoring of an entity’s controls
through separate evaluations. Ordinarily, they regularly provide information about the functioning of internal
control, focusing considerable attention on evaluating the effectiveness of internal control, and communicate
information about strengths and deficiencies in internal control and recommendations for improving internal
control.
Monitoring activities may include using information from communications from external parties that may indicate
problems or highlight areas in need of improvement. Customers implicitly corroborate billing data by paying their
386 EP-GRMCE

invoices or complaining about their charges. In addition, regulators may communicate with the entity concerning
matters that affect the functioning of internal control, for example, communications concerning examinations
by bank regulatory agencies. Also, management may consider communications relating to internal control from
external auditors in performing monitoring activities.

LIMITATIONS OF INTERNAL CONTROL

The limitations of Internal Control as laid down by SA 315 are:
l Internal control, no matter how effective, can provide an entity with only reasonable assurance about
achieving the entity’s financial reporting objectives. The likelihood of their achievement is affected
by the inherent limitations of internal control. These include the realities that human judgment
in decision- making can be faulty and that breakdowns in internal control can occur because of
human error. For example, there may be an error in the design of, or in the change to, a control.
Equally, the operation of a control may not be effective, such as where information produced for
the purposes of internal control (for example, an exception report) is not effectively used because
the individual responsible for reviewing the information does not understand its purpose or fails to
take appropriate action.
l Additionally, controls can be circumvented by the collusion of two or more people or inappropriate
management override of internal control. For example, management may enter into side agreements
with customers that alter the terms and conditions of the entity’s standard sales contracts, which may
result in improper revenue recognition. Also, edit checks in a software program that are designed to
identify and report transactions that exceed specified credit limits may be overridden or disabled.
l Further, in designing and implementing controls, management may make judgments on the nature
and extent of the controls it chooses to implement, and the nature and extent of the risks it chooses to
assume.

CONSIDERATIONS SPECIFIC TO SMALLER ENTITIES

l Smaller entities often have fewer employees which may limit the extent to which segregation of duties
is practicable. However, in a small owner-managed entity, the owner-manager may be able to exercise
more effective oversight than in a larger entity. This oversight may compensate for the generally more
limited opportunities for segregation of duties.
l On the other hand, the owner-manager may be more able to override controls because the system of
internal control is less structured. This is taken into account by the auditor when identifying the risks of
material misstatement due to fraud.

DIVISION OF INTERNAL CONTROL INTO COMPONENTS

l The division of internal control into the following five components, for purposes of the SAs, provides a
useful framework for auditors to consider how different aspects of an entity’s internal control may affect
the audit:
a. The control environment;
b. The entity’s risk assessment process;
c. The information system, including the related business processes, relevant to financial reporting,
and communication;
d. Control activities; and
e. Monitoring of controls.
 Lesson 13 n Internal Control 387

l The division does not necessarily reflect how an entity designs, implements and maintains internal
control, or how it may classify any particular component. Auditors may use different terminology or
frameworks to describe the various aspects of internal control, and their effect on the audit than those
used in this SA, provided all the components described in this SA are addressed.
l Application material relating to the five components of internal control as they relate to a financial
statement audit is set out in paragraphs A69-A104 below. Appendix 1 provides further explanation of
these components of internal control. Characteristics of manual and automated elements of internal
control relevant to the auditor’s risk assessment
l An entity’s system of internal control contains manual elements and often contains automated elements.
The characteristics of manual or automated elements are relevant to the auditor’s risk assessment and
further audit procedures based thereon.
l The use of manual or automated elements in internal control also affects the manner in which
transactions are initiated, recorded, processed, and reported:
– Controls in a manual system may include such procedures as approvals and reviews of
transactions, and reconciliations and follow-up of reconciling items. Alternatively, an entity may
use automated procedures to initiate, record, process, and report transactions, in which case
records in electronic format replace paper documents.
– Controls in IT systems consist of a combination of automated controls (for example, controls
embedded in computer programs) and manual controls. Further, manual controls may be
independent of IT, may use information produced by IT, or may be limited to monitoring the
effective functioning of IT and of automated controls, and to handling exceptions. When IT is
used to initiate, record, process or report transactions, or other financial data for inclusion in
financial statements, the systems and programs may include controls related to the corresponding
assertions for material accounts or may be critical to the effective functioning of manual controls
that depend on IT.
An entity’s mix of manual and automated elements in internal control varies with the nature and complexity of
the entity’s use of IT.
l Generally, IT benefits an entity’s internal control by enabling an entity to:
– Consistently apply predefined business rules and perform complex calculations in processing
large volumes of transactions or data;
– Enhance the timeliness, availability, and accuracy of information;
– Facilitate the additional analysis of information;
– Enhance the ability to monitor the performance of the entity’s activities and its policies and
procedures;
– Reduce the risk that controls will be circumvented; and
– Enhance the ability to achieve effective segregation of duties by implementing security controls in
applications, databases, and operating systems.
l IT also poses specific risks to an entity’s internal control, including, for example:
– Reliance on systems or programs that are inaccurately processing data, processing inaccurate
data, or both.
– Unauthorised access to data that may result in destruction of data orimproper changes to data,
including the recording of unauthorised or nonexistent transactions, or inaccurate recording of
388 EP-GRMCE

transactions. Particular risks may arise where multiple users access a common database.
– The possibility of IT personnel gaining access privileges beyond those necessary to perform their
assigned duties thereby breaking down segregation of duties.
– Unauthorised changes to data in master files.
– Unauthorised changes to systems or programs.
– Failure to make necessary changes to systems or programs.
– Inappropriate manual intervention.
– Potential loss of data or inability to access data as required.
l Manual elements in internal control may be more suitable where judgment and discretion are required
such as for the following circumstances:
– Large, unusual or non-recurring transactions.
– Circumstances where errors are difficult to define, anticipate or predict.
– In changing circumstances that require a control response outside the scope of an existing
automated control.
– In monitoring the effectiveness of automated controls.
l Manual elements in internal control may be less reliable than automated elements because they can
be more easily bypassed, ignored, or overridden and they are also more prone to simple errors and
mistakes. Consistency of application of a manual control element cannot therefore be assumed. Manual
control elements may be less suitable for the following circumstances:
l High volume or recurring transactions, or in situations where errors that can be anticipated or predicted
can be prevented, or detected and corrected, by control parameters that are automated.
l Control activities where the specific ways to perform the control can be adequately designed and
automated.
l The extent and nature ofthe risks to internal control vary depending on the nature and characteristics of
the entity’s information system. The entity responds to the risks arising from the use of IT or from use
of manual elements in internal control by establishing effective controls in light of the characteristics of
the entity’s information system.

TECHNIQUES OF INTERNAL CONTROL SYSTEM

Any business that hires employees runs the risk of fraudulent activity. Fraud can have a large negative impact
on one’s business’s bottom line. In some cases, a trusted employee who has easy access to a business’s
finances may abuse his authority by stealing company funds. A variety of internal control techniques can help
prevent improprieties. The following points in this regard are worth mentioned:
l There should be clear division of the work.
l Segregation of the work should be in such a manner that the work done by one person is the beginning
of the work for another person.
l There should be the clarity of the responsibility.
l The work flow process be documented or standardized so that the staff may perform the work as
suggested in the work flow chart.
l No single persons should be allowed to have access or control over any important business operation.
 Lesson 13 n Internal Control 389

l There should be job rotation of the staff duties periodically.

l Staff should be asked to go on mandatory leave periodically so that other person may come to know if
someone is playing foul with the system.
l Persons having the charge of the important assets should not be allowed to have access to the books
of accounts.
l Periodical inspection of the physical assets be carried out to ensure its physical existence as well in
good working conditions.
l The valuable items like cash and others, by physically inspected and the periodicity should be at
irregular intervals, so that the person under whose charge the assets are, cannot know in advance,
when the inspection will took place and manage the affairs.
The following methods are adopted for Internal Control in modern organisation:
(1) Internal Check
(2) Internal Audit
(3) Flow Charts
(4) Internal Control Questionnaire
(5) Inter firm and Intra firm Comparisons.

Internal Check
Accurate, complete and reliable record of accounting is a pre-requisite of good working of an organisation.
The allocation of duties and responsibilities of an organisation should be such that the working is proved trust
worthy. To help it further, the procedures and methods should also be designed accordingly.
Internal check has been defined differently by different authors and institutions connected with subject. The
Institute of Chartered Accountants of England and Wales defines internal check as the allocation of authority and
work in such a manner as to effort the checks on the day to day transactions which operate continuously as part
of routine system whereby the work of one person is automatically proved independently or is complementary
to the work of another, the object being prevention or early detection of error and frauds.
It is also defined as those measures and methods adopted within the organisation itself to safeguard the cash
and other assets of the company as well as to check clerical accuracy of book keeping.
Thus, the term ‘internal check’ refers to allocation of duties in such a manner that the work of one person
is checked by another while that other is performing his own duties in a normal way. Internal check is the
organisation of duties of staff in a scientific way so that no one is responsible for all phases of the transaction and
the work of one employee is so distributed that the discrepancies are revealed in the process of performance of
duties of that employee. The duties are divided and sub-divided in such a manner that discrepancies flow out
from the system itself.
Briefly speaking, the internal check system may be referred to as a system of instituting checks on the day-
to-day transactions which operate continuously as a part of routine system whereby the work of one person
is complementary to the work of another, the object being the prevention or early detection of errors or fraud.
The objective of such allocation of duties is that no single individual has an exclusive control over any one
transaction or group of transactions.
The following are the important objects of internal check system:
(i) To assign to a specific person, the responsibility of particular acts, defaults or omissions by allocation
of specific duties.
390 EP-GRMCE

(ii) To obtain physical and financial confirmation of facts and entries physical and financial by creation and
preservation of necessary records.
(iii) To facilitate the breakdown of accounting procedures where required so as to avoid bottlenecks and
establish an even flow of work and operations.
(iv) To reduce the possibilities of fraud and errors.
The main purpose of introducing internal check is ensured by division of labour. The internal check should be
arranged after the proper study of the requirement of each business.
As specified by Special Committee on Terminology, American Institute of Accountants, “Internal check—a
system under which the accounting methods and details of an establishment are so laid out that the accounts
and procedures are not under the absolute and independent control of any person - that on the contrary, the
work of an employee is complementary to that of another and that a continuous audit of the business is made
by the employees”.
Essential Features of Internal Check
Essential features of internal check are given hereunder:
(1) There should be proper division of work and responsibilities.
(2) The duties of each person should be properly defined so as to fix definite responsibilities of each
individual.
(3) Possibilities of giving absolute control to anybody should not be left out unchecked.
(4) Too much confidence on a person should be avoided.
(5) The duties of staff should be rotated and one person should not be allowed to occupy a particular area
of operation for long.
(6) Necessary safeguards should be provided so as to avoid collusion of thoughts which quite often leads
to commission of fraud.
(7) The person handling cash, stock, securities should be given compulsory leave so as to prevent their
having uninterrupted control.
(8) Physical inventory of fixed assets and stocks should be taken periodically.
(9) Assets should be protected from unauthorised use.
(10) To prevent loss or misappropriation of cash, mechanical devices such as the automatic cash register,
should be employed.
(11) The financial and administrative powers should be distributed very judiciously among different officers
and the manner in which these are actually exercised should be reviewed periodically.
(12) Accounting procedures should be laid down for periodical verification and testing of different sections
of accounting records to ensure that they are accurate.
Objectives of Internal Check : The objectives of the Internal Check may be list out as under:
l Division of work : In the process of internal check, the work is divided in such a manner that no
complete process is done by the single/few persons, thus it facilitates the division of the work in small
portion.
l Fixation of responsibility : Since the employee is supposed to undertake the small portion of the work
assigned to him, so fixation of the responsibility becomes easier. The employee concerned is also more
cautious to observed due diligence while performing his duties.
 Lesson 13 n Internal Control 391

l Increasing efficiency of employees : As small portion of the entire process is to be performed by the
employee concerned, so he gradually gets expertise in performing that task with speed and accuracy.
l Minimization of errors : The same type of work is being performed repeatedly, so the probability of
errors also minimizes.
l Prevention of frauds : As the end process of one person becomes the start process for the another
person and no one person is entitled to carry out the entire process, thus the modus operandi of the
employee can be judged from the start to end, which minimizes the occurrence of frauds.
l Quick preparation of annual accounts : The internal check system facilitates the quick preparation of
the annual accounts, since the accounting work is being consistently performed in an efficient manner
and free from error.
l Facilitating of smooth audit work : Last but not least the sound internal check system also facilitates
the audit task smoothly, whether it be the internal audit or external audit. The auditor may rely where
the sound internal check system is in vogue.
For introducing any system of internal check the work should be allotted on the basis of specialisation. The
grey area where internal check could prove to be of much help are receipts and payments of cash, payment
of wages, credit purchases etc. The nature and size of operation should also be given consideration while
installing or introducing internal check system in any organisation. The success of internal check system
would, by and large, depend upon the in-built safeguards introduced in the system. Instituting internal
check system would reduce the work load of the auditor and make the accounting system more reliable.
The internal check is of great importance to small as well as large companies, although this method of
operation will necessarily vary from that adopted in major concerns. In small organisation the number of
employees is too few to establish an adequate division of duties so that supervisors or owners must claim
more responsibility.
It is of importance that accounting procedures and working in any organisation is liable to changes and the
system of internal check will have to be modified to suit the changed conditions. The pitfalls in the system are a
warning to the auditor that something is wrong. If he disregards such a warning by failing to make the additional
tests necessitated by the disclosed weaknesses he will not be able to perform his duties well and is liable to
commit mistakes.

Internal Audit
Internal auditing though part of an internal control is a function in itself as administration, production, personnel,
marketing etc. Whereas internal check devises the form and flow of operations of an entity so that automatic
checks are carried out as the transactions occur; internal audit is a critical appraisal of functioning of various
operations of an enterprise including the system of internal check. This is evident in its definition itself as “an
independent appraisal function”.
‘Internal auditing’ in its traditional parlance, meant an audit on behalf of management to ensure only:
(a) the adequacy and effectiveness of internal controls;
(b) accuracy and timeliness of financial and other records and reports;
(c) adherence to the laid down policies and procedures by each unit of the organisation.
Thus, with major emphasis on detection of frauds and ensuring accuracy of financial records, internal auditing
was merely concerned with financial security by conducting routine checks. However, the modern world has
witnessed dynamic changes in the manner of conducting activities by industrial and commercial organisations.
Fast rising wages, increasing costs, cut throat competition, government’s regulatory policies and globalisation
have resulted in management’s search for all round improvements, efficiency, economy and making an
392 EP-GRMCE

endeavour to provide the society with the best products at the most economical prices. As a result, the scope
of internal auditing has been progressively widened to circumscribe a complete intra- company financial and
operational review and fulfill its role as a tool of effective management control.
The Institute of Internal Auditors has defined internal audit as under:
“Internal auditing is an independent, objective assurance and consulting activity designed to add value and
improve an organization’s operations. It helps an organization accomplish its objectives by bringing a systematic,
disciplined approach to evaluate and improve the effectiveness of risk management, control, and governance
processes.”
It is seen that internal auditing is not only confined to traditional functions like review of custodianship,
safeguarding of assets and checking the reliability of accounting information but also encompasses new areas
like review of economical and efficient use of resources and ensuring optimum organizational performance. It
is thus:
(1) an independent appraisal function;
(2) established within the organization;
(3) to examine and evaluate the activities as a service to the management;
(4) to assist the members for effective discharge of their responsibilities;
(5) to furnish with analyses, appraisals, suggestions etc.
The scope of internal auditing within an organization is broad and may involve topics such as an organization’s
governance, risk management and management controls over: efficiency/effectiveness of operations (including
safeguarding of assets), the reliability of financial and management reporting, and compliance with laws and
regulations. Internal auditing may also involve conducting proactive fraud audits to identify potentially fraudulent
acts; participating in fraud investigations under the direction of fraud investigation professionals, and conducting
post investigation fraud audits to identify control breakdowns and establish financial loss.
The following are the main aspects of internal auditing:
1. Review, appraisal and evaluation of the soundness, adequacy and application of financial, accounting
and other operating controls.
2. Ascertaining the adequacy and reliability of management information and control systems.
3. Ascertaining the achievement of management objectives and compliance with established plans,
policies and procedures.
4. Ensuring proper safeguards for assets - their utilization and accounting thereof.
5. Detection and prevention of fraud and error.
6. Ascertaining the integrity of management data in an organisation.
7. Identifying the areas of cost reduction, coupled with increased production, improved productivity and
improved systems.
8. Ascertaining the quality of performance and undertaking ‘value for money’ exercises.
9. Compliance with statutory laws and rules including adherence to the Companies (Auditors’ Report)
Order, 2003 to avoid adverse comments from the statutory auditors.
10. Undertaking special reviews and assignments directed by management to ensure economical and
efficient use of resources.
11. To provide for a channel of communicating new ideas to the top management.
 Lesson 13 n Internal Control 393

Over the last few years, the need to manage risks has become recognised as an essential part of good corporate
governance practice. This has put organisations under increasing pressure to identify all the business risks
they face and to explain how they manage them. In fact, the activities involved in managing risks have been
recognised as playing a central and essential role in maintaining a sound system of internal control. While the
responsibility for identifying and managing risks belongs to management, one of the key roles of internal audit
is to provide assurance that those risks have been properly managed.
Risk based Internal Audit (RBIA) is an internal methodology which is primarily focused on the inherent risk
involved in the activities or system and provide assurance that risk is being managed by the management within
the defined risk appetite level It is the risk management framework of the management and seeks at every
stage to reinforce the responsibility of management and BOD (Board of Directors) for managing risk.
Existing in the fast changing business environment the biggest challenge the Internal Audit currently faces
is whether it is now in a position to add value to an organization. Economic events in the recent history
of global financial markets emphasized the importance of management understanding the risks facing
an organization and the impact of not implementing an effective risk management process. Internal audit
functions historically followed a compliance based approach that adds little value with organizations now
facing ever changing risks. Heading in the right direction of alignment with corporate objectives and adding
value to the business the Internal Audit function is becoming one of the critical functions finding its justified
place within corporate

STEPS FOR INTERNAL CONTROL

In order to establish the internal control mechanism the following points are to be kept in view:
l Identify the key areas where the internal control mechanism is to be established.
l Every work flow should be so documented that it is not complete if another person has not checked it
out.
l The other person’s role should start when the first person’s role comes to an end.
l Establish the surprise check mechanism where the money matters are involved.
l Reporting of the non-adherence of key compliance areas.
l Review mechanism of the control units.
l Establishment of Vigil Mechanism: The organization should establish a vigil mechanism as per the
provisions of Rule 7 of the companies (Meetings of board and its Powers) Rules 2014. The relevant rule
and its applicability is appended below.

COSO’S INTERNAL CONTROL FRAMEWORK

COSO is the abbreviation of, The Committee of Sponsoring Organizations of the Treadway Commission (COSO).
It is a joint initiative of the five private sector organizations (American Accounting Association, American Institute
of CPA, Financial Executives International, The Association of Accountants and Financial Professionals in
Business and The Institute of Internal Auditors) and is dedicated to providing thought leadership through the
development of frameworks and guidance on enterprise risk management, internal control and fraud deterrence.
In 1992 the COSO released its Internal Control–Integrated Framework (the original framework). In the twenty
years since the inception of the original framework, business and operating environments have changed
dramatically, becoming increasingly complex, technologically driven, and global. At the same time, stakeholders
are more engaged, seeking greater transparency and accountability for the integrity of systems of internal
control that support business decisions and governance of the organization.
On May 14, 2013, COSO released its revisions and updates to the 1992 document Internal Control - Integrated
394 EP-GRMCE

Framework. COSO’s goal in updating the framework was to increase its relevance in the increasingly complex
and global business environment so that organizations worldwide can better design, implement, and assess
internal control. COSO believes this framework will provide organizations significant benefits; for example,
increased confidence that controls mitigate risks to acceptable levels and reliable information supporting sound
decision making.
As per definition given by COSO, the Internal control is a process, effected by an entity’s board of directors,
management, and other personnel, designed to provide reasonable assurance regarding the achievement of
objectives relating to operations, reporting, and compliance.
The fundamental concepts from the definition of Internal Control are:
l Geared to the achievement of objectives in one or more separate but overlapping Categories.
l A process consisting of ongoing tasks and activities – it is a means to an end, not an end in itself.
l Effected by people – it is not merely about policy and procedure manuals, systems, and forms, but
about people and the actions they take at every level of an organization to effect internal control.
l Able to provide reasonable assurance, not absolute assurance, to an entity’s senior management and
board of directors.
l Adaptable to the entity structure – flexible in application for the entire entity or for a particular subsidiary,
division, operating unit, or business process.
COSO’s Internal Control Framework includes enhancements and clarifications that are intended to ease use and
application. One of the more significant enhancements is the formalization of fundamental concepts introduced
in the original framework as principles. These principles, associated with the five components, provide clarity
for the user in designing and implementing systems of internal control and for understanding requirements for
effective internal control.
The Framework has been enhanced by expanding the financial reporting category of objectives to include
other important forms of reporting, such as non-financial and internal reporting. Also, the Framework reflects
considerations of many changes in the business, operating, and regulatory environments over the past several
decades, including:
l Expectations for governance oversight.
l Globalization of markets and operations.
l Changes and greater complexity in the business.
l Demands and complexities in laws, rules, regulations, and standards.
l Expectations for competencies and accountabilities.
l Use of, and reliance on, evolving technologies.
l Expectations relating to preventing and detecting fraud.
Objectives: The Framework sets forth three categories of objectives, which allow organizations to focus on
separate aspects of internal control:
l Operations Objectives: These pertain to effectiveness and efficiency of the entity’s operations, including
operational and financial performance goals, and safeguarding assets against loss.
l Reporting Objectives : These pertain to internal and external financial and non-financial reporting and
may encompass reliability, timeliness, transparency, or other terms as set forth by regulators, standard
setters, or the entity’s policies.
l Compliance Objectives: These pertain to adherence to laws and regulations to which the entity is subject.
 Lesson 13 n Internal Control 395

Difference between Internal Control, Internal Check and Internal Audit

Basis Internal Control Internal Check Internal Audit

Meaning Internal Control means the Internal check means Internal auditing means an
process designed, implemented an arrangement audit on behalf of management
and maintained by those charged that a transaction is to ensure the adequacy and
with governance, management processed by two or effectiveness of internal controls,
and other personnel to provide more persons and each accuracy and timeliness of
reasonable assurance about one is independent financial and other records
the achievement of an entity’s and starts with when and reports and adherence
objectives with regard to reliability the predecessor has to the laid down policies and
of financial reporting, effectiveness completed the task. procedures by each unit of the
and efficiency of operations, and organization.
compliance with applicable laws
and regulations.

Verification It is a self-balancing mechanism One person’s work is The entire work process / system
implemented by the management, independently checked is checked and reviewed by the
so as to ensure that the entire by another person(s). internal auditor.
work process is divisible in parts,
so that not a single person may
have the access to complete the
entire process.

Reporting It is a mechanism introduced by No such report is Internal auditor submit its report
the management. prepared. Only one to the management.
person’s work is
independently checked
by another person.

What it is? It is a system introduced by the Internal check is the part It is an activity done by the
management. of the internal control internal auditor.
mechanism.

When it is Internal Control is a policy As soon as one part or Its periodicity may be yearly
done? decision by the management and process is completed, it or half yearly or quarterly, as
is a continuous process. is checked by another decided by the management.
person(s).

Purpose Formulation and circu­ lation of Safeguarding or minimis­ Detecting and report­
ing errors
management principles and ing errors and frauds in and frauds and irregularities
policies and effective and speedy actions transactions and re­
garding assets com­mitted, if
execution there­of with the help records, and profacting any detec­tion and prevention
of internal checking and internal assets. So as to ensure activity.
audit activities. the efficient running of
busi­ness.
396 EP-GRMCE

Scope Wider in scope than internal check Rather restricted to Limited to a continu­ous internal
and in­ternal audit as specified formu­lation and working system of checking financial
above. of proper accounting and non-financial opera­tions
and other operational and reporting to internal top
systems and reporting manage­ment.
or offering suggestions
to appropriate internal
authorities.

Components of Internal Control as defined by COSO

1. Control environment : The control environment describes a set of standards, processes, and structures that
provide the basis for carrying out internal control across the organization. According to the Institute of Internal
Auditors (IIA), a control environment is the foundation on which an effective system of internal control is built
and operated in an organization that strives to:
l achieve its strategic objectives,
l provide reliable financial reporting to internal and external stakeholders,
l operate its business efficiently and effectively,
l comply with all applicable laws and regulations, and
l safeguard its assets.
2. Risk Assessment : The risk assessment forms the basis for determining how risks will be managed. A risk
is defined as the possibility that an event will occur and adversely affect the achievement of organizational
objectives. Risk assessment requires management to consider the impact of possible changes in the internal
and external environment and to potentially take action to manage the impact.
3. Control Activities : Control activities are actions (generally described in policies, procedures, and standards)
that help management mitigate risks in order to ensure the achievement of objectives. Control activities may be
preventive or detective in nature and may be performed at all levels of the organization.
4. Information : Information is obtained or generated by management from both internal and external sources
in order to support internal control components. Communication based on internal and external sources is
used to disseminate important information throughout and outside of the organization, as needed to respond
to and support meeting requirements and expectations. The internal communication of information throughout
an organization also allows senior management to demonstrate to employees that control activities should be
taken seriously.
5. Monitoring Activities : Monitoring activities are periodic or ongoing evaluations to verify that each of the
five components of internal control, including the controls that affect the principles within each component, are
present and functioning. around their products.
The 2013 Framework is a flexible, reliable, and cost-effective approach to the design and evaluation of internal
control systems for organizations looking to achieve operational, compliance, and reporting objectives. The
2013 Framework can be applied regardless of organization size or type: public companies, privately held
companies, not-for-profit entities, and governmental entities.
 Lesson 13 n Internal Control 397

The COSOs Cube

Table of Five Components and Seventeen Principles of Internal Control

Five Components Seventeen Principles

1. Control environment 1. Demonstrates commitment to integrity and ethical values

2. Exercises oversight responsibility
3. Establishes structure, authority, and responsibility 4. Demonstrates
commitment to competence
5. Enforces accountability

2. Risk Assessment 6. Specifies suitable objectives

7. Identifies and analyzes risk
8. Assesses fraud risk
9. Identifies and analyzes significant change

3. Control Activities 10. Selects and develops control activities

11. Selects and develops general controls over technology
12. Deploys control activities through policies and procedures

4. Information and communication 13. Uses relevant information

14. Communicates internally
15. Communicates externally

5. Monitoring Activities 16. Conducts ongoing and/or separate evaluations

17. Evaluates and communicates deficiencies
398 EP-GRMCE

Control Testing and Evaluation

One central element of COSO’s updated framework is its continued emphasis on the linkage among objectives,
risk, and control. Organizations seek to accomplish objectives, and those objectives need to be articulated.
There are risks to achieving the objectives, whether they relate to operations, compliance, or reporting, and
those risks need to be identified. The key is to link controls to risks and objectives: The only reason that controls
exist is to mitigate risks and thereby increase the probability that the organization will accomplish its objectives.
Control, therefore, is subservient to risk — and to the objectives they help achieve.

Efficiency of Internal Controls and its Review

The internal control should be adequate to cover all the key and sensitive areas of the organization. No one
person should be allowed to complete one set of transactions. The control mechanism once established should
be reviewed periodically in order to assess the lacunas and to remove the same. The password sharing should
be strictly prohibited and stringent action should be taken against the erring staff. The efficacy of the internal
control mechanism depends when the employees accepts this philosophy in the true letter and spirit.
What Internal Control Can Do:
l Internal control can help an entity achieve its performance and profitability targets, and prevent loss of
resources.
l It can help ensure reliable financial reporting.
l It can help ensure that the enterprise complies with laws and regulations, avoiding damage to its
reputation and other consequences.
l In sum, it can help an entity get to where it wants to go, and avoid pitfalls and surprises along the way.

Limitation of Internal control

l Internal control cannot change an inherently poor manager into a good one.
l Internal control cannot ensure success, or even survival in case of shifts in government policy or
programs, competitors’ actions or economic conditions, since these are beyond the management’s
control.
l An internal control system, no matter how well conceived and operated, can provide only reasonable--
not absolute--assurance to management and the board regarding achievement of an entity’s objectives.
l The likelihood of achievement is affected by limitations inherent in all internal control systems.
l Controls can be circumvented by the collusion of two or more people, and management has the ability
to override the system.
l Another limiting factor is that the design of an internal control system must reflect the fact that there are
resource constraints, and the benefits of controls must be considered relative to their costs.
l Thus, while internal control can help an entity achieve its objectives, it is not a panacea.

ROLE AND RESPONSIBILITIES WITH REGARD TO INTERNAL CONTROL

Everyone in an organization has responsibility for internal control.
Management: The chief executive officer is ultimately responsible and should assume “ownership” of the
system. More than any other individual, the chief executive sets the “tone at the top” that affects integrity and
ethics and other factors of a positive control environment. In a large company, the chief executive fulfills this
duty by providing leadership and direction to senior managers and reviewing the way they’re controlling the
 Lesson 13 n Internal Control 399

business. Senior managers, in turn, assign responsibility for establishment of more specific internal control
policies and procedures to personnel responsible for the unit’s functions. In a smaller entity, the influence of
the chief executive, often an owner-manager is usually more direct. In any event, in a cascading responsibility,
a manager is effectively a chief executive of his or her sphere of responsibility. Of particular significance are
financial officers and their staffs, whose control activities cut across, as well as up and down, the operating and
other units of an enterprise.

SEBI (LODR) Regulations, 2015

Regulation 17(8): The chief executive officer and the chief financial officer shall provide the
compliance certificate to the board of directors as specified in Part B of Schedule II.
Part B of Schedule II-Compliance Certificate
The following compliance certificate shall be furnished by chief executive officer and chief financial
officer:
A. They have reviewed financial statements and the cash flow statement for the year and that to the
best of their knowledge and belief :
1. these statements do not contain any materially untrue statement or omit any material fact or
contain statements that might be misleading;
2. these statements together present a true and fair view of the listed entity’s affairs and are in
compliance with existing accounting standards, applicable laws and regulations.
B. There are, to the best of their knowledge and belief, no transactions entered into by the listed
entity’s during the year which are fraudulent, illegal or violative of the company’s code of conduct.
C. They accept responsibility for establishing and maintaining internal controls for financial reporting
and that they have evaluated the effectiveness of internal control systems of the listed entity’s
pertaining to financial reporting and they have disclosed to the auditors and the Audit Committee,
deficiencies in the design or operation of such internal controls, if any, of which they are aware and
the steps they have taken or propose to take to rectify these deficiencies.
D. They have indicated to the auditors and the Audit committee:
1. significant changes in internal control over financial reporting during the year;
2. significant changes in accounting policies during the year and that the same have been
disclosed in the notes to the financial statements; and
3. instances of significant fraud of which they have become aware and the involvement therein, if
any, of the management or an employee having a significant role in the listed entity’s internal
control system over financial reporting.
400 EP-GRMCE

Regulation 18(3) : The role of the audit committee and the information to be reviewed by the
audit committee shall be as specified in Part C of Schedule II.
Part C of Schedule II:
ROLE OF THE AUDIT COMMITTEE AND REVIEW OF INFORMATION BY
AUDIT COMMITTEE
A. The role of the audit committee shall include the following:
(1) oversight of the listed entity’s financial reporting process and the disclosure of its financial information
to ensure that the financial statement is correct, sufficient and credible;
(2) recommendation for appointment, remuneration and terms of appointment of auditors of the listed
entity;
(3) approval of payment to statutory auditors for any other services rendered by the statutory auditors;
(4) reviewing, with the management, the annual financial statements and auditor’s report thereon before
submission to the board for approval, with particular reference to:
(a) matters required to be included in the director’s responsibility statement to be included in the
board’s report in terms of clause (c) of sub-section (3) of Section 134 of the Companies Act,
2013;
(b) changes, if any, in accounting policies and practices and reasons for the same;
(c) major accounting entries involving estimates based on the exercise of judgment by management;
(d) significant adjustments made in the financial statements arising out of audit findings;
(e) compliance with listing and other legal requirements relating to financial statements;
(f) disclosure of any related party transactions;
(g) modified opinion(s) in the draft audit report;
(5) reviewing, with the management, the quarterly financial statements before submission to the board
for approval;
(6) reviewing, with the management, the statement of uses / application of funds raised through an
issue (public issue, rights issue, preferential issue, etc.), the statement of funds utilized for purposes
other than those stated in the offer document / prospectus / notice and the report submitted by
the monitoring agency monitoring the utilisation of proceeds of a public or rights issue, and making
appropriate recommendations to the board to take up steps in this matter;
(7) reviewing and monitoring the auditor’s independence and performance, and effectiveness of audit
process;
(8) approval or any subsequent modification of transactions of the listed entity with related parties;
(9) scrutiny of inter-corporate loans and investments;
(10) valuation of undertakings or assets of the listed entity, wherever it is necessary; (11) evaluation of
internal financial controls and risk management systems;
(12) reviewing, with the management, performance of statutory and internal auditors, adequacy of the
internal control systems;
 Lesson 13 n Internal Control 401

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

Board of Directors: Management is accountable to the board of directors, which provides governance, guidance
and oversight. Effective board members are objective, capable and inquisitive. They also have a knowledge
of the entity’s activities and environment, and commit the time necessary to fulfill their board responsibilities.
Management may be in a position to override controls and ignore or stifle communications from subordinates,
enabling a dishonest management which intentionally misrepresents results to cover its tracks. A strong, active
board, particularly when coupled with effective upward communications channels and capable financial, legal
and internal audit functions, is often best able to identify and correct such a problem.
402 EP-GRMCE

Directors’ Responsibility Statement:

Section 134(3)(c) of the Companies Act, 2013 provides that there shall be attached to statements laid
before a company in general meeting, a report by its Board of Directors, which shall include Directors’
Responsibility Statement.
In terms of sub-clause (e) of sub-section (5) of section 134 the Directors’ Responsibility Statement shall state
that –
(e) the directors, in the case of a listed company, had laid down internal financial controls to be followed
by the company and that such internal financial controls are adequate and were operating effectively.
Explanation. – For the purposes of this clause, the term “internal financial controls” means the
policies and procedures adopted by the company for ensuring the orderly and efficient conduct of its
business, including adherence to company’s policies, the safeguarding of its assets, the prevention
and detection of frauds and errors, the accuracy and completeness of the accounting records, and
the timely preparation of reliable financial information;
(f) the directors had devised proper systems to ensure compliance with the provisions of all applicable
laws and that such systems were adequate and operating effectively.

Internal Auditors: Internal auditors play an important role in evaluating the effectiveness of control systems,
and contribute to ongoing effectiveness. Because of organizational position and authority in an entity, an internal
audit function often plays a significant monitoring role.
Other Personnel: Internal control is, to some degree, the responsibility of everyone in an organization and
therefore should be an explicit or implicit part of everyone’s job description. Virtually all employees produce
information used in the internal control system or take other actions needed

CONCLUSION
Internal control has two components, internal check and internal audit. Internal control enables an entity to
achieve desired performance, profitability, and prevent loss of resources through the effective internal checks
supported by the internal audit.
Principles of Corporate Governance requires adherence to the applicable laws and regulations through
adequate disclosures, transparency and reliable financial reporting. The law abiding entity improves the image
among stakeholders, improved relations with regulators, and avoid pitfalls. All this may happen only due to
perfect internal controls.
COSO has enunciated seventeen principles on internal control. The principles have been recognized world
over. While it discusses the responsibility for establishing of the internal control measures in the organization,
it also describes what internal control can do and what it cannot do. An internal control system, no matter
how well conceived and operated, can provide only reasonable, not absolute, assurance to management
and the board regarding achievement of an entity’s objectives. The likelihood of achievement is affected by
limitations inherent in all internal control systems. These include the realities that judgments in decision-
making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally,
controls can be circumvented by the collusion of two or more people, and management has the ability to
override the system.
Another limiting factor is that the design of an internal control system must reflect the fact that there are resource
constraints, and the benefits of controls must be considered relative to their costs.
 Lesson 13 n Internal Control 403

GLOSSARY OF TECHNICAL WORDS

– Internal Control : The Internal control is a process, effected by an entity’s board of directors,
management, and other personnel, designed to provide reasonable assurance regarding the
achievement of objectives relating to operations, reporting, and compliance.
– Internal Check : Internal check is an arrangement of as duties allocated in such a way that the work of
one clerk is automatically checked by another while internal audit is an independent review of operations
and records undertaken by the staff specially appointed for the purpose.
– Internal Audit : Internal audit is a dynamic profession involved in helping organisations achieve their
objectives. It is concerned with evaluating and improving the effectiveness of risk management, control
and governance processes in an organisation.

LESSON ROUND UP
– The Information Systems Control and Audit Association (ISACA) has defined the Internal Control
Systems as, ‘The policies and procedures, practices and organizational structures, designed to
provide reasonable assurance that business objectives will be achieved and that undesired events
will be prevented or detected and corrected’.
– As per definition given by COSO, the Internal control is a process, effected by an entity’s board of
directors, management, and other personnel, designed to provide reasonable assurance regarding
the achievement of objectives relating to operations, reporting, and compliance.
– Components of Internal Control include internal check and internal audit. Internal check means an
arrangement that a transaction is process by two or more persons and each one is independent and
starts with when the predecessor has completed the task. So, it is a self balancing system which have
in-built systems of independent checking of the work done by other. Internal audit may be done by
the own staff or by engaging any professional person outside of the organisation. The scope of the
internal audit is determined by the management. Internal Auditor is required to submit its report to the
management (who is appointing authority).
– COSO’s Internal Control Framework includes enhancements and clarifications that are intended to
ease use and application. One of the more significant enhancements is the formalization of fundamental
concepts introduced in the original framework as principles. These principles, associated with the five
components, provide clarity for the user in designing and implementing systems of internal control
and for understanding requirements for effective internal control.
– The COSO Framework sets forth three categories of objectives, which allow organizations to focus
on separate aspects of internal control. These are Operations Objectives, Reporting and Objectives
Compliance Objectives.
– The Framework sets out five components of internal control and seventeen principles representing
the fundamental concepts associated with components. Control Environment (5 principles), Risk
Assessment (4 Principles), Control Activities (3 Principles), Information and Communication (3
Principles), Monitoring Activities ( 2 Principles)
– Everyone in an organization (viz: Management, Board of Directors, Internal Auditor and Other
persons) all have the responsibility for internal control.

REFERENCE FOR FURTHER READING

– https://en.wikipedia.org/wiki/Internal_control
– https://www.coso.org/Documents/COSO-CROWE-COSO-Internal-Control-Integrated-Framework.pdf
404 EP-GRMCE

TEST YOURSELF
(These are meant for recapitulation only. Answers to these questions are not to be submitted for evaluation)
1. Do you know the components and principles of Internal Control? Briefly explain.
2. Discuss briefly the efficacy of Internal Control.
3. Can you discuss in detail about the COSO’s Internal Control Framework.
4. Please explain the roles and responsibilities of Internal Control System.
 Lesson 14
Reporting

LESSON OUTLINE
LEARNING OBJECTIVES
– Introduction
The future of corporate reporting is a subject
– Regulatory Framework attracting much attention of late. In this chapter
– Financial Reporting we will discuss where corporate reporting stands
at present and identify the key decisions that need
– Objectives of Financial Reporting
to be taken to improve the quality and usefulness
– Importance of Financial Reporting of reports with particular reference to non-financial
reporting.
– Limitations of Financial Reporting
The objective of this study lesson is to enable the
– Non-Financial Reporting
students to understand the concept of Reporting
– Board’s Report which includes the financial as well as non-financial
– Corporate Social Responsibility Report reporting. The legal provisions and regulations with
regard to Board’s Report, CSR Report and BRR
– Corporate Sustainability Reporting reports have also been dealt.
– Benefits of Sustainability Reporting This chapter explains the concepts of sustainability
– GRI - Sustainability Reporting Framework reporting and contemporary developments like
integrated reporting.
– Sustainability Reporting Framework in India
– Challenges in Mainstreaming Sustainability
Reporting
– Towards Integrated Reporting
– Integrated Reporting By Listed Entities in
India
– Relation between Integrated Reporting and
Sustainability Reporting
– Glossary
– LESSON ROUND-UP
– TEST YOURSELF

“I think all good reporting is the same thing - the best attainable version of the truth.”
– Carl Bernstein
406 EP-GRMCE

INTRODUCTION
Reporting may mean to provide the information to the stakeholders as per the requirement of the law. Reporting
is not the new concept. The companies are reporting through their annual report which is a comprehensive report
on a company’s activities throughout the preceding year. Annual reports are intended to give shareholders and
other interested people information about the company’s activities and financial performance. The annual report
contains the financial reporting as well as non-financial reporting.

REGULATORY FRAMEWORK

Sl. No. Description

1 Global Reporting Initiative

2 Regulation 34(2)(f) of the SEBI (LODR) Regulations, 2015

3 Business Responsibility Report Format by SEBI

4 National Guidelines on Responsible Business Conduct (NGRBC)

5 International Integrated Reporting Framework (IIRC)

FINANCIAL REPORTING
Financial reporting is the process of producing statements that disclose an organisation’s financial status to
management, investors and the government.
Financial reporting serves two primary purposes. First, it helps management to engage in effective decision-
making concerning the company’s objectives and overall strategies. The data disclosed in the reports can help
management discern the strengths and weaknesses of the company, as well as its overall financial health.
Second, financial reporting provides vital information about the financial health and activities of the company
to its stakeholders including its shareholders, potential investors, consumers, and government regulators. It’s a
means of ensuring that the company is being run appropriately.
Financial Reporting involves the disclosure of financial information to the various stakeholders about the financial
performance and financial position of the organisation over a specified period of time. These stakeholders
include – investors, creditors, public, debt providers, governments & government agencies. In case of listed
companies the frequency of financial reporting is quarterly & annual.
The main components of financial reporting are:
1. The financial statements – Balance Sheet, Statement of Profit & Loss, Cash flow statement & Statement
of changes in stock holder’s equity
2. The notes to financial statements
3. Quarterly & Annual reports (in case of listed companies)
4. Prospectus (In case of companies going for IPOs)
5. Management Discussion & Analysis (In case of public companies)
The Institute of Chartered Accounts of India (ICAI) has issued various accounting standards and guidance
notes which are applied for the purpose of financial reporting. This ensures uniformity across various diversified
industries when they prepare and present their financial statements.
 Lesson 14 n Rerporting 407

Objectives of Financial Reporting

The following points may be summed up as the objectives and purposes of financial reporting –
1. Providing information to management of an organisation which is used for the purpose of planning,
analysis, benchmarking and decision making.
2. Providing information to investors, promoters, debt provider and creditors which is used to enable them
to male rational and prudent decisions regarding investment, credit etc.
3. Providing information to shareholders & public at large in case of listed companies about various
aspects of an organisation.
4. Providing information about the economic resources of an organisation, claims to those resources
(liabilities & owner’s equity) and how these resources and claims have undergone change over a period
of time.
5. Providing information as to how an organisation is procuring & using various resources.
6. Providing information to various stakeholders regarding performance management of an organisation
as to how diligently & ethically they are discharging their fiduciary duties & responsibilities.
7. Providing information to the statutory auditors which in turn facilitates audit.
8. Enhancing social welfare by looking into the interest of employees, trade union & Government.

Importance of Financial Reporting

The importance of financial reporting cannot be over emphasized. It is required by each and every stakeholder
for multiple reasons and purposes. The following points highlight the importance of financial reporting –
1. In helps and organisation to comply with various statues and regulatory requirements. The
organisations are required to file financial statements to ROC, Government Agencies. In case of
listed companies, quarterly as well as annual results are required to be filed to stock exchanges
and published.
2. It facilitates statutory audit. The statutory auditors are required to audit the financial statements of an
organisation to express their opinion.
3. Financial Reports forms backbone for financial planning, analysis, bench marking and decision making.
These are used for above purposes by various stakeholders.
4. Financial reporting helps organisations to raise capital both domestic as well as overseas.
5. On the basis of financials, the public in large can analyze the performance of the organisation as well
as of its management.
6. For the purpose of bidding, labour contract, government supplies etc., organisations are required to
furnish their financial reports & statements.
7. Financial reporting also facilitates an introspection of the organization. It takes stock of various affairs
which would have been missed in absence of any financial system.

Limitations of Financial Reporting

Corporate reporting is an essential means by which companies communicate with investors as part of their
accountability and stewardship obligations. The current financial reporting model was developed in the 1930’s
for an industrial world. In general, the model provides a backwards-looking review of performance and does not
provide enough relevant information for decision- making today.
408 EP-GRMCE

The financial reporting model is like “looking in the rear-view mirror,” when in fact the road ahead is very
turbulent and there are huge impacts on the company, both societal and environmental.
It is not necessarily the volume of information, but the lack of a comprehensive story, which is where improvements
in corporate reporting are needed. Investors expect information about:
l Business model and strategy,
l Intangible factors and sustainability (i.e. economic, environmental, social) commitments,
l Impacts and performance that affect a company’s value today and its ability to create value in the
future,
l Key aspects of corporate governance,
l Internal controls,
l Human rights / diversity practices and policies,
l Key financial ratios.

NON-FINANCIAL REPORTING
Apart from financial reporting, the non-financial reporting under the annual reports is also being made by the
companies. It contains the information relating to the company’s performance during the previous year, future
projections, award achievements and penalty imposed, if any by any regulators, are apprised to the Stake
holders by way of reporting in the annual report.
It is a structured way of presenting information about ones performance. Non-financial reporting is the practice
of measuring, disclosing and being accountable to internal and external stakeholders for organisational
performance towards the goal of sustainable and inclusive development.
There has been a general perception that right from the time of Industrial Revolution, economic development
has come at the cost of environment and has brought about large scale destruction of nature and growth
process has not been inclusive. Due to the negative externalities of economic development, the practice of
non-financial reporting started largely in response to pressure from non-governmental organisations (NGOs)
and civic society, which claimed that many firms lacked social and environmental responsibility. It epitomises
that a company’s financial health is dependent on much more than the assets on its balance sheet and the
movements on its profit and loss account.
Non-financial reporting is an opportunity to communicate in an open and transparent way with stakeholders.
In their non-financial reports, firms volunteer an overview of their environmental and social impact during the
previous year. The information in nonfinancial reports contributes to building up a company’s risk-return profile.
Non-financial reporting includes-
l Board’s Report,
l Corporate Social Responsibility Report
l Corporate Sustainability Reporting

BOARD’S REPORT
The Companies Act, 2013, requires the Board of Directors of every company to attach its report to the financial
statements to be laid before the members at the annual general meeting. The Board’s Report is an important
means of communication by the Board of Directors of a company with its stakeholders. The Board’s Report
provides the stakeholders with both financial and non-financial information, including the performance and
prospects of the company, relevant changes in the management and capital structure, recommendations as
 Lesson 14 n Rerporting 409

to the distribution of profits, future and on-going programmes of expansion, modernisation and diversification,
capitalisation of reserves, further issue of capital and other relevant information.
The Companies Act, 2013, mandates certain disclosures to be made in the Board’s Report. A listed company
is also required to comply with certain additional requirements as stated under the Securities and Exchange
Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015.
Similarly, a company, whose securities are listed on an overseas stock exchange, is required to comply with
additional requirements as may be specified by such stock exchange. Further, a company which is regulated
under other laws, may also be required to make additional disclosures in its Board’s Report as stated in the
respective applicable laws.
The Board’s Report should be based on the company’s standalone financial statement and not on the
consolidated financial statement and should relate to the financial year for which such financial statement is
prepared. The Board’s Report should avoid repetition of information. If any information is mentioned elsewhere
in the financial statement, a reference thereof should be given in Board’s Report instead of repeating the same.
A board’s report should typically include information under following heads-
l Company Specific Information
l General Information
l Capital and Debt Structure
l Credit Rating of Securities
l Investor Education and Protection Fund (IEPF)
l Management
l Disclosures Relating to Subsidiaries, Associates and Joint Ventures
l Details of Deposits
l Particulars of Loans, Guarantees And Investments
l Particulars of Contracts or Arrangements with Related Parties
l Corporate Social Responsibility (CSR)
l Conservation of Energy, Technology Absorption
l Foreign Exchange Earnings and Outgo
l Risk Management including management perception to Risk
l Details of Establishment of Vigil Mechanism
l Material Orders of Judicial Bodies /Regulators
l Auditors Report
l Secretarial Audit Report
l Explanations in Response to Auditors’ Qualifications
l Compliance With Secretarial Standards
l Compliance of applicable regulations
l Corporate Insolvency Resolution Process Initiated under the Insolvency and Bankruptcy Code, 2016 (IBC)
l Failure to Implement any Corporate Action
410 EP-GRMCE

l Annual Return
l Additional Disclosures Under Listing Regulations
l Disclosures Pertaining to the Sexual Harassment of Women at the Workplace (Prevention, Prohibition
And Redressal) Act, 2013 etc.

CORPORATE SOCIAL RESPONSIBILITY REPORT

The Board of the Company is mandated to prepare a CSR Report under Section 134(3)(o) of the Companies
Act, 2013. The Companies (CSR Policy) Rules, 2014 provide for the format for reporting CSR activities annually.
The format for the annual report on CSR activities to be included in the Board’s report is as follows:
1. A brief outline of the company’s CSR policy, including overview of projects or programs proposed to be
undertaken and a reference to the web-link to the CSR policy and projects or programs.
2. The Composition of the CSR Committee.
3. Average net profit of the company for the last three financial years
4. Prescribed CSR expenditure (two per cent, of the amount as in item 3 above
5. Details of CSR spent during the financial year
(a) Total amount to be spent for the financial year:
(b) Amount unspent, if any:
(c) Manner in which the amount spent during the financial year is detailed below

6. In case the company has failed to spend the two per cent of the average net profit of the last three
financial years or any part thereof, the company shall provide the reasons for not spending the amount
in its Board report.
7. A responsibility statement of the CSR Committee that the implementation and monitoring of CSR Policy,
is in compliance with CSR objectives and Policy of the company.
If the company has been unable to spend the minimum required on its CSR initiatives, the reasons for not doing
so are to be specified in the Board Report. If a company has a website, the CSR policy and the report containing
details of such activities have to be made available on the company’s website for informational purposes.

CORPORATE SUSTAINABILITY REPORTING

The concept of sustainability reporting is of recent origin. Conventionally financial accounting was the tool that
aided management control. Then, management accounting has emerged separately with focus on generating
information for management planning, control and decision-making. In the recent years, with emphasis being
placed on the ways in which companies match their resources to the needs of the marketplace, it has given rise
to the concept of corporate performance management and measurement. The new approach is an integrated
 Lesson 14 n Rerporting 411

one seeking to link strategic management, management accounting and reporting. The reporting contemplated
here covers the whole information communication process comprising internal and external stakeholders.
Sustainability reporting is a part of the new approach.
Corporate sustainability is an approach that creates long-term stakeholder value by implementing a business
strategy that considers every dimension of how a business operates in the ethical, social, environmental,
cultural, and economic spheres. Sustainability reporting is a process for publicly disclosing an organization’s
economic, environmental, and social performance. Many companies find that financial reporting alone no longer
satisfies the needs of shareholders, customers, communities and other stakeholders for information about
overall organizational performance. Through sustainability reporting, organizations report on progress against
performance goals not only for economic achievements, but for environmental protection and social well-being.
A sustainability report is an organizational report that gives information about economic, environmental, social
and governance performance. Sustainability reporting aims to communicate an organization’s sustainability
priorities, policies, programs and performance to its investors. It comprises information on how a company,
proactively and beyond regulations, acts responsibly towards the environment around it and works towards
equitable and fair business practices and brings to life products and services with lower impacts on the natural
environment. Such a report describes how a company has implemented a greener supply chain, has engaged
with local communities, is helping tackle climate-change issues, or is “innovating for the poor”. Best-in-class
reports mention where raw material labour are sourced from, and openly discuss sustainability issues at
hand (e.g. diversity in the workforce, overall environmental footprint, safety performance, labour conditions
in the supply-chain), along with the associated “remediation steps”. A sustainability report also presents the
organization’s values and governance model, and demonstrates the link between its strategy and its commitment
to a sustainable global economy.
Sustainability reporting can be considered as synonymous with other terms for non-financial reporting; triple
bottom line reporting, corporate social responsibility (CSR) reporting, and more. It is also an intrinsic element
of integrated reporting; a more recent development that combines the analysis of financial and non-financial
performance.

Benefits of sustainability reporting

Sustainability reporting can help organizations to measure, understand and communicate their economic,
environmental, social and governance performance, and then set goals, and manage change more effectively.
A sustainability report is the key platform for communicating sustainability performance and impacts – whether
positive or negative.
l Internal benefits of sustainability reporting for companies and organizations can include: Increased
understanding of risks and opportunities
l Emphasizing the link between financial and non-financial performance
l Influencing long term management strategy and policy, and business plans
l Streamlining processes, reducing costs and improving efficiency
l Benchmarking and assessing sustainability performance with respect to laws, norms, codes,
performance standards, and voluntary initiatives
l Avoiding being implicated in publicized environmental, social and governance failures
l Comparing performance internally, and between organizations and sectors External benefits of
sustainability reporting can include:
l Mitigating – or reversing – negative environmental, social and governance impacts
412 EP-GRMCE

l Improving reputation and brand loyalty

l Enabling external stakeholders to understand the organization’s true value, and tangible and intangible
assets
l Demonstrating how the organization influences, and is influenced by, expectations about sustainable
development
Some of the key drivers of sustainability reporting are-
l Regulations: Governments, at most levels have stepped up the pressure on corporations to measure
the impact of their operations on the environment. Legislation is becoming more innovative and is
covering an ever wider range of activities. The most notable shift has been from voluntary to mandatory
sustainability, monitoring and reporting.
l Customers: Public opinion and consumer preferences are a more abstract but powerful factor that
exerts considerable influence on companies, particularly those that are consumer oriented. Customers
significantly influence a company’s reputation through their purchasing choices and brand.
l Loyalty: This factor has led the firms to provide much more information about the products they produce,
the suppliers who produce them, and the product’s environmental impact starting from creation to
disposal.
l NGO’s and the media: Public reaction comes not just from customers but from advocates and the
media, who shape public opinion. Advocacy organisations, if ignored or slighted, can damage brand
value.
l Employees: Those who work for a company bring particular pressure to bear on how their employers
behave; they, too, are concerned citizens beyond their corporate roles.
l Peer pressure from other companies: Each company is part of an industry, with the peer pressures
and alliances that go along with it. Matching industry standards for sustainability reporting can be a
factor; particularly for those who operate in the same supply chain and have environmental or social
standards they expect of their partners.
l Companies themselves: Corporations, as public citizens, feel their own pressure to create a credible
sustainability policy, with performance measures to back it up, but with an eye on the bottom line as
well. Increasingly, stakeholders are demanding explicit sustainability reporting strategies and a proof of
the results.
l Investors: Increasingly, investors want to know that companies they have targeted have responsible,
sustainable, long-term business approaches. Institutional investors and stock exchange CEOs,
for example, have moved to request increased sustainability reporting from listed companies, and
environmental, social and corporate governance indices have been established such as the Dow Jones
Sustainability Index.

GLOBAL REPORTING INITIATIVE - SUSTAINABILITY REPORTING FRAMEWORK

Meaning of Sustainability Reporting: A sustainability report is a report published by a company or organization
about the economic, environmental and social impacts caused by its everyday activities. A sustainability report
also presents the organization’s values and governance model, and demonstrates the link between its strategy
and its commitment to a sustainable global economy.
Sustainability reporting can help organizations to measure, understand and communicate their economic,
environmental, social and governance performance, and then set goals, and manage change more effectively.
A sustainability report is the key platform for communicating sustainability performance and impacts – whether
positive or negative.
 Lesson 14 n Rerporting 413

Sustainability reporting can be considered as synonymous with other terms for non-financial reporting; triple
bottom line reporting, corporate social responsibility (CSR) reporting, and more. It is also an intrinsic element
of integrated reporting; a more recent development that combines the analysis of financial and non-financial
performance.
Global Reporting Initiative Standards (GRI Standards):
The GRI Standards represent global best practice for reporting publicly on a range of economic, environmental
and social impacts. Sustainability reporting based on the Standards provides information about an organization’s
positive or negative contributions to sustainable development.
The modular, interrelated GRI Standards are designed primarily to be used as a set, to prepare a sustainability
report focused on material topics. The three universal Standards are used by every organization that prepares
a sustainability report. An organization also chooses from the topic-specific Standards to report on its material
topics – economic, environmental or social.
Preparing a report in accordance with the GRI Standards provides an inclusive picture of an organization’s
material topics, their related impacts, and how they are managed. An organization can also use all or part of
selected GRI Standards to report specific information.
GRI Sustainability Reporting Standards (GRI Standards) help businesses, governments and other organizations
understand and communicate the impact of business on critical sustainability issues. Some of the distinctive
elements of the GRI Standards – and the activity that creates them – include:
l Multi-stakeholder input: The approach is based on multi-stakeholder engagement, representing the
best combination of technical expertise and diversity of experience to address the needs of all report
makers and users. This approach enables to produce universally-applicable reporting guidance. All
elements of the Reporting Framework are created and improved using a consensus-seeking approach,
and considering the widest possible range of stakeholder interests which includes business, civil society,
labor, accounting, investors, academics, governments and sustainability reporting practitioners.
l A record of use and endorsement: Of the world’s largest 250 corporations, 92% report on their
sustainability performance and 74% of these use GRI’s Standards to do so. With over 23,000 GRI
Reports recorded in the database, sustainability reporting using the GRI Standards continues to grow.
New audiences for sustainability information, like investors and regulators, are now calling for more and
better performance data. Annual growth in the number of reporters is expected to continue, as we work
towards a key area of our strategy: more reporters and better reporting.
l Governmental references and activities: Enabling policy is a key aspect of overall strategy and GRI
work with governments, international organizations and capital markets to further this agenda. As a
result, 35 countries use GRI in their sustainability policies and look for guidance as the world’s most
widely used sustainability reporting standards. In addition GRI have long-standing collaborations with
over 20 international organizations such as the UNGC, OECD and the UN Working Group on Business
& Human Rights.
l Independence: The creation of the Global Sustainability Standards Board in 2014, and related
governance structure changes, have strengthened the independence of the standards aspect funding
approach also ensures independence. GRI is a stichting – in Dutch, a non-profit foundation – with a
business model that aims for a degree of self-sufficiency. Funding is secured from diverse sources;
governments, companies, foundations, partner organizations and supporters.
l Shared development costs: The expense of developing GRI’s reporting guidance is shared among
many users and contributors. For companies and organizations, this negates the cost of developing
in-house or sector-based reporting frameworks.
414 EP-GRMCE

The GRI standards are as under:

Universal Standards:
GRI-101: Foundation
GRI-102: General Disclosure
GRI-103: Management Approach
Topic-Specific Standards:
GRI-200: Economic
GRI-300: Environmental
GRI-400: Social
Internal benefits for companies and organizations can include:
l Increased understanding of risks and opportunities
l Emphasizing the link between financial and non-financial performance
l Influencing long term management strategy and policy, and business plans
l Streamlining processes, reducing costs and improving efficiency
l Benchmarking and assessing sustainability performance with respect to laws, norms, codes,
performance standards, and voluntary initiatives
l Avoiding being implicated in publicized environmental, social and governance failures
l Comparing performance internally, and between organizations and sectors
External benefits of sustainability reporting can include:
l Mitigating – or reversing – negative environmental, social and governance impacts
l Improving reputation and brand loyalty
l Enabling external stakeholders to understand the organization’s true value, and tangible and intangible
assets
l Demonstrating how the organization influences, and is influenced by, expectations about sustainable
development.
Financial reporting : As for financial reporting, companies follow a generally accepted reporting framework;
Global Reporting Initiative (GRI) has developed a generally accepted framework to simplify report preparation
and assessment, helping both reporters and report users gain greater value from sustainability reporting.
Non-financial reporting : Global Reporting Initiative (GRI) is an initiative at the global level to standardize non-
financial Reporting (NFR), which the institutions adopt and has become the standard internationally. The aim
of the Guidelines is to assist reporting organizations and their stakeholders in articulating and understanding
contributions of the reporting organizations to sustainable development.
The GRI Sustainability Reporting Framework is made up of the Sustainability Reporting Guidelines, Sector
supplements and Indicator Protocols. Together these are known as the Sustainability Reporting Framework.
The GRI Reporting Framework is intended to serve as a generally accepted framework for reporting on an
organization’s economic, environmental, and social performance. It is designed for use by organizations of
any size, sector, or location. It takes into account the practical considerations faced by a diverse range of
organizations – from small enterprises to those with extensive and geographically dispersed operations.
 Lesson 14 n Rerporting 415

Sustainability Reporting Guidelines

The Sustainability Reporting Guidelines are the core element of the Reporting Framework. They outline content
that is broadly relevant to all organizations regardless of size, sector or location. The Sustainability Reporting
Guidelines developed by the Global Reporting Initiative, is a significant system that integrates sustainability
issues in to a frame of reporting.
An ever-increasing number of companies and other organizations want to make their operations sustainable.
Moreover, expectations that long-term profitability should go hand-in-hand with social justice and protecting the
environment are gaining ground. These expectations are only set to increase and intensify as the need to move
to a truly sustainable economy is understood by companies’ and organizations’ financiers, customers and other
stakeholders. Sustainability reporting helps organizations to set goals, measure performance, and manage
change in order to make their operations more sustainable.
G4 Sector Disclosures: The G4 Guidelines have been superseded by the GRI Standards. The G4 Sector
Disclosures and their translations have been retired and are no longer available for download. The Global
Sustainability Standards Board (GSSB), GRI’s independent standard-setting body, intends to develop
further sector contents, which will describe sectors’ most significant impacts from a sustainable development
perspective.
GRI G4 Sustainability Guidelines (the Guidelines) in 2013: The Global Reporting Initiative (GRI) launched
the fourth generation of its sustainability reporting guidelines: the GRI G4 Sustainability Guidelines (the
Guidelines) in 2013. The aim of G4, is to help reporters prepare sustainability reports that matter, contain
valuable information about the organization’s most critical sustainability-related issues, and make such
sustainability reporting standard practice.
G4 is applicable to all organizations, large and small, across the world. The Guidelines are now presented in
two parts to facilitate the identification of reporting requirements and related guidance. It consist of following
two parts-
l Part 1- Reporting Principles and Standard Disclosures: It contains the reporting principles and standard
disclosures and also sets out the criteria to be applied by an organization to prepare its sustainability
report in accordance with the Guidelines.
l Part 2 - Implementation Manual: It contains reporting and interpretative guidance that an organization
should consult when preparing its sustainability report.
The Guidelines are designed to align and harmonize as much as possible with other internationally recognized
standards. The Guidelines provide links with the United Nations Global Compact’s Ten Principles, 2000; the
OECD’s Guidelines for Multinational Enterprises, 2011; and the UN’s Guiding Principles on Business and
Human Rights, 2011.

Reporting Principles and Standard Disclosures

The Reporting Principles are fundamental to achieving transparency in sustainability reporting and therefore
should be applied by all organizations when preparing a sustainability report. The Implementation Manual
outlines the required process to be followed by an organization in making decisions consistent with the Reporting
Principles.
The Principles are divided into two groups:
(a) Principles for defining report content: The Principles for Defining Report Content describe the
process to be applied to identify what content the report should cover by considering the organization’s
activities, impacts, and the substantive expectations and interests of its stakeholders. These Principles
are designed to be used in combination to define the report content.
416 EP-GRMCE

(b) Principles for Defining Report Quality: The Principles for Defining Report Quality guide on ensuring
the quality of information in the sustainability report, including its proper presentation. The quality
of the information is important to enable stakeholders to make sound and reasonable assessments of
performance, and take appropriate actions. Decisions related to the process of preparing information in
a report should be consistent with these Principles. All of these Principles are fundamental to achieving
transparency.
There are two different types of Standard Disclosures:
1. GENERAL STANDARD DISCLOSURES
l Strategy and Analysis
l Organizational Profile
l Identified Material Aspects and Boundaries
l Stakeholder Engagement
l Report Profile
l Governance
l Ethics and Integrity
2. SPECIFIC STANDARD DISCLOSURES
l Disclosures on Management Approach
l Indicators
For detailed study students may refer- G4 Sustainability Reporting Guidelines available at https://www2.
globalreporting.org/resourcelibrary/GRIG4-Part1-Reporting-Principles-and-Standard-Disclosures.pdf

SUSTAINABILITY REPORTING FRAMEWORK IN INDIA

Considering the importance of sustainability in businesses, MCA launched Corporate Social Responsibility
Voluntary Guidelines in 2009. This voluntary CSR Policy addresses six core elements – Care for all Stakeholders,
Ethical functioning, Respect for Workers’ Rights and Welfare, Respect for Human Rights, Respect for
Environment and Activities for Social and Inclusive Development. To take this further, in 2011 MCA issued
‘National Voluntary Guidelines on Social, Environmental and Economical Responsibilities of Business’ which
encourages reporting on environment, social and governance issues.
In line with the National Voluntary Guidelines on Social, Environmental and Economic Responsibilities of
Business and considering the larger interest of public disclosure regarding steps taken by listed entities from a
Environmental, Social and Governance (“ESG”) perspective, SEBI decided to mandate inclusion of Business
Responsibility Reports (“BRR reports”) as part of the Annual Reports for listed entities.
SEBI in its (Listing Obligations and Disclosure Requirements) Regulations, 2015 has mandated the requirement
of submission of BRR for top 1000 listed entities describing initiative taken by them from an environmental,
social and governance perspective in the prescribed format [Regulation 34(2)(f)].
 Lesson 14 n Rerporting 417

Regulation 34(2)(f) of SEBI(LODR) Regulations 2015:

34(2)The annual report shall contain the following:
(f) for the top one thousand listed entities based on market capitalization (calculated as on March 31 of every
financial year), business responsibility report describing the initiatives taken by them from an environmental,
social and governance perspective, in the format as specified by the Board from time to time:
Provided that listed entities other than top one thousand listed companies based on market capitalization
and listed entities which have listed their specified securities on SME Exchange, may include these business
responsibility reports on a voluntary basis in the format as specified.

Business Responsibility Report is a disclosure of adoption of responsible business practices by a listed company
to all its stakeholders. This is important considering the fact that these companies have accessed funds from
the public, have an element of public interest involved, and are obligated to make exhaustive disclosures on a
regular basis.
SEBI has prescribed a format for ‘Business Responsibility Report’, vide its circular No. CIR/ CFD/ CMD / 10/
2015 dated 4th November, 2015. The said circular states that:
1. At a time and age when enterprises are increasingly seen as critical components of the social system,
they are accountable not merely to their shareholders from a revenue and profitability perspective
but also to the larger society which is also its stakeholder. Hence, adoption of responsible business
practices in the interest of the social set –up and the environment are as vital as their financial and
operational performance. This is all the more relevant for listed entities which, considering the fact
that they have accessed funds from the public, have an element of public interest involved, and
are obligated to make exhaustive continuous disclosures on a regular basis. Ministry of Corporate
Affairs, Government of India, in July 2011, came out with the ‘National Voluntary Guidelines on Social,
Environmental and Economic Responsibilities of Business’. These guidelines contain comprehensive
principles to be adopted by companies as part of their business practices and a structured business
responsibility reporting format requiring certain specified disclosures, demonstrating the steps taken by
companies to implement the said principles. SEBI had introduced requirements with respect to BRR
vide circular No. CIR/CFD/DIL/8/2012 dated August 13, 2012.
2. Pursuant to notification of Securities and Exchange Board of India (Listing Obligations and Disclosure
Requirements) Regulations, 2015 (“Listing Regulations”), the aforesaid circular dated August 13, 2012
was rescinded. As per clause (f) of sub regulation (2) of regulation 34 of Listing Regulations, the annual
report shall contain a business responsibility report describing the initiatives taken by the listed entity
from an environmental, social and governance perspective, in the format as specified by the Board.
Accordingly, listed entities shall be guided by the format as per Annexure I.
3. Certain key principles to assess the fulfillment of listed entities and a description of the core elements
under these principles are detailed at Annexure II.
4. Those listed entities which have been submitting sustainability reports to overseas regulatory agencies/
stakeholders based on internationally accepted reporting frameworks need not prepare a separate
report for the purpose of these guidelines but only furnish the same to their stakeholders along with
the details of the framework under which their BR Report has been prepared and a mapping of the
principles contained in these guidelines to the disclosures made in their sustainability reports.
5. This circular is issued under regulation 34 read with regulation 101(2) of Securities and Exchange
Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015.
418 EP-GRMCE

The BRR framework is divided into five sections:

(a) Section A: General Information about the Organisation – Industry Sector, Products & Services,
Markets, other general information
(b) Section B: Financial Details of the Organisation – Paid up capital, Turnover, Profits, CSR (Corporate
Social Responsibility) spend.
(c) Section C: Other Details – BR initiatives at Subsidiaries and Supply-chain Partners
(d) Section D: BR Information – Structure, Governance & Policies for Business Responsibility
(e) Section E: Principle-wise Performance – Indicators to assess performance on the 9 Business
Responsibility principles as envisaged by the National Voluntary Guidelines (NVGs)

Annexure I of the SEBI Circular dated 4th November, 2015

SUGGESTED FORMAT FOR BUSINESS RESPONSIBILITY REPORT
[See Regulation 34(2)(f)]
SECTION A: GENERAL INFORMATION ABOUT THE COMPANY
1. Corporate Identity Number (CIN) of the Company
2. Name of the Company
3. Registered address
4. Website
5. E-mail id
6. Financial Year reported
7. Sector(s) that the Company is engaged in (industrial activity code-wise)
8. List three key products/services that the Company manufactures/provides (as in balance sheet)
9. Total number of locations where business activity is undertaken by the Company (a) Number of
International Locations (Provide details of major 5) (b) Number of National Locations
10. Markets served by the Company – Local/State/National/International
SECTION B: FINANCIAL DETAILS OF THE COMPANY
1. Paid up Capital (INR)
2. Total Turnover (INR)
3. Total profit after taxes (INR)
4. Total Spending on Corporate Social Responsibility (CSR) as percentage of profit after tax (%)
5. List of activities in which expenditure in 4 above has been incurred:- (a) . b) .(c) .
SECTION C: OTHER DETAILS
1. Does the Company have any Subsidiary Company/ Companies?
2. Do the Subsidiary Company/Companies participate in the BR Initiatives of the parent company? If
yes, then indicate the number of such subsidiary company(s)
3. Do any other entity/entities (e.g. suppliers, distributors etc.) that the Company does business with,
participate in the BR initiatives of the Company? If yes, then indicate the percentage of such entity/
entities? [Less than 30%, 30-60%, More than 60%]
 Lesson 14 n Rerporting 419

SECTION D: BR INFORMATION
1. Details of Director/ Directors responsible for BR
(a) Details of the Director/ Director responsible for implementation of the BR policy / policies.
1. DIN Number
2. Name
3. Designation
(b) Details of the BR Head

No. Particulars Details

1. DIN Number (if applicable)
2. Name
3. Designation
4. Telephone number
5. E-mail id

2. Principle-wise (as per NVGs) BR Policy/ Policies

(a) Details of compliance (Reply in Y/N)

No. Questions P1 P2 P3 P4 P5 P6 P7 P8 P9
1. Do you have a policy /
policies for---
2. Has the policy being
formulated in consultation
with the relevant
stakeholders?
3. Does the policy conform to
any national /international
standards? IF yes.
Specify? (50 words)
4. Has the policy being
approved by the Board?
5. Does the company have
a specified committee
of the Board/ Director/
Official to oversee the
implementation of the
Policy?
6. Indicate the link for the
policy to be viewed
online?
7. Has the policy been
formally communicated
to all relevant internal and
external stakeholders?
420 EP-GRMCE

8. Does the company have

in-house structure to
implement the policy /
policies.
9. Does the company have
a grievance redressal
mechanism related to the
policy/ policies?
10. Has the company carried
out independent audit /
evaluation of the working
of this policy by an internal
or external agency?

(b) If answer to the question at serial 1 against and principle, is ‘No’ please explain why: (Tick up
to 2 options)

No. Questions P1 P2 P3 P4 P5 P6 P7 P8 P9
1. The company has
not understood the
Principles
2. The company is not at a
stage where it finds itself
in a position to formulate
and implement the
policies on specified
principles.
3. The company does
not have financial or
manpower resources
available for the task.
4. It is planned to be done
within next 6 months
5. It is planned to be done
within the next 1 year
6. Any other reason
(Please specify)

3. Governance related to BR
(a) Indicate the frequency with which the Board of Directors, Committee of the Board or CEO to
assess the BR performance of the Company. Within 3 months, 3-6 months, Annually, More
than 1 year
(b) Does the Company publish a BR or a Sustainability Report? What is the hyperlink for viewing
this report? How frequently it is published?
 Lesson 14 n Rerporting 421

SECTION E: PRINCIPLE-WISE PERFORMANCE

Principle 1
1. Does the policy relating to ethics, bribery and corruption cover only the company? Yes/ No. Does it
extend to the Group/Joint Ventures/ Suppliers/Contractors/NGOs /Others?
2. How many stakeholder complaints have been received in the past financial year and what percentage
was satisfactorily resolved by the management? If so, provide details thereof, in about 50 words or
so.
Principle 2
1. List up to 3 of your products or services whose design has incorporated social or environmental
concerns, risks and/or opportunities.
(a)
(b)
(c)
2. For each such product, provide the following details in respect of resource use (energy, water, raw
material etc.) per unit of product(optional):
(a) Reduction during sourcing/production/ distribution achieved since the previous year throughout
the value chain?
(b) Reduction during usage by consumers (energy, water) has been achieved since the previous
year?
3. Does the company have procedures in place for sustainable sourcing (including transportation)?
(a) If yes, what percentage of your inputs was sourced sustainably? Also, provide details thereof,
in about 50 words or so.
4. Has the company taken any steps to procure goods and services from local & small producers,
including communities surrounding their place of work?
(a) If yes, what steps have been taken to improve their capacity and capability of local and small
vendors?
5. Does the company have a mechanism to recycle products and waste? If yes what is the percentage
of recycling of products and waste (separately as 10%). Also, provide details thereof, in about 50
words or so.
Principle 3
1. Please indicate the Total number of employees.
2. Please indicate the Total number of employees hired on temporary/contractual/casual basis.
3. Please indicate the Number of permanent women employees.
4. Please indicate the Number of permanent employees with disabilities
5. Do you have an employee association that is recognized by management.
6. What percentage of your permanent employees is members of this recognized employee
association?
422 EP-GRMCE

7. Please indicate the Number of complaints relating to child labour, forced labour, involuntary labour,
sexual harassment in the last financial year and pending, as on the end of the financial year.

No. Category No. of complaints No. of complaints

filed during the pending as on end of
financial year the financial year
1. Child labour / forced labour /
involuntary labour
2. Sexual harassment
3. Discriminatory employment

8. What percentage of your under mentioned employees were given safety & skill upgradation training
in the last year?
(a) Permanent Employees
(b) Permanent Women Employees
(c) Casual/Temporary/Contractual Employees
(d) Employees with Disabilities
Principle 4
1. Has the company mapped its internal and external stakeholders? Yes/No
2. Out of the above, has the company identified the disadvantaged, vulnerable & marginalized
stakeholders.
3. Are there any special initiatives taken by the company to engage with the disadvantaged, vulnerable
and marginalized stakeholders. If so, provide details thereof, in about 50 words or so.
Principle 5
1. Does the policy of the company on human rights cover only the company or extend to the Group/
Joint Ventures/Suppliers/Contractors/NGOs/Others?
2. How many stakeholder complaints have been received in the past financial year and what percent
was satisfactorily resolved by the management?
Principle 6
1. Does the policy related to Principle 6 cover only the company or extends to the Group/Joint Ventures/
Suppliers/Contractors/NGOs/others.
2. Does the company have strategies/ initiatives to address global environmental issues such as
climate change, global warming, etc? Y/N. If yes, please give hyperlink for webpage etc.
3. Does the company identify and assess potential environmental risks? Y/N
4. Does the company have any project related to Clean Development Mechanism? If so, provide
details thereof, in about 50 words or so. Also, if Yes, whether any environmental compliance report
is filed?
5. Has the company undertaken any other initiatives on – clean technology, energy efficiency,
renewable energy, etc. Y/N. If yes, please give hyperlink for web page etc.
 Lesson 14 n Rerporting 423

6. Are the Emissions/Waste generated by the company within the permissible limits given by CPCB/
SPCB for the financial year being reported?
7. Number of show cause/ legal notices received from CPCB/SPCB which are pending (i.e. not
resolved to satisfaction) as on end of Financial Year.
Principle 7
1. Is your company a member of any trade and chamber or association? If Yes, Name only those
major ones that your business deals with: (a) . (b) . (c) . (d) .
2. Have you advocated/lobbied through above associations for the advancement or improvement of
public good? Yes/No; if yes specify the broad areas ( drop box: Governance and Administration,
Economic Reforms, Inclusive Development Policies, Energy security, Water, Food Security,
Sustainable Business Principles, Others)
Principle 8
1. Does the company have specified programmes/initiatives/projects in pursuit of the policy related to
Principle 8? If yes details thereof.
2. Are the programmes/projects undertaken through in-house team/own foundation/external NGO/
government structures/any other organization?
3. Have you done any impact assessment of your initiative?
4. What is your company’s direct contribution to community development projects- Amount in INR and
the details of the projects undertaken.
5. Have you taken steps to ensure that this community development initiative is successfully adopted
by the community? Please explain in 50 words, or so.
Principle 9
1. What percentage of customer complaints/consumer cases are pending as on the end of financial
year.
2. Does the company display product information on the product label, over and above what is
mandated as per local laws? Yes/No/N.A. /Remarks(additional information)
3. Is there any case filed by any stakeholder against the company regarding unfair trade practices,
irresponsible advertising and/or anti-competitive behaviour during the last five years and pending
as on end of financial year. If so, provide details thereof, in about 50 words or so.
4. Did your company carry out any consumer survey/ consumer satisfaction trends?
424 EP-GRMCE

Annexure II of the SEBI Circular dated 4th November, 2015

PRINCIPLES TO ASSESS COMPLIANCE WITH ENVIRONMENTAL, SOCIAL AND GOVERNANCE
NORMS
[See Regulation 34(2)(f)]
Principle 1: Businesses should conduct and govern themselves with Ethics, Transparency and
Accountability
1. Businesses should develop governance structures, procedures and practices that ensure ethical
conduct at all levels; and promote the adoption of this principle across its value chain. Businesses
should communicate transparently and assure access to information about their decisions that
impact relevant stakeholders.
2. Businesses should not engage in practices that are abusive, corrupt, or anti-competition.
3. Businesses should truthfully discharge their responsibility on financial and other mandatory
disclosures.
4. Businesses should report on the status of their adoption of these Guidelines as suggested in the
reporting framework in this document.
5. Businesses should avoid complicity with the actions of any third party that violates any of the
principles contained in these Guidelines
Principle 2: Businesses should provide goods and services that are safe and contribute to
sustainability throughout their life cycle
1. Businesses should assure safety and optimal resource use over the life-cycle of the product – from
design to disposal – and ensure that everyone connected with it designers, producers, value chain
members, customers and recyclers are aware of their responsibilities.
2. Businesses should raise the consumer’s awareness of their rights through education, product
labelling, appropriate and helpful marketing communication, full details of contents and composition
and promotion of safe usage and disposal of their products and services.
3. In designing the product, businesses should ensure that the manufacturing processes and
technologies required to produce it are resource efficient and sustainable.
4. Businesses should regularly review and improve upon the process of new technology development,
deployment and commercialization, incorporating social, ethical, and environmental considerations.
5. Businesses should recognize and respect the rights of people who may be owners of traditional
knowledge, and other forms of intellectual property.
6. Businesses should recognize that over-consumption results in unsustainable exploitation of our
planet’s resources, and should therefore promote sustainable consumption, including recycling of
resources.
Principle 3: Businesses should promote the wellbeing of all employees
1. Businesses should respect the right to freedom of association, participation, collective bargaining,
and provide access to appropriate grievance Redressal mechanisms.
2. Businesses should provide and maintain equal opportunities at the time of recruitment as well as
during the course of employment irrespective of caste, creed, gender, race, religion, disability or
sexual orientation.
 Lesson 14 n Rerporting 425

3. Businesses should not use child labour, forced labour or any form of involuntary labour, paid or
unpaid.
4. Businesses should take cognizance of the work-life balance of its employees, especially that of
women.
5. Businesses should provide facilities for the wellbeing of its employees including those with special
needs. They should ensure timely payment of fair living wages to meet basic needs and economic
security of the employees.
6. Businesses should provide a workplace environment that is safe, hygienic humane, and which
upholds the dignity of the employees. Business should communicate this provision to their
employees and train them on a regular basis.
7. Businesses should ensure continuous skill and competence upgrading of all employees by providing
access to necessary learning opportunities, on an equal and non-discriminatory basis. They
should promote employee morale and career development through enlightened human resource
interventions.
8. Businesses should create systems and practices to ensure a harassment free workplace where
employees feel safe and secure in discharging their responsibilities.
Principle 4: Businesses should respect the interests of, and be responsive towards all stakeholders,
especially those who are disadvantaged, vulnerable and marginalized.
1. Businesses should systematically identify their stakeholders, understand their concerns, define
purpose and scope of engagement, and commit to engaging with them.
2. Businesses should acknowledge, assume responsibility and be transparent about the impact of
their policies, decisions, product & services and associated operations on the stakeholders.
3. Businesses should give special attention to stakeholders in areas that are underdeveloped.
4. Businesses should resolve differences with stakeholders in a just, fair and equitable manner.
Principle 5: Businesses should respect and promote human rights
1. Businesses should understand the human rights content of the Constitution of India, national laws
and policies and the content of International Bill of Human Rights. Businesses should appreciate
that human rights are inherent, universal, indivisible and interdependent in nature.
2. Businesses should integrate respect for human rights in management systems, in particular through
assessing and managing human rights impacts of operations, and ensuring all individuals impacted
by the business have access to grievance mechanisms.
3. Businesses should recognize and respect the human rights of all relevant stakeholders and groups
within and beyond the workplace, including that of communities, consumers and vulnerable and
marginalized groups.
4. Businesses should, within their sphere of influence, promote the awareness and realization of
human rights across their value chain.
5. Businesses should not be complicit with human rights abuses by a third party.
426 EP-GRMCE

Principle 6: Business should respect, protect, and make efforts to restore the environment
1. Businesses should utilize natural and manmade resources in an optimal and responsible manner
and ensure the sustainability of resources by reducing, reusing, recycling and managing waste.
2. Businesses should take measures to check and prevent pollution. They should assess the
environmental damage and bear the cost of pollution abatement with due regard to public interest.
3. Businesses should ensure that benefits arising out of access and commercialization of biological
and other natural resources and associated traditional knowledge are shared equitably.
4. Businesses should continuously seek to improve their environmental performance by adopting
cleaner production methods, promoting use of energy efficient and environment friendly technologies
and use of renewable energy.
5. Businesses should develop Environment Management Systems (EMS) and contingency plans and
processes that help them in preventing, mitigating and controlling environmental damages and
disasters, which may be caused due to their operations or that of a member of its value chain.
6. Businesses should report their environmental performance, including the assessment of potential
environmental risks associated with their operations, to the stakeholders in a fair and transparent
manner.
7. Businesses should proactively persuade and support its value chain to adopt this principle.
Principle 7: Businesses, when engaged in influencing public and regulatory policy, should do so in
a responsible manner
1. Businesses, while pursuing policy advocacy, must ensure that their advocacy positions are
consistent with the Principles and Core Elements contained in these Guidelines.
2. To the extent possible, businesses should utilize the trade and industry chambers and associations
and other such collective platforms to undertake such policy advocacy.
Principle 8: Businesses should support inclusive growth and equitable development
1. Businesses should understand their impact on social and economic development, and respond
through appropriate action to minimise the negative impacts.
2. Businesses should innovate and invest in products, technologies and processes that promote the
wellbeing of society.
3. Businesses should make efforts to complement and support the development priorities at local and
national levels, and assure appropriate resettlement and rehabilitation of communities who have
been displaced owing to their business operations.
4. Businesses operating in regions that are underdeveloped should be especially sensitive to local
concerns.
Principle 9: Businesses should engage with and provide value to their customers and consumers
in a responsible manner
1. Businesses, while serving the needs of their customers, should take into account the overall well-
being of the customers and that of society.
2. Businesses should ensure that they do not restrict the freedom of choice and free competition in
any manner while designing, promoting and selling their products.
 Lesson 14 n Rerporting 427

3. Businesses should disclose all information truthfully and factually, through labelling and other
means, including the risks to the individual, to society and to the planet from the use of the products,
so that the customers can exercise their freedom to consume in a responsible manner. Where
required, businesses should also educate their customers on the safe and responsible usage of
their products and services.
4. Businesses should promote and advertise their products in ways that do not mislead or confuse the
consumers or violate any of the principles in these Guidelines.
5. Businesses should exercise due care and caution while providing goods and services that result in
over exploitation of natural resources or lead to excessive conspicuous consumption.
6. Businesses should provide adequate grievance handling mechanisms to address customer
concerns and feedback.

National Guidelines on Responsible Business Conduct (NGRBC)

The Ministry of Corporate Affairs has revised the  National Voluntary Guidelines on Social, Environmental
and Economic Responsibilities of Business, 2011 (NVGs) and has released the National Guidelines on
Responsible Business Conduct (NGRBC) in March 2019. These guidelines urge businesses to actualise the
principles in letter and spirit.

Principal purpose of this reporting framework:

The principal purpose of this reporting framework is to serve as an internal tool for businesses whishing to align
themselves with the NGRBC. It should not be seen as a mandatory reporting format as that is the domain of a
regulator or law.
The Annexure 3 of the Guidelines details the reporting framework associated with the National Guidelines for
Responsible Business Conduct. It consists of three sections:
(a) Section A – General Disclosures, covering operational, financial and ownership related information,
(b) Section B – Management and Process Disclosures covering the structures, policies and processes to
integrate the Guidelines, and
(c) Section C – Principle-wise Performance Indicators covering how well businesses are performing in
pursuit of these Guidelines.
Businesses may use this reporting framework to voluntarily disclose their commitment to and performance
against their economic, social and environmental impacts. A growing number of businesses are already doing
this and are reporting several benefits, internal and external, as a result of their commitment to disclosure and
reporting.
SECTION A: GENERAL DISCLOSURES
Company details
1. Name of the Company:
2. Year of registration:
3. Corporate Identity Number (CIN) of the Company (if applicable):
4. Corporate address, telephone, email and website:
Products/services
428 EP-GRMCE

5. Sector(s) that the business is engaged in (industrial activity code):

6. Goods manufactured/services provided (top three by revenue):
7. Brands (top five by respective share of market) owned and percentage of revenue contributed:
Operations
8. Location of plants (in case of manufacturing businesses)
a. National (Districts and states – top five by employee strength):
b. International (Country – top three by employee strength)):
9. Location of major offices (in case of service businesses)
a. National (Districts and states – top five by employee strength):
b. International (Country – top three by employee strength)):
Employees
10. Number of permanent employees:
11. Contractual employees (seasonal, non-seasonal):
12. Temporary employees:
13. Percentage of women:
a. On the Governance Structure:
b. In top management, i.e. business and function heads;
Associate entities
14. Names of subsidiary / associate companies;
15. Details of Trust/Society/Section 8 company to further its CSR agenda:
a. Names;
b. Organization form (Trust, Society, Company) and year of establishment;
c. Main objects/purpose;
d. Amounts and sources of funds received in the reporting year;
16. Contact details of Nodal Officer for this report (name, designation, email id, phone number).
SECTION B: MANAGEMENT AND PROCESS DISCLOSURES
This section is aimed at helping businesses demonstrate the structures, policies and processes put in place
towards adopting the Principles and Core Elements.

No. Disclosure Questions P1 P2 P3 P4 P5 P6 P7 P8 P9

Policy and Management Processes
1. Names of the Policy / policies that covers
each Principle
2. Core Elements related to the Principle that
the Policy / Policies cover
 Lesson 14 n Rerporting 429

3. Policy / Policies relating to each principles

that has been translated into guidelines
and procedures.
4. Extent to which manpower, planning and
financial resources have been allocated
for the implementation of the policy /
policies relating to each Principle.
5. National and International codes and
standards adopted mapped to various
Principles.
Governance, leadership and oversight
6. Names of the above policies that have
been approved by the Board/ top
management.
7. Name of the specified committee(s) of the
Board/ Director/Officer and processes to
oversee the implementation of the policy/
policies
8. The process for board/ top management
to review performance against the above
policies and incorporating inputs (100
words)
9. Process for board/ top management
to review compliance with statutory
requirements of relevance to the Principles
and rectify any non-compliances (100
words)
10. Frequency of the reviews of the business’s
alignment with the Principles and Core
Elements conducted by the board/ top
management
Stakeholder Engagement
11. Description of the process to identify your
business’s key stakeholders (100 words)
12. Description of the process to engage with
your stakeholders on the Principles (100
words)
13. Description of the processes to
identify groups that are vulnerable and
marginalized stakeholders (100 words).
430 EP-GRMCE

14. Description of the processes to identify

issues related to inclusion and impact of
adopting the Principles on vulnerable and
marginalized stakeholders (100 words).
Communications
15. Description of process to communicate to
stakeholders, the impact of your policies,
procedures, decisions and performance
that impact them (100 words)
16. Description of how the business
communicates the results of stakeholder
engagement in the public domain (100
words)
17. Description of the process of
communicating performance against
these Guidelines to relevant stakeholders
(100 words)
18. Note on how disclosures and reporting
helped in improving business performance
/ strategy (50 words)
If answer to question (1) above is “No” i.e. not all Principles are covered by a policy, reasons to be stated:

Questions P1 P2 P3 P4 P5 P6 P7 P8 P9
The company has not understood the
Principles
The company is not at a stage where
it finds itself in a position to formulate
and implement the policies on specified
Principles
The company does not have financial or
manpower resources available for the task
It is planned to be done within next 6
months
It is planned to be done within next 12
months
Any other reason (please specify)

SECTION C: PRINCIPLE-WISE PERFORMANCE DISCLOSURE

This section is aimed at helping businesses demonstrate their performance in integrating the Principles and
Core Elements with key processes and decisions. The information sought is categorized as “Essential” and
“Leadership”. While the Essential level is expected from every business that has adopted these Guidelines,
the Leadership level is expected of businesses which aspire to progress to a higher level in their quest to be
socially, environmentally, and ethically responsible.
 Lesson 14 n Rerporting 431

CHALLENGES IN MAINSTREAMING SUSTAINABILITY REPORTING

Since the Sustainability Reporting is relatively a new concept, many organizations find it difficult to prepare
sustainability. Following may be considered as the challenges in mainstreaming sustainability reporting:
1. Government Encouragement: In many jurisdictions, there are no guidelines on sustainability reporting
to encourage the corporate sector. While on the other hand, there are voluntary as well as mandatory
guidelines from regulators for reporting on Sustainability aspects like in India we have SEBI framework
of Business Responsibility Report. In South Africa, listed companies are required to prepare Integrated
Report which is one step ahead of sustainability reporting. It is the need of the hour that governments
should encourage the corporate in their jurisdiction to adopt the sustainability reporting as a measure
of good corporate governance.
2. Awareness: lack of awareness about the emerging concept of sustainability reporting is also a major
challenge which the government and corporate governance bodies need to address by arranging the
sustainability awareness programme for the Professionals, Board of Directors and Management in
the corporate sector, as these are the persons who will drive sustainability reporting initiative for an
organisation. The government/regulators should organize such awareness programme jointly with the
experts in the field of Sustainability Reporting.
3. Expertise Knowledge: Sustainability Reporting is relatively a new concept in many jurisdictions and
organization found it very difficult to prepare a sustainability report in the absence of expert guidance
on the subject. The Sustainability Reporting concept is emerging as a good tool to showcase the
corporate governance practices of an orgainsation and this area demand professionals having expert
knowledge of sustainability reporting. The professional bodies in various jurisdictions should impart the
expert knowledge of sustainability reporting to their members to develop a good cadre of experts in this
emerging area of sustainability reporting.
4. Investor Behaviour: It is a recognized principle that investors should consider the Environmental,
Social and Governance (ESG) issues while making investment decisions. There are specific regulators
guidelines for the institutional investor to be vigilant on voting aspects and be concerned about the
governance practices of the companies in which they invest. However, the investor behaviour may
vary from company to company and sometimes they invest in companies without considering the ESG
issues either due to lack of awareness on ESG issues or some other business reasons. It should
be made a practice that the investor fund flow to those organization following the good governance
including reporting on sustainability aspects.

TOWARDS INTEGRATED REPORTING

Integrated reporting is a new approach to corporate reporting which is rapidly gaining international recognition.
Integrated reporting is founded on integrated thinking, which helps demonstrate interconnectivity of strategy,
strategic objectives, performance, risk and incentives and helps to identify sources of value creation. Integrated
reporting is a concept that has been created to better articulate the broader range of measures that contribute
to long-term value and the role, organisations play in society. Central to this is the proposition that value is
increasingly shaped by factors additional to financial performance, such as reliance on the environment, social
reputation, human capital skills and others. This value creation concept is the backbone of integrated reporting.
In addition to financial capital, integrated reporting examines five additional capitals that should guide an
organisation’s decision-making and long-term success — its value creation in the broadest sense. While
integrated reports benefit a broad range of stakeholders, they’re principally aimed at long-term investors.
Integrated reporting starts from the position that any value created as a result of a sustainable strategy —
regardless of whether it becomes a tangible or intangible asset — will translate, at least partially, into performance.
Market value will therefore be impacted.
432 EP-GRMCE

Integrated Reporting is one step ahead of sustainability reporting and its set to become the way companies
report their annual financial and sustainability information together in one report. The aim of an integrated
report is to clearly and concisely tell the organization’s stakeholders about the company and its strategy and
risks, linking its financial and sustainability performance in a way that gives stakeholders a holistic view of the
organization and its future prospects.
Sustainable organisations create value by combining a broad range of resources controlled by the organisation
or third parties. They are increasingly expected to generate positive outcomes for society that go beyond
returns for their shareholders or investors — outcomes that can be instrumental in improving an organisation’s
long-term financial performance. Understanding this co-creation and shared value process is fundamental to
integrated reporting. Other considerations include:
l An organisation’s value creation potential depends on its ability to identify all of the resources available
to it, whether tangible or intangible, owned by the organisation or third parties, and to align them with
its corporate strategy
l Any value created, including that which benefits society as a whole, has the potential to impact on the
organisation’s value and profitability
l An organisation that communicates its strategy to the market and quantifies this broader contribution
may well be stimulating value creation in itself. However, to increase stakeholder confidence the
information must be credible.
International Integrated Reporting Council (IIRC):
The IIRC is a global coalition of regulators, investors, companies, standard setters, the accounting professionl
and NGOs. Together, this coalition shares the view that communication about value creation should be the next
step in the evolution of corporate reporting.
The International Framework has been developed to meet this need and provide a foundation for the future.
Integrated Reporting (IR) promotes a more cohesive and efficient approach to corporate reporting and aims
to improve the quality of information available to providers of financial capital to enable a more efficient and
productive allocation of capital. The IIRC’s long term vision is a world in which integrated thinking is embedded
within mainstream business practice in the public and private sectors, facilitated by as the corporate reporting
norm.

AN INTEGRATED REPORT
The primary purpose of an integrated report is to explain to providers of financial capital how an organization
creates value over time. An integrated report benefits all stakeholders interested in an organization’s ability
to create value over time, including employees, customers, suppliers, business partners, local communities,
legislators, regulators and policy-makers.
The International Framework (the Framework) takes a principles-based approach. The intent is to strike
an appropriate balance between flexibility and prescription that recognizes the wide variation in individual
circumstances of different organizations while enabling a sufficient degree of comparability across organizations
to meet relevant information needs. It does not prescribe specific key performance indicators, measurement
methods, or the disclosure of individual matters, but does include a small number of requirements that are to be
applied before an integrated report can be said to be in accordance with the Framework.
An integrated report may be prepared in response to existing compliance requirements, and may be either
a standalone report or be included as a distinguishable, prominent and accessible part of another report or
communication. It should include, transitionally on a comply or explain basis, a statement by those charged with
governance accepting responsibility for the report.
 Lesson 14 n Rerporting 433

FUNDAMENTAL CONCEPTS
An integrated report aims to provide insight about the resources and relationships used and affected by an
organization – these are collectively referred to as “the capitals” in this Framework. It also seeks to explain how
the organization interacts with the external environment and the capitals to create value over the short, medium
and long term.
The capitals are stocks of value that are increased, decreased or transformed through the activities and outputs
of the organization. They are categorized in this Framework as financial, manufactured, intellectual, human,
social and relationship, and natural capital, although organizations preparing an integrated report are not
required to adopt this categorization or to structure their report along the lines of the capitals.
The ability of an organization to create value for itself enables financial returns to the providers of financial
capital. This is interrelated with the value the organization creates for stakeholders and society at large through
a wide range of activities, interactions and relationships. When these are material to the organization’s ability to
create value for itself, they are included in the integrated report.

THE FRAMEWORK
The purpose of this Framework is to establish Guiding Principles and Content Elements that govern the overall
content of an integrated report, and to explain the fundamental concepts that underpin them. The Framework:
l Identifies information to be included in an integrated report for use in assessing the organization’s
ability to create value; it does not set benchmarks for such things as the quality of an organization’s
strategy or the level of its performance
l Is written primarily in the context of private sector, for-profit companies of any size but it can also be
applied, adapted as necessary, by public sector and not-for-profit organizations.

GUIDING PRINCIPLES
The following Guiding Principles underpin the preparation of an integrated report, informing the content of the
report and how information is presented:
l Strategic focus and future orientation: An integrated report should provide insight into the
organization’s strategy, and how it relates to the organization’s ability to create value in the short,
medium and long term, and to its use of and effects on the capitals
l Connectivity of information: An integrated report should show a holistic picture of the combination,
interrelatedness and dependencies between the factors that affect the organization’s ability to create
value over time
l Stakeholder relationships: An integrated report should provide insight into the nature and quality
of the organization’s relationships with its key stakeholders, including how and to what extent the
organization understands, takes into account and responds to their legitimate needs and interests
l Materiality: An integrated report should disclose information about matters that substantively affect the
organization’s ability to create value over the short, medium and long term
l Conciseness: An integrated report should be concise
l Reliability and completeness: An integrated report should include all material matters, both positive
and negative, in a balanced way and without material error
l Consistency and comparability: The information in an integrated report should be presented: (a) on
a basis that is consistent over time; and (b) in a way that enables comparison with other organizations
to the extent it is material to the organization’s own ability to create value over time.
434 EP-GRMCE

CONTENT ELEMENTS
An integrated report includes eight Content Elements that are fundamentally linked to each other and are not
mutually exclusive:
l Organizational overview and external environment: What does the organization do and what are
the circumstances under which it operates?
l Governance: How does the organization’s governance structure support its ability to create value in
the short, medium and long term?
l Business model: What is the organization’s business model? • Risks and opportunities: What are
the specific risks and opportunities that affect the organization’s ability to create value over the short,
medium and long term, and how is the organization dealing with them?
l Strategy and resource allocation: Where does the organization want to go and how does it intend to
get there? Performance: To what extent has the organization achieved its strategic objectives for the
period and what are its outcomes in terms of effects on the capitals?
l Outlook: What challenges and uncertainties is the organization likely to encounter in pursuing its
strategy, and what are the potential implications for its business model and future performance?
l Basis of presentation: How does the organization determine what matters to include in the integrated
report and how are such matters quantified or evaluated?

Integrated Reporting by Listed Entities in India

SEBI vide its circular No. SEBI/ HO/ CFD/ CMD /CIR /P/2017/ 10 dated 6th February, 2017, issued a circular
on Integrated reporting by Listed entities, in exercise of the powers conferred under Section 11 read with
Section 11A of the Securities and Exchange Board of India Act, 1992. The text of the aforesaid circular is as
under:
1. SEBI has mandated the requirement of submission of Business Responsibility Report (‘BRR’) for top 500
listed entities under Regulation 34(2)(f) of SEBI (Listing Obligations and Disclosure Requirements) Regulations
2015 (“SEBI LODR”). The key principles which are required to be reported by the entities pertain to areas such
as environment, governance, stakeholder’s relationships, etc.
2. Today an investor seeks both financial as well as non-financial information to take a well-informed investment
decision. An integrated report aims to provide a concise communication about how an organisation’s strategy,
governance, performance and prospects create value over time. Further it may be noted that the concept of
integrated reporting is being discussed at various international forums. The purpose of integrated reporting is to
provide shareholders and interested stakeholders with relevant information that is useful for making investment
decisions.
3. Also regulation 4(1)(d) of SEBI LODR states “the listed entity shall provide adequate and timely information
to recognised stock exchange(s) and investors”. IOSCO Principle 16 states “there should be full, accurate and
timely disclosure of financial results, risks and other information that is material to investors´ decisions.”
4. In this regard, the International Integrated Reporting Council (‘IIRC’) has prescribed Guiding Principles
which underpin the preparation of an integrated report, specifying the content of the report and how information
is to be presented.
5. All organizations depend on various forms of capital for their success. It is important that all such forms of
capital are disclosed to stakeholders to enable informed investment decision making. IIRC has categorized the
forms of capital as follows:
l Financial capital
 Lesson 14 n Rerporting 435

l Manufactured capital
l Intellectual capital
l Human capital
l Social and relationship capital
l Natural capital
6. The Integrated Reporting Framework prescribed by International Integrated Reporting Council (‘IIRC’) is available
at web link: http://integratedreporting.org/wp-content/uploads/2015/03/13-12-08-THEINTERNATIONAL-IR-
FRAMEWORK-2-1.pdf 7.
7. It has been observed that certain listed entities in India and other jurisdictions have already been making
disclosures by following the principles of integrated reporting. Towards the objective of improving disclosure
standards, in consultation with industry bodies and stock exchanges, the listed entities have been advised to
adhere to the following by the SEBI vide this circular:
a. Integrated Reporting may be adopted on a voluntary basis from the financial year 2017-18 by top 500
companies which are required to prepare BRR.
b. The information related to Integrated Reporting may be provided in the annual report separately or by
incorporating in Management Discussion & Analysis or by preparing a separate report (annual report
prepared as per IR framework).
c. In case the company has already provided the relevant information in any other report prepared in
accordance with national/international requirement / framework, it may provide appropriate reference
to the same in its Integrated Report so as to avoid duplication of information.
d. As a green initiative, the companies may host the Integrated Report on their website and provide
appropriate reference to the same in their Annual Report.

RELATION BETWEEN INTEGRATED REPORTING AND SUSTAINABILITY REPORTING

Sustainability reporting is a process that assists organizations in setting goals, measuring performance and
managing change towards a sustainable global economy – one that combines long term profitability with social
responsibility and environmental care. Sustainability reporting – mainly through but not limited to a sustainability
report – is the key platform for communicating the organization’s economic, environmental, social and governance
performance, reflecting positive and negative impacts. The Aspects that the organization deems to be material,
in response to its stakeholders’ expectations and interests, drive sustainability reporting. Stakeholders can
include those who are invested in the organization as well as those who have other relationships with the
organization.
Integrated reporting is an emerging and evolving trend in corporate reporting, which in general aims primarily
to offer an organization’s providers of financial capital with an integrated representation of the key factors
that are material to its present and future value creation. Integrated reporters build on sustainability reporting
foundations and disclosures in preparing their integrated report. Through the integrated report, an organization
provides a concise communication about how its strategy, governance, performance and prospects lead to the
creation of value over time. Therefore, the integrated report is not intended to be an extract of the traditional
annual report nor a combination of the annual financial statements and the sustainability report. However, the
integrated report interacts with other reports and communications by making reference to additional detailed
information that is provided separately.
Although the objectives of sustainability reporting and integrated reporting may be different, sustainability
reporting is an intrinsic element of integrated reporting. Sustainability reporting considers the relevance of
436 EP-GRMCE

sustainability to an organization and also addresses sustainability priorities and key topics, focusing on the
impact of sustainability trends, risks and opportunities on the long term prospects and financial performance of
the organization. Sustainability reporting is fundamental to an organization’s integrated thinking and reporting
process in providing input into the organization’s identification of its material issues, its strategic objectives, and
the assessment of its ability to achieve those objectives and create value over time.

GLOSSARY OF TECHNICAL WORDS

– Inegrated Reporting: Integrated reporting (IR) is a "process that results in communication, most visibly
a periodic “integrated report”, about value creation over time.
– Financial Reporting: Financial reporting is the process of producing statements that disclose an
organization's financial status to management, investors and the government.
– Annual Report: An annual report is a comprehensive report on a company's activities throughout
the preceding year. Annual reports are intended to give shareholders and other interested people
information about the company's activities and financial performance.

LESSON ROUND UP
– Financial reporting is the process of producing statements that disclose an organisation’s financial
status to management, investors and the government.
– Non financial reporting is the practice of measuring, disclosing and being accountable to internal and
external stakeholders for organisational performance towards the goal of sustainable and inclusive
development.
– Corporate sustainability is an approach that creates long-term stakeholder value by implementing a
business strategy that considers every dimension of how a business operates in the ethical, social,
environmental, cultural, and economic spheres.
– SEBI in its (Listing Obligations and Disclosure Requirements) Regulations, 2015 has mandated the
requirement of submission of BRR for top 1000 listed entities describing initiative taken by them from
an environmental, social and governance perspective in the prescribed format [Regulation 34(2)(f)].
– Business Responsibility Report is a disclosure of adoption of responsible business practices by a
listed company to all its stakeholders. This is important considering the fact that these companies
have accessed funds from the public, have an element of public interest involved, and are obligated
to make exhaustive disclosures on a regular basis.
– Integrated reporting is a concept that has been created to better articulate the broader range of
measures that contribute to long-term value and the role, organisations play in society.
– An Integrated Report is “a concise communication about how an organisation’s strategy, governance,
performance and prospects, in the context of its external environment, lead to the creation of value
over the short, medium and long term”.
– The Guiding principles of International Integrated Reporting Framework are: Strategic focus and
future orientation, Connectivity of information, Stakeholder relationships, Materiality, Conciseness,
Reliability and completeness, Consistency and comparability.

TEST YOURSELF
(These are meant for recapitulation only. Answers to these questions are not to be submitted for evaluation)
1. Do you know about Integrated Reporting? Write a brief note.
 Lesson 14 n Rerporting 437

2. Apart from the Financial Reporting, Non-financial reporting has become an integral part of the Annual
Report. Please explain your views.
3. Is there are limitations of financial reporting. Explain.
4. Do you know what is Sustainability Report? Write a brief note on Sustainability Report.
5. Can you discuss the integrated reporting by listed entities in India?
438 EP-GRMCE
 Lesson 15
Ethics and Business

LESSON OUTLINE
LEARNING OBJECTIVES
– Introduction
The objective of this study lesson is to enable the
– Ethics students to understand the importance of Business
– Business Ethics Ethics and its advantages to the organization.

– Organisation Structure and Ethics Ethical Promotion of culture of ethics is an imperative, and
Dilemma it is increasingly being realized that it is the bedrock
of good governance which ultimately re-instills the
– Code of Ethics Indian Ethos Code of
confidence of the stakeholder in the company.
Conduct
The objective of the study lesson is to enable the
– Advantages of Business Ethics
students understand the following:
– Conclusion
– Inner Conscience and its Linkage to
– Glossary Governance
– LESSON ROUND-UP – The concept of business ethics
– TEST YOURSELF – Advantages of Ethics

“I think all good reporting is the same thing - the best attainable version of the truth.”
– Carl Bernstein
440 EP-GRMCE

INTRODUCTION
Today, the corporate world as a whole is in the process of acquiring a moral conscience. The new and emerging
concepts in management like corporate governance, business ethics and corporate sustainability are some
of the expressions through which this emerging ethical instinct in the corporate world is trying to express and
embody itself in the corporate life. In this study we examine the concept of ethics and its importance for the
business, corporate governance and governance through inner conscience and sustainability.

WHAT IS ETHICS
As per the Oxford Dictionary the meaning of ethics is a “system of moral principles, rules and conduct.”. Ethics
is a “Science of morals.” The word ethics has emerged from Latin ‘Ethicus’ or in Greek ‘Ethicos’. The origin of
these two words is from ‘ethos’ meaning character. Character unlike behavior is an intrinsic or basic factor which
derives from inner most.
Ethics is the study of morality and application of reasons for taking any decision or choosing any course of
action, morality is related to norms, values and beliefs embedded in social process.
The term ‘ethics’ can commonly refer to the rules and principles that define right and wrong conduct of individuals
(Robbins, Bergman, Stagg and Coulter, 2003, p.150). Ethical Behavior is accepted as “right” or “good” in the
context of a governing moral code. Ethics can be viewed as a way of behaving that can be prescribed and
imposed by the work environment (Garcia-Zamor, 2003).
Ethics refers to well-founded standards of right and wrong that prescribe what humans ought to do, usually in
terms of rights, obligations, benefits to society, fairness, or specific virtues.
Thus, ethics relates to the standards of conduct and moral judgements that differentiate right from wrong. Ethics
is not a natural science but a creation of the human mind. For this reason, it is not absolute and is open to the
influence of time, place and situation.

BUSINESS ETHICS
Business Ethics, as a subject is the study of business situations, activities and decisions where the issues of
right and wrong is addressed.
Business ethics constitute the ethical/moral principles and challenges that arise in a business environment.
Some of the areas related with – and not limited to- business ethics include the following:
1. Finance and Accounting: Creative accounting, Earnings management, Financial analysis, Insider
trading, Securities Fraud, Facilitation payment.
2. Human Resource Management: Executive compensation, Affirmative action, Workplace surveillance,
Whistle blowing, Occupational safety and health, Indentures servitude, Union busting, Sexual
Harassment, Employee raiding.
3. Sales and Marketing: Price fixing, price discrimination, green washing, spamming, using addictive
messages/images in advertising, Marketing to children, False advertising, Negative campaigning.
Business Ethics is the application of ethical principles and methods of analysis to business. Business ethics
deals with the topic of study that has been given its due importance in business, commerce and industry since
last three decades.

Context and relevance of Business Ethics in today’s business

Present day global crisis has raised questions about the legitimacy of capitalism. Ethical failures certainly
played a role. While it remains to be seen whether and how many people blatantly broke the law, there are
 Lesson 15 n Ethics and Business 441

abundant signs of various forms of potentially unethical behavior. These include greed, unreasonable amounts
of leverage, subtle forms of corruption (such as ratings agencies that appear to have had a conflict of interest),
complex financial instruments that no one really understood, and herd behavior where people just followed
along and failed to exercise independent judgment. Business leaders must use their personal moral compasses
to make ethical decisions. As for the business’s compass, it should be oriented toward satisfying customers
above all stakeholders. That is the orientation that allows for the greatest competitive success and profitability.
The question is what sort of changes will be needed in business management principles and practices to build
companies that are truly fit for the future?
Gary Hamel, World’s most influential business thinker (The Wall Street) and world’s leading expert on business
strategy (Fortune), answered this question which is basically conclusions of one International Conference in
California organized by The Management Lab - a Silicon Valley based research organization, with the support
of McKinsey & Company, where 35 top management scholars and practitioners of the world met for two days
to debate the future of management. These are the points:
l “Modern” management much of which dates back to the late nineteenth century has reached the limits
of improvement.
l Unless management innovators tackle those issues, companies will be unable to cope with tomorrow’s
volatile world.
l Management pioneers must find ways to infuse mundane business activities with deeper, soul-stirring
ideals, such as honor, truth, love, justice, and beauty. These timeless virtues have long inspired human
beings to extraordinary accomplishment and can no longer be relegated to the fringes of management.
l Most companies strive to maximize shareholder wealth - a goal that is inadequate. As an emotional
catalyst, wealth maximization lacks the power to fully mobilize human energies Tomorrow’s management
systems must give as much credence to such timeless human ideals as beauty, justice, and community
as they do to the traditional goals of efficiency, advantage, and profit.
l Tomorrow’s managers will require new skills, among them reflective learning, system-based thinking,
creative problem solving, and values- driven thinking. Business Schools and companies must redesign
training programs to help executives develop such skills and reorient management systems to
encourage their application.
— Ciary Hamel (Director, The Management Lab, a Silicon Valley based research organization) Ref: Harv and
Business Review, February 2009 issue, p.79-86
Mere professional competence alone does not lead to excellence. In the long-term enduring quality or excellence
comes from values. These universal human values like truth, beauty, goodness and harmony are applicable to
all human activity. But for practical application of these values for a professional activity, we have to take into
consideration the unique and intrinsic nature of that activity.
Now the question is How Values affect the bottom line?
Here comes an important principle, which is beginning to be recognized in the modern corporate life. It is the
pragmatic significance of values. For a moral or spiritual value lived in action releases a corresponding moral
or spiritual force, which in the long-term leads to positive material gains. This is a fact, which was intuitively
perceived by all morally and spiritually sensitive minds but difficult to prove in empirical terms. However, there
is at present a growing body of research, which indicates that moral ideals can lead to financial and business
success.
For example, Patricia Aburdene, in her well-known book, “Megatrends 2010/’ states:
“Socially responsible firms repeatedly achieve first-rate financial returns that meet and often beat the market
442 EP-GRMCE

and their peers, proving morals and money may be curiously compatible, after all.”
Narayan Murthy, founder chairman of Infosys also emphatically said:
“A sound value system is what differentiates long-term players from others. As long as the leaders articulate
the value system very clearly, as long as they show by example, the company can hold on its own in any
environment, even faced with intense competition and avoid the pitfalls of the likes of Enron, WorldCom, Qwest,
Tyco and others.”

Lets read one real life story narrated by Narayan Murthy in a recent interview:
In February 1984, Infosys decided to import a super minicomputer so that we could start developing software
for overseas clients. When the machine landed at Bangalore Airport, the local customs official refused to clear
it unless we “took care of him”—the Indian euphemism for demanding a bribe. A delay could have meant the
end for us before we had even started. When an Infosys manager informed me about the problem, my only
question was, “What is the alternative to paying a bribe?” The manager hesitantly replied that we could pay
a customs duty of 135% and then appeal for a refund. I told him: “Do that.”

We didn’t have enough money to pay the duty and had to borrow it. However, because we had decided to do
business ethically, we didn’t have a choice. We would not pay bribes. We effectively paid twice for the machine
and had only a slim chance of recovering our money. But a clear conscience is the softest pillow on which you
can lay your head down at night.
However we must note here this link between higher ideals and the bottomline happens only when the pragmatic
values like efficiency, productivity or prosperity, knowledge and competence, innovation, progress & perfection,
quality etc. are not rejected or ignored but properly integrated with the pursuit and actualization of higher values.
In practical terms, it means the values and ideals of the higher mind and spirit should inspire, guide and control
our physical and vital life and cast their refining influence on the body and life of our individual and collective
organism.
The corporate world pursues mainly the economic bottomline. But this is not enough for success or even survival
in the emerging world of the future. There are other imperatives or dimensions which need equal attention like
the human, social, environmental and the evolutionary. So, we have suggested Five Bottom Lines of the future.

Five Bottom Lines of the future

Economic Bottomline: Wealth-creation is the most basic and fundamental dharma of business. A business
organization which doesn’t create wealth for the society is adharmic, unethical. We have to focus more on
the causative factors which lead to these economic goals like for example, Technology, Productivity, Quality,
Customer, Service, Innovation or “knowledge”. These are the key-factors of the Economic Bottomline.
Human Bottomline: The Key Result Areas in this domain are those factors which lead to a better quality of the
work-force like for example, Leadership, Teamwork, Motivation, Creativity, Ethics, Values and Wellness.
Social Bottomline: An organization is an integral part of the larger social environment. In the long-term, well-
being of the organization depends on the wellbeing of the society. This is the rationale behind the concept
of Corporate Social Responsibility (CSR) which is gaining increasing acceptance among corporate leaders.
However, here also the concept and practice of CSR has to progress beyond isolated charitable projects to
embrace the community as a whole.
A business organization is not merely an economic entity but also a social organism, a human community. The
highest aim of CSR must be to integrate the communal life of the organization with the communal life of the
surrounding environment and harmonise the organizational goals with the developmental goals of the larger
community of which it is a part. In this broader perspective, the corporation has to share with the community not
 Lesson 15 n Ethics and Business 443

only its wealth but also some of its capabilities or expertise.

There is a concentration of resources, knowledge, competence and skill in a business organization, which it has
to share with the community of which it is a part.

Among business leaders, J.R.D. Tata had a clear perception of this responsibility and also the potentiality
of business for community development. He said “Every company has a special continuing responsibility
towards the people of the area in which it is located. The company should spare its engineers, doctors,
managers to advise the people of the villages and supervise new developments undertaken by cooperative
effort between them and the company.” We must note here that JRD’s conception of corporate responsibility
goes far beyond charity or sharing of wealth towards sharing of capabilities.

Environmental Bottomline: We are not only part of society but also part of Nature. Any human group which
draws energy and resources from Nature has a responsibility to use them prudently within the laws and limits set
by Nature. Here again as with CSR, the highest aim of ecological responsibility is to harmonize the communal
life of the group (especially the economic and material life) and the resource-energy management strategies,
with the laws of Nature and the natural environment. However, for long-term effectiveness, social and ecological
bottomlines should not remain as mere decorative, idealistic, showy “projects” at the fringe of the corporate life.
They have to become part of the core strategy of the organization.
Evolutionary Bottomline: This is something which has not been recognized in the corporate world.
We humans, as a species, are an unfinished project. We have not yet realized all our potentialities hidden within
us, especially in the moral, psychological and spiritual realms of our consciousness. We have to progress or
evolve further to reach our highest potential as human being. The work and life of the modern corporate world
provides a rich field of experience not only for professional growth but also for evolution of the individual. For
someone who is seeking for moral and spiritual development, the corporate world provides a more effective
field of experience for accelerated inner growth than an isolated ashram, monastery or forest. The problems,
difficulties, challenges, temptation and conflicts of the corporate world, are a fertile arena for becoming fully
conscious of our weaknesses and strengths and also for expressing our inner potentialities. Secondly, the
modern corporate experiences provide the right anvil for testing the quality and genuineness of our inner growth.
But a corporate leader or manager may ask: How can it be called a bottom- line? Why should a business
organization bother about the personal growth of the employees, which is his personal business? There are two
reasons why. The first reason is that personal growth will have its ultimate impact on the four bottom lines. Most
of the moral and spiritual disciplines can also make the employee a better professional.
For example the discipline of inner peace, equanimity and loving kindness to all which are common disciplines
in all eastern spiritual traditions can lead to greater clarity in thought, better judgement, more effective decision-
making, less stress and a more harmonious interpersonal relationship or team-work. Similarly the spiritual
discipline of karma yoga can lead to a greater efficiency, creativity and skill in action.
The second reason is that prophetic insights of seers have perceived this inner growth in the moral psychological
and spiritual realms as the next step in human evolution and whichever group takes up this higher evolution as
a part of its vision and strategy will be among the leaders of the future.
As Sri Aurobindo said,
“In the next stage of human progress it is not a material but a spiritual, moral and psychical progress that has
to be made” and therefore “whatever race or country seizes on the lines of that new evolution and fulfills it will
be the leader of humanity.”

Importance of Business Ethics

(i) Business is existing because of society: Philip Kotler had said “we sell products in the society not in the
444 EP-GRMCE

market” It is the society and the values of the people which creates desire.
(ii) Business relates to people and ethics are essential to people.
(iii) Ethical practices would result to social contribution
(iv) Business malpractices can adversely effect all stakeholders, apart from Govt., environment etc.
(v) Business will have positive effects on customers who will have the trust on the brand, either product or
service. There will not be any trust unless the company follows ethical standards.
(vi) Cultivates strong team work& productivity among employees resulting to enhanced employee growth.
(vii) Helps to build a strong public image.

ORGANISATION STRUCTURE AND ETHICS

An organization’s structure is important to the study of business ethics. In a centralized organization, decision-
making authority is concentrated in the hands of top-level managers, and very little authority is delegated to the
lower levels. Responsibility, both internal and external, rests with top management. This structure is especially
suited for organizations that make high-risk decisions, and whose lower-level managers are not highly skilled
in decision-making. It is also suitable for organizations in which production processes are routine and efficiency
is of primary importance.
These organizations are usually extremely bureaucratic, and the division of labour is typically very well defined.
Each worker knows his/her job and what is specifically expected of him/her, and each has a clear understanding
of how to carry out assigned tasks. Centralized organizations stress on formal rules, policies, and procedures,
backed up by elaborate control systems. Their codes of ethics may specify the techniques to be used for
decision-making.
Because of the top-down approach and the distance between employee and decision-maker, centralized
organizational structures can lead to unethical acts. If the centralized organization is very bureaucratic, some
employees may behave according to “the letter of the law” rather than the spirit.
In a decentralized organization, decision-making authority is delegated as far down the chain of command as
possible. Such organizations have relatively few formal rules, coordination and control are usually informal and
personal. They focus on increasing the flow of information. As a result, one of the main strengths of decentralized
organizations is their adaptability and early recognition of external change. This provides greater flexibility
to managers and they can react quickly to changes in their ethical environment. Weakness of decentralized
organizations lies in the fact that they have difficulty in responding quickly to changes in policy and procedures
established by the top management. In addition, independent profit centers within a decentralized organization
may sometimes deviate from organizational objectives.
Organisational structure touches on many issues related to ethics. Such as:
1. The alienation experienced by workers doing repetitive work
2. The feelings of oppression created by the exercise of authority
3. The responsibilities heaped on the shoulders of managers.
4. The power tactics employed by managers who are anxious to advance their career ambitions.
5. Health problems created by unsafe working conditions.
6. The absence of due process for non-unionised employees.
A manager of any organization must ensure consistency between the structures of the organization, the scale
of its operations, the tasks at hand, the needs of all stakeholders and the strategic direction of the organization.
 Lesson 15 n Ethics and Business 445

This consistency between structure and operations distinguishes successful organizations from less successful
ones. According to Kreitner and Kinicki (2001, p.92), there is a tendency among managers to act unethically in
the face of perceived pressure for results. Terms of employment and compensation schemes can also create
incentives for unethical conduct (Carson, 2003). This can cause managers to unwittingly set the stage for
unethical shortcuts by employees who seek to please the organization. Adequate training, good communication
channels and a cooperative working environment within the hierarchies can help reduce the unethical practices.
The rewarding of ethical behavior can be a practice organizations can adopt. The rewards could come in
the form of recognition or praise and not necessary money (Minkes, Small, Chatterjee, 1999). This can help
promote and encourage ethical behavior within the organization.
Conflict of interest in business arises when an employee or manager of a company is engaged in carrying out a
task on behalf of the company and the employee has private interest in the outcome of the task:
1. Possibly antagonistic to the best interests of the company
2. Substantial enough that it does or reasonably might affect.
3. The independent judgement of the company expects the employee to exercise on its behalf.
Sometimes, there are situations in the organization where there is conflict of interest and lack of independence.
One who is internal auditor should not report to Head of Finance or Accounts , which would dilute his
independence. Persons looking after materials should not also be in charge of finance and accounts .Executives
in internal audit/vigilance should not be party to commercial decisions.

Four fundamental ethical principles

1. The Principle of Respect for autonomy

Autonomy is Latin for “self-rule” We have an obligation to respect the autonomy of other persons, which is
to respect the decisions made by other people concerning their own lives. This is also called the principle of
human dignity. It gives us a negative duty not to interfere with the decisions of competent adults, and a positive
duty to empower others for whom we’re responsible.
Corollary principles: honesty in our dealings with others & obligation to keep promises.

2. The Principle of Beneficence

We have an obligation to bring about good in all our actions.
Corollary principle? We must take positive steps to prevent harm. However, adopting this corollary principle
frequently places us in direct conflict with respecting the autonomy of other persons.

3. The Principle of nonmaleficence

(It is not “non-malfeasance,” which is a technical legal term, & it is not “nonmalevolence,” which means that one
did not intend to harm.)
We have an obligation not to harm others: “First, do no harm. Corollary principle: Where harm cannot be
avoided, we are obligated to minimize the harm we do. Corollary principle: Don’t increase the risk of harm to
others. Corollary principle: It is wrong to waste resources that could be used for good.
Combining beneficence and nonmaleficence: Each action must produce more good than harm.

4. The Principle of justice

We have an obligation to provide others with whatever they are owed or deserve. In public life, we have an
obligation to treat all people equally, fairly, and impartially.
446 EP-GRMCE

Corollary principle: Impose no unfair burdens.

Combining beneficence and justice: We are obligated to work for the benefit of those who are unfairly treated.

ETHICAL DILEMMA
Dilemma is a situation that requires a choice between options that are or seem equally unfavorable or mutually
exclusive. By definition, an ethical dilemma involves the need to choose from among two or more morally
acceptable courses of action, when one choice prevents selecting the other; or, the need to choose between
equally unacceptable alternatives (Hamric, Spross, and Hanson, 2000).
A dilemma could be a right vs. wrong situation in which the right would be more difficult to pursue and wrong
would be more convenient. A right versus wrong dilemma is not so easy to resolve. It often involves an apparent
conflict between moral imperatives, in which to obey one would result in transgressing the other. This is also
called an ethical paradox.
An ethical dilemma involves a situation that makes a person question what is the ‘right’ or ‘wrong’ thing to do.
They make individuals think about their obligations, duties or responsibilities. These dilemmas can be highly
complex and difficult to resolve. Easier dilemmas involve a ‘right’ versus ‘wrong’ answer; whereas, complex
ethical dilemmas involve a decision between a right and another right choice. However, any dilemma needs to
be resolved.

Addressing Ethical Dilemmas

The ethical dilemma consideration takes us into the grey zone of business and professional life, where things
are no longer black or white and where ethics has its vital role today. A dilemma is a situation that requires a
choice between equally balanced arguments or a predicament that seemingly defies a satisfactory solution.
An ethical dilemma is a moral situation in which a choice has to be made between two equally undesirable
alternatives. Dilemmas may arise out of various sources of behaviour or attitude, as for instance, it may
arise out of failure of personal character, conflict of personal values and organizational goals, organizational
goals versus social values, etc. A business dilemma exists when an organizational decision maker faces
a choice between two or more options that will have various impacts on (i) the organization’s profitability
and competitiveness; and (ii) its stakeholders. ‘In situations of this kind, one must act out of prudence to
take a better decision.

Case studies on Ethical dilemma

Example 1 Peeps into Mythology1 (From Mahabharata)
Let’s have a read of this episode from the Mahabharata.
At the end of imparting training in archery and other martial skill to all the Pandavas and Kauravas, Dronacharya,
their mentor, called up Arjuna and conferred on him the Supreme brahmastra.
Ashwatthama, Drona’s own son and a Kauravite, was incensed at this and argued with his father:
‘What disparity it is to deny the brahmastra to your own son, and bestow it upon Arjuna? I simply cannot take
this lying down. You must give one to me too…’
Drona refused to yield. But the obstinate pressure tactics used by Ashwatthama aroused the sentimental father
in Drona, and he gave away another piece of brahmastra to his son.
Why was Drona so reluctant for long to equip Ashwatthama with this deadliest of weapons?
We have to wait for an answer to this question in the climactic phase of the Mahabharata war, when the leading

1. Ref: Foundations of Managerial Work: Contributions from Indian Thought by S. K. Chakraborty

 Lesson 15 n Ethics and Business 447

Kauravites had fallen in Kurukshetra, and Ashwatthma was at the helm. Violating the strictest injunction of
Drona against the use of the brahmastra, to both Arjuna and Ashwatthama, the latter hurled it to annihilate the
Pandavas in a fit of impetuous anger. The whole earth was in peril because of the impending collision of the
two weapons, for Arjuna too had released his weapon in self-defense. Sensing the imminent catastrophe, the
Sage Vyasa tried to mediate and prevail on them both. Arjuna responded, and could withdraw the weapon he
had shot, but Ashwatthama lacked such capacity. Vyasa did devise a poignant compromise to avert the total
devastation which the unretracted weapon of Ashwatthama could have wrought.
What are the insights embedded in this two-stage drama?
l Drona discriminated in favour of Arjuna and against Ashwatthama on the ground of values alone. He
knew, as a guru, that his son may be no less than Arjuna in skill, but his value- system was in a mess.
l Drona was conscious of the reality that powerful instruments in the hands of ‘value-weak’, ‘skill-strong’
individuals are apt to be used destructively. Before and since Drona’s time the world has witnessed
countless such events.
l The acharya in Drona could initially snub and bridle the father in him. Yet later on, even a man of his
willpower and wisdom succumbed to familial emotions. How much more demanding then is the task of
cultivating and retaining objectivity in managerial roles donned by much lesser mortals! Unaware, the
values of much-hyped objectivity in decision-making are caught in the quick-sands of subjectivity.

l Individuals with a strong sense of values can rise above temporary provocations, can contain their
small egos without nursing a feeling of humiliation or loss of face, even when required to dispense with
a legitimate retaliatory move. This magnanimity is what Arjuna demonstrated when Vyasa pleaded with
him. Is this weakness or strength?
Example 22
In a large public sector undertaking the corporate chief of finance was long engaged in a duel with one of the
profit centre heads for establishing supremacy in financial decisions. Tragically, the profit centre accountant
became the shuttlecock in this game. For observing corporate financial norms he was answerable to the
corporate finance chief. But when he would report financial irregularities, after repeated prior information to
the profit centre head, to the corporate boss, his life would be made difficult by the former. If he did not report,
the CFO would be at his throat. The sensible solution would seem to be that the two bosses met and resolved
their conflicts. But that would never happen – each party continuing to use the junior accountant to fight out
their egoistic battles through proxy. Both the bosses were pursuing a contingency approach – each waiting for
the other to make the first move. One of the ultimate outcomes of these egoistic tussles was the quitting of the
demoralized junior accountant after a few months.
Example 3
The Managing Director-designate of a pharmaceutical company had presented the General Manager – Finance
with an entertainment bill of `15,000/- for reimbursement. But there were no vouchers. The GM was in a moral
fix, for, even LTC allowances to junior officers were being denied unless accompanied by proper papers. So
the GM mustered enough courage to talk about the matter with the MD. It transpired that apparently this sum
was spent by him in Delhi to entertain certain senior officials who held the key to his confirmation as the MD (he
happened to be an MBA from a leading management institute). The entire accounts department was in astir with
this episode. It was a culture-shock for them because the recently-retired MD had for years shown impeccable
integrity in such matters. But the new MD seemed to grab his pound of flesh – at any cost.
Example 43

2. Ref: Foundations of Managerial Work: Contributions from Indian Thought by S. K. Chakraborty, p.32,36
3. Leading with Wisdom by Peter Pruzen
448 EP-GRMCE

First-hand experience of Mr. A.K.Chattopadhyay, Sr. Vice President of ACC Ltd., Refractories Divisions, Nagpur,
India. Formerly he was Executive Director, Tata Refractories Ltd. And Deputy Chairman of IRMA.
‘One incident happened sometime back when a man who had previously worked for ACC supplied and installed
some refractory material to one of our customers. He represented himself to his customer as an ACC employee
and claimed that the material had come from ACC, which was not true. So the client agreed to let him do the
work because he used the ACC name. It so happens that the work that he did failed after two months.
‘The customer came to me and talked with me about what had happened. I went through all the purchase
orders, but could not find one for that specific job. Then he mentioned the name of the man who did the work. I
told him that that man had not worked for us for over six months. The customer assured me that this man told
him that he worked for ACC and that he was using ACC materials.
‘In this situation, we had no legal obligation. The work was not done by our people or with our materials. But I
felt it was our moral responsibility to stand behind this job because this customer gave the job to this man based
on the ACC name. I replaced the material and sent my engineer out to install it. We lost heavily as there was no
income whatsoever on this job. Even though I faced a lot of audit queries about this, I had the support of ACC
management behind me.
‘People who want to be spiritual-based leaders sometimes face conflict when they try to listen to their inner self.
They are sometimes afraid to follow their conscience because they do not want to lose money. When I gave
the approval to have our people install new material for this job, that we had not originally done, losing a lot of
money on it, I clearly told our people, “I am willing to take this loss, because I know there is a much bigger gain.”
This is the dilemma that we must face sometimes, when we listen to our inner voice. We will face opposition and
difficulties. However, the more the aspiring spiritual-based leaders do this, the more they will be successful. As
a leader I must also help them to achieve these successes. As there are successes, then they will grow in their
courage to continue on this path to being a spiritual-based leader.’
Example 54
V. V. Ranganathan, Senior Partner, Ernst & Young, India, having vast experience in corporate arena shared his
experience how he handled a major mistake. Let’s go through the real life story.
Ernst & Young has a worldwide practice called Environment Management Services that helps governments
and industries to address pollution and other environmental problems. ‘In one project, there was a preliminary
environmental management report that was submitted to the consulate authorities in order to clear a project that
involved the construction of a dam. In a study like this, you must study the flora and fauna to determine what
would happen to the environment if the dam were built in this area. You must also study the people to determine
the social consequences of building this dam. Based on the report that we submitted, it then had to go on to a
national board before permission could be given to start the project.
‘Unfortunately, an overenthusiastic young man, who had only been in our firm for about six months, was working
in this area. He had been trained as an environmental engineer in the USA. He cleared the environmental
report in less than a week; this was something impossible to do within our firm’s normal review process. What
he actually did was to use a draft from another report without going through our review process. Then he sent
the report to the state board on our letterhead, and they adopted it.
‘There were a lot of environmental activists who wanted the building of the dam to be stopped and they suspected
that this clearance had been done to please the company which was going to build the dam there. So the press
picked it up and said that Ernst & Young was a big fraud in how they cleared this large environmental project
report.
‘I got a lot of calls from the press because they saw this as a very juicy story. When a journalist came to my
office we had a totally different conversation. I asked him, “If someone brought you a story and you published
4. Leading with Wisdom by Peter Pruzen, p.244
 Lesson 15 n Ethics and Business 449

it in good faith, and then you found out it was completely wrong, what would you do? You would come with
an apology the next day. This is exactly what has happened here. The firm has not done anything wrong. It is
unfortunate that a very immature person who was in his position for less than six months did this. We are very
sorry that this has happened. We have officially withdrawn the report and we have agreed to not handle this
assignment for our client.”
‘We got many e-mails from environmental groups in the USA, Canada and Europe. I would patiently take each
one of them and reply. My spiritual theme of “seeing God in everyone” helped me in this situation a lot. It allowed
me to come out with the truth and to put it into perspective. It helped me to speak from a conscious mind with
no ulterior motives whatsoever. It helped me to not get mentally agitated at all. I believe that it is only because
of this spiritual basis that I could be so tranquil inside.’
Example 6
Surya meets his best childhood buddy Arnav after a decade. Surya had settled down in a different country after
completing higher studies and has just returned to the country with a new job at a very senior position in a multi-
national company.
Surya discovers that the warmth, camaraderie, openness and joy that they had felt years before had matured
instead of fading out.
When Surya asks Arnav about his work, Arnav initially avoids but on coaxing reveals that he is having serious
issues at his office where his colleagues are taking undue advantage of his simplicity and sincerity. He knows
that Arnav has this innate goodness in him and is aware that this can be taken advantage of by others. On
further probing Surya comes to know that Arnav works in the same organization that he will be joining but at
several levels lower in hierarchy. But he abstains from revealing this to Arnav.
Surya joins the organization on the scheduled date and as expected, after a few days, Arnav comes to know of
this. Arnav visits Surya in his personal chamber and congratulates him. He seems to be genuinely happy that
both the friends share the same workplace.
Concerned that Arnav may make a habit of visiting him often in office as a friend sending wrong signals to
others, Surya gently but expressly tells Arnav to maintain the hierarchical decorum in office. Arnav does not
return to his chamber after that day but the office grapevine finds out about their childhood friendship.
After a few days, Arnav’s appraisal report comes to Surya for his approval. He is shocked to find below average
grades in almost all the parameters of performance. He knows this cannot be a correct assessment but hesitates
to probe into this. He is concerned that his thoughts may be prejudiced or may be considered prejudiced by the
others. So he signs the report. Consequently, Arnav, who is truly honest, sincere and dedicated to his work, is
denied once more of his due appreciation from the organization.
Example 7
Ramesh is in charge of the stationary department of a large software organization. Employees who need
notepads, pens, scissors, and such stationary items enter their employee id, department name, project name
and the items that they take in a register that he maintains. The organization has about a 10,000 employees
and there are hundreds of entries in the register. At the end of the day, he enters these entries into the computer
and updates stock. No one crosschecks the manual entry with the data entered in the system.
At home, he is the only bread-earner of a relatively large family with 3-4 school-going children. One of the
children needed a special marker pen for a project in his school. It is quite an expensive pen and would make
Ramesh go beyond his monthly budget.
Suddenly Ramesh realizes that the inventory that he maintains has these pens and various projects frequently
uses these. There is an initial hesitation rising in him which he dismisses with the reason that the loss is less
than negligible to the organization while it will be an enormous financial relief to him. Thinking thus, he makes
450 EP-GRMCE

an additional entry in the system for the pen against a project and picks it up for the child at home. When his
wife asks him about the price, he mumbles a random value to her.
Steps to Resolving an Ethical Dilemma

Considering the options

available

Considering Consequences
– positives and negatives
of each option

Analysing Actions

Decision Making and

Commitment

Evaluate the System

1. What are the options?

List the alternative courses of action available.
2. Consider the consequences
Think carefully about the range of positive and negative consequences associated with each of the different
paths of action available.
− Who/what will be helped by what is done?
− Who/what will be hurt?
− What kinds of benefits and harms are involved and what are their relative values?
− What are the short-term and long-term implications?
3. Analyse the actions
Actions should be analysed in a different perspective i.e. viewing the action per se disregard the consequences,
concentrating instead on the actions and looking for that option which seems problematic. How do the options
measure up against moral principles like honesty, fairness, equality, and recognition of social and environmental
vulnerability? In the case you are considering, is there a way to see one principle as more important than the
others?
4. Make decision and act with commitment
Now, both parts of analysis should be brought together and a conscious and informed decision should be made.
 Lesson 15 n Ethics and Business 451

Once the decision is made, act on the decision assuming responsibility for it.
5. Evaluate the system
Think about the circumstances which led to the dilemma with the intention of identifying and removing the
conditions that allowed it to arise.
Suggest change in the system in consultation with the concerned person.

RESOLVING ETHICAL DILEMMA – A CASE STUDY

You are a senior manager in a major firm of investment managers.
Your employer is an international firm with a publicly stated commitment to the highest standards of ethical
behaviour. The company is making losses and is due to make a very important presentation to a major
corporate client, and if the deal falls through it would turn around the company. Management feels that
this activity will provide a lucrative return to the successful bidder for the business and a number of major
investment managers have been asked to make presentations.
Your firm is keen to win the mandate for the business and has committed considerable resources to its
bid, for which initial presentations were held last week. Following the initial presentation, you learn that the
proposal was well received and you are on the shortlist against only one other major firm. You realize that
there is a substantial variation in the bid from the original presentation but you leave it to the judgement of
the team. It is soon discovered by you that your team had got hold of the bid book of the competitor which
was inadvertently left by them in the waiting room.
In business, howsoever highly competitive, there are rules and principles to ensure that certain ethical
standards are maintained.
The ethical dilemma projected in this case should be resolved. Applying the steps to resolving an ethical
dilemma:
STEP I — List the alternative courses of action available.
What are the Options?
(i) Keep quiet and let things take their own course.
(ii) Inform the company seeking the bid about the incident and let them decide whether to have a re-bid
or not.
(iii) Inform your competitor about the incident and let them decide whether to seek for a re-bid or any
other corrective measures at their end.
(iv) Withdraw the tender/bid and let the competitor get the deal.
STEP II—What are the consequences and evaluation of action?
Think carefully about the range of positive and negative consequences associated with each of the different
paths of action available.
– Who/what will be helped by what is done?
– Who/what will be hurt?
– What kinds of benefits and harms are involved and what are their relative values?
– What are the short-term and long- term implications?
452 EP-GRMCE

Option 1
(i) In all probability the deal would be awarded to my company. The competitor was careless in leaving
the bid-book, and therefore there is nothing wrong if my team took advantage of the situation. In any
case, it is in the best interest of the company.
(ii) There is however a risk that the competitor would discover his mistakes and approach the company
seeking the bid company for a re-bid. In that eventuality, the reputation of my company “as being
committed to the highest ethical standards” will get affected. In addition, my company would not get
the deal.
Option 2
(i) The company seeking the bid, inspite of knowing about the incident, may award the deal to my
company and not take any cognizance of the incident keeping in view the cost of the tendering
process, the time involved, etc. or may decide to seek bids again.
(ii) May award the deal to the competitor by disqualifying my company.
(iii) May seek a re-bid.
Option 3
(i) The competitor, in spite of being aware of the incident, may decide not to take up the matter with the
company seeking bids, which may get me the deal.
(ii) The competitor may approach the company seeking the bid. I inform them about the incident and tell
them that they were informed by my company about the same, and may : (a) either seek the company
making the bid to seek bids again or; (b) let them decide whether or not to seek the bid again.
Option 4
The deal would rightfully have been awarded to the competitor but for the incident, and hence it is most
appropriate that my company should withdraw.
STEP III – Make decision and act with commitment
Both the parts of the analysis should be complied and conscious decision should be made. Once the decision
is made, it has to be followed through with commitment irrespective of the consequences.
STEP IV – Evaluate the system.
What my team did was ethically wrong. Even if the bid book was carelessly left by the competitor, my team
had no right to capitalize on the same. They should have returned it to the competitor. In any case, the
competitors would have discovered their mistake. This would put the reputation of my company at stake.
The employees of the company need to be sensitized about the ethical practices and the culture of the
company through appropriate training.

CODE OF ETHICS
Managers at all levels and in all functional areas face ethical issues. In fact, there is seldom a decision wherein
an ethical dimension is not involved. Matters of right and wrong, just and unjust, and fairness and unfair arise
frequently. In order to deal with these issues, managers need some guidelines. Organisations, formulate both
business and non-business guidelines in the form of a code of conduct or code of ethics. The need for a corporate
code of conduct has increased due to frequent corporate scandals, inside trading and misuse of funds. With
globalisation of business, more and more companies are developing a code of ethics to be observed. Moreover,
every profession has a code of conduct for its members. The Institute of Company Secretaries of India, Medical
 Lesson 15 n Ethics and Business 453

Council of India, Bar Council, All India Management Association (AIMA) and other professional bodies have
their own professional codes.
A corporate code of conduct may be defined as a document containing the core values and moral principles
which all those working in the company are expected to follow in the course of their duties as well as in their
daily activities. It reflects commitment of the company to ensure ethical behaviour on the part, of its members.
It also indicates how an employee should act in general or in specific situations. A code of conduct lays down
‘do’s’ and `don’ts’. It describes socially acceptable and responsible behaviour. Hence, a code of ethics is a
tangible guide to ethically desirable behaviour.
It is a corporate code of conduct that helps its members to promote high standards of ethics and practice.
It makes them aware of ethical dilemmas; and by adhering to these codes of conduct, business people can
observe elevated standards of conduct and personal integrity so as to win the trust and confidence of the
stakeholders.
A code of ethics should reflect top managements’ desire for compliance with the values, rules, and policies
that support an ethical climate. The development of a code of ethics should involve the President, Board of
Directors, and Chief Executive Officers who should be implementing the code. Legal staff should also ensure
that the code has assessed key areas of risk correctly, and that it provides buffers for potential legal problems.
Corporate code of ethics often contains six core values or principles in addition to more detailed descriptions
and examples of appropriate conduct. The six values that are desirable for codes of ethics include: (1)
trustworthiness, (2) respect, (3) responsibility, (4) fairness, (5) caring, and (6) citizenship.
Explanation: For this purpose, the term “Senior Management” involves the personnel of the company, who
are members of its core management team, excluding Board of Directors. Normally, this would comprise all
members of management one level below the executive directors, including all functional heads.
In the United States of America, Section 406 of the Sarbanes Oxley Act, 2002 requires public companies
to disclose whether they have codes of ethics, and also to disclose any waivers of those codes for certain
members of senior management. Section 406(a) of the Regulation requires companies to disclose:
– whether they have a written code of ethics that applies to their principal executive officer, principal
financial officer, principal accounting officer or controller, or persons performing similar functions;
– any waivers of the code of ethics for these individuals; and
– any changes to the code of ethics.
If companies do not have a code of ethics, they must explain why they have not adopted one. A company may
file its codes as an exhibit in the annual report, post the codes on the company’s website, or agree to provide a
copy of the codes upon request and without charge.
To create a code of ethics, an organization must define its most important guiding values, formulate behavioural
standards, review the existing procedures for guidance and direction and establish the systems and processes
to ensure that the code of conduct is implemented and effective. Codes of ethics are not easily created from
boilerplate. Ideally, the development of a code is a process in whereby Boards and senior management actively
debate and decide core values, roles, responsibilities, expectations, and behavioural standards
Thus, the code of ethics outlines a set of fundamental principles which could be used as the basis for operational
requirements (things one must do), operational prohibitions (things one must not do). It is based on a set of
core principles and values and is by no means designed for convenience. The employees subjected to the code
are required to understand, internalize, and apply it to situations which the code does not specifically address.
Organizations expect that the principles, once communicated and illustrated, will be applied in every case, and
that failure to do so may lead to disciplinary action.
454 EP-GRMCE

Code of conduct has now been mandated for the directors and senior officers in listed companies and Central
Public Sector Enterprises(CPSEs) and therefore, also falls under forced and regulatory ethics.

Ideal Ethical Organization

There can be various measures and initiative which may be taken by an organization. Some of them are
discussed below.
(a) Have reasonable ethical code of conduct, which can reasonably complied with;
(b) Top management should always follow ethical practices;
(c) Should not discriminate amongst its stakeholders without solid reasons;
(d) Reward employees with track record of ethical standards like integrity, honesty, loyalty etc.
(e) Handle stakeholders, mainly employees grievances properly and quickly( many a times employee
grievance leads to unethical practices)
(f) Conduct ethics workshop;
(g) Have ethics counsellors/ethics committees: for advising on employees with unethical issues or going
through ethical dilemma.
(h) Have vigil mechanism, whistle blowing policies etc.

INDIAN ETHOS
The essence of good governance and leadership lies not in the paraphernalia of systems and procedures but
on the quality of people who create, govern or operate the systems. In Indian ethos it is known as Swadharma
of each individual.
What depends the quality of the people? It is Consciousness. The essence of a human being is consciousness.
And the quality of our consciousness is not determined by the IQ of our intellect. The swindlers behind most of
the scams are high IQ guys. Who brought down Lehman Brothers and sank the world-economy into the waters
of recession? They are the super smart MBAs of top B-schools of the world.
This is the reason why an intellectual and emotional awakening of the surface nature to ethical values, though
helpful as a beginning, is not enough for a deep and lasting moral change.
Rational analysis, case studies and stories are helpful in creating a preliminary ethical awakening in our surface
nature and in our thinking mind. But this awakening does not have sufficient force to overcome a strong and
compelling temptation or the gust of nature. The lure and temptation is all the more difficult to resist when it is
sugar-coated with pleasure and immediate gratification.
Here one example from Mahabharata is very relevant. In Mahabharata Duryodhana once said, “I know what is
right, but I have no inclination for it. I also know what is not right, but I can’t resist it.” It recalls the famous verse
of Pandava Gita:
 Lesson 15 n Ethics and Business 455

Janaami dharmam na cha pravruthi,

Janamyadharmam na cha may nivruthi,
Kenapi devena hrudhi sthithena,
Yada niyuktho asmi karomi.
Pandavagita 57
I know what is right but I am not able to practice it;
I know what is wrong and I am not able to keep away from it.
I act as I am directed to by some mysterious power
that is seated in my heart.

This is the central knot of the immemorial ethical problem. According to Indian ethos the long-term solution lies
in an inner discipline or education which brings a greater light, strength, energy and discrimination to our mind
and heart and our higher aspirations and ultimately transforms our consciousness and life. There are many
such disciplines in the spiritual traditions of the world, especially in the Eastern and Indian Yoga.
However the mental, moral and psychological discipline described in these Indian spiritual traditions provides a
practical system of “value education” which can lead to a deeper and more lasting moral transformation than the
mostly intellectual and superficial approach to ethics taught in modern academic and management education.
The present ethical debate in the corporate world is focused mostly on values like honesty, integrity, fairness or
transparency. But the scope of ethics is not confined to these values only.

CODE OF CONDUCT
The Code of conduct or what is popularly known as the Code of Business Conduct contains standards of
business conduct that must guide actions of the Board of Directors and senior management of the company.
The Code of Conduct outlines specific behaviours that are required or prohibited as a condition of ongoing
employment. The code of conduct for a group or organization is an agreement on rules of behavior for the
members of that group or organization. Commonly generated by corporations themselves, corporate codes of
conduct vary extensively in design and objective. Crucially, they are not directly subject to legal enforcement.
In an era acutely aware of the dramatic social and environmental effects of corporate activity across the world,
such codes of conduct have become the focus of considerable attention.
A well-written code of conduct clarifies an organization’s mission, values and principles, linking them with
standards of professional conduct. The code articulates the values the organization wishes to foster in leaders
and employees and, in doing so, defines desired behavior. As a result, written codes of conduct or ethics can
become benchmarks against which individual and organizational performance can be measured.
Additionally, a code is a central guide and reference for employees to support day-to-day decision making. A
code encourages discussions of ethics and compliance, empowering employees to handle ethical dilemmas
they encounter in everyday work. It can also serve as a valuable reference, helping employees locate relevant
documents, services and other resources related to ethics within the organization.
456 EP-GRMCE

The code of conduct may include the following:

(a) Company Values
(b) Avoidance of conflict of interests
(c) Accurate and timely disclosure in reports and documents that the company files before Government
agencies, as well as in the company’s other communications
(d) Compliance of applicable laws, rules and regulations including Insider Trading Regulations
(e) Maintaining confidentiality of the company affairs
(f) Standards of business conduct for the company’s customers, communities, suppliers, shareholders,
competitors, employees
(g) Prohibition for the Directors and senior management from taking corporate opportunities for themselves
or their families
(h) Review of the adequacy of the Code annually by the Board
(i) No authority to waive off the Code should be given to anyone in any circumstances. The Code of
Conduct for each Company summarises its philosophy of doing business.
Although the exact details of this code are a matter of discretion, the following principles have been found to
occur in most of the companies:
– Use of company’s assets;
– Avoidance of actions involving conflict of interests;
– Avoidance of compromising on commercial relationship;
– Avoidance of unlawful agreements;
– Avoidance of offering or receiving monetary or other inducements;
– Maintaining confidentiality;
– Collection of information from legitimate sources only;
– Safety at workplace;
– Maintaining and Managing Records;
– Free and Fair competition;
– Disciplinary actions against the erring person.
Difference between a Code of ethics and Code of conduct
The terms “Code of Ethics” and “Code of Conduct” are often mistakenly used interchangeably. They are, in fact,
two unique documents. Codes of ethics, which govern decision-making, and codes of conduct, which govern
actions, represent two common ways that companies self-regulate.

Similarities:
Both a Code of Ethics and a Code of Conduct are similar as they are used in an attempt to encourage specific
forms of behaviour by employees. Ethics guidelines attempt to provide guidance about values and choices to
influence decision making. Conduct regulations assert that some specific actions are appropriate, others in
appropriate. In both cases, the organization’s desire is to obtain a narrow range of acceptable behaviors from
employees.
 Lesson 15 n Ethics and Business 457

Differences
With similarities, comes differences. Both are used in an attempt to regulate behavior in very different
ways. Ethical standards generally are wide-ranging and non-specific, designed to provide a set of values
or decision-making approaches that enable employees to make independent judgments about the most
appropriate course of action. Conduct standards generally require little judgment; you obey or incur a
penalty, and the code provides a fairly clear set of expectations about which actions are required, acceptable
or prohibited.
Violation of code of ethics may not lead to action against the employee but violation of code of conduct may
lead to disciplinary action.

MODEL CODE OF BUSINESS CONDUCT & ETHICS

Preamble
Commitment to ethical professional conduct is a MUST for every employee of the company in all of its
businesses/units/subsidiaries. This code, consisting of imperatives formulated as statements of personal
responsibility, identifies the elements of such a commitment. It contains many, but not all issues, employees
are likely to face.
The code is intended to serve as a basis for ethical decision-making in the conduct of professional work. It
may also serve as a basis for judging the merit of a formal complaint pertaining to violation of professional
ethical standards.
It is understood that some words and phrases in a code of ethics and conduct document are subject to varying
interpretations and that any ethical principle may conflict with other ethical principles in specific situations.
Questions related to ethical conflicts can best be answered by thoughtful consideration of fundamental
principles rather than reliance on detailed regulations. In case of conflict, the decision of the Board shall be
final.

Applicability
This code is applicable to the Board Members and all employees in and above Officers level (hereinafter
collectively referred to as “Employee(s)”). All employees must read and understand this code and ensure to
abide by it in their day-to-day activities.

General Moral Imperatives

Contribute to society and human well-being

This principle concerning the quality of life of all people affirms an obligation to protect fundamental human
rights and to respect the diversity of all cultures. We must attempt to ensure that the products of our efforts
will be used in socially responsible ways, will meet social needs and will avoid harmful effects to health and
welfare of others.
In addition to a safe social environment, human well-being includes a safe natural environment. Therefore, all
of us who are accountable for the design, development, manufacture and promotion of company’s products,
must be alert to, and make others aware of, any potential damage to the local or global environment.
Avoid harm to others
“Harm” means injury or negative consequences, such as loss of property, property damage or unwanted
health and environmental impacts. This principle prohibits use of men, material and technology in ways that
result in harm to our consumers, employees and the general public.
458 EP-GRMCE

Well-intended actions, including those that accomplish assigned duties, may lead to harm unexpectedly. In
such an event, the responsible person or persons are obligated to undo or mitigate the negative consequences
as much as possible.
Be honest and trustworthy
Honesty is an essential component of trust. Without trust an organisation cannot function effectively. All of
us are expected not to make deliberately false or deceptive claims about our products/systems, but instead
provide full disclosure of all pertinent limitations and problems.
Be fair and take action not to discriminate
The values of equality, tolerance, respect for others, and the principles of equal justice govern this imperative.
Discrimination on the basis of race, sex, religion, age, disability, national origin, or other such factors is an
explicit violation of this code.
Practice integrity in our inter-personal relationships
In our relationships with colleagues, we should treat them with respect and in good faith. We ourselves would
expect them to treat us in the same way. The principle to be adopted to guard against loose talk or in its worst
form, character assassination, is not to say anything behind one’s back and never utter something, which
cannot be put in writing.
Honor confidentiality
The principle of honesty extends to issues of confidentiality of information. The ethical concern is to respect
all obligations of confidentiality to all stakeholders unless discharged from such obligations by requirements
of the law or other principles of this code.
We, therefore, will maintain the confidentiality of all material non-public information about company’s
business and affairs.

Specific Professional Responsibilities

Live the Company’s Values each day.
We must live the Company’s Values each day. For quick reference our core values are:
Ownership
This is our company. We accept personal responsibility and accountability to meet business needs. Passion
for winning
We all are leaders in our area of responsibility with a deep commitment to deliver results. We are determined
to be the best at doing what matters most.
People development
People are our most important asset. We add value through result driven training and we encourage and
reward excellence.
Consumer focus
We have superior understanding of consumer needs and develop products to fulfill them better.
Teamwork
We work together on the principle of mutual trust and transparency in a boundary less organisation. We are
intellectually honest in advocating proposals, including recognizing risks.
 Lesson 15 n Ethics and Business 459

Innovation
Continuous innovation in products and process is the basis of our success.
Integrity
We are committed to the achievement of business success with integrity. We are honest with consumers,
business partners and one another.
Strive to achieve the highest quality, effectiveness and dignity in both the processes and products
of professional work
Excellence is perhaps the most important obligation of a professional. We must strive to achieve the highest
quality, effectiveness and dignity in all that we are responsible for each day.
Acquire and maintain professional competence
Excellence depends on individuals who take responsibility for acquiring and maintaining professional
competence. We must participate in setting standards for appropriate levels of competence, and strive to
achieve those standards.
Know and respect existing laws
We must obey existing local, state, national, and international laws unless there is a compelling ethical
basis not to do so. We should also obey the policies, procedures, rules and regulations of the company.
Violation of a law or regulation may be ethical when that law or rule has inadequate moral basis or when it
conflicts with another law judged to be more important. If one decides to violate a law or rule because it is
viewed as unethical, or for any other reason, one must fully accept responsibility for one’s actions and for
the consequences.
Accept and provide appropriate professional review
Quality professional work depends on professional reviewing and critiquing. Whenever appropriate, individual
members should seek and utilize peer review as well as provide critical review of their work.
Manage personnel and resources to enhance the equality of working life
Organisational leaders are responsible for ensuring that a conducive environment is created for fellow
employees to enable to deliver their best. We all, therefore, are responsible for ensuring human dignity of all
our colleagues, ensuring their personal and professional development and enhancing the quality of working
life.
Deal with the Media tactfully
We should guard against being misquoted and finding ourselves compromised. Our role as individuals is
always to be tactful, to avoid comments, and to pass enquiries to those who are authorized to respond to
them.
Be upright and avoid any inducements
Neither directly nor through family and other connections indirectly, should we solicit any personal
fee, commission or other form of remuneration arising out of transactions involving the Company. This
includes gifts or other benefits of significant value, which might be extended at times, to influence
business-especially during bulk purchase of commodities for the organisation or awarding a contract
to an agency, etc. We are likely to be offered various gifts by vendors/parties/agencies and people
associated with the Company under different wraps or generally on personal celebrations or functions
or religious festivals, etc.
460 EP-GRMCE

Observe Corporate Discipline

Our flow of communication is not rigid and people are free to express themselves at all levels. However,
this informality should not be misunderstood. What it means is that though there is a free exchange of
opinions in the process of arriving at a decision, after the debate is over and a policy consensus has
been established, all are expected to adhere to and abide by it, even when in certain instances we may
not agree with it individually. In some cases policies act as a guide to action, in others they are designed
to put a constraint on action. We all must learn to recognise the difference and appreciate why we need
to observe them.
Conduct ourselves in a manner that reflects credit to the Company
All of us are expected to conduct ourselves, both on and off-duty, in a manner that reflects credit to the
company. The sum total of our personal attitude and behaviour has a bearing on the standing of the Company
and the way in which it is perceived within the organisation and by the public at large.
Be accountable to our stake-holders
All of those whom we serve be it our customers, without whom we will not be in business, our shareholders,
who have an important stake in our business and the employees, who have a vested interest in making
it all happen-are our stakeholders. And we must keep in mind at all times that we are accountable to our
stakeholders.
“Inside information” gained from the Company or otherwise must not be used for personal gains. We
undertake to comply with the Company’s Code of Conduct for Prevention of Insider Trading.
Identify, mitigate and manage business risks
It is our responsibility to follow our institutionalized Company’s Risk Management Framework to identify
the business risks that surround our function or area of operation and to assist in the company-wide
process of managing such risks, so that the Company may achieve its wider business objectives. All of
us should continuously ask ourselves “What can go wrong and what am I doing to prevent it from going
wrong.”
Protect The Company’s properties
We all are perceived as Trustees of Company’s properties, funds and other assets. We owe fiduciary duty
to each stakeholder, as their agent, for protecting the Company’s assets. We, therefore, must safeguard
and protect the Company’s assets against any misappropriation, loss, damage, theft, etc. by putting in place
proper internal control systems and procedures and effectively insuring the same against any probable fire,
burglary, fidelity and any other risk.

Specific Additional Provisions for Board Members and Management Committee Members
As Board/Management Committee Members
We undertake to actively participate in meetings of the Board, or the Committees thereof and the meetings
of Management Committee on which we serve.
As Board members
1. We undertake to inform the Chairman of the Board of any changes in our other board positions,
relationship with other business and other events/ circumstances/conditions that may interfere with
our ability to perform Board/Board Committee duties or may impact the judgment of the Board as to
whether we meet the independence requirements of Listing Agreement with Stock Exchanges.
 Lesson 15 n Ethics and Business 461

2. We undertake that without prior approval of the disinterested members of the Board, we will avoid
apparent conflict of interest. Conflict of interest may exist when we have personal interest that may
have a potential conflict with the interest of the company at large. Illustrative cases can be:
–
Related Party Transactions: Entering into any transactions or relationship with the Company
or its subsidiaries in which we have a financial or other personal interest (either directly or
indirectly such as through a family member or other person or other organisation with which
we are associated).
–
Outside Directorship: Accepting Directorship on the Board of any other Company that compete
with the business of Company.
–
Consultancy/Business/Employment : Engaging in any activity (be it in the nature of providing
consultancy service, carrying on business, accepting employment) which is likely to interfere
or conflict with our duties/responsibilities towards the Company. We should not invest or
associate ourselves in any other manner with any supplier, service provider or customer of the
Company.
–
Use of Official position for our personal gains : We should not use our official position for our
personal gains.

Compliance with the Code

As employees of the Company, we will uphold and promote the principles of this code
The future of the organisation depends on both technical and ethical excellence. Not only is it important
for employees to adhere to the principles expressed in this Code, each employee should encourage and
support adherence to the code by other employees.
Treat violations of this code as inconsistent association with the organisation
Adherence of professionals to a code of ethics is largely a voluntary matter. However, if any of us do
not follow this code by engaging in process misconduct, the matter would be reviewed by the Board and
its decision shall be final. The Company reserves the right to take appropriate action against the guilty
employee.

Miscellaneous
Continual updation of code
This code is subject to continuous review and updation in line with any changes in law, changes in company’s
philosophy, vision, business plans or otherwise as may be deemed necessary by the board.

ADVANTAGES OF BUSINESS ETHICS

More and more companies have begun to recognize the relation between business ethics and financial
performance. Companies displaying a “clear commitment to ethical conduct” consistently outperform those
companies that do not display an ethical conduct.
A company that adheres to ethical values and dedicatedly takes care of its employees is rewarded with equally
loyal and dedicated employees.

1. Attracting and retaining talent

People aspire to join organizations that have high ethical values. Such companies are able to attract the best
talent. The ethical climate matters a lot to the employees. Ethical organizations create an environment that
462 EP-GRMCE

is trustworthy, making employees willing to rely on company’s policies, ability to take decisions and act on
those decisions. In such a work environment, employees can expect to be treated with respect, and will have
consideration for their colleagues and superiors as well. Thus, company’s policies cultivate teamwork, promote
productivity and support employee-growth.
Retaining talented people is as big a challenge for the company as getting them in the first place. Work is a
mean to an end for the employees and not an end in itself. The relationship with their employer must be a win-
win situation in which their loyalty should not be taken for granted. Talented people will invest their energy and
talent only in organizations with values and beliefs that matches their own. In order to achieve this equation,
managers need to build culture, compensation and benefit packages, and career paths that reflect and foster
certain shared values and beliefs.

2. Investor Loyalty
Investors are concerned about ethics, social responsibility and reputation of the company in which they invest.
Investors are becoming more and more aware that an ethical climate provides a foundation for efficiency,
productivity and profits. Relationship with any stakeholder, including investors, based on dependability, trust
and commitment results in sustained loyalty.

3. Customer satisfaction
Customer satisfaction is a vital factor of a successful business strategy. Repeated purchases/orders and an
enduring relationship with mutual respect is essential for the success of the company. The name of a company
should evoke trust and respect among customers for enduring success. This is achieved by a company only
when it adopts ethical practices. When a company with a belief in high ethical values is perceived as such,
the crisis or mishaps along the way is tolerated by the customers as minor aberrations. Such companies are
also guided by their ethics to survive a critical situation. Preferred values are identified and it is ensured that
organizational behavior is aligned to those values. An organization with a strong ethical environment places its
customers’ interests as foremost. Ethical conduct towards customers builds a strong competitive position for the
company. It promotes a strong public image too.

4. Regulators
Regulators eye companies functioning ethically as responsible citizens. The regulator need not always monitor
the functioning of the ethically sound company. Any organisation that acts within the confines of business ethics
not only earns profit but also gains reputation publicly.
To summarise, companies that are responsive to employees’ needs have lower turnover in staff.
– Shareholders invest their money into a company and expect a certain level of return from that money
in the form of dividends and/or capital growth.
– Customers pay for goods, give their loyalty and enhance a company’s reputation in return for goods or
services that meet their needs.
– Employees provide their time, skills and energy in return for salary, bonus, career progression and
experience.

CONCLUSION
In making ethics work in an organization it is important that there is synergy in vision statement, mission
statement, core values, general business principles and the code of ethics. A commitment by corporate
management to follow an ethical code of conduct confers a variety of benefits. An effective ethics programme
requires continual reinforcement of strong values. Organisations are challenged with the task to make their
employees live and imbibe their ethical codes and values. To ensure a right ethical climate, a right combination
of spirit and structure is required.
 Lesson 15 n Ethics and Business 463

Corporate Ethics is much needed to stress the importance of sustainability, social development, stakeholders and
consumers satisfaction. It is an orientation to provide a valuable service instead of displaying more orientation
for profits. Ethics, point out what is good and what is bad and also what is right or wrong. It brings to the notice of
the business community the importance of honesty, sincerity and fairness which makes them alert and socially
conscious. It reconciles conflicting interest of various sections of the society such as workers, shareholders,
consumers, distributors, suppliers, competitors and government and thus, expedite a better relation between
business and the society.

GLOSSARY OF TECHNICAL WORDS

– Business Ethics: Business ethics (also known as corporate ethics) is a form of applied ethics or
professional ethics, that examines ethical principles and moral or ethical problems that can arise in a
business environment.
– Indian Ethos: Indian Ethos in Management refers to the values and practices that can contribute to
service, leadership and management. These values and practices are rooted in Sanathana Dharma
(the eternal essence), and have been influenced by various strands of Indian philosophy.
– CSR: Corporate Social Responsibility is a management concept whereby companies integrate social
and environmental concerns in their business operations and interactions with their stakeholders.
– Ethical Dilemma: An ethical dilemma or ethical paradox is a decision-making problem between two
possible moral imperatives, neither of which is unambiguously acceptable or preferable. The
complexity arises out of the situational conflict in which obeying one would result in transgressing
another.
– Code of Conduct: A code of conduct is a set of rules outlining the social norms, religious rules and
responsibilities of, and or proper practices for, an individual.

LESSON ROUND-UP
– Business ethics is a form of applied ethics. In broad sense ethics in business is simply the application
of moral or ethical norms to business.
– The Board shall lay down a code of conduct for all Board members and senior management of the
company. The code of conduct shall be posted on the website of the company.
– To create a code of ethics, an organization must define its most important guiding values, formulate
behavioral standards to illustrate the application of those values to the roles and responsibilities of the
persons affected, review the existing procedures for guidance and direction as to how those values
and standards are typically applied, and establish the systems and processes to ensure that the code
is implemented and is effective.
– An ethical dilemma involves a situation that makes a person question what is the ‘right’ or ‘wrong’ thing
to do. Ethical dilemmas make individuals think about their obligations, duties and responsibilities. These
dilemmas can be highly complex and difficult to resolve. Easier dilemmas involve a ‘right’ versus ‘wrong’
choice; whereas, complex ethical dilemmas involve a decision between a right and a right choice.
– Advantages of business ethics - attracting and retaining talent, investor loyalty, customer satisfaction
and regulators.
– In making ethics work in an organization it is important that there is synergy between vision statement,
mission statement, core values, general business principles and code of ethics.
464 EP-GRMCE

TEST YOURSELF
(These are meant for recapitulation only. Answers to these questions are not to be submitted for evaluation)
1. Can you discuss about the influence of organization climate and organizational structure on the ethics
programme of a company?
2. Do you know Ethical Dilemma. Briefly describe.
3. Is there any advantages of Business Ethics for an organization? Explain some of the advantages.
4. Can you explain Code of Conduct for a company?
5. Is there any difference between a Code of ethics and a Code of Conduct? Explain.
 Lesson 16
CSR and Sustainability

LESSON OUTLINE
LEARNING OBJECTIVES
– Introduction
The objective of this study lesson is to enable the
– Regulatory Framework students to understand the concept, applicability
– Corporate Social Responsibility (CSR) and reporting in respect to Corporate Social
Responsibility and Sustainability.
– Why CSR at All?
The basic premise is that when the corporations
– Factors Influencing CSR
get bigger in size, apart from the economic
– Triple Bottom Line Approach of CSR responsibility of earning profits, there are many
other responsibilities attached to them which
– Corporate Citizenship – Beyond the
are more of non-financial/social in nature. These
Mandate of Law
are the expectations of the society from these
– Global Principles and Guidelines corporate to give something in return to the society
– Corporate Sustainability with whose explicit or implicit help these entities
stand where they are, discussed in this lesson.
– United Nations Global Compact’s Ten
Principles, 2000 This lesson provides working knowledge on the
concepts of sustainability and corporate social
– CSR and Sustainability in India responsibility. This chapter may be useful in
– National Guidelines on Responsible forming the advisory role in practical areas of work.
Business Conduct (NGRBC) - 2019
– Sustainable Development
– The 2030 Agenda for Sustainable
Development
– Sustainable Development Goals
– Sustainability Indices
– Measuring Business Sustainability
– Glossary
– LESSON ROUND-UP
– TEST YOURSELF

“When you are in doubt…. recall the face of the poorest and the weakest man whom you may have seen
and ask yourself if the step you contemplate is going to be of any use to him? Will he gain anything by
it? Will it restore him to control over his own life and destiny? That test alone can make our plans and
programs meaningful.”
– Mahatma Gandhi
466 EP-GRMCE

INTRODUCTION
The 21st century is characterized by unprecedented challenges and opportunities, arising from globalization,
the desire for inclusive development and the imperatives of climate change. Indian business, which is today
viewed globally as a responsible component of the ascendancy of India, is poised now to take on a leadership
role in the challenges of our times. It is recognized the world over that integrating social, environmental and
ethical responsibilities into the governance of businesses ensures their long term success, competitiveness
and sustainability. This approach also reaffirms the view that businesses are an integral part of society, and
have a critical and active role to play in the sustenance and improvement of healthy ecosystems, in fostering
social inclusiveness and equity, and in upholding the essentials of ethical practices and good governance. This
also makes business sense as companies with effective CSR, have image of socially responsible companies,
achieve sustainable growth in their operations in the long run and their products and services are preferred by
the customers.
Corporate Social Responsibility (CSR) is a concept whereby companies not only consider their profitability
and growth, but also the interests of society and the environment by taking responsibility for the impact of
their activities on stakeholders, environment, consumers, employees, communities, and all other members
of the public sphere. The basic premise is that when the corporations get bigger in size, apart from the
economic responsibility of earning profits, there are many other responsibilities attached to them which are
more of non-financial/social in nature. These are the expectations of the society from these corporate to
give something in return to the society with whose explicit or implicit help these entities stand where they
are.
The vedic philosophy of “Sarva loka hitam” i.e. ‘‘the well-being of all stakeholders”, has regained importance
in the current business environment. The concept has evolved over the years and now used as strategy and a
business opportunity to earn stakeholder goodwill.
The old principle of concern , care and share applies to present day corporate where the corporates need to be
concerned for the society, particularly the less privileged class, care about their well being and development and
in order to do that shall share the part of wealth they have or they earn, However, spending money itself does
qualify that a company is socially concerned.
Although scholars and practitioners often interpret Corporate Sustainability and Corporate Social Responsibility
as being nearly synonymous, pointing to similarities and the common domain. The two concepts have different
backgrounds and different theoretical paths. According to management science, the notion of Corporate
Sustainability can be defined first as the capacity of a firm to create value through the product and services
it produces, and to continue operating over the years. Sustainability, in this context, entails the creation of a
sustainable competitive advantage.
Corporate Sustainability can be considered as an attempt to adapt the concept of Sustainable Development to the
corporate setting, matching the goal of value creation with environmental and social considerations. According
to the Dow Jones Sustainability Index, ‘Corporate Sustainability is a business approach that creates long-term
shareholder value by embracing opportunities and managing risks deriving from economic, environmental and
social developments’.
The Journal of Environmental Strategy defines corporate sustainability as ‘the capacity of an enterprise to maintain
economic prosperity in the context of environmental responsibility and social stewardship. Accountability, the
capability of an organization to continue its activities, indefinitely, has taken due account of its impact on natural,
social and human capitals.
Corporate Sustainability includes an attempt to assimilate the environmental and social dimensions into business
operations: processes, products and procedures. In practical terms, the Corporate Sustainability approach
leads to a very concrete and pragmatic problem; how to measure performance based on the three dimensions
 Lesson 16 n CSR and Sustainability 467

outlined and how natural and social values can be incorporated into corporate accounting.
The evolutionary part of the concept of Corporate Social Responsibility is different from that of the Corporate
Sustainability. The first recognized contribution in the literature dates back to Bowen, who stressed the
responsibilities of businesses, and wrote that social responsibility refers to the obligations of the businessmen
to pursue those policies, to make those decisions, or to follow those lines of action which are desirable in terms
of the objectives and values of our society.
Besides economic and legal responsibilities (that is, to be able to make profits as well as obey the law),
companies are expected to satisfy other requirements, relevant to the conformity to social norms and voluntary
contributions to the community in which they operate. Another important Corporate Social Responsibility
approach was developed during the 1980s in the light of the growth of the stakeholder approach. According to
it, firms have obligations to a larger group of stakeholders than the simple shareholders, where a stakeholder
is a group or an individual who can affect or is affected by the achievement of the firm’s objectives. Business
can be understood as a set of relationships among groups which have a stake in the activities that make up the
business.
Although Corporate Sustainability and Corporate Social Responsibility have different roots and have developed
along diverse theoretical paths, they have ultimately converged. This strong convergence is evident in some
recent definitions of the Corporate Social Responsibility provided by international organizations, like the Prince
of Wales International Business Leaders Forum : Corporate Social Responsibility means open and transparent
business practices that are based on ethical values and have respect for their employees, communities and
environment. It is designed to deliver sustainable value to society at large, as well as to the shareholders.
The concept of sustainable development has been transposed from the macro to the corporate dimensions.
Companies, in fact, are a productive resource of our socio-economic system, and key to the eventual
implementation of sustainability. According to the management theory, the attempt to include sustainability
issues in the managerial framework can be divided into two separate issues: Corporate Sustainability and
Corporate Social Responsibility. The actualization of the theoretical pillars of Sustainability Development within
Corporate Sustainability/Corporate Social Responsibility seems crucial to effectively respond to the challenges
posed by sustainability.

CORPORATE SOCIAL RESPONSIBILITY (CSR)

CSR is understood to be the way firms integrate social, environmental and economic concerns into their
values, culture, decision making, strategy and operations in a transparent and accountable manner and thereby
establish better practices within the firm, create wealth and improve society. CSR is also called Corporate
Citizenship or Corporate Responsibility of business.
The 1950s saw the start of the modern era of CSR when it was more commonly known as Social Responsibility.
In 1953, Howard Bowen published his book, “Social Responsibilities of the Businessman”, and is largely
credited with coining the phrase ‘corporate social responsibility’ and is perhaps the Father of modern CSR.
Bowen asked: “what responsibilities to society can business people be reasonably expected to assume?”
Bowen also provided a preliminary definition of CSR: “its refers to the obligations of businessmen to pursue
those policies, to make those decisions, or to follow those lines of action which are desirable in terms of the
objectives and values of our society“.
According to Business for Social Responsibility (BSR) “Corporate social responsibility is operating a business
in a manner which meets or excels the ethical, legal, commercial and public expectations that a society has
from the business.”
At some point of discussion, it appears that CSR is the major element of Corporatize Governance, though
governance issues are much more towards managerial effectiveness which may not directly address social
issues.
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Business entity is expected to undertake those activities, which are essential for betterment of the society.
Every aspect of business has a social dimension. Corporate Social Responsibility means open and transparent
business practices that are based on ethical values and respect for employees, communities and the
environment. It is designed to deliver sustainable value to society at large as well as to shareholders.
Corporate Social Responsibility is nothing but what an organisation does, to positively influence the society
in which it exists. It could take the form of community relationship, volunteer assistance programmes, special
scholarships, preservation of cultural heritage and beautification of cities. The philosophy is basically to return
to the society what it has taken from it, in the course of its quest for creation of wealth.
With the understanding that businesses play a key role of job and wealth creation in society, CSR is generally
understood to be the way a company achieves a balance or integration of economic, environmental, and social
imperatives while at the same time addressing shareholder and stakeholder expectations.
According to CSR Asia, a social enterprise, “CSR is a company’s commitment to operate in an economically,
socially and environmentally sustainable manner whilst balancing the interests of diverse stakeholders”
CSR is generally accepted as applying to firms wherever they operate in the domestic and global economy.
The way businesses engage/involve the shareholders, employees, customers, suppliers, Governments, non-
Governmental organizations, international organizations, and other stakeholders is usually a key feature of the
concept. While an organisation’s compliance with laws and regulations on social, environmental and economic
objectives set the official level of CSR performance, it is often understood as involving the private sector
commitments and activities that extend beyond this foundation of compliance with laws.

The term Corporate Social According to the Commission of the European Communities, 2003, “CSR
responsibility refers to the is the concept that an enterprise is accountable for its impact on all relevant
concept of business being stakeholders. It is the continuing commitment by business to behave fairly and
accountable for how it responsibly and contribute to economic development while improving the quality
manages the impact of its of life of the work force and their families as well as of the local community and
processes on stakeholders society at large.”
and takes responsibility for
According to the World Business Council for Sustainable Development, 1999
producing a positive effect
“Corporate Social Responsibility is the continuing commitment by business to
on society.
behave ethically and contribute to the economic development while improving
the quality of life of the workforce and their families as well as of the local
community and the society at large.”

CSR is a concept whereby companies integrate social and environmental concerns in their business operations
and in their interaction with their stakeholders on a voluntary basis. The main function of an enterprise is to
create value through producing goods and services that society demands, thereby generating profit for its
owners and shareholders as well as welfare for society, particularly through an ongoing process of job creation.
However, new social and market pressures are gradually leading to a change in the values and in the horizon
of business activity.
Philip Kotler said” we sell products in the society, not in the market”. It means that it is the society which creates
demand. Individual values percolate into social values and social values percolate into corporate values.
Therefore, companies cannot sustain in the long run ignoring social values.
Essentially, Corporate Social Responsibility is an inter-disciplinary subject in nature and encompasses in its
fold:
1. Social, economic, ethical and moral responsibility of companies and managers,
2. Compliance with legal and voluntary requirements for business and professional practice,
 Lesson 16 n CSR and Sustainability 469

3. Challenges posed by needs of the economy and socially disadvantaged groups,

4. Management of corporate responsibility activities, and
5. Proper implementation of the projects taken up by the company so that the benefit goes to people in
need.
CSR is an important business strategy because, wherever possible, consumers want to buy products from
companies they trust; suppliers want to form business partnerships with companies they can rely on; employees
want to work for companies they respect; and NGOs, increasingly, want to work together with companies
seeking feasible solutions and innovations in areas of common concern. CSR is a tool in the hands of corporates
to enhance the market penetration of their products, enhance its relation with stakeholders. CSR activities
carried out by the enterprises affects all the stakeholders, thus making good business sense, the reason being
contribution to the bottom line.

WHY CSR AT ALL?

There is one school of thought which feels that purpose of business is to do business. Social issues, more so ,
the social welfare issues are the concern of the ruler or Govt. Traditionally, the ruler/ Govt. would collect taxes,
in whatever name and form, and the money will be spent on social development. Corporates pay taxes on
their profits. The individuals pay taxes on purchase of articles for their consumption. Therefore, why again the
corporates are expected to do social activities. Notwithstanding that the above idea do not have any ground at
all, it is now accepted by the Govt. and by the corporates themselves that yes, corporates have a supporting
role in social development.
Business cannot exist in isolation; business cannot be oblivious to societal development. The social responsibility
of business can be integrated into the business purpose so as to build a positive synergy between the two.
1. CSR creates a favourable public image, which attracts customers. Reputation or brand equity of the
products of a company which understands and demonstrates its social responsibilities is very high.
Customers trust the products of such a company and are willing to pay a premium on its products.
Organizations that perform well with regard to CSR can build reputation, while those that perform poorly
can damage brand and company value when exposed. Brand equity, is founded on values such as
trust, credibility, reliability, quality and consistency.
2. Corporate Social Responsibility (CSR) activities have its advantages. It builds up a positive image
encouraging social involvement of employees, which in turn develops a sense of loyalty towards
the organization, helping in creating a dedicated workforce proud of its company. Employees like to
contribute to the cause of creating a better society. Employees become champions of a company for
which they are proud to work.
3. Society gains through better neighborhoods and employment opportunities, while the organisation
benefits from a better community, which is the main source of its workforce and the consumer of its
products.
4. Public needs have changed leading to changed expectations from consumers. The industry/ business
owes its very existence society and has to respond to needs of the society.
5. The company’s social involvement discourages excessive regulation or intervention from the
Government or statutory bodies, and hence gives greater freedom and flexibility in decision-making.
6. The internal activities of the organisation have an impact on the external environment, since the society
is an inter-dependent system.
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7. A business organisation has a great deal of power and money, entrusted upon it by the society and
should be accompanied by an equal amount of responsibility. In other words, there should be a balance
between the authority and responsibility.
8. The good public image secured by one organisation by their social responsiveness encourages other
organizations in the neighborhood or in the professional group to adapt themselves to achieve their
social responsiveness.
9. The atmosphere of social responsiveness encourages co-operative attitude between groups of
companies. One company can advise or solve social problems that other organizations could not solve.
10. Companies can better address the grievances of its employees and create employment opportunities
for the unemployed.
11. A company with its “ear to the ground” through regular stakeholder dialogue is in a better position to
anticipate and respond to regulatory, economic, social and environmental changes that may occur.
12. Financial institutions are increasingly incorporating social and environmental criteria into their
assessment of projects. When making decisions about where to place their money, investors are
looking for indicators of effective CSR management.
13. In a number of jurisdictions, governments have expedited approval processes for firms that have
undertaken social and environmental activities beyond those required by regulation.

FACTORS INFLUENCING CSR

Many factors and influences, including the following, have led to increasing attention being devoted to CSR:
→ Globalization – coupled with focus on cross-border trade, multinational enterprises and global supply
chains – is increasingly raising CSR concerns related to human resource management practices,
environmental protection, and health and safety, among other things.
→ Governments and intergovernmental bodies, such as the United Nations, the Organisation for Economic
Co-operation and Development and the International Labour Organization have developed compacts,
declarations, guidelines, principles and other instruments that outline social norms for acceptable conduct.
→ Advances in communications technology, such as the Internet, cellular phones and personal digital
assistants, are making it easier to track corporate activities and disseminate information about them.
Non-governmental organizations now regularly draw attention through their websites to business
practices they view as problematic.
→ Consumers and investors are showing increasing interest in supporting responsible business practices
and are demanding more information on how companies are addressing risks and opportunities related
to social and environmental issues.
→ Numerous serious and high-profile breaches of corporate ethics have contributed to elevated public
mistrust of corporations and highlighted the need for improved corporate governance, transparency,
accountability and ethical standards. However,being ethical and being socially responsible in making
positive measurable contribution to society may not be same.
→ Citizens in many countries are making it clear that corporations should meet standards of social and
environmental care, no matter where they operate.
→ There is increasing awareness of the limits of government legislative and regulatory initiatives to
effectively capture all the issues that corporate social responsibility addresses.
→ Businesses are recognizing that adopting an effective approach to CSR can reduce risk of business
disruptions, open up new opportunities, and enhance brand and company reputation.
 Lesson 16 n CSR and Sustainability 471

→ Ethical persons shall be attracted to join the company.

→ Effective CSR will depend on the mindset of executives of the corporate who are taking up CSR
initiatives.
→ CSR also depends on the implementing agencies with regard to their seriousness, integrity, honesty
and attitude.

TRIPLE BOTTOM LINE APPROACH OF CSR

Within the broader concept of corporate social responsibility, the concept of Triple Bottom Line (TBL) is gaining
significance and becoming popular amongst corporates. Coined in 1997 by John Ellington, noted management
consultant, the concept of TBL is based on the premise that business entities have more to do than make just
profits for the owners of the capital, only bottom line people understand. “People, Planet and Profit” is used to
succinctly describe the triple bottom lines. “People” (Human Capital) pertains to fair and beneficial business
practices toward labor and the community and region in which a corporation conducts its business. “Planet”
(Natural Capital) refers to sustainable environmental practices. It is the lasting economic impact the organization
has on its economic environment A TBL company endeavors to benefit the natural order as much as possible or
at the least do no harm and curtails environmental impact. “Profit” is the bottom line shared by all commerce.

The people issues faced by the organisation includes –

♦ Health
♦ Safety
♦ Diversity
♦ Ethnicity
♦ Education and literacy
♦ Prevention of child labour
♦ Differently-abled
The planet concerns include
♦ Climate change
♦ Energy
♦ Water
♦ Biodiversity and land use
♦ Chemicals, toxics and heavy metals
♦ Air pollution
472 EP-GRMCE

♦ Waste management
♦ Ozone layer depletion
♦ Ocean and fisheries
♦ Afforestation
The Profit includes
♦ Creating Employment
♦ Generating Innovation
♦ Paying Taxes
♦ Wealth Creation
The need to apply the concept of TBL is caused due to –
(a) Increased consumer sensitivity to corporate social behaviour
(b) Growing demands for transparency from shareholders/stakeholders
(c) Increased environmental regulation
(d) Legal costs of compliances and defaults
(e) Concerns over global warming
(f) Increased social awareness
(g) Awareness about and willingness for respecting human rights
(h) Media’s attention to social issues
(i) Growing corporate participation in social upliftment
While profitability is a pure economic bottom line, social and environmental bottom lines are semi or non-
economic in nature so far as revenue generation is concerned but it has certainly a positive impact on long term
value that an enterprise commands.
But discharge of social responsibilities by corporates is a subjective matter as it cannot be measured with
reasonable accuracy.
The current generation people are well aware of what goes on around them. People today know a lot about
environment, how it affects them, how things we do affects the environment in turn. For the aware and
conscientious consumers today, it is important that they buy products that do not harm the environment. They
only like to deal with companies that believe and do things for the greater good of planet earth.
Therefore, TBL leads to three important principles.
1. company cannot sustain only by making profit and ignoring society or environment;
2. company cannot run only for the benefit of people and forget the commercial function of making profit;
3. company cannot run only to protect the environment and forget people and profit

CORPORATE CITIZENSHIP – BEYOND THE MANDATE OF LAW

Corporate citizenship is a commitment to improve community well-being through voluntary business practices
and contribution of corporate resources leading to sustainable growth. Corporate responsibility is achieved
when a business adapts CSR well aligned to its business goals and meets or exceeds, the ethical, legal,
commercial and public expectations that society has of business.
 Lesson 16 n CSR and Sustainability 473

The term corporate citizenship implies the behaviour, which would maximize a company’s positive impact and
minimize the negative impact on its social and physical environment. It means moving from supply driven to
more demand led strategies; keeping in mind the welfare of all stakeholders; more participatory approaches to
working with communities; balancing the economic cost and `benefits with the social; and finally dealing with
processes rather than structures. The ultimate goal is to establish dynamic relationship between the community,
business and philanthropic activities so as to complement and supplement each other.
Corporate citizenship is being adopted by more companies who have come to understand the importance of
the ethical treatment of stakeholders. As a good corporate citizen, the companies are required to focus on the
following key aspects:
1. Absolute Value Creation for the Society: Organisations should set their goal towards the creation of
absolute value for the society. Once it is ensured, a corporate never looks back and its sustainability in
the long run is built up.
2. Ethical Corporate Practices: In the short run, enterprise can gain through non-ethical practices.
However those cannot be sustained in the long run. Society denies accepting such products or services.
For example, in Drug and Pharmaceutical industry many products are today obsolete due their side
effects which such companies never disclosed to protect their sales volume. Only when they were
banned by the WHO or other authorities, they had to stop their production.
3. Worth of the Earth through Environmental Protection: Resources which are not ubiquitous and
have economic and social value should be preserved for a long- term use and be priced properly after
considering environmental and social costs. For example, a power plant should build up its cost model
efficiently after taking into account cost of its future raw material sourcing, R&D cost for alternate energy
source, cost for proper pollution control measures and so on.
4. Equitable Business Practices: Corporates should not indulge themselves in unfair means and should
create candid business practices, ensuring healthy competition and fair trade practices.
5. Corporate Social Responsibility: As a Corporate citizen, every corporate is duty bound to its society
wherein it operates and serves. Although there are no hard and fast rules, CSR activities need to be
clubbed and integrated into the business model of the company.
6. Innovate new technology/process/system to achieve eco-efficiency: Innovation is the key to
success. Risks and crisis can be eliminated through innovation. Learning and innovative enterprise
gets a cutting edge over others. These innovative processes bring sustainability if developments are
aimed at satisfying human needs, and ensure quality of life, while progressively reducing ecological
impact and resource intensity to a level at least in line with earth’s estimated carrying capacity.
7. Creating Market for All: Monopoly, unjustified subsidies, prices not reflecting real economic, social
environmental cost, etc. are hindrances to the sustainability of a business. Simultaneously, a corporate
has to build up its products and services in such a way so as to cater to all segments of customers/
consumers. Customer confidence is the essence of corporate success.
8. Switching over from the Stakeholders Dialogue to holistic Partnership: A business enterprise can
advance its activities very positively if it makes all the stakeholders partner in its progress. It not only
builds confidence of its stakeholders, but also helps the management to steer the business under a
very dynamic and flexible system. This approach offers business, government and other stakeholders
of the society to build up an alliance to bring about common solutions to the common concerns faced
by all.
9. Compliance of Statutes: Compliance of statutes, rules and regulations and standards set by various
bodies ensure clinical check up of a corporate and confers societal license upon it to the corporate to
run and operate its business in the society.
474 EP-GRMCE

Many companies have prepared and hosted the same in their website a document called “ citizenship charter”,
where the above issues are included along with other issues. Making and hosting a citizenship charter is
mandatory for CPSUs.
Some of the above issue deal with good governance practices which are beyond normal business ethics. A
company may be ethical but may be practicing all good governance practices. Therefore good governance
practices are beyond ethics or extended business ethics.

TATA STEEL – A COMPANY THAT ALSO MAKES STEEL

Tata Steel’s Vision strikes a balance between economic value as well as ecological and societal value by
aspiring to be “a Global Benchmark in Value Creation and Corporate Citizenship”. In the initial years, Tata
Steel’s CSR interventions were more as a ‘provider’ to society where the community was given support for its
overall needs, both for sustenance and development. Gradually, the shift in approach led to Tata Steel being
an ‘enabler’ focusing on building community capacity through training programmes; focusing on providing
technical support rather than giving aid. At present, CSR interventions of Tata Steel focus on ‘sustainable
development’ to enhance the quality of life of people. It guides the Company in its race to excel in all areas of
sustainability. J R D Tata the Chairman of the Tata Group believed that, “to create good working conditions,
to pay the best wages to its employees and provide decent housing to its employees are not enough for the
industry, the aim of an industry should be to discharge its overall social responsibilities to the community and
the society at large, where industry is located.”
Guided by this mandate, Tata Steel has for decades uses its skills and resources, to the extent it can
reasonably afford, to give back to the community a fair share of the product of its efforts.
It was the first to establish labour welfare practices, even before these were made statutory laws across
the world. The Company also instituted an eight-hour workday in 1912, free medical aid in 1915, a Welfare
Department in 1917, leave with pay, Workers Provident Fund and Workmen’s Compensation in 1920 and
Maternity Benefit for ladies in 1928.
The Company supports and propagates the principles of the United Nations Global Compact as a Founder
Member, is a signatory to the Worldsteel Sustainability Charter and supports the Affirmative Action programme
of the Confederation of Indian Industry.
Tata Steel’s approach to business has evolved from the concept that the wealth created must be continuously
returned to society. The responsibility of combining the three elements of society - social, environmental,
and economic - is of utmost importance to the way of life at Tata Steel. Today, Tata Steel’s CSR activities
in India encompass the Company’s Steel Works, Iron ore mines and collieries, reaching out to the city of
Jamshedpur, its peri-urban areas and over 800 villages in the states of Jharkhand, Odisha and Chhattisgarh.
Community involvement is a characteristic of all Tata Steel Group companies around the world. It can take
the form of financial support, provision of materials and the involvement of time, skills and enthusiasm of
employees. The Group contributes to a very wide range of social, cultural, educational, sporting, charitable
and emergency assistance programmes. The Company works in partnership with the Government, national
and international development organisations, local NGOs and the community to ensure sustainable
development. The Corporate ServicesDivision delivers these responsibilities through several institutionalised
bodies:
l Tata Steel Corporate Social Responsibility and Accountability Policy
l Corporate Social Responsibility
l Tata Steel Rural Development Society (TSRDS)
l Tribal Cultural Society (TCS)
 Lesson 16 n CSR and Sustainability 475

l Tata Steel Family Initiatives Foundation (TSFIF)

l Tata Steel Skill Development Society (TSSDS)
l Education
l Medical Services
l Urban Services
l Sports Department
l Tata Steel Adventure Foundation
l JUSCO
l Other societies like Ardeshir Dalal Memorial Hospital, Blood Banks, Kanti Lal Gandhi Memorial
Hospital etc.)
l Tata Relief Committee
To assess the effectiveness of its social initiatives Tata Steel has innovatively devised a Human Development
Index (HDI). In 2012-13, HDI assessment was completed for 230 villages. The Corporate Social Responsibility
Advisory Council was also created with the objective that this apex body along with the results of the
measurement of HDI will enable the Group to direct its social initiatives better and allocate resources more
efficiently.

GLOBAL PRINCIPLES AND GUIDELINES

A comprehensive guidance for companies pertaining to CSR is available in the form of several globally
recognised guidelines, frameworks, principles and tools, some of which are discussed below. It must be noted
that most of these guidelines relate to the larger concept of sustainability or business responsibility, in keeping
with the fact that these concepts are closely aligned globally with the notion of CSR.
l The UN Guiding Principles on Business and Human Rights: The UN guiding principles provide
assistance to states and businesses to fulfil their existing obligations towards respecting and protecting
human rights and fundamental freedoms and comply with the existing laws. These principles act
as global standards for addressing the risk of human rights violation related to business activity. In
circumstances when these laws are breached or the guidance is not adhered to, suitable remedies
have also been recommended. The primary focus is on the protection of human rights by both, the state
and the business enterprises, and the principles broadly outline the manner in which the framework can
be implemented.
l OECD Guidelines: Multinational enterprises: OECD Guidelines for multinational enterprises elaborate
on the principles and standards for responsible business conduct for multinational corporations. These
guidelines were recently updated in 2011. They cover areas such as employment, human rights,
environment, information disclosure, combating bribery, consumer interests, science and technology,
competition and taxation. They contain defined standards for socially and environmentally responsible
corporate behaviour, and also provide procedures for resolving disputes between corporations and
communities or individuals adversely impacted by business activities.
l Institute of Social and Ethical Accountability: AccountAbility’s AA1000 series of standards: This is a
series of standards which enable organisations to become accountable, responsible and sustainable.
It consists of the (i) AA1000 accountability principles (AP) standard (ii) AA1000 assurance standard
(AS) (iii) AA1000 stakeholder engagement (SE) standard. Since these standards have been formulated
through a multi-stakeholder consultation process, they ensure that those impacted (that is, enterprises,
476 EP-GRMCE

governments and civil societies) stand to gain. The Vodafone Group Plc has adopted the AA1000AP
standard by focusing on three broad areas: (i) inclusivity (stakeholder engagement to develop and
implement a strategic approach to sustainability) (ii) materiality (assess the management effort required
for each material issue and determine the content of sustainability reports) (iii) responsiveness (respond
with solutions to material issues and challenges).
l Social Accountability International (SAI): SA 8000 Standard: This is one of the world’s first auditable
social certification standard. It is based on ILO, UN and national law conventions, and adopts a
management system approach in order to ensure that companies that adopt this approach also
comply with it. This standard ensures the protection of basic human rights of workers. The nine
basic elements of this standard include (i) child labour (ii) forced and compulsory labour (iii) health
and safety (iv) freedom of association and the right to collective bargaining (v) discrimination (vi)
disciplinary practices (vii) working hours (viii) remuneration (ix) management systems. According
to SAAS, there are 695 facilities in India that have been accredited with this standard. Out of these,
Aditya Birla Chemicals (India) Limited, Bhilai Steel Plant Steel Authority of India Limited, Birla
tyres, Dr Reddy’s Laboratories Limited and Reliance Infrastructure Limited figure prominently in the
list of certified facilities within India.
l ISO 26000: Social responsibility: ISO 26000 is the international standard giving guidance on social
responsibility and is intended for use by organizations of all types both public and private sectors, in
developed and developing countries. It provides guidance on principles of social responsibility, the core
subjects and issues pertaining to social responsibility and on ways to integrate socially responsible
behaviour into existing organizational strategies, systems, practices and processes. This is a guidance
tool provided by the ISO which enables organisations to understand the meaning and significance of
social responsibility. It is important to note that this is not a certification but only a guiding tool. Hence,
organisations which comply with these standards are self-certified. It covers six core areas of social
responsibility, including (i) human rights (ii) labour practices (iii) environment (iv) fair operating practices
(v) consumer issues (vi) community involvement and development. This ensures a holistic approach to
the concept of social responsibility and sustainable development.
It intends to assist organizations in contributing to sustainable development. It is intended to encourage
them to go beyond legal compliance, recognizing that compliance with law is a fundamental duty of
any organization and an essential part of their social responsibility. It is intended to promote common
understanding in the field of social responsibility, and to complement other instruments and initiatives
for social responsibility, not to replace them.
ISO 26000 is not a management system standard. It is not intended or appropriate for certification
purposes or regulatory or contractual use.
l Global Compact Self-Assessment Tool
The Global Compact Self Assessment Tool is an easy-to-use guide designed for use by companies of
all sizes and across sectors committed to upholding the social and environmental standards within their
respective operations. The tool consists of 45 questions with a set of three to nine indicators for each
question. It consists of a ‘management section’ and four other sections, including human rights, labour,
environment and anti-corruption that relate to the principles of the UN Global Compact. The tool is in
line with the UN Guiding Principles on Business and Human Rights. For a small company, this tool acts
as a measure of the company’s performance in all areas of the UN Global Compact and how well these
issues are managed. For a large organisation, this tool helps to continuously improve existing policies
and systems, engage subsidiaries, suppliers or other stakeholders, and improves internal and external
reporting.
 Lesson 16 n CSR and Sustainability 477

CORPORATE SUSTAINABILITY
Sustainability means meeting of the needs of the present without compromising the ability of future generations
to meet theirs. It has three main pillars: economic, environmental, and social. These three pillars are informally
referred to as people, planet and profits. These three Ps have its priority orders too. One should take first take
care of the PEOPLE and thereafter the PLANET. PROFIT is an economic activity and is much for the survivial
of the unit, but in the array of these three Ps, its priority should stand in last and not at the cost of People and
Planet.
Sustainability is based on a simple principle: Everything that we need for our survival and well-being depends,
either directly or indirectly, on our natural environment. Sustainability creates and maintains the conditions
under which humans and nature can exist in productive harmony that permits fulfilling the social, economic and
other requirements of the present and future generations.
Sustainability is important to make sure that we have and will continue to have the water, materials, and
resources to protect human health and our environment.
“Sustainability is an economic state where the demand placed upon the environment by people and commerce
can be met without reducing the capacity of the environment to provide for future generations. It can also be
expressed in the simple terms of an economic golden rule for the restorative economy; leave the world better
than you found it, take no more than you need, try not to harm life of environment, make amends if you do.” Paul
Hawkin’s book – The Ecology of Commerce
Corporate sustainability indicates new philosophy, as an alternative to the traditional growth and profit-
maximization model, under which sustainable development comprising of environmental protection, social
justice and equity, and economic development are given more significant focus while recognizing simultaneous
growth of the corporate and profitability.
It is a business approach that creates long-term shareholder value by embracing opportunities and managing
risks deriving from economic, environmental and social developments. Corporate sustainability describes
business practices built around social and environmental considerations.
Corporate sustainability encompasses strategies and practices that aim to meet the needs of the stakeholders
today while seeking to protect, support and enhance the human and natural resources that will be the need of
the future. Corporate sustainability leaders achieve long-term shareholder value by gearing their strategies and
management to harness the market’s potential for sustainability products and services while at the same time
successfully reducing and avoiding sustainability costs and risks.
Thomas Dyllick and Kai Hockerts in ‘Beyond the Business Case for Corporate Sustainability’ define Corporate
Sustainability as, “meeting the needs of a firm’s direct and indirect stakeholders (such as shareholders,
employees, clients, pressure groups, and communities) without compromising its ability to meet the needs of
future stakeholders as well.”
The Australian government defines Corporate Sustainability as “encompassing strategies and practices that
aim to meet the needs of the stakeholders today, while seeking to protect, support, and enhance the human and
natural resources that will be needed in the future.”
Worldwide business communities are recognizing the need to address the environmental and social impacts
of their activities. The fundamental business objectives towards creating economic values, clubbed with the
environmental and social value addition, evolved the concept of ‘triple bottom line’ under sustainable development.
Corporate Boards are required to address issues, such as environment, social justice and economic efficiency
to ensure their long-term existence.
Concern towards social, environmental and economical issues, i.e., covering all the segments of the stakeholders,
are now basic and fundamental issues which permit a corporate to operate in the long run sustainably. Following
key drivers need to be garnered to ensure sustainability:
478 EP-GRMCE

l Internal Capacity Building strength – In order to convert various risks into competitive advantages.
l Social impact assessment – In order to become sensitive to various social factors, like changes in
culture and living habits.
l Repositioning capability through development and innovation: Crystallisation of all activities to ensure
consistent growth.
l Corporate sustainability is a business approach creating shareholder value in the long run.
These may be derived by converting risks arising out of economic, environmental and social activities of a
corporate into business opportunities keeping in mind the principles of a sustainable development.

UNITED NATIONS GLOBAL COMPACT’S TEN PRINCIPLES, 2000

Corporate sustainability starts with a company’s value system and a principled approach to doing business.
This means operating in ways that, at a minimum, meet fundamental responsibilities in the areas of human
rights, labour, environment and anti-corruption. Responsible businesses enact the same values and principles
wherever they have a presence, and know that good practices in one area do not offset harm in another.
The UN Global Compact is a strategic policy initiative for businesses that are committed to aligning their operations
and strategies with ten universally accepted principles in the areas of human rights, labour, environment and
anti-corruption. By incorporating the Global Compact principles into strategies, policies and procedures, and
establishing a culture of integrity, companies are not only upholding their basic responsibilities to people and
planet, but also setting the stage for long-term success. The UN Global Compact’s Ten Principles are derived
from: the Universal Declaration of Human Rights, the International Labour Organization’s Declaration on
Fundamental Principles and Rights at Work, the Rio Declaration on Environment and Development, and the
United Nations Convention Against Corruption.

Human Rights Principle 1 Businesses should support and respect the protection of
internationally proclaimed human rights.
Meaning of this Principle:
l Respecting human rights means a business should use
due diligence to avoid infringing human rights (“do no
harm”) and should address adverse human rights impacts
with which they are involved.
l In addition, beyond respecting human rights, business is
encouraged to take action to support human rights. This
means seeing the opportunity to take voluntary action to
make a positive contribution towards the protection and
fulfillment of human rights whether through core business,
strategic social investment/philanthropy, public policy
engagement/advocacy, and/or partnerships and other
collective action.
l Action to support human rights should be a complement to
and not a substitute for action to respect human rights.
l Special attention should be paid to the rights of vulnerable
groups, including women, children, people with disabilities,
indigenous peoples, migrant workers, older persons etc.
 Lesson 16 n CSR and Sustainability 479

Principle 2 Make sure that they are not complicit in human rights abuses.
Meaning of this Principle:
l Complicity means being implicated in a human rights
abuse that another company, government, individual or
other group is causing.
l The risk of complicity in a human rights abuse may be
particularly high in areas with weak governance and/or
where human rights abuse is widespread. However, the
risk of complicity exists in every sector and every country.
l The requirement to respect human rights, pursuant to
Global Compact Principle 1 and the UN Guiding Principles
on Business and Human Rights, includes avoiding
complicity, which is another way, beyond their own direct
business activities, that businesses risk interfering with the
enjoyment of human rights.
l The risk of an allegation of complicity is reduced (though
not eliminated) if a company has a systematic management
approach to human rights, including due diligence
processes that cover the entity’s business relationships.
l Such processes should identify and prevent or mitigate the
human rights risks with which the company may be involved
through links to its products, operations or services.

Labour Principle 3 Businesses should uphold the freedom of association and the
effective recognition of the right to collective bargaining.
Meaning of this Principle:
l Freedom of association implies respect for the right of
all employers and all workers to freely and voluntarily
establish and join groups for the promotion and defence of
their occupational interests.
l Both workers and employers have the right to set up, join
and run their own organizations without interference from
the State or any other entity.
l All, including employers, have the right to freedom of
expression and opinion, including on the topic of unions –
provided that the exercise of this right does not infringe a
worker’s right to freedom of association.
l As a voluntary initiative, the UN Global Compact does not
and cannot require that employers adopt or express any
particular opinion.
l To be able to make a free decision, workers need a climate
free of violence, pressure, fear and threats.
480 EP-GRMCE

l Association” includes activities of rule formation,

administration and the election of representatives. The
freedom to associate involves employers, unions and other
workers representatives freely discussing issues at work
in order to reach agreements that are jointly acceptable.
These freedoms also allow for industrial action to be taken
by workers and organizations in defence of their economic
and social interests.
l Collective bargaining is a voluntary process or activity
through which employers and workers discuss and negotiate
their relations, in particular terms and conditions of work
and the regulation of relations between employers, workers
and their organizations. Participants in collective bargaining
include employers themselves or their organizations,
and trade unions or, in their absence, representatives
freely designated by the workers. An important part of the
effective recognition of the right to collective bargaining is
the “principle of good faith”.

Principle 4 The elimination of all forms of forced and compulsory labour.

Meaning of this Principle:
l Forced or compulsory labour is any work or service that is
exacted from any person under the menace of any penalty,
and for which that person has not offered himself or herself
voluntarily.
l Providing wages or other compensation to a worker does
not necessarily indicate that the labour is not forced or
compulsory.
l By right, labour should be freely given and employees
should be free to leave in accordance with established
rules.

Principle 5 The effective abolition of child labour.

Meaning of this Principle:
l Child labour is a form of exploitation that is a violation of a
human right and it is recognized and defined by international
instruments.
l It is the declared policy of the international community and
of almost all Governments to abolish child labour.
l While the term “child” covers all girls and boys under 18
years of age, not all under-18s must be removed from work:
the basic rules under international standards distinguish
what constitutes acceptable or unacceptable work for
children at different ages and stages of their development.
 Lesson 16 n CSR and Sustainability 481

Principle 6 The elimination of discrimination in respect of employment and

occupation.
Meaning of this Principle:
l Discrimination in employment and occupation means
treating people differently or less favourably because of
characteristics that are not related to their merit or the
inherent requirements of the job.
l In national law, these characteristics commonly include:
race, colour, sex, religion, political opinion, national
extraction, social origin, age, disability, HIV/AIDS status,
trade union membership, and sexual orientation. However,
Principle 6 allows companies to consider additional grounds
where discrimination in employment and occupation may
occur.
l Discrimination can arise in a variety of work-related
activities. These include access to employment, to
particular occupations, promotions and to training and
vocational guidance. Moreover, it can occur with respect
to the terms and conditions of the employment, such as,
Recruitment, Remuneration, Hours of work and rest/paid
holidays, Maternity protection, Security of tenure, Job
assignments, Performance assessment and advancement,
Training and opportunities, Job prospects, Social security,
Occupational safety and health.
l Non-discrimination in employment means simply that
employees are selected on the basis of their ability to
do the job and that there is no distinction, exclusion or
preference made on other grounds. Employees who
experience discrimination at work are denied opportunities
and have their basic human rights infringed. This affects
the individual concerned and negatively influences the
greater contribution that they might make to society.

Environment Principle 7 Principle 7: Businesses should support a precautionary approach

to environmental challenges.
Meaning of this Principle:
l Introducing the precautionary approach, Principle 15 of the
1992 Rio Declaration states that “where there are threats
of serious or irreversible damage, lack of full scientific
certainty shall not be used as a reason for postponing cost-
effective measures to prevent environmental degradation”.
l Precaution involves the systematic application of risk
assessment, risk management and risk communication.
When there is reasonable suspicion of harm, decision-
makers need to apply precaution and consider the degree
of uncertainty that appears from scientific evaluation.
482 EP-GRMCE

l Deciding on the “acceptable” level of risk involves not only

scientific-technological evaluation and economic cost-
benefit analysis, but also political considerations such
as acceptability to the public. From a public policy view,
precaution is applied as long as scientific information
is incomplete or inconclusive and the associated risk is
still considered too high to be imposed on society. The
level of risk considered typically relates to standards of
environment, health and safety.

Principle 8 Principle 8: undertake initiatives to promote greater environmental

responsibility.
Meaning of this Principle:
l In Chapter 30 of Agenda 21, the 1992 Rio Earth Summit
spelled out the role of business and industry in the
sustainable development agenda as: “Business and
industry should increase self-regulation, guided by
appropriate codes, charters and initiatives integrated into
all elements of business planning and decision-making,
and fostering openness and dialogue with employees and
the public.”
l The Rio Declaration says that business has the responsibility
to ensure that activities within their own operations do not
cause harm to the environment. Society expects business
to be good actors in the community. Business gains its
legitimacy through meeting the needs of society, and
increasingly society is expressing a clear need for more
environmentally sustainable practices.

Principle 9 Principle 9: encourage the development and diffusion of

environmentally friendly technologies.
Meaning of this Principle:
l Environmentally sound technologies, as defined in Agenda
21 of the Rio Declaration, should protect the environment,
are less polluting, use all resources in a more sustainable
manner, recycle more of their wastes and products and
handle residual wastes in a more acceptable manner than
the technologies for which they were substitutes.
l They include a variety of cleaner production processes and
pollution prevention technologies as well as end-of-pipe
and monitoring technologies.
l Moreover, they include know-how, procedures, goods and
services and equipment as well as organizational and
managerial procedures.
 Lesson 16 n CSR and Sustainability 483

l Where production processes that do not use resources

efficiently generate residues and discharge wastes,
environmentally sound technologies can be applied to
reduce day-to-day operating inefficiencies, emissions
of environmental contaminants, worker exposure
to hazardous materials and risks of environmental
disasters.

Anti-Corruption Principle 10 Principle 10: Businesses should work against corruption in all its
forms, including extortion and bribery.
Meaning of this Principle:
l The tenth principle against corruption was adopted in 2004
and commits UN Global Compact participants not only
to avoid bribery, extortion and other forms of corruption,
but also to proactively develop policies and concrete
programmes to address corruption internally and within
their supply chains.
l Companies are also challenged to work collectively and
join civil society, the United Nations and governments to
realize a more transparent global economy.
l With the entry into force of the UN Convention Against
Corruption (UNCAC) in 2005, an important global tool
to fight corruption was introduced. The UNCAC is the
underlying legal instrument for the 10th Principle.
l Corruption can take many forms that vary in degree from
the minor use of influence to institutionalized bribery.
Transparency International's definition of corruption is "the
abuse of entrusted power for private gain". This can mean
not only financial gain but also non-financial advantages.

UN Global Compact incorporates a transparency and accountability policy known as the Communication on
Progress (COP). The Communication on Progress (COP) is an annual disclosure to stakeholders on progress
made in implementing the ten principles of the UN Global Compact in the areas of human rights, labour,
environment and anti-corruption, and in supporting broader UN development goals. The COP is posted on the
Global Compact website by business participants. Failure to issue a COP will change a participant’s status to
non-communicating and can eventually lead to the expulsion of the participant.
Joining the Global Compact is a widely visible as commitment to the ten principles. A company that signs-on to
the Global Compact specifically commits itself to:
– set in motion changes to business operations so that the Global Compact and its principles become
part of management, strategy, culture, and day-to-day operations;
– publish in its annual report or similar public corporate report (e.g. sustainability report) a description of
the ways in which it is supporting the Global Compact and its principles (Communication on Progress),
– publicly advocate the Global Compact and its principles via communications vehicles such as press
releases, speeches, etc.
Ideally, COPs should be integrated into a participant’s existing communication with stakeholders, such as an
484 EP-GRMCE

annual or sustainability report. However, in case a participant does not publish such reports, a COP can be a
stand-alone report that is made available for stakeholders through other public communication channels (e.g.
websites, newsletters, intranets, company notice boards, included with payroll, etc.). COPs should be issued in
the company’s working language and, if the company determines a need, in additional languages.
Participants are asked to supply a URL link to their COP and to upload the COP itself (as a PDF, Powerpoint, or
word document) to the Global Compact website in order to meet the COP submission requirement.

CSR AND SUSTAINABILITY IN INDIA

Indian entrepreneurs and business enterprises have a long tradition of working within the values that have
defined our nation’s character for millennia. India’s ancient wisdom, which is still relevant today, inspires
people to work for the larger objective of the well-being of all stakeholders. These sound and all encompassing
values are even more relevant in current times, as organizations grapple with the challenges of modern-day
enterprise, the aspirations of stakeholders and of citizens eager to be active participants in economic growth
and development.
The subject of Corporate Social Responsibility has evolved during last few decades from simple philanthropic
activities to integrating the interest of the business with that of the communities in which it operates. By exhibiting
socially, environmentally and ethically responsible behaviour in governance of its operations, the business can
generate value and long term sustainability for itself while making positive contribution in the betterment of the
society. Although we have seen a period of sustained economic growth in the current decade, we still continue
to face major challenges on the human side in India. The problems like poverty, illiteracy, malnutrition etc.
have resulted in a large section of the population remaining as “un-included” from the mainstream. We need to
address these challenges through suitable efforts and interventions in which all the state and non-state actors
need to partner together to find and implement innovative solutions.
Indian business has traditionally been socially responsible and some of the business houses have demonstrated
their efforts on this front in a laudable manner. However, the culture of social responsibility needs to go deeper
in the governance of the businesses.

CASE STUDIES
ITC - “E-CHOUPAL”
ITC’s Agri Business Division, one of India’s largest exporters of agricultural commodities, has conceived
e-Choupal as a more efficient supply chain aimed at delivering value to its customers around the world on
a sustainable basis. e-Choupal’ model unshackles the potential of Indian farmer who has been trapped in
a vicious cycle of low risk taking ability - low investment - low productivity - weak market orientation - low
value addition - low margin - low risk taking ability. This made him and Indian agribusiness sector globally
uncompetitive, despite rich & abundant natural resources.
‘e-Choupal’ leverages Information Technology to virtually cluster all the value chain participants, Real-
time information and customised knowledge provided by ‘e-Choupal’ enhance the ability of farmers to
take decisions and align their farm output with market demand and secure quality & productivity. The
aggregation of the demand for farm inputs from individual farmers gives them access to high quality inputs
from established and reputed manufacturers at fair prices. As a direct marketing channel, virtually linked to
the ‘mandi’ system for price discovery, ‘e-Choupal’ eliminates wasteful intermediation and multiple handling.
Thereby it significantly reduces transaction costs.
Launched in June 2000, ‘e-Choupal’, has already become the largest initiative among all Internet-based
interventions in rural India. ‘e-Choupal’ services today reach out to over 4 million farmers growing a range
of crops - soyabean, coffee, wheat, rice, pulses, shrimp - in over 40,000 villages through 6500 kiosks
across ten states (Madhya Pradesh, Haryana, Uttarakhand, Karnataka, Andhra Pradesh, Uttar Pradesh,
Rajasthan, Maharashtra, Kerela and Tamil Nadu).
 Lesson 16 n CSR and Sustainability 485

Before the enactment of the Companies Act, 2013, various other laws in India took care of the basic CSR included
various legislations under labour laws such as Factories Act, 1948, ESI Act, 1948, Employees Compensation
Act, 1923, Contract Labour (Regulation and Abolition) Act, 1970, Equal Remuneration Act, 1976, The Minimum
Wages Act, 1948, Employees’ Provident Fund and Miscellaneous Provisions Act, 1952, environment protection
laws such as The Water (Prevention and Control of Pollution) Act, 1974, The Air (Prevention and Control of
Pollution) Act, 1981 and the Environment Protection Act, 1986
The main object of the Factories Act, 1948 is to ensure adequate safety measures and to promote the health
and welfare of the workers employed in factories. The Act also makes provisions regarding employment of
women and young persons (including children and adolescents), annual leave with wages etc.
The Employees’ State Insurance Act, 1948 provides for certain benefits to employees in case of sickness,
maternity and employment injury and also makes provisions for certain other matters in relation thereto.
The Employees Compensation Act, 1923 is a social security legislation. It imposes statutory liability upon an
employer to discharge his moral obligation towards his employees when they suffer from physical disabilities
and diseases during the course of employment in hazardous working conditions. The Act also seeks to help the
dependents of the workmen rendered destitute by the ‘accidents’ and from the hardship arising out from such
accidents.
It is socialist manager’s believe that business is an extension of the society. The society is also the collection
of people who work for the business are also called labor force. The welfare and security regulations, few of
which are mentioned above are also called social security legislations. However, a company doing something
for compliance of Law, other than the CSR activities under the provisions of Companies Act, 2013 will not be
considered as CSR as in any case, they need to be complied with.
In 1972, the Department of Science and Technology set up a National Committee on Environmental
Planning and Coordination to identify and investigate problems of preserving or improving the human
environment and also to propose solutions for environmental problems. In 1977, by an amendment to the
Constitution, Article 48A was introduced imposing a duty on the State to protect and improve the environment and
safeguard the forests and wildlife of the country. Article 51A also, provides for the protection and improvement of
the natural environment including forests, lakes, rivers and wild life and to have compassion for living creatures.
The Water (Prevention and Control of Pollution) Act was enacted in 1974 and the Air (Prevention and Control
of Pollution) Act was passed by the Union of India in 1981.
In 1986, the Government enacted the Environment Protection Act to provide for the protection and improvement
of environment and the prevention of hazards to human beings, other living creatures, plants and property.
The Ministry of Corporate Affairs has adopted the role of an enabler, facilitator and regulator for effective
functioning and growth of the corporate sector. A number of initiatives have been taken on the legislative,
service delivery and capacity building sides so that the corporate sector is provided with a buoyant and enabling
regulatory environment for its growth. Simultaneously, the Ministry is also focusing on various issues related to
inclusive growth in relation to the development of corporate sector.

Corporate Social Responsibility Voluntary Guidelines, 2009

The Corporate Social Responsibility Voluntary Guidelines issued by the MCA in December 2009 was the first
step towards mainstreaming the concept of Business Responsibilities. Through these Guidelines, the Ministry
urged the business sector to adopt the principles contained in the Guidelines for responsible business practices.
It was recommendatory initiative to underline that the business sector also needs to take the responsibility of
exhibiting socially responsible business practices that ensures the distribution of wealth and well-being of the
communities in which the business operates.
486 EP-GRMCE

National Voluntary Guidelines on Social, Environmental and Economic Responsibilities of

Business – 2011
The ‘Voluntary Guidelines on Corporate Social Responsibility’ which were issued in 2009 were subsequently
revised as ‘National Voluntary Guidelines on Social, Environmental and Economic Responsibilities of Business,
2011 (NVGs)’. The NVGs were developed based on India’s socio-cultural context and priorities as well as global
best practices. The Guidelines were released by the MCA on 8th July, 2011.
The Guidelines emphasize that businesses have to endeavour to become responsible actors in society, so that
their every action lead to sustainable growth and economic development. Accordingly, the Guidelines use the
terms ‘Responsible Business’ instead of Corporate Social Responsibility (CSR) as the ‘Responsible Business’
encompasses the limited scope and understanding of the term CSR.
Principles and the core elements
The principles and the core elements of each of the principles as recommended by the National Voluntary
Guidelines are summarized below:

Principles Core Elements

Principle 1: 1. Businesses should develop governance structures, procedures

and practices that ensure ethical conduct at all levels; and promote
Businesses should conduct and
the adoption of this principle across its value chain. Businesses should
govern themselves with Ethics,
communicate transparently and assure access to information about
Transparency and Accountability
their decisions that impact relevant stakeholders.
Brief Description:
2. Businesses should not engage in practices that are abusive, corrupt,
The principle recognizes that or anti-competition.
ethical conduct in all functions and
3. Businesses should truthfully discharge their responsibility on financial
processes is the cornerstone of
and other mandatory disclosures.
responsible business.
4. Businesses should report on the status of their adoption of these
The Principle acknowledges that
Guidelines as suggested in the reporting framework in NVG’s.
business decisions and actions
including those required to 5. Businesses should avoid complicity with the actions of any third party
operationalize the principles in these that violates any of the principles contained in these Guidelines
Guidelines should be amendable to
disclosure and be visible to relevant
stakeholders.
The principle emphasizes that
businesses should inform all relevant
stakeholders of the operating risks
and address and redress the issues
raised.
The principle recognizes that the
behavior, decision making styles
and actions of the leadership of the
business establishes a culture of
integrity and ethics throughout the
enterprise.
 Lesson 16 n CSR and Sustainability 487

Principle 2: 1. Businesses should assure safety and optimal resource use over
the life-cycle of the product – from design to disposal – and ensure
Businesses should provide
that everyone connected with it- designers, producers, value chain
goods and services that are safe
members, customers and recyclers are aware of their responsibilities.
and contribute to sustainability
throughout their life cycle 2. Businesses should raise the consumer’s awareness of their rights
through education, product labelling, appropriate and helpful marketing
Brief Descripton:
communication, full details of contents and composition and promotion
The principle emphasizes that in of safe usage and disposal of their products and services.
order to function effectively and 3. In designing the product, businesses should ensure that the
profitably, businesses should work manufacturing processes and technologies required to produce it are
to improve the quality of life of resource efficient and sustainable.
people.
4. Businesses should regularly review and improve upon the process
The principle recognizes that all of new technology development, deployment and commercialization,
stages of the product life cycle, incorporating social, ethical and environmental considerations.
right from design to final disposal
of the goods and services after 5. Businesses should recognize and respect the rights of people who
use, have an impact on society may be owners of traditional knowledge and other forms of intellectual
and the environment. Responsible property.
businesses, therefore, should
engineer value in their goods and
services by keeping in mind these
impacts.
The principle, while appreciating
that businesses are increasingly
aware of the need to be internally
efficient and responsible, exhorts
them to extend their processes to
cover the entire value chain – from
sourcing of raw materials or process
inputs to distribution and disposal.
488 EP-GRMCE

Principle 3: 1. Businesses should respect the right to freedom of association,

Businesses should promote the participation, collective bargaining, and provide access to appropriate
well being of all employees grievance redressal mechanisms.

Brief description: 2. Businesses should provide and maintain equal opportunities at

the time of recruitment as well as during the course of employment
The principle encompasses all irrespective of caste, creed, gender, race, religion, disability or sexual
policies and practices relating to the orientation.
dignity and well being of employees
3. Businesses should not use child labour, forced labour or any form of
engaged within a business or in its
involuntary labour, paid or unpaid.
value chain.
4. Businesses should take cognizance of the work-life balance of its
The principle extends to all employees, especially that of women.
categories of employees engaged
5. Businesses should provide facilities for the well being of its employees
in activities contributing to the
including those with special needs. They should ensure timely payment
business, within or outside of
of fair living wages to meet basic needs and economic security of the
its boundaries and covers work
employees.
performed by individuals, including
sub-contracted and home based 6. Businesses should provide a workplace environment that is safe,
hygienic humane, and which upholds the dignity of the employees.
work.
Business should communicate this provision to their employees and
train them on a regular basis.
7. Businesses should ensure continuous skill and competence
upgrading of all employees by providing access to necessary learning
opportunities, on an equal and non-discriminatory basis. They should
promote employee morale and career development through enlightened
human resource interventions.
8. Businesses should create systems and practices to ensure a
harassment free workplace where employees feel safe and secure in
discharging their responsibilities.

Principle 4: The principle recognizes that businesses have a responsibility to think

Businesses should respect the and act beyond the interests of its shareholders to include all their
interests of, and be responsive to- stakeholders.
wards all stakeholders, especially 1. Businesses should systematically identify their stakeholders,
those who are disadvantaged, vul- understand their concerns, define purpose and scope of engagement,
nerable and marginalized. and commit to engaging with them.
Brief Description:
2. Businesses should acknowledge, assume responsibility and be
The principle recognizes that transparent about the impact of their policies, decisions, product &
businesses have a responsibility to services and associated operations on the stakeholders.
think and act beyond the interests of
its shareholders to include all their 3. Businesses should give special attention to stakeholders in areas
stakeholders. that are underdeveloped.
The principle, while appreciating 4. Businesses should resolve differences with stakeholders in a just,
that all stakeholder are not equally fair and equitable manner.
influential or aware, encourages,
business to proactively engage with
and respond to those that are disad-
vantages, vulnerable and marginal-
ized.
 Lesson 16 n CSR and Sustainability 489

Principle 5: 1. Businesses should understand the human rights content of the

Constitution of India, national laws and policies and the content of
Businesses should respect and
International Bill of Human Rights. Businesses should appreciate that
promote human rights
human rights are inherent, universal, indivisible and interdependent in
Brief Description: nature.
The principle recognizes that 2. Businesses should integrate respect for human rights in management
human rights are the codification systems, in particular through assessing and managing human rights
and agreement of what it means to impacts of operations, and ensuring all individuals impacted by the
treat others with dignity and respect. business have access to grievance mechanisms.
The principle imbibes its spirit 3. Businesses should recognize and respect the human rights of all
from the Constitution of India, relevant stakeholders and groups within and beyond the workplace,
which through its provisions of including that of communities, consumers and vulnerable and
Fundamental Rights and Directive marginalized groups.
Principles of State Policy, enshrines
4. Businesses should, within their sphere of influence, promote the
the achievement of human rights for
awareness and realization of human rights across their value chain.
all its citizens.
5. Businesses should not be complicit with human rights abuses by a
The principle takes into account
third party.
the ‘Corporate Responsibility to
Respect Human Rights’ as referred
in the United Nations ‘Protect,
Respect, Remedy’ framework.
490 EP-GRMCE

Principle 6: The principle recognizes that environmental responsibility is a

prerequisite for sustainable economic growth and for the well being of
Business should respect, protect,
society.
and make efforts to restore the
environment. 1. Businesses should utilize natural and manmade resources in
an optimal and responsible manner and ensure the sustainability of
Brief Description:
resources by reducing, reusing, recycling and managing waste.
The principle recognizes that en-
2. Businesses should take measures to check and prevent pollution.
vironmental responsibility is a pre-
They should assess the environmental damage and bear the cost of
requisite for sustainable economic
pollution abatement with due regard to public interest.
growth and for the well being of so-
ciety. 3. Businesses should ensure that benefits arising out of access and
commercialization of biological and other natural resources and
The principle emphasizes that envi-
associated traditional knowledge are shared equitably.
ronmental issues are interconnect-
ed at the local regional and global 4. Businesses should continuously seek to improve their environmental
levels which makes it imperative performance by adopting cleaner production methods, promoting use
for businesses to address issues of energy efficient and environment friendly technologies and use of
such as global warming, biodiversi- renewable energy.
ty conservation and climate change
5. Businesses should develop Environment Management Systems
in a comprehensive and systematic
(EMS) and contingency plans and processes that help them in
manner.
preventing, mitigating and controlling environmental damages and
The principle encourages business- disasters, which may be caused due to their operations or that of a
es to understand and be account- member of its value chain.
able for direct and indirect environ-
6. Businesses should report their environmental performance, including
mental impacts of their operations,
the assessment of potential environmental risks associated with their
products and services and to strive
operations, to the stakeholders in a fair and transparent manner.
to make them more environment
friendly. 7. Businesses should proactively persuade and support its value chain
to adopt this principle.
The principle urges businesses to
follow the precautionary principle
and not go ahead with a particular
action if it is unsure of its adverse
impacts.

Principle 7: The principle recognizes that businesses operate within the specified
Businesses, when engaged in legislative and policy frameworks prescribed by the Government, which
influencing public and regulatory guide their growth and also provide for certain desirable restrictions and
policy, should do so in a boundaries.
responsible manner 1. Businesses, while pursuing policy advocacy, must ensure that
Brief Description: their advocacy positions are consistent with the Principles and Core
Elements contained in these Guidelines.
The principle recognizes that busi-
nesses operate within the specified 2. To the extent possible, businesses should utilize the trade and
legislative and policy framework industry chambers and associations and other such collective platforms
prescribed by the Government, to undertake such policy advocacy.
which guide their growth and also
provide for certain desirable restric-
tions and boundaries.
 Lesson 16 n CSR and Sustainability 491

The principle acknowledges that

in a democratic set-up, such legal
frameworks are developed in a col-
laborative manner with participation
of all the stakeholders, including
businesses.
The principle, in that context, recog-
nizes the right of businesses to en-
gage with the Govt. for redressal of
a grievance or for influencing public
policy and public opinion.
The principle emphasizes that pol-
icy advocacy must expand public
good rather than diminish it or make
it available to a select few.

Principle 8: Businesses should The principle recognizes the value of the energy and enterprise
support inclusive growth and of businesses and encourages them to innovate and contribute
equitable development to the overall development of the country, especially to that of the
disadvantaged, vulnerable and marginalised sections of society.
Brief Description:
1. Businesses should understand their impact on social and economic
The principle recognizes the chal-
development, and respond through appropriate action to minimise the
lenges of social and economic de-
negative impacts.
velopment faces by India and builds
upon the development agenda that 2. Businesses should innovate and invest in products, technologies and
has been articulated in the govern- processes that promote the well being of society.
ment policies and priorities.
3. Businesses should make efforts to complement and support
The principle recognizes the val- the development priorities at local and national levels, and assure
ue of the energy and enterprise of appropriate resettlement and rehabilitation of communities who have
businesses and encourages them been displaced owing to their business operations.
to innovate and contribute to the
4. Businesses operating in regions that are underdeveloped should be
overall development of the country,
especially sensitive to local concerns.
especially to that of the disadvan-
taged, vulnerable and marginalized
sections of society.
The principle also emphasizes the
need for collaboration amongst
businesses, government agencies
and civil society in furthering this
development agenda.
The principle reiterates that busi-
ness prosperity and inclusive
growth and equitable development
are interdependent.
492 EP-GRMCE

Principle 9: 1. Businesses, while serving the needs of their customers, should take
into account the overall well-being of the customers and that of society.
Businesses should engage
with and provide value to their 2. Businesses should ensure that they do not restrict the freedom of
customers and consumers in a choice and free competition in any manner while designing, promoting
responsible manner and selling their products.
Brief Description: 3. Businesses should disclose all information truthfully and factually,
through labeling and other means, including the risks to the individual,
This principle is based on the fact that
to society and to the planet from the use of the products, so that the
the basic aim of a business entity is
customers can exercise their freedom to consumer in a responsible
to provide goods and services to its
manner. Where required, businesses should also educate their
customers in a manner that creates
customers on the safe and responsible usage of their products and
value for both.
services.
The principle acknowledges that no
4. Businesses should promote and advertise their products in ways that
business entity can exist or survive
do not mislead or confuse the consumers or violate any of the principles
in the absence of its customers.
in these Guidelines.
The principle recognizes that
5. Businesses should exercise due care and caution while providing
customers have the freedom of
goods and services that result in over exploitation of natural resources
choice in the selection and usage
or lead to excessive conspicuous consumption.
of goods and services, and that
the enterprises will strive to make 6. Businesses should provide adequate grievance handling mechanisms
available goods that are safe, to address customer concerns and feedback.
competitively priced, easy to sue
and safe to dispose off, for the
benefit of their customers.
The principle also recognizes that
businesses have an obligation to
mitigating the long term adverse
impacts that excessive consumption
may have on the overall well-being
of individual, society and our planet.

The Companies Act, 2013

Section 135 of the Companies Act, 2013
(1) Every company having net worth of rupees five hundred crore or more, or turnover of rupees one thousand
crore or more or a net profit of rupees five crore or more during the immediately preceding financial year shall
constitute a Corporate Social Responsibility Committee of the Board consisting of three or more directors, out
of which at least one director shall be an independent director.
Provided that where a company is not required to appoint an independent director under sub-section (4) of
section 149, it shall have in its Corporate Social Responsibility Committee two or more directors.
(2) The Board’s report under sub-section (3) of section 134 shall disclose the composition of the Corporate
Social Responsibility Committee.
(3) The Corporate Social Responsibility Committee shall,—
(a) formulate and recommend to the Board, a Corporate Social Responsibility Policy which shall indicate
the activities to be undertaken by the company in areas or subject, specified in Schedule VII
 Lesson 16 n CSR and Sustainability 493

(b) recommend the amount of expenditure to be incurred on the activities referred to in clause (a); and
(c) monitor the Corporate Social Responsibility Policy of the company from time to time.
(4) The Board of every company referred to in sub-section (1) shall,—
(a) after taking into account the recommendations made by the Corporate Social Responsibility Committee,
approve the Corporate Social Responsibility Policy for the company and disclose contents of such
Policy in its report and also place it on the company’s website, if any, in such manner as may be
prescribed; and
(b) ensure that the activities as are included in Corporate Social Responsibility Policy of the company are
undertaken by the company.
(5) The Board of every company referred to in sub-section (1), shall ensure that the company spends, in
every financial year, at least two per cent. of the average net profits of the company made during the three
immediately preceding financial years or where the company has not completed the period of three financial
years since its incorporation, during such immediately preceding financial years, in pursuance of its Corporate
Social Responsibility Policy:
Provided that the company shall give preference to the local area and areas around it where it operates, for
spending the amount earmarked for Corporate Social Responsibility activities:
Provided further that if the company fails to spend such amount, the Board shall, in its report made under clause
(o) of sub-section (3) of section 134, specify the reasons for not spending the amount and, unless the unspent
amount relates to any ongoing project referred to in sub-section (6), transfer such unspent amount to a Fund
specified in Schedule VII, within a period of six months of the expiry of the financial year.
Explanation – For the purposes of this section “net profit” shall not include such sums as may be prescribed,
and shall be calculated in accordance with the provisions of section 198.

Comments
Section 135(5) does not require earmarking certain percentage of amount as CSR rather it calls for spending
on CSR. The proviso to sub-section (5) of the section 135 states that, where any company fails to spend
such amount, it shall specify the reasons for not spending the amount in its Board’s Report. This is on the
principle of COMPLY OR EXPLAIN. The Act only provides for disclosure, there is no monetary penalty
for non-compliance. However, non-reporting of CSR expenditure in the Board’s Report may attract penalty
as specified under section 134(8) of the Act.

(6) Any amount remaining unspent under sub-section (5), pursuant to any ongoing project, fulfilling such
conditions as may be prescribed, undertaken by a company in persuance of its Corporate Social Responsibility
Policy, shall be transferred by the company within a period of thirty days from the end of the financial year to a
special account to be opened by the company in that behalf for that financial year in any scheduled bank to be
called the Unspent Corporate Social Responsibility Account, and such amount shall be spent by the company in
pursuance of its obligation towards the Corporate Social Responsibility Policy within a period of three financial
years from the date of such transfer, failing which, the company shall transfer the same to a Fund specified in
Schedule VII, within a period of thirty days from the date of completion of the third financial year.
(7) If a company contravenes the provisions of sub-section (5) or sub-section (6), the company shall be
punishable with fine which shall not be less than fifty thousand rupees but which may extend to twenty-five lakh
rupees and every officer of such company who is in default shall be punishable with imprisonment for a term
which may extend to three years or with fine which shall not be less than fifty thousand rupees but which may
extend to five lakh rupees, or with both.
494 EP-GRMCE

(8) The Central Government may give such general or special directions to a company or class of companies
as it considers necessary to ensure compliance of provisions of this section and such company or class of
companies shall comply with such directions.

The Companies (Corporate Social Responsibility Policy) Rules, 2014

Meaning of Corporate Social Responsibility- Rule 2(c):
CSR means and includes but is not limited to :-
(i) Projects or programs relating to activities areas or subjects specified in Schedule VII to the Act; or
(ii) Projects or programs relating to activities undertaken by the board of directors of a company (Board) in
pursuance of recommendations of the CSR Committee of the Board as per declared CSR Policy of the
company subject to the condition that such policy will include activities, areas or subjects specified in
Schedule VII of the Act.
CSR Committee- Rule 2(d): CSR Committee means the Corporate Social Responsibility Committee of the
Board referred to in section 135 of the Act.
CSR Policy- Rule 2(e): CSR Policy relates to the activities to be undertaken by the company in areas or
subjects specified in Schedule VII to the Act and the expenditure thereon, excluding activities undertaken in
pursuance of normal course of business of a company;
Net profit-Rule 2(f): New Profit means the net profit of a company as per its financial statement prepared in
accordance with the applicable provisions of the Act, but shall not include the following, namely :-
i. any profit arising from any overseas branch or branches of the company, whether operated as .a
separate company or otherwise; and
ii. any dividend received from other companies in India, which are covered under and complying with the
provisions of section135 of the Act:
Provided that net profit in respect of a financial year for which the relevant financial -statements were prepared
in accordance with the provisions of the Companies Act, 1956 (1 to 1956) shall not be required to be re-
calculated in accordance with the provisions of the Act:
Provided further that in case of a foreign company covered under these rules, net profit means the net profit of
such company as per profit and loss account prepared in terms of clause (a) of sub-section (1) of section 381
read with section 198 of the Act.
Rule 3. Corporate Social Responsibility.
(1) Every company including its holding or subsidiary, and a foreign company defined under clause (42) of
section 2 of the Act having its branch office or project office in India, which fulfills the criteria specified in sub-
section (I) of section 135 of the Act shall comply with the provisions of section 135 of the Act and these rules:
Provided that net worth, turnover or net profit. of a foreign company of the Act shall be computed in accordance
with balance sheet and Profit and loss account of such company prepared in accordance .with the provisions of
clause (a) of sub-section (1) of section 381 and section 198 of the Act
(2) Every company which ceases to be a company covered under subsection (1) of section 135 of the Act for
three consecutive financial years shall not be required to -
(a) constitute a CSR Committee; and
(b) comply with the provisions contained in sub-section (2) to (5) of the said section,
till such time it meets the criteria specified in sub-section (1) of section 135.
 Lesson 16 n CSR and Sustainability 495

Rule 4. CSR Activities

(1) The CSR activities shall be undertaken by the company, as per its stated CSR Policy, as projects or
programs or activities (either new or ongoing), excluding activities undertaken in pursuance of its normal course
of business.
(2) The Board of a company may decide to undertake its CSR activities approved by the CSR Committee,
through
(a) a company established under section 8 of the Act or a registered trust or a registered society, established
by the company, either singly or alongwith any other company, or
(b) a company established under section 8 of the Act or a registered trust or a registered society, established
by the Central Government or State Government or any entity established under an Act of Parliament
or a State legislature :
Provided that- if, the Board of a company decides to undertake its CSR activities through a company established
under section 8 of the Act or a registered trust or a registered society, other than those specified in this sub-rule,
such company or trust or society shall have an established track record of three years in undertaking similar
programs or projects; and the company has specified the projects or programs to be undertaken, the modalities
of utilisation of funds of such projects and programs and the monitoring and reporting mechanism”.
(3) A company may also collaborate with other companies for undertaking projects or programs or CSR activities
in such a manner that the CSR Committees of respective companies are in a position to report separately on
such projects or programs in accordance with these rules.
(4) Subject to provisions of sub-section (5) of section 135 of the Act, the CSR projects or programs or activities
undertaken in India only shall amount to CSR Expenditure.
(5) The CSR projects or programs or activities that benefit only the employees of the company and their families
shall not be considered as CSR activities in accordance with section 135 of the Act.
(6) Companies may build CSR capacities of their own personnel as well as those of their Implementing agencies
through Institutions with established track records of at least three financial years but such expenditure including
expenditure on administrative overheads, shall not exceed five percent of total CSR expenditure of the company
in one financial year.
(7) Contribution of any amount directly or indirectly to any political party under section 182 of the Act, shall not
be considered as CSR activity.
Rule 5. CSR Committees.
(1) The companies mentioned in the rule 3 shall constitute CSR Committee as under.-
(i) a company covered under subsection (1) of section 135 which is not required to appoint an independent
director pursuant to sub-section (4) of section 149 of the Act, shall have its CSR Committee without
such director ;
(ii) a private company having only two directors on its Board shall constitute its CSR Committee with two
such directors;
(iii) with respect to a foreign company covered under these rules, the CSR Committee shall comprise of
at least two persons of which one person shall be as specified under clause (d) of sub-section (1) of
section 380 of the Act and another person shall be nominated by the foreign company.
(2) The CSR Committee shall institute a transparent monitoring mechanism for implementation of the CSR
projects or programs or activities undertaken by the company.
496 EP-GRMCE

Rule 6. CSR Policy

(1) The CSR Policy of the company shall, inter-alia, include the following namely :-
(a) a list of CSR projects or programs which a company plans to undertake areas or subjects specified
in of the Schedule VII of the Act, specifying modalities of execution of such project or programs and
implementation schedules for the same; and
(b) monitoring process of such projects or programs:
Provided that the CSR activities does not include the activities undertaken in pursuance of normal course of
business of a company.
Provided further that the Board of Directors shall ensure that activities included by a company in its Corporate
Social Responsibility Policy are related to the areas or subjects specified in Schedule VII] of the Act.
(2) The CSR Policy of the company shall specify that the surplus arising out of the CSR projects or programs or
activities shall not form part of the business profit of a company.
Rule 7. CSR Expenditure
CSR expenditure shall include all expenditure including contribution to corpus, or on projects or programs
relating to CSR activities approved by the Board on the recommendation of its CSR Committee, but does not
include any expenditure on an item not in conformity or not in line with activities which fall within the areas or
subjects, specified in Schedule VII of the Act.
Report on Corporate Social Responsibility: Section 134(3)(o) states that there shall be attached to statements
laid before a company in general meeting, a report by its Board of Directors, which shall include, the details
about the policy developed and implemented by the company on corporate social responsibility initiatives taken
during the year.
Rule 8. CSR Reporting
(1) The Board’s Report of a company covered under these rules pertaining to a financial year commencing
on or after the 1st day of April, 2014 shall include an annual report on CSR containing particulars specified in
Annexure.
(2) In case of a foreign company, the balance sheet filed under sub-clause (b) of sub-section (1) of section 381
shall contain an Annexure regarding report on CSR.
Penal provision for non-compliance: Section 134(8) further states that if a company contravenes the
provisions of this section, the company shall be punishable with fine which shall not be less than fifty
thousand rupees but which may extend to twenty-five lakh rupees and every officer of the company who
is in default shall be punishable with imprisonment for a term which may extend to three years or with
fine which shall not be less than fifty thousand rupees but which may extend to five lakh rupees, or
with both.
Rule 9. Display of CSR Activities on its Website
The Board of Directors of the company shall, after taking into account the recommendations of CSR Committee,
approve the CSR Policy for the company and disclose contents of such policy in its report and the same shall
be displayed on the company’s website, if any, as per the particulars specified in the Annexure.
 Lesson 16 n CSR and Sustainability 497

Reporting format of CSR Activities:

Format for the Annual Report on CSR Activities

(To be included in the Board’s Report)

1. A brief outline of the company’s CSR policy,

including overview of projects or programs proposed
to be undertaken and a reference to the web-link to
the CSR policy and projects Or programs.

2. The Composition of the CSR Committee.

3. Average net profit of the company for last three

financial years

4. Prescribed CSR Expenditure (two per cent. of the

amount as in item 3 above)

5. Details of CSR spent during the financial year.

(a) Total amount to be spent for the financial year;

(b) Amount unspent , if any;
(c) Manner in which the amount spent during the
financial year is detailed below.

(1) (2) (3) (4) (5) (6) (7) (8)

S.No. CSR Sector in Projects or Amount Amount Cumulative Amount

Project which the programs outlay spent expenditure spent:
or activity Project is (budget) on the up to the Direct or
(1) Local
identified covered project or projects or reporting through im-
area or
programs programs period plementing
other
wise Sub-heads: agency*
(2) Specify
(1) Direct
the State
expenditure
and district
on
where
projects or
projects or
programs
programs
was (2)
undertaken Overheads:

1.

2.

3.

Total
498 EP-GRMCE

*Give details of implementing agency

6. In case the company has failed to spend the two

per cent, of the average net profit of the last three
financial years or any part thereof, the company shall
provide the reasons for not spending the amount in its
Board report.

7. A responsibility statement of the CSR Committee

that the implementation and monitoring of CSR Policy,
is in compliance with CSR objectives and Policy of the
company.

Sd/- Sd/- Sd/-

(Chief Executive Officer or (Chairman CSR Committee) (Person specified under clause (d)
Managing Director or Director) of sub-section (1) of section 380 of
the Act) (wherever applicable)

Activities eligible for CSR: The activities, which are eligible for CSR are contained in Schedule VII. The details
of the activities are as under:

SCHEDULE VII
(See Section 135)
Activities which may be included by companies in their Corporate Social Responsibility Policies Activities
relating to: –
i. Eradicating hunger, poverty and malnutrition, ‘‘promoting health care including preventive health care’’
and sanitation including contribution to the Swach Bharat Kosh set-up by the Central Government for
the promotion of sanitation and making available safe drinking water.
ii. promoting education, including special education and employment enhancing vocation skills especially
among children, women, elderly and the differently abled and livelihood enhancement projects.
iii. promoting gender equality, empowering women, setting up homes and hostels for women and
orphans; setting up old age homes, day care centres and such other facilities for senior citizens and
measures for reducing inequalities faced by socially and economically backward groups.
iv. ensuring environmental sustainability, ecological balance, protection of flora and fauna, animal
welfare, agroforestry, conservation of natural resources and maintaining quality of soil, air and water
including contribution to the Clean Ganga Fund set-up by the Central Government for rejuvenation of
river Ganga.
v. protection of national heritage, art and culture including restoration of buildings and sites of historical
importance and works of art; setting up public libraries; promotion and development of traditional art
and handicrafts;
vi. measures for the benefit of armed forces veterans, war widows and their dependents, Central Armed
Police Forces (CAPF) and Central Para Military Forces (CPMF) veterans, and their dependents
including widows;
vii. training to promote rural sports, nationally recognised sports, Paralympic sports and Olympic sports
 Lesson 16 n CSR and Sustainability 499

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

SEBI (LODR) Regulations, 2015

In line with the National Voluntary Guidelines on Social, Environmental and Economic Responsibilities
of Business and considering the larger interest of public disclosure regarding steps taken by listed entities,
SEBI has mandated the requirement of submission of Business Responsibility Report (‘BRR’) for top 1000
listed entities under Regulation 34(2)(f) of SEBI (Listing Obligations and Disclosure Requirements) Regulations
2015 (“SEBI LODR”). The key principles which are required to be reported by the entities pertain to areas such
as environment, governance, stakeholder’s relationships, etc.
Regulation 34(2)(f) of the SEBI(LODR) Regulations, 2015, provides that the annual report shall contain the
top one thousand listed entities based on market capitalization (calculated as on March 31 of every financial
year), business responsibility report describing the initiatives taken by them from an environmental, social and
governance perspective, in the format as specified by the Board from time to time:
Provided that listed entities other than top one thousand listed companies based on market capitalization
and listed entities which have listed their specified securities on SME Exchange, may include these business
responsibility reports on a voluntary basis in the format as specified.

National Guidelines on Responsible Business Conduct (NGRBC), 2019

There have been various national and international developments in the past decade that have nudged
businesses to be sustainable and more responsible, prior most being the United Nations Guiding Principles on
Business & Human Rights (UNGPs). These became the key drivers for further revision of the guidelines. Some
of these include the thrust of Companies Act, 2013 (Act) on businesses to be more mindful of their stakeholders.
The Act casts fiduciary duties on the Directors of a Company (S. 166) requiring them to promote the objects of
the company for the benefit of its members as a whole, and in the best interests of the company, its employees,
the shareholders, the community and for the protection of environment. There was also a need to demonstrate
more visibly India’s implementation of the UNGPs based on UNHRC’s ‘Protect, Respect & Remedy’ Framework
and also make evident India’s commitment to Sustainable Development Goals (SDGs).
500 EP-GRMCE

The MCA has revised the National Voluntary Guidelines on Social, Environmental and Economic Responsibilities
on Business, 2011 (NVGs) and formulated the National Guidelines on Responsible Business Conduct (NGRBC).
The same was published on MCA official website on 15th March, 2019.
The NGRBC is applicable to all kinds of businesses, irrespective of their size, ownership, size, sector, structure
or location. It is expected that all businesses investing or operating in India or outside to follow these Guidelines.
NGRBC also provides useful framework to guide Indian MNCs for their overseas Operation.
The NGRBC consist of two chapters and an expanded set of annexures. While the Principles have been
updated, they have retained the articulation and description of those in the NVGs. The connected Core Elements
enhance the operationalization of each Principle. The details in the annexures provide practical guidance to
businesses on the adoption and implementation of these guidelines.

Principle 1 Businesses should conduct and govern themselves with integrity and in a
manner that is ethical, transparent and accountable.
Brief Description:
l This Principle recognizes that ethical behaviour in all operations, functions
and processes, is the cornerstone of businesses guiding their governance of
economic, social and environmental responsibilities.
l The Principle emphasizes that disclosures on business decisions and actions
that impact stakeholders form the fundamental basis of operationalizing
responsible business conduct and should be accessible to all relevant
stakeholders.
l It recognizes that businesses are an integral part of society and that they
will hold themselves accountable for the effective adoption, implementation,
and the making of disclosures on their performance with respect to the Core
Elements of these Guidelines.
l The Principle further emphasizes that the governance structure of the business
should ensure this, in line with SDG 16.

Principle 2 Businesses should provide goods and services in a manner that is sustainable
and safe.
Brief Description:
l This Principle recognizes the proposition of SDG 12, that sustainable production
and consumption are interrelated, contribute to enhancing the quality of life
and towards protecting and preserving earth’s natural resources.
l The Principle further emphasizes that businesses should focus on safety and
resource-efficiency in the design and manufacture of their products, and use
their products in a manner that creates value while minimizing and mitigating
its adverse impacts on the environment and society through all stages of its life
cycle, from design to final disposal. Over time, businesses should embrace the
idea of circularity in all its operations.
l In order to do so, the Principle encourages businesses to understand all
material sustainability issues across their product life cycle and value chain.
 Lesson 16 n CSR and Sustainability 501

Principle 3 Businesses should respect and promote the well-being of all the employees,
including those in their value chains.
Brief Description:
l This Principle encompasses all policies and practices relating to the equity,
dignity and well-being, and provision of decent work (as indicated in SDG 8),
of all employees engaged within a business or in its value chain, without any
discrimination and in a way that promotes diversity.
l The principle recognizes that the well-being of an employee also includes the
wellbeing of her/his family.

Principle 4 Businesses should respect the interests of and be responsible to all its
stakeholder.
Brief Description:
l This Principle recognizes that businesses operate in an eco-system
comprising a number of stakeholders, beyond shareholders and investors,
and that their activities impact natural resources, habitats, communities
and the environment.
l The Principle acknowledges that it is the responsibility of businesses to ensure
that the interests of all stakeholders, especially those who may be vulnerable
and marginalized, are protected.
l The Principle further recognizes that businesses have a responsibility to
maximize the positive impacts and minimize and mitigate the adverse impacts
of its products, operations, and practices on all their stakeholders.

Principle 5 Businesses should respect and promote human rights.

Brief Description:
l This Principle recognizes that human rights are rights inherent to all human
beings, and that everyone, individually or collectively, is entitled to these rights,
without discrimination. It further recognizes that human rights are inherent,
inalienable, interrelated, interdependent and indivisible.
l The Principle is inspired, informed and guided by the Constitution of India and
the International Bill of Rights and recognizes the primacy of the State’s duty
to protect and fulfil human rights.
l The Principle is further informed and guided by the UN Guiding Principles
on Business and Human Rights in its articulation of the responsibility of
businesses to respect human rights. It affirms that the responsibility of
businesses to respect human rights requires that it avoids causing or
contributing to adverse human rights impacts, and that it addresses such
impacts when they occur.
l The Principle urges businesses to be especially responsive to such persons,
individually or collectively, who are most vulnerable to, or at risk of, such
adverse human rights impacts.
502 EP-GRMCE

Principle 6 Businesses should respect and make efforts to protect and restore the environment.
Brief Description:
l This Principle recognizes that environmental responsibility is a prerequisite for
sustainable economic growth and for the well-being of society.
l The Principle emphasizes that environmental issues are interconnected at the
local, regional and global levels, which makes it imperative for businesses
to address issues like pollution, biodiversity conservation, sustainable use of
natural resources and climate change (mitigation, adaptation and resilience) in
a just, comprehensive and systematic manner. These are aligned with SDGs
11, 13, 14 and 15.
l The Principle encourages businesses to assess environment impacts of its
products and operations and take steps to minimize and mitigate its adverse
impacts where these cannot be avoided.
l The Principle encourages businesses to adopt environmental practices and
processes that minimize or eliminate the adverse impacts of its operations and
across the value chain.
l The Principle encourages businesses to follow the Precautionary Principle in
all its actions.

Principle 7 Businesses, when engaging in influencing public and regulatory policy, should
do so in a manner that is responsible and transparent.
Brief Description:
l This Principle recognizes that businesses operate within specified national
and international legislative and policy frameworks, which guide their growth
and also provide for certain desirable restrictions and boundaries.
l The Principle recognizes the legitimacy of businesses to engage with
governments for redressal of a grievance or for influencing public policy.
l The Principle emphasizes that public policy advocacy must expand public
good.

Principle 8 Businesses should promote inclusive growth and equitable development.

Brief Description:
l This Principle recognizes the challenges of social and economic development
faced by India, and builds upon the national and local development agenda as
articulated in government policies and priorities. This is particularly significant
in zones affected by social disharmony and low human development.
l The Principle recognizes the value of the energy and enterprise of businesses
and encourages them to innovate and contribute to the overall development of
the country with a specific focus on disadvantaged, vulnerable and marginalized
communities, as articulated in Section 135 of the Companies Act, 2013.
l The Principle also emphasizes the need for collaboration amongst businesses,
government agencies and civil society in furthering this development agenda
in line with SDG 17.
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l The Principle reiterates that business success, inclusive growth and equitable
development are interdependent.

Principle 9 Businesses should engage with and provide value to their consumers in a
responsible manner.
Brief Description:
l This Principle is based on the fact that the basic aim of a business entity is
to provide goods and services to its consumers that are safe to use, and in a
manner that creates value for both.
l The Principle recognizes that consumers have the freedom of choice in the
selection and usage of goods and services, and that the enterprises will strive
to make available products that are safe, competitively priced, easy to use and
safe to dispose of, for the benefit of their consumers.
l The Principle also recognizes that businesses should play a key role, along with
other relevant stakeholders, in mitigating the adverse impacts that excessive
consumption of its products may have on the overall well-being of individuals,
society and our planet, in line with SDG 12.

Apart from the Principles and Core Elements contained in the NGRBC, the following Annexures have
also been provided, which supplement the principles. These are as under:

Annex 1 Guidance on Adoption of NGRBC

What does adoption mean?
The Principles and Core Elements contained in the NGRBC are designed to enable
businesses to conduct themselves responsibly. Therefore, adopting these guidelines
refers to the integration of the Principles and Core Elements into the core business
strategy and operations of an enterprise including its value chain.
Key Enablers:
l Leadership commitment
l Employee Engagement
l Stakeholder Engagement
l Disclosure and Reporting
The Business Case for Adoption:
l Prioritize Core Elements:
Vision, mission and values
Business success factors
Material sustainability issues
Laws, regulations, global covenants and good practices
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l Review and Develop Policies:

Map current policies, processes, guidelines vis-a-vis prioritized Core Elements
Develop new policies where there are gaps (in consultation with stakeholders)
Get policies endorsed by the Governance Structure
l Determine Ambition:
Determine performance level for each prioritized Core Element
Two performance levels suggested in the Guidelines: Essential and Leadership
l Set Targets:
Select indicators for each prioritized Core Element that reflects the ambition
Set targets for each indicator / issue

Annex 2 Guidance for Micro, Small and Medium Enterprises

The Business Case for MSMEs to adopt the NGRBC:
Increased access to markets and customers
Better preparedness for compliance
De-risking operations
Cost savings and increase in productivity
Access to funds

Annex 3 Business Responsibility Reporting Framework

Annex 4 SDGs Mapped against NGRBC

Annex 5 Business Case Matrix

Annex 6 Guidance for Businesses on Using the BRRF as a Self-Assessment Tool

Annex 7 Indian Laws and Principles (Indicative)

Annex 8 Resources

SUSTAINABLE DEVELOPMENT
Sustainable development is a broad concept that balances the need for economic growth with environmental
protection and social equity. It is a process of change in which the exploitation of resources, the direction of
investments, the orientation of technological development, and institutional change are all in harmony and
enhance both current and future potential to meet human needs and aspirations. Sustainable development is
a broad concept and it combines economics, social justice, environmental science and management, business
management, politics and law.
The goal of sustainable development is to maintain economic growth without environment destruction. Exactly
what is being sustained (economic growth or the global ecosystem, or both) is currently at the root of several
debates, although many scholars argue that the apparent reconciliation of economic growth and the environment
is simply a green sleight of hand that fails to address genuine environmental problems.
In 1987, a report of the World Commission on Environment and Development (WCED) of the United Nations
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(popularly known as Brundtland Report) first introduced the concept. The Commission describes Sustainable
Development as a process of change in which the exploitation of resources, the direction of investments, the
orientation of technological development … instrumental change and the ability of biosphere to absorb the
effects of human activities are consistent with future as well as present needs.
In an attempt to address criticism of the vagueness in the definition of sustainable development, Karl-Henrik
Robert, founder of the environment organization The Natural Step, along with a group of 50 scientists sought
to obtain a consensus on sustainability and developed four ‘basi, non-negotiable system conditions for global
sustainability’. These include:
1. No systematic increase of substances from the earth’s crust in the ecosphere. This condition implies a
drastic reduction in the use of minerals, fossils fuels and non-renewable resources.
2. No systematic increase of substances produced by society in the ecosphere. This condition means that
substances cannot be produced faster that they are broken down and degraded biologically. Therefore,
the uses of non-biodegradable materials must be minimized.
3. No systematic diminishing of the physical basis for productivity and diversity of nature. This condition
requires preservation of biodiversity, non-environmentally damaging land use practices and use of
renewable resources.
4. Fair and efficient use of resources and social justice. This implies equitable access to an just distribution
of resources.
While the above four conditions may provide a more precise definition that Brundtland’s, problems of
operationalizing remain; there is still considerable disagreement among the scientific community on evaluation
of environmental impact of products and processes. There are also other practical issue:
l What is the base line from which we can measure ‘systematic increase?
l Are goals of zero emissions as stated in the environmental policy statements of several transnational
firms mere feel good statements or are they achievable?
In an analysis of the impact of globalization on environmental sustainability using the Natural Step framework,
Osland et al. (2002) found the evidence to be ‘mixed’. They were being quite charitable in their overall
assessment because while there were some positive examples of environmentally sustainable practices like
energy efficiency, recycling and cleaner technologies there were more negative environmental effects like
species and biodiversity depletion, soil erosion, deforestation and salinity, to name a few.
Sustainable Development indicates development that meets the needs of the present generation without
compromising with the ability of the future generations to meet their needs. The principle behind it is to foster
such development through technological and social activities which meets the needs of the current generations,
but at the same time ensures that the needs of the future generation are not impaired. For example, natural
energy resources, like Coal and Petroleum etc., should be prudently used avoiding wastage so that the future
generation can inherit these energy resources for their survival also.
The contribution of sustainable development to corporate sustainability is twofold. First, it helps set out the
areas that companies should focus on: environmental, social, and economic performance. Secondly, it provides
a common societal goal for corporations, governments, and civil society to work towards ecological, social, and
economic sustainability. However, sustainable development by itself does not provide the necessary arguments
for why companies should care about these issues. Those arguments come from corporate social responsibility
and stakeholder theory.
Corporate sustainability encompasses strategies and practices that aim at meeting the needs of the stakeholders
today while seeking to protect, support and enhance the human and natural resources that will be needed in
the future.
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Four fundamental Principle of Sustainable Development agreed by the world community are:
1. Principle of Intergenerational equity: need to preserve natural resources for the future generations.
2. Principle of sustainable use: use of natural resources in a prudent manner without or with minimum
tolerable impact on nature.
3. Principle of equitable use or intra-generational equity: Use of natural resources by any state /
country must take into account its impact on other states.
4. Principle of integration: Environmental aspects and impacts of socio-economic activities should be
integrated so that prudent use of natural resources is ensured.
This was reinforced at the United Nations Conference on Environment and Development (UNCED) held in
Rio de Janeiro in 1992. It is now universally acknowledged that the present generation has to ensure that the
coming generations have a world no worse than ours, rather hopefully better.
The generations have been following these fundamental natural laws for thousands of years. However, scenario
started changing rapidly during industrial revolution in Europe, and later on they have started growing side by
side with awakening of modern society worldwide. The environmental protection issues came in to the lime light
when the in the 1960s to 1970s the environmental legislations were passed in the US / Europe. During that era
it was seen this as the corporate responsibility to protect the environment, since the companies were taking the
advantages and exploitation of the natural resources by producing the carbon and polluting the environment
and water resources through the chemical base, which leads to further fertility of the soil. The Bhopal Gas
tragedy which happened in 1984 is the burning example before us, how the corporate have exploited the soil
and put the life in danger for generations to come.
Environmentalists claim that living things other than humans, and the natural environment as a whole, deserve
consideration in reasoning about the morality of political, economic, and social policies. The movement seeks
to improve and protect the quality of the natural environment through bringing about changes in environmentally
harmful human activities; adoption of forms of political, economic, and social organization that are thought
to be necessary for, or at least conducive to, the benign treatment of the environment by humans; and a
reassessment of humanity’s relationship with nature.
The U.S. Environmental Protection Agency defines Sustainable development as: “Sustainable development
marries two important themes: that environmental protection does not preclude economic development and that
economic development must be ecologically viable now and in the long run.” Hence sustainability encompasses
ideas and values that inspire people to become custodian of the environment without compromising with the
economic growth.
Some of the major treaties on environmental and social aspects are discussed below-

1. United Nations Conference on Human Environment

The United Nations Conference on the Human Environment (also known as the Stockholm Conference) was
an international conference convened under United Nations auspices held in Stockholm, Sweden from June
5-16,1972. It was the UN’s first major conference on international environmental issues, and marked a turning
point in the development of international environmental politics. One of the key issues addressed was the use
of CFCs (chlorofluorocarbons) which were thought to be responsible for the depletion of the ozone layer. The
Stockholm Conference laid a framework for future environmental cooperation; led to the creation of global and
regional environmental monitoring networks and the creation of the United Nations Environment Programme.

2. United Nations Environment Programme

United Nations Environment Programme (UNEP), established in 1972, is the voice for the environment within
 Lesson 16 n CSR and Sustainability 507

the United Nations system. UNEP acts as a catalyst, advocate, educator and facilitator to promote the wise
use and sustainable development of the global environment. To accomplish this, UNEP works with a wide
range of partners, including United Nations agencies, international organizations, national governments, non-
governmental organizations, the private sector and civil society. The Mission of the United Nation’s Environment
Programme is -
“To provide leadership and encourage partnership in caring for the environment by inspiring, informing, and
enabling nations and peoples to improve their quality of life without compromising that of future generations.”
The major Milestones of the UNEP include:
– 1973 - Convention on International Trade in Endangered Species (CITES)
– 1985 - Vienna Convention for the Protection of the Ozone Layer
– 1987 - Montreal Protocol on Substances that Deplete the Ozone Layer
– 1988 - Intergovernmental Panel on Climate Change (IPCC)
– 1989 - Basel Convention on the Transboundary Movement of Hazardous Wastes
– 1992 - UN Conference on Environment and Development (Earth Summit) publishes Agenda 21, a
blueprint for sustainable development
– 1992 - Convention on Biological Diversity
– 2000 - Malmö Declaration - first Global Ministerial Forum on the Environment calls for strengthened
international environmental governance
– 2000 - Millennium Declaration - environmental sustainability was included as one of eight Millennium
Development Goals
– 2002 - World Summit on Sustainable Development
– 2004 - Bali Strategic Plan for Technology Support and Capacity Building
– 2005 - World Summit outcome document highlights key role of environment in sustainable development
– 2012 - The United Nations Conference on Sustainable Development (Rio +20)
– 2013-15 – High level Political Forum on Sustainable Development
– 2015 – United Nations Sustainable Development Summit, 2015 (New York)
In India, the Water (Prevention and Control of Pollution) Act, 1974 and the Air (Prevention and Control of
Pollution) Act, 1981 have been enacted, essentially to give effect to the decisions taken at the International
Conference on Human Environment at Stockholm in 1972 declaring man’s fundamental right to live in a
pollution-free atmosphere and his responsibility to protect and improve the environment.
The United Nations Environment Programme (UNEP) is the leading global environmental authority that sets
the global environmental agenda, promotes the coherent implementation of the environmental dimension of
sustainable development within the United Nations system, and serves as an authoritative advocate for the
global environment.
United Nations categorize this work into seven broad thematic areas, which are:
(i) Climate change,
(ii) Disasters and conflicts,
(iii) Ecosystem management,
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(iv) Environmental governance,

(v) Chemicals and waste,
(vi) Resource efficiency, and
(vii) Environment under review.

Millennium Development Goals (MDGs)

The United Nations Millennium Development Goals are eight goals that all 191 UN member states have
agreed to try to achieve by the year 2015. The United Nations Millennium Declaration, signed in September
2000 commits world leaders to combat poverty, hunger, disease, illiteracy, environmental degradation, and
discrimination against women. The MDGs are derived from this Declaration, and all have specific targets and
indicators.
The Eight Millennium Development Goals are:
i. to eradicate extreme poverty and hunger;
ii. to achieve universal primary education;
iii. to promote gender equality and empower women;
iv. to reduce child mortality;
v. to improve maternal health;
vi. to combat HIV/AIDS, malaria, and other diseases;
vii. to ensure environmental sustainability; and
viii. to develop a global partnership for development.
The MDGs are inter-dependent; all the MDG influence health, and health influences all the MDGs. For example,
better health enables children to learn and adults to earn. Gender equality is essential to the achievement of
better health. Reducing poverty, hunger and environmental degradation positively influences, but also depends
on, better health.

3. Brundtland Commission
The Brundtland Commission, formally the World Commission on Environment and Development (WCED),
known by the name of its Chairman Gro Harlem Brundtland, was convened by the United Nations in 1983.
The Commission was created to address growing concern “about the accelerating deterioration of the human
environment and natural resources and the consequences of that deterioration for economic and social
development.” In establishing the Commission, the UN General Assembly recognized that environmental
problems were global in nature and determined that it was in the common interest of all nations to establish
policies for sustainable development.
The Report of the Brundtland Commission, Our Common Future, published in 1987, deals with sustainable
development and the change of policies needed for achieving that. The definition of this term in the report is
quite well known and often cited:
“Sustainable development is development that meets the needs of the present without compromising the ability
of future generations to meet their own needs.”

4. United Nations Conference on Environment and Development (UNCED)

United Nations Conference on Environment and Development (UNCED), byname Earth Summit,
 Lesson 16 n CSR and Sustainability 509

conference held at Rio de Janeiro, Brazil (June 3–14, 1992), to reconcile worldwide economic development
with protection of the environment. The Earth Summit was the largest gathering of world leaders as of 1992,
with 117 heads of state and representatives of 178 nations in all attending. By means of treaties and other
documents signed at the conference, most of the world’s nations nominally committed themselves to the pursuit
of economic development in ways that would protect the Earth’s environment and non-renewable resources.
Five major agreements on global environmental issues were signed.
Two of these,
(i) The Framework Convention on Climate Change and
(ii) The Convention on Biological Diversity,
were formal treaties whose provisions are binding on the parties.
The other three UNCED agreements were non-binding statements on the relationship between sustainable
environmental practices and the pursuit of social and socioeconomic development.
(i) Agenda 21 is a wide-ranging assessment of social and economic sectors with goals for improving
environmental and developmental impact of each.
(ii) The Rio Declaration summarizes consensus principles of sustainable development, and
(iii) The Statement on Forest Principles pledges parties to more sustainable use of forest resources.

5. Kyoto Protocol
The Kyoto Protocol was adopted on 11 December 1997. Owing to a complex ratification process, it entered into
force on 16 February 2005. Currently, there are 192 Parties to the Kyoto Protocol.
In short, the Kyoto Protocol operationalizes the United Nations Framework Convention on Climate Change by
committing industrialized countries to limit and reduce greenhouse gases (GHG) emissions in accordance with
agreed individual targets. The Convention itself only asks those countries to adopt policies and measures on
mitigation and to report periodically.
The Kyoto Protocol is based on the principles and provisions of the Convention and follows its annex-based
structure. It only binds developed countries, and places a heavier burden on them under the principle of
“common but differentiated responsibility and respective capabilities”, because it recognizes that they are
largely responsible for the current high levels of GHG emissions in the atmosphere.
The Kyoto Protocol sets binding emission reduction targets for 36 industrialized countries and the European
Union. Overall, these targets add up to an average 5 per cent emission reduction compared to 1990 levels over
the five year period 2008–2012 (the first commitment period).
In Doha, Qatar, on 8 December 2012, the Doha Amendment to the Kyoto Protocol was adopted for a second
commitment period, starting in 2013 and lasting until 2020. However, the Doha Amendment has not yet entered
into force; a total of 144 instruments of acceptance are required for entry into force of the amendment.
The amendment includes:
l New commitments for Annex I Parties to the Kyoto Protocol who agreed to take on commitments in a
second commitment period from 1 January 2013 to 31 December 2020;
l A revised list of GHG to be reported on by Parties in the second commitment period; and
l Amendments to several articles of the Kyoto Protocol which specifically referenced issues pertaining to
the first commitment period and which needed to be updated for the second commitment period.
On 21 December 2012, the amendment was circulated by the Secretary-General of the United Nations, acting
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in his capacity as Depositary, to all Parties to the Kyoto Protocol in accordance with Articles 20 and 21 of the
Protocol.
During the first commitment period, 37 industrialized countries and the European Community committed to
reduce GHG emissions to an average of five percent against 1990 levels. During the second commitment
period, Parties committed to reduce GHG emissions by at least 18 percent below 1990 levels in the eight-year
period from 2013 to 2020; however, the composition of Parties in the second commitment period is different
from the first.
One important element of the Kyoto Protocol was the establishment of flexible market mechanisms, which are
based on the trade of emissions permits. Under the Protocol, countries must meet their targets primarily through
national measures. However, the Protocol also offers them an additional means to meet their targets by way of
three market-based mechanisms:
l International Emissions Trading
l Clean Development Mechanism (CDM)
l Joint implementation (JI)
These mechanisms ideally encourage GHG abatement to start where it is most cost-effective, for example, in
the developing world. It does not matter where emissions are reduced, as long as they are removed from the
atmosphere. This has the parallel benefits of stimulating green investment in developing countries and including
the private sector in this endeavour to cut and hold steady GHG emissions at a safe level. It also makes leap-
frogging—that is, the possibility of skipping the use of older, dirtier technology for newer, cleaner infrastructure
and systems, with obvious longer-term benefits—more economical.
Monitoring emission targets
The Kyoto Protocol also established a rigorous monitoring, review and verification system, as well as a
compliance system to ensure transparency and hold Parties to account. Under the Protocol, countries’ actual
emissions have to be monitored and precise records have to be kept of the trades carried out.
Registry systems track and record transactions by Parties under the mechanisms. The UN Climate Change
Secretariat, based in Bonn, Germany, keeps an international transaction log to verify that transactions are
consistent with the rules of the Protocol.
Reporting is done by Parties by submitting annual emission inventories and national reports under the Protocol
at regular intervals.
A compliance system ensures that Parties are meeting their commitments and helps them to meet their
commitments if they have problems doing so.
Adaptation
The Kyoto Protocol, like the Convention, is also designed to assist countries in adapting to the adverse effects of
climate change. It facilitates the development and deployment of technologies that can help increase resilience
to the impacts of climate change.
The Adaptation Fund was established to finance adaptation projects and programmes in developing countries
that are Parties to the Kyoto Protocol. In the first commitment period, the Fund was financed mainly with a
share of proceeds from CDM project activities. In Doha, in 2012, it was decided that for the second commitment
period, international emissions trading and joint implementation would also provide the Adaptation Fund with a
2 percent share of proceeds.
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6. Bali Roadmap
At the 2007 United Nations Climate Change Conference in Bali, Indonesia in December, 2007, the participating
nations adopted the Bali Roadmap as a two-year process for finalizing a bindinig agreement in 2009 in Denmark.
The Bali Road Map consists of a number of forward-looking decisions that represent the various tracks essential
to reaching a secure climate future. The Bali Road Map includes the Bali Action Plan, which charts the course
for a new negotiating process designed to tackle climate change, with the aim of completing this by 2009. To
conduct the process, a subsidiary body under the Convention called the Ad Hoc Working Group on Long-term
Cooperative Action under the Convention (AWG-LCA) was set up.
To discuss future commitments for industrialized countries under the Kyoto Protocol, the Conference of the
Parties serving as the Meeting of the Parties to the Kyoto Protocol established a working group in December
2005, called the Ad Hoc Working Group on further Commitments for Annex I Parties under the Kyoto Protocol
(AWG-KP).

7. United Nations Conference on Sustainable Development, Rio+20

The United Nations Conference on Sustainable Development - or Rio+20 - took place in Rio de Janeiro, Brazil
on 20-22 June 2012. It resulted in a focused political outcome document which contains clear and practical
measures for implementing sustainable development.
In Rio, Member States decided to launch a process to develop a set of Sustainable Development Goals (SDGs),
which will build upon the Millennium Development Goals and converge with the post 2015 development
agenda.
The Conference also adopted ground-breaking guidelines on green economy policies. Governments also
decided to establish an intergovernmental process under the General Assembly to prepare options on a strategy
for sustainable development financing. The Rio+20 outcome document “The Future We Want” resolved to
establish an inclusive and transparent intergovernmental process on SDGs that is open to all stakeholders with
a view to develop global sustainable development goals agreed by the UN General Assembly.
Following are some commitments adopted under Rio+20 outcome document:
1. Poverty Eradication: poverty eradication should be given highest priority within UN agenda;
2. Food Security and Nutrition and Sustainable Agriculture: commitment of the right of everyone to have
access to safe, sufficient and nutritious food, importance of sustainable agriculture and recognition to the
importance of addressing the access of rural communities to credit, financial services, markets, land tenure,
health care and social services;
3. Energy: critical role of energy in sustainable development – access to sustainable modern energy contributes
to poverty eradication, saves lives and improves health, essential to social inclusion and gender equality.
4. Sustainable transport: importance of environmentally sound, safe and affordable transportation as a
means to improve social equity and health. Support development of sustainable transport systems, notably
public mass transportation systems. Acknowledge that developing countries need assistance.
5. Sustainable cities: well planned and integrated cities can be economically, socially and environmentally
sustainable - including housing, safe and healthy living environment for all, particularly the vulnerable;
affordable and sustainable transport and energy, promotion and protection of safe and green urban spaces,
water and sanitation, air quality, decent jobs and improved urban planning and slum upgrading. Recognize
importance of mixed-use planning and non-motorized mobility - including by promoting pedestrian and
cycling infrastructures.
6. Health and population: Health is a precondition for an outcome of and an indicator of all three dimensions
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of sustainable development. Sustainable development cannot be achieved in the presence of high burden
on communicable/non communicable diseases.
7. Commit to strengthen health systems toward the provision of equitable, universal coverage and promote
affordable access to prevention, treatment, care and support related to NCDs, especially cancer,
cardiovascular diseases, chronic respiratory diseases and diabetes.
8. Commit to establish or strengthen multi-sectoral national policies for the prevention and control of non-
communicable diseases.
9. Reaffirm the full right to use TRIPS provisions and Doha Declaration on TRIPs to promote access to
medicines for all and encourage development assistance in this regard.
10. Call to strengthen health systems through increased financing and the recruitment/training/retention of
health workers, improved distribution and access to medicines and improving health infrastructure.
11. Commit and consider population trends in development policy, emphasize need for universal access to
reproductive health, including family planning and protection of human rights in this context
12. Commit to reducing maternal and child mortality, gender equality and protection of human rights on matters
related to sexuality, and work to ensure health systems, address sexual and reproductive health.
13. Promoting full and productive employment, decent work for all, and social protections: need to
provide productive employment and decent work for all. Recognize importance of job creation. Workers
should have access to education, skills and healthcare, including occupational health and safety.

8. Paris Agreement on Climate Change, 2015

At the 21st Conference of the Parties in Paris, Parties to the United Nations Framework Convention on Climate
Change (UNFCCC) reached a landmark agreement to combat climate change and to accelerate and intensify
the actions and investments needed for a sustainable low carbon future. The Paris Agreement brings all nations
into a common cause to undertake take ambitious efforts to combat climate change and adapt to its effects, with
enhanced support to assist developing countries to do so.
The Paris Agreement’s central aim is to strengthen the global response to the threat of climate change by
keeping the global temperature rise this century well below 2 degrees Celsius above pre-industrial levels and
to pursue efforts to limit the temperature increase even further to 1.5 degrees Celsius.
On Earth Day, 22 April 2016, 175 world leaders signed the Paris Agreement at United Nations Headquarters in
New York. This was by far the largest number of countries ever to sign an international agreement on a single
day.

THE 2030 AGENDA FOR SUSTAINABLE DEVELOPMENT

The 2030 Agenda for Sustainable Development” including its 17 Sustainable Development Goals (SDGs) and
169 targets was adopted on 25 September 2015 by Heads of State and Government at a special UN summit.
The Agenda is a commitment to eradicate poverty and achieve sustainable development by 2030 world-wide,
ensuring that no one is left behind. The adoption of the 2030 Agenda was a landmark achievement, providing
for a shared global vision towards sustainable development for all.
l It issued a first Communication “A decent life for all: ending poverty and giving the world a sustainable
future” in February 2013. It was followed by Council Conclusions on “An overarching post-2015
framework” in June 2013.
l A second Communication “A decent life for all: from vision to collective action” was issued in June 2014
and was followed by Council Conclusions on “A transformative post-2015 agenda” in December 2014.
 Lesson 16 n CSR and Sustainability 513

l On 5 February 2015 the Commission issued its third Communication “A Global Partnership for Poverty
Eradication and Sustainable Development after 2015” which puts forward ideas on the appropriate
enabling policy environment; on financing – public and private, national and international; and on
monitoring and accountability.
l This was followed by Council Conclusions on “a global partnership for Poverty Eradication and
Sustainable Development after 2015” on 26 May 2015.
The 2030 Agenda itself consists of 4 sections:
(i) A political Declaration
(ii) A set of 17 sustainable Development Goals and 169 targets (based on the report of the OWG, with
some small modifications)
(iii) Means of Implementation
(iv) A framework for follow up and review of the Agenda.
In addition, the 2030 Agenda integrates in a balanced manner the three dimensions of sustainable
development - economic, social and environmental. The 2030 Agenda is also indivisible, in a sense that it must
be implemented as a whole, in an integrated rather than a fragmented manner, recognizing that the different
goals and targets are closely interlinked.

Sustainable Development Goals

1. Goal 1. End poverty in all its forms everywhere
2. Goal 2. End hunger, achieve food security and improved nutrition and promote sustainable agriculture
3. Goal 3. Ensure healthy lives and promote well-being for all at all ages
4. Goal 4. Ensure inclusive and equitable quality education and promote lifelong learning opportunities for
all
5. Goal 5. Achieve gender equality and empower all women and girls
6. Goal 6. Ensure availability and sustainable management of water and sanitation for all
7. Goal 7. Ensure access to affordable, reliable, sustainable and modern energy for all
8. Goal 8. Promote sustained, inclusive and sustainable economic growth, full and productive employment
and decent work for all
9. Goal 9. Build resilient infrastructure, promote inclusive and sustainable industrialization and foster
innovation
10. Goal 10. Reduce inequality within and among countries
11. Goal 11. Make cities and human settlements inclusive, safe, resilient and sustainable
12. Goal 12. Ensure sustainable consumption and production patterns
13. Goal 13. Take urgent action to combat climate change and its impacts*
14. Goal 14. Conserve and sustainably use the oceans, seas and marine resources for sustainable
development
15. Goal 15. Protect, restore and promote sustainable use of terrestrial ecosystems, sustainably manage
forests, combat desertification, and halt and reverse land degradation and halt biodiversity loss
16. Goal 16. Promote peaceful and inclusive societies for sustainable development, provide access to
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justice for all and build effective, accountable and inclusive institutions at all levels
17. Goal 17. Strengthen the means of implementation and revitalize the global partnership for sustainable
development

SUSTAINABILITY INDICES

(A) DOW-JONES SUSTAINABILITY INDEX

The Dow Jones Sustainability Indices are the first global indices tracking the financial performance of the
leading sustainability-driven companies worldwide, it was launched in 1999.
The Dow Jones Sustainability World Index (DJSI World) comprises more than 300 companies that represent
the top 10% of the leading sustainability companies out of the biggest 2500 companies in the Dow Jones World
Index.
In addition to the composite DJSI World, there are six specialized subset indexes excluding alcohol, ex gambling,
ex tobacco, ex armaments & firearms, ex alcohol, tobacco, gambling, armaments & firearms indexes, and ex
alcohol, tobacco, gambling armaments & firearms, and adult entertainment.

(B) ENVIRONMENT, SOCIAL, GOVERNANCE (ESG) INDEX

ESG describes the environmental, social and corporate governance issues that investors are considering in the
context of corporate behaviour. Integration of ESG refers to the active investment management processes that
include an analysis of environmental, social, and corporate governance risks and opportunities and sustainability
aspects of company performance evaluation.
The ESG index employs a unique and innovative methodology that quantifies a company’s ESG practices and
translates them into a scoring system which is then used to rank each company against its peers in the market.
Its quantitative scoring system offers investors complete transparency on Environmental, Social & governance
issues of a company.
Key Performance Indicators:
l Environment - Energy use and efficiency, Greenhouse gas emissions, Water use, Use of ecosystem
services – impact & dependence and Innovation in environment friendly products and services.
l Social - Employees, Poverty and community impact and Supply chain management
l Governance - Codes of conduct and business principles, accountability, transparency and disclosure
and Implementation – quality and consistency.

(C) STANDARD & POOR’S ESG INDIA INDEX

Standard & Poor’s ESG India index provides investors with exposure to a liquid and tradable index of 50 of the
best performing stocks in the Indian market as measured by environmental, social, and governance parameters.
The index employs a unique and innovative methodology that quantifies a company’s ESG practices and
translates them into a scoring system which is then used to rank each company against their peers in the Indian
market. Its quantitative scoring system offers investors complete transparency.
The creation of the index involves a two step process, the first of which uses a multi-layered approach to
determine an ‘ESG’ score for each company. The second step determines the weighting of the index by score.
Index constituents are derived from the top 500 Indian companies by total market capitalizations that are listed
on National Stock Exchange of India Ltd. (NSE). These stocks are then subjected to a screening process which
yields a score based on a company’s ESG disclosure practices in the public domain.
 Lesson 16 n CSR and Sustainability 515

MEASURING BUSINESS SUSTAINABILITY

Some approaches to measure business sustainability are discussed below.

ALTMAN Z-SCORE
The Altman Z Score model is a financial model to predict the likelihood of bankruptcy in a company. It was
created by Edward I. Altman, a professor at the Leonard N. Stern School of Business of New York University.
His aim at predicting bankruptcy began around the time of the great depression, in response to a sharp rise in
the incidence of default. The formula helps to predict the probability of a firm to go into bankruptcy within next
two years. In 1960s, an idea of trying to predict which companies would be unsuccessful in the near future
was far from new at that time. Altman added a statistical technique called multivariate analysis to the mix of
traditional ratio-analysis techniques. Adding multivariate analysis allowed him to consider the effects of several
ratios on the ‘predictiveness’ of his bankruptcy model. In addition to this it allowed to consider how those ratios
affected each other’s usefulness in the model.
Z-scores are used to predict corporate defaults and an easy-to-calculate control measure for the financial
distress status of companies. The purpose of the Z Score Model is to measure a company’s financial health
and to predict the probability that a company will collapse within 2 years. It is proven to be very accurate to
forecast bankruptcy in a wide variety of contexts and markets. Studies show that the model has 72% – 80%
reliability of predicting bankruptcy. However, the Z-Score does not apply to every situation. It can only be used
for forecasting if a company being analyzed can be compared to the database.
The Z-score uses multiple corporate income and balance sheet values to measure the financial health of a
company. The Z-score is a linear combination of five common business ratios, weighted by coefficients.
Formula
Z-Score = 1.2A + 1.4B + 3.3C + 0.6D + 1.0E
Where:
l A = Working capital / total assets: -This ratio measures liquid assets. The companies in trouble will
usually experience shrinking liquidity.
l B = Retained earnings / total assets: -This ratio calculates the overall profitability of the company.
Dwindling profitability is a warning sign.
l C = Earnings Before Interest and Tax (EBIT)/ total assets: -This ratio shows how productive a company
is in generating earnings, relative to its size.
l D = Market value of equity / total liabilities: - This ratio suggests how far the company’s assets can
decline before it becomes technically insolvent (i.e., its liabilities become higher than its assets).
l E = Sales / total assets:-This is the asset turnover ratio and is a measure of how effectively the firm uses
its assets to generate sales.
A Z score of greater than 2.99 means that the entity being measured is safe from bankruptcy. A score of less
than 1.81 means that a business is at considerable risk of going into bankruptcy, while scores in between should
be considered a red flag for possible problems. The model has proven to be reasonably accurate in predicting
the future bankruptcy of entities under analysis.

RISK-ADJUSTED RETURN ON CAPITAL - RAROC

Risk-adjusted return on capital (RAROC) is a profitability metric that can be used to analyse return in relation
to the level of risk taken on. It can be used to compare the performance of several investments with differing
levels of risk exposure. It should not be confused with RORAC (return on risk-adjusted capital) which adjusts
516 EP-GRMCE

the capital invested based on the risks being taken. RAROC instead adjusts the return itself. RAROC was
developed by Bankers Trust in the late 1970s and early 1980s in response to regulatory interest in the capital
ratios of financial institutions and the implementation of capital adequacy regulations. RAROC is often used by
banks to determine the amount of capital required to support the bank’s activities.
RAROC is a modified return on investment (ROI) figure that takes elements of risk into account. In financial
analysis, project and investments with greater risk levels must be evaluated differently; RAROC thus account
for changes in an investment’s profile by discounting risk cash flows against less-risk cash flows.
RAROC is also referred to as a profitability-measurement framework, based on risk that allows analysts to
examine a company’s financial performance and establish a steady view of profitability across business sectors
and industries.
RAROC system allocates capital for two basic reasons:
1. Risk management
2. Performance evaluation
For risk management purposes, the main goal of allocating capital to individual business units is to determine
the bank’s optimal capital structure—that is economic capital allocation is closely correlated with individual
business risk. As a performance evaluation tool, it allows banks to assign capital to business units based on the
economic value added of each unit.
Risk-adjusted return on capital (RAROC) is a modified return on investment (ROI) figure that takes elements
of risk into account. The formula used to calculate RAROC is:

Where:
l Income from capital = (capital charges) × (risk-free rate)
l Expected Loss = Average loss expected over specified period of time.
l This is calculated by multiplying capital charges by the risk-free rate. This is because, since capital is
set aside to support a risky transaction, it should theoretically be invested in something ‘risk free’.
l Expected loss is the average anticipated loss over the period being measured. It will include the cost of
doing business as well as any loss incurred from default or operational risk.
l Capital means economic capital is the amount of capital that a financial institution needs to ensure that
the company remains solvent. It should be sufficient to support any risks that the company takes on.
In financial analysis, projects and investments with greater risk levels must be evaluated differently; RAROC
accounts for changes in an investment’s profile by discounting risky cash flows against less-risky cash flows.
Risk-adjusted return on capital is a useful tool in assessing potential acquisitions. The general underlying
assumption of RAROC is investments or projects with higher levels of risk offer substantially higher returns.
Companies that need to compare two or more different projects or investments must keep this in mind.

ECONOMIC VALUE ADDED (EVA)

EVA is promoted by a consulting firm Stern Steward & Co., which was established in 1982 and pioneered the
EVA concept in 1989. EVA is a performance measure that captures the true economic profit of an enterprise.
EVA is used by over 300 successful companies. EVA is a value based financial performance measure. It is an
investment decision tool and it is also a performance measure reflecting the absolute amount of shareholder
 Lesson 16 n CSR and Sustainability 517

value created. It is computed as the product of the “excess return” made on an investment or investments and
the capital invested in that investment or investments.
“Economic Value Added (EVA) is the net operating profit minus an appropriate charge for the opportunity cost
of all capital invested in an enterprise or project. It is an estimate of true economic profit, or amount by which
earnings exceed or fall short of the required minimum rate of return investors could get by investing in other
securities of comparable risk (Stewart, 1990).”
EVA is net operating profit after tax less capital charge.
Or, EVA = NOPAT- (Invested Capital × WACC).
Components of EVA
The equation for EVA shows that there are three key components to a company’s EVA: i.e. NOPAT, Capital
invested, and the WACC:
l NOPAT can be calculated manually but is normally listed in a public company’s financials.
l Invested Capital is the amount of money used to fund a specific project.
l WACC is the average rate of return a company expects to pay its investors; the weights are derived as
a fraction of each financial source in a company’s capital structure. WACC can also be calculated but
is normally provided as public record.
An equation for invested capital often used to calculate EVA is = Total Assets - Current Liabilities, two figures
easily found on a firm’s balance sheet. In this case, the formula for EVA is: NOPAT - (Total Assets - Current
Liabilities) * WACC.
The cost of capital is a weighted average that reflects the cost of both debt and equity capital. Thus, EVA
measures the excess of a firm’s operating income over the cost of the capital employed in generating those
earnings. It relates operating income to capital employed in an additive operation. This is in contrast to return
on assets (ROA = operating income / capital), which compares operating income to capital employed in a
multiplicative operation.
EVA assesses the performance of a company and its management through the idea that a business is only
profitable when it creates wealth and returns for shareholders, thus requiring performance above a company’s
cost of capital. EVA as a performance indicator is very useful. The calculation shows how and where a company
created wealth, through the inclusion of balance sheet items. This forces managers to be aware of assets and
expenses when making managerial decisions. However, the EVA calculation relies heavily on the amount of
invested capital, and is best used for asset-rich companies that are stable or mature. Companies with intangible
assets, such as technology businesses, may not be good for an EVA evaluation.

MARKET VALUE ADDED (MVA)

Market Value Added (MVA) is a tool to measure shareholder’s value at a particular moment; this was introduced
by Stewart in 1991. Market Value Added (MVA) is the additional market capitalization over and above the book
value of equity (Gupta & Kundu, 2008). From an investor’s point of view, MVA is the best final measure of a
Company’s performance. Stewart states that MVA is a cumulative measure of corporate performance and that
it represents the stock market’s assessment from a particular time onwards of the net present value of all a
Company’s past and projected capital projects. MVA is calculated at a given moment, but in order to assess
performance over time, the difference or change in MVA from one date to the next can be determined to see
whether value has been created or destroyed.
It is typically used for companies that are larger and publicly-traded. MVA is not a performance metric like EVA,
but instead is a wealth metric, measuring the level of value a company has accumulated over time.
518 EP-GRMCE

In another words Market Value Added (MVA) is the difference between the current market value of a firm (V)
and the capital contributed by its investors (K):

Total Market Value (TMV) = Market Value Added (MVA) + Initial Invested Capital (IIC)
Hence MVA = TMV- IIC

In another words Market Value Added (MVA) is the difference between the total market value of a firm (TMV)
and the initial capital contributed by its investors (IIC):
Market Value Added (MVA) = TMV – IIC
If the MVA is positive, the Company has created wealth for its shareholders.
If it is MVA is negative, then the firm has destroyed value.
The capital is the amount that is put in the Company by the shareholders.
Company creates value when MVA > 0 that is when the market value of capital exceeds the capital invested.
A negative value for MVA proves that the provisions concerning the ability of management to use efficiently the
capital are unfavourable. The link between EVA and MVA is that MVA is the present value of all the future EVAs
a Company is expected to generate, discounted at the WACC.
Market Value Added (MVA) = V – K
If the Market Value Added (MVA) is positive, the Company has created wealth for its shareholders. If it is
negative, then the firm has destroyed value. The capital is the amount that is put in the Company by the
shareholders. Company creates value when MVA > 0 that is when the market value of capital exceeds the
capital invested. A negative value for MVA proves that the provisions concerning the ability of management to
use efficiently the capital are unfavourable. The link between EVA and MVA is that MVA is the present value of
all the future EVAs a Company is expected to generate, discounted at the WACC.
Market Value Added (MVA) = PV (EVA)
Theoretically, MVA is equal to the present value of all future EVAs.
Stewart (1991) states that Market Value Added (MVA) is an cumulative measure of corporate performance
and that it represents the stock markets assessments from a particular time onwards of the net present
value of all of a Company’s past and projected capital projects. The disadvantage of the method is that
like EVA there can be a number of value based adjustments made in order to arrive at the economic book
value and that it is affected by the volatility from the market values, since it tends to move in tandem with
the market.
From an investor’s point of view, MVA is the best final measure of a Company’s performance. Stewart (1991)
states that MVA is a cumulative measure of corporate performance and that it represents the stock market’s
assessment from a particular time onwards of the net present value of all a Company’s past and projected
capital projects. MVA is calculated at a given moment, but in order to assess performance over time, the
difference or change in MVA from one date to the next can be determined to see whether value has been
created or destroyed.

SUSTAINABLE VALUE ADDED (SVA)

Traditionally, an enterprise focuses on value maximization. The conventional management takes into account
just one dimension – economic – when creating value in an enterprise. All resources including environmental
and social resources are neglected. This point of view is not acceptable when speaking about sustainable
development. Over the last decades, theorists emphasize wider scope of entrepreneurial objectives besides
 Lesson 16 n CSR and Sustainability 519

obtaining the greatest value possible. Sustainable development is a normative concept laid out as the combination
of economic prosperity, environmental integrity and social equity.Value is created whenever benefits exceed
costs.
There are two approaches to measure corporate contribution to sustainability i.e. Absolute Measures and
Relative Measures.
Absolute Measures:
The absolute measure of assessing corporate contributions to sustainability is to subtract the costs form the
benefits created by a company. For this purpose both internal and external costs need to be considered. The
underlying idea is, that a company contributes to sustainability, if the benefits exceed the sum of internal and
external costs. The result is ‘Green Value Added’. (GVA).
Relative Measures:
The relative measures express corporate contributions to sustainability as benefits per unit of environmental
or social impact. The best known example of a relative measure is eco-efficiency. There are two different uses
of the term eco-efficiency. As a maxim eco-efficiency refer to the reduction or even minimization impacts. The
second notion uses the term eco-efficiency to describe the ratio of created value per environmental impact
added.
Sustainable Value Added takes into account both, the efficiency and the absolute level (effectiveness) of
resource use. It has never been more important for businesses to use their economic, environmental and social
resources efficiently. Conceptually, SVA stresses the complementary disposition of economic, environmental
and social resources. Sustainable Value Added is the extra value created when the overall level of environmental
and social impacts is kept constant.
Current approaches to measure corporate sustainable performance take into account external costs caused
by environmental and social damage or focus on the ratio between value creation and resource consumption.
As Sustainable Value Added is inspired by strong sustainability, it measures whether a company creates
extra value while ensuring that every environmental and social impact is in total constant. Therefore, it takes
into account both, corporate eco and social efficiency as well as the absolute level of environmental and
social resource consumption (eco and social effectiveness). As a result, Sustainable Value Added considers
simultaneously economic, environmental and social aspects. The overall result can be expressed in any of the
three dimensions of sustainability.
Sustainable Value Added allows assessing the sustainable performance of enterprises similar to financial
performance in monetary terms and this, in turn, enhances creative leadership and better formulation of a
resource efficient business strategy.

GLOSSARY OF TECHNICAL WORDS

– Sustainable Development : Sustainable development is development that meets the needs of the
present without compromising the ability of future generations to meet their own needs
– Corporate Sustainability: Corporate sustainability is an approach that creates long-term stakeholder
value by implementing a business strategy that considers every dimension of how a business operates
in the ethical, social, environmental, cultural, and economic spheres.
– Triple Bottom Line:. The triple bottom line is an accounting framework with three parts: social,
environmental (or ecological) and financial. Some organizations have adopted the TBL framework to
evaluate their performance in a broader perspective to create greater business value.
– The Altman Z Score model is a financial model to predict the likelihood of bankruptcy in a company.
520 EP-GRMCE

LESSON ROUND-UP
– Corporate Social Responsibility (CSR) is a concept whereby companies not only consider their
profitability and growth, but also the interests of society and the environment by taking responsibility
for the impact of their activities on stakeholders, environment, consumers, employees, communities,
and all other members of the public sphere.
– Corporate sustainability is imperative for the long-term sustainable development of the economy and
society.
– The term sustainability accounting is used to describe the new information management and
accounting methods that aim to create and provide high quality information to support a corporation
in its movement towards sustainability.
– Sustainability (corporate sustainability) is derived from the concept of sustainable development which
is defined by the Brundt land Commission as “development that meets the needs of the present
without compromising the ability of future generations to meet their own needs”.
– Corporate citizenship is a commitment to improve community well-being through voluntary business
practices and contribution of corporate resources leading to sustainable growth.
– ISO 26000 is the international standard giving guidance on social responsibility and is intended for use
by organizations of all types both public and private sectors, in developed and developing countries.
– The Global Compact Self Assessment Tool is an easy-to-use guide designed for use by companies
of all sizes and across sectors committed to upholding the social and environmental standards within
their respective operations.
– The UN Global Compact is a strategic policy initiative for businesses that are committed to aligning
their operations and strategies with ten universally accepted principles in the areas of human rights,
labour, environment and anti-corruption.
– In line with the National Voluntary Guidelines on Social, Environmental and Economic Responsibilities
of Business and considering the larger interest of public disclosure regarding steps taken by listed
entities, SEBI has mandated the requirement of submission of Business Responsibility Report (‘BRR’)
for top 500 listed entities under Regulation 34(2)(f) of SEBI (Listing Obligations and Disclosure
Requirements) Regulations 2015 (“SEBI LODR”).
– In March 2019, the Ministry of Corporate Affairs has revised the National Voluntary Guidelines on
Social, Environmental and Economic Responsibilities of Business, 2011 (NVGs) and has released
the National Guidelines on Responsible Business Conduct (NGRBC), 2019.
– Risk-adjusted return on capital (RAROC) is a profitability metric that can be used to analyse return in
relation to the level of risk taken on.

TEST YOURSELF
(These are meant for recapitulation only. Answers to these questions are not to be submitted for evaluation)
1. As a company secretary, can you explain what does the Corporate Social Responsibility (CSR) means?.
Why is CSR important ?
2. Can you briefly explain the term Sustainability Reporting?
3. Write a short note on the principles of UN Global Compact.
4. How many principles are there under National Guidelines on Responsible Business Conduct (NGRBC),
2019, briefly explain those principles.
 Lesson 16 n CSR and Sustainability 521

5. Explain sustainable development and goals of sustainable development.

6. Whether Business Sustainability can be measured? If so, how?
522 EP-GRMCE
 Lesson 17 Anti-Corruption and Anti-Bribery Laws in India 523
Lesson 17
n

Anti-Corruption and Anti-Bribery

Laws in India
LESSON OUTLINE
LEARNING OBJECTIVES
– Introduction
The objective of this study lesson is to enable the
– Regulatory Framework students to understand the legal framework in India
– Bribery and Corruption - Global Scenarios which regard to the prevailing Anti-Corruption and
Anti-Bribery Laws.
– Brief Information on the Laws and
Enforcement Regime in India Most importantly, the past few years have seen
a change in attitude of enforcement agencies,
– Delhi Special Police Establishment Act,
which have started enforcing anti-corruption laws
1946
aggressively in India, and have been supported in
– Unlawful Activities (Prevention) Act, 1967 their efforts by the judiciary (which has taken up
an active role in monitoring corruption cases) are
– Foreign Corrupt Practices Act, 1977
discussed in this lesson.
– Prevention of Corruption Act, 1988
– Central Vigilance Commission Act, 2003
– Lokpal and Lokayukta Act, 2013
– ICSI Anti Bribery Code
– Glossary
– LESSON ROUND-UP
– TEST YOURSELF

“Corruption is the enemy of development, and of good governance. It must be got rid of. Both the government
and the people at large must come together to achieve this national objective.”
– Pratibha Patel
524 EP-GRMCE

INTRODUCTION

Forceful and Regulatory Ethics

Ethical practices can be voluntary or compulsory. Again compulsory practices can be categorized into following:-
(i) Semi compulsory: customary which has become ritual i.e. family customs, organizational customs,
religious customs etc.
(ii) Quasi statutory: This would include rules, regulations, code of conduct, discipline rules, office orders,
circulars etc.
(iii) Statutory: common law which applies to all.
(iv) In case of any legal dispute, the Court may also take cognizance of the quasi statutory ethical practices
which are codified. Semi compulsory ethical practices are not codified.
In this lesson, we will discuss the statutory or regulatory ethical practices, which if violated, would amount
to legal action in the form of punishment or/and fine. It can be said that most of the laws in India are against
corruption and in India we link corruption with bribery. There may be non bribery corruption also like favoritism,
not deciding on merit, willful negligence of use of resources etc.
The Indian economy is characterized by the presence of a big government – the Indian political structure
encompasses central and state governments, as well as various local self-governance structures. Apart
from performing functions such as regulation and licensing, the government also operates large commercial
enterprises in several sectors, including education, defence, aviation, railways (a near monopoly), infrastructure
and healthcare – accordingly, interactions with the government (in its various forms) and government owned
enterprises are unavoidable for entities looking to do business in India. It is also important to bear in mind that
Indian laws and regulations often provide for considerable discretion in the hands of government agencies and
personnel, and this can make interacting with government a subjective and time-consuming exercise.
While Indian anti-corruption laws are fairly stringent, corruption is not uncommon in India, and until recently
the enforcement of anti-corruption laws left much to be desired. This has led to unfortunate notion (particularly
outside India) that corruption is an accepted practice in India – however, this notion is misplaced, and recent
years have been marked with growing public dissatisfaction over corruption and its cost to the Indian economy.
Over the past five to six years, there has been a strong public sentiment against corruption, and high-profile
instances of corruption have become key political and election issues – for example, the incumbent Indian
government has also taken a hard line stance on corruption issues.
These factors has prompted the introduction of several legislative measures aimed at tackling corruption in
India, including the creation of an independent ombudsman (the Lokpal) to investigate and prosecute cases of
corruption to the public officials (including ministers), expansion of existing laws governing money laundering
and ‘bemani’ (i.e. proxy) transactions, and new laws to target undisclosed income and assets (whether in India
or aboard). Most importantly, the past few years have seen a change in attitude of enforcement agencies, which
have started enforcing anti-corruption laws aggressively in India, and have been supported in their efforts by the
judiciary (which has taken up an active role in monitoring corruption cases).

REGULATORY FRAMEWORK

Sl. No. Description

1. Delhi Special Police Establishment Act, 1946
2. Unlawful Activities (Prevention) Act, 1967
 Lesson 17 n Anti-Corruption and Anti-Bribery Laws in India 525

3. Foreign Corrupt Practices Act, 1977

4. Prevention of Corruption Act, 1988
5. Central Vigilance Commission Act, 2003
6. Lokpal and Lokayukta Act, 2013
7. ICSI Anti Bribery Code

Bribery and Corruption - Global Scenarios

US: The deterrence of bribery and corruption is one of the primary issues for governments worldwide. The
US Foreign Corrupt Practices Act, 1977 (FCPA), which prohibits businesses from bribing foreign officials and
political figures, remains the most robustly enforced anti-bribery and anti-corruption (ABAC) legislation globally.
The US Department of Justice and the Securities and Exchange Commission take the lead in its enforcement.
The core aim of the Foreign Corrupt Practices Act (FCPA) is to prohibit companies and their individual officers
from influencing foreign officials with any personal payments or rewards. The FCPA applies to any person who
has a certain degree of connection to the United States and engages in corrupt practices abroad, as well as to
U.S. businesses, foreign corporations trading securities in the U.S., American nationals, citizens, and residents
acting in furtherance of a foreign corrupt practice, whether or not they are physically present in the U.S. This is
considered the nationality principle of the Act. Any individuals involved in these activities may face prison time.
In the case of foreign natural and legal persons, the Act covers their deeds if they are in the U.S. at the time of
the corrupt conduct. This is considered the protective principle of the Act.
UK: The Bribery Act 2010 is an Act of the Parliament of the United Kingdom that covers the criminal law relating
to bribery. Introduced to Parliament in the Queen’s Speech in 2009 after several decades of reports and draft
bills, the Act received the Royal Assenton 8 April 2010 following cross-party support. Initially scheduled to enter
into force in April 2010, this was changed to 1 July 2011. The Act repeals all previous statutory and common law
provisions in relation to bribery, instead replacing them with the crimes of bribery, being bribed, the bribery of
foreign public officials, and the failure of a commercial organisation to prevent bribery on its behalf.
The penalties for committing a crime under the Act are a maximum of 10 years’ imprisonment, along with an
unlimited fine, and the potential for the confiscation of property under the Proceeds of Crime Act 2002, as
well as the disqualification of directors under the Company Directors Disqualification Act 1986. The Act has
a near-universal jurisdiction, allowing for the prosecution of an individual or company with links to the United
Kingdom, regardless of where the crime occurred. Described as “the toughest anti-corruption legislation in the
world”, concerns have been raised that the Act’s provisions criminalize behaviour that is acceptable in the global
market, and puts British business at a competitive disadvantage.

BRIEF INFORMATION ON THE LAWS AND ENFORCEMENT REGIME IN INDIA

(A) DELHI SPECIAL POLICE ESTABLISHMENT ACT, 1946

The Central Bureau of Investigation traces its origin to the Special Police Establishment (SPE) which was set
up in 1941 by the Government of India. The preamble of the Act provides that it is an Act to make provision for
the constitution of a special police force in Delhi for the investigation of certain offences in the Union territories
for the superintendence and administration of the said force and for the extension to other areas of the powers
and jurisdiction of members of the said force in regard to the investigation of the said offences.
The functions of the SPE then were to investigate cases of bribery and corruption in transactions with the War
& Supply Deptt. of India during World War II. Even after the end of the War, the need for a Central Government
agency to investigate cases of bribery and corruption by Central Government employees was felt. The Delhi
Special Police Establishment Act was therefore brought into force in 1946. The CBI’s power to investigate cases
526 EP-GRMCE

is derived from this Act.

As amended by the Central Vigilance Commission Act, 2003.
This is an Act to make provision for the constitution of a special police force in Delhi for the investigation of
certain offences in the Union Territories, for the superintendence and administration of the said force and for
the extension to other of the powers and jurisdiction of members of the said force in regard to the investigation
of the said offences.
Constitution and powers of special police establishment (Section 2):
(1) Notwithstanding anything in the Police Act, 1861 (5 of 1861), the Central Government may constitute
a special police force to be called the Delhi Special Police Establishment for the investigation in any
Union territory of offences notified under section 3.
(2) Subject to any orders which the Central Government may make in this behalf, members of the said police
establishment shall have throughout any Union territory, in relation to the investigation of such offences
and arrest of persons concerned in such offences, all the powers, duties, privileges and liabilities which
police officers of that Union territory have in connection with the investigation of offences committed
therein.
(3) Any member of the said police establishment of or above the rank of Sub-Inspector may, subject to
any orders which the Central Government may make in this behalf, exercise in any Union territory
any of the powers of the officer in charge of a police station in the area in which he is for the time
being and when so exercising such powers shall, subject to any such orders as aforesaid, be
deemed to be an officer in charge of a police station discharging functions of such an officer within
the limits of his station.
Offences to be investigated by special police establishment (Section 3):
The Central Government may, by notification in the Official Gazette, specify the offences or classes of offences
which are to be investigated by the Delhi Special Police Establishment.
Superintendence and administration of Special Police Establishment (Section 4):
(1) The superintendence of the Delhi Special Police Establishment in so far as it relates to investigation of
offences alleged to have been committed under the Prevention of Corruption Act, 1988 (49 of 1988),
shall vest in the Commission.
(2) Save as otherwise provided in sub-section (1), the superintendence of the said police establishment in
all other matters shall vest in the Central Government.
(3) The administration of the said police establishment shall vest in an officer appointed in this behalf by the
Central Government (hereinafter referred to as the Director) who shall exercise in respect of that police
establishment such of the powers exercisable by an Inspector-General of Police in respect of the police
force in a State as the Central Government may specify in this behalf.
Extension of powers and jurisdiction of special police establishment to other areas (Section 5):
(1) The Central Government may by order extend to any area (including Railway areas) in a State, not
being a Union territory the powers and jurisdiction of members of the Delhi Special Police Establishment
for the investigation of any offences or classes of offences specified in a notification under section 3.
(2) When by an order under sub-section (1) the powers and jurisdiction of members of the said police
establishment are extended to any such area, a member thereof may, subject to any orders which the
Central Government may make in this behalf, discharge the functions of a police officer in that area and
shall, while so discharging such functions, be deemed to be a member of the police force of that area
 Lesson 17 n Anti-Corruption and Anti-Bribery Laws in India 527

and be vested with the powers, functions and privileges and be subject to the liabilities of a police officer
belonging to that police force.
(3) Where any such order under sub-section (1) is made relation to any area, then, without prejudice to
the provisions of sub-section (2), any member of the Delhi Special Police Establishment of or above
the rank of Sub-Inspector may, subject to any orders which the Central Government may make in
this behalf, exercise the powers of the officer in charge of a police station in that area and when so
exercising such powers, shall be deemed to be an officer in charge of a police station discharging the
functions of such an officer within the limits of his station.
Consent of State Government to exercise of powers and jurisdiction (Section 6):
Nothing contained in section 5 shall be deemed to enable any member of the Delhi Special Police Establishment
to exercise powers and jurisdiction in any area in a State, not being a Union territory or railway area, without the
consent of the Government of that State.
Approval of Central Government to conduct, inquiry or investigation (Section 6A):
(1) The Delhi Special Police Establishment shall not conduct any inquiry or investigation into any offence
alleged to have been committed under the Prevention of Corruption Act, 1988 (49 of 1988) except with
the previous approval of the Central Government where such allegation relates to—
(a) the employees of the Central Government of the level of Joint Secretary and above; and
(b) such officers as are appointed by the Central Government in corporations established by or under
any Central Act, Government companies, societies and local authorities owned or controlled by
that Government.
(2) Notwithstanding anything contained in sub-section (1), no such approval shall be necessary for
cases involving arrest of a person on the spot on the charge of accepting or attempting to accept any
gratification other than legal remuneration referred to in clause (c) of the Explanation to section 7 of the
Prevention of Corruption Act, 1988 (49 of 1988)].

(B) UNLAWFUL ACTIVITIES (PREVENTION) ACT, 1967

The Act was enacted to make provisions as to more effective prevention of Individual’s and associations’ certain
unlawful activities. The Act was amended by the Unlawful Activities (Prevention) Amendment Act, 2004 and
also the Amending Act of 2008 for adding in its long title, the object of dealing with the Terrorist Activities. The
said amendments were made in pursuance with the Resolutions of the Security Council of the United Nations
requiring all the States to take measures and actions against terrorism. The provisions of the Act extended to
the whole of India. So far as the applicability of the provisions of the Act to persons are concerned, the section
1 itself says that all persons who commits any act or omission which is contrary to the provisions of this Act,
should be held guilty in India, and be punished under this Act. Even commission of such acts or omission
contrary to the provisions of this Act out side India, is also to be treated, as the same has been committed in
India.

UNLAWFUL ASSOCIATIONS (Chapter II):

The Act makes its provisions under different seven chapters thereof and from amongst such chapters, the first
chapter is making preliminary provisions of the Act, including short title, extension, etc. as aforesaid. Moreover,
the second chapter makes provisions as to unlawful associations, wherein section 3 provides for declaration by
the Central Government to the effect that any association has became unlawful, however, the Government is
also required to specify the grounds on the basis of which it had declared such unlawful association. Moreover,
for effecting such declaration a confirmation is required from the Tribunal under section 4 of the Act, where the
Tribunal on being provided with the reference, is required to adjudicate the issue of declaration of such unlawful
528 EP-GRMCE

association. Such Tribunal is to be constituted by the Central Government under section 5, with the name and
title as ‘Unlawful Activities (Prevention) Tribunal’, which is to have certain powers of the Civil Court under the
provisions of Code of Civil Procedure, 1908. Such declaration after its confirmation by the Tribunal, will remain
in force for the period of 2 years and the same can be cancelled by the Central Government within that period.
The Fund of every such declared unlawful association, if being used by any person under whose custody such
fund is there, then the Central Government can make an order prohibiting such person from using such fund.
However, if any person feels aggrieved under such order, then he can approached to the Court within the period
of 15 days.

OFFENCES AND PENALTIES (Chapter III):

The chapter III of the Act makes penal provisions, wherein section 10 as amended by the Amending Act of 2004,
provides that if any person from the association after being declared as unlawful under this Act, continues to be
a member thereof, takes part in its meetings, makes contribution of any kind for its purposes or otherwise acted
in the manner as provided under the provision, then he should be held guilty under the Act, and punishment
can extend to life imprisonment and should not be below 5 years imprisonment along with fine. Similarly, the
punishment for dealing with funds of the unlawful association is upto 3 years imprisonment and fine also.
Besides this, the Act also provides for punishment in respect of contravening the order made in respect of a
notified place and also for unlawful activities.

PUNISHMENT FOR TERRORIST ACTIVITIES (Chapter IV):

Further, chapter IV of the Act makes provisions for penal provisions as to terrorist activities. Section 15 of the
Act defines the terrorist act as an act done with intent to threaten or likely to threaten the unity, integrity, security,
etc. of India by using various destructive substances provide under the provision. The punishment for such acts,
is death penalty, if the same results in death of any persons and in other cases, the punishment can extend to
life imprisonment and minimum 5 years punishment is given. Similarly, there are different punishments provided
for other relevant terrorist acts. Further the next chapter is dealing with provisions of forfeiture of the proceeds of
terrorism to the Central Government, which no one is entitled to hold. The provision of this chapter was inserted
by the Amending Act of 2004.

FORFEITURE OF PROCEEDS OF TERRORISM OR ANY PROPERTY INTENDED TO BE USED

FOR TERRORISM (Chapter V):
CHAPTER V of the Act deals with the forfeiture of proceeds of terrorism or any property intended to be
used for terrorism: Section 24 provides reference to proceeds of terrorism to include any property intended
to be used for terrorism and section 24A. Deals with the forfeiture of proceeds of terrorism. Powers of
investigating officer and Designated Authority and appeal against order of Designated Authority have been
mentioned in section 25.
Sections 26 to 34 deals with the issues relating to the Court to order forfeiture of proceeds of terrorism. Issue
of show cause notice before forfeiture of proceeds of terrorism, Appeal, Order of forfeiture not to Interfere with
other punishments, Claims by third party, Powers of Designated Authority, Certain transfers to be null and void.
Forfeiture of property of certain persons, Company to transfer shares to Government.

TERRORIST ORGANISATIONS (Chapter VI):

The chapter VI of the Act makes provisions as to terrorist organization, where the Organisations which are
identified as a terrorist one, in the Resolution adopted by the Security Council of UN, should be added to the
Schedule of this Act by the Central Government. Similarly, removal of any organisation can also be made by the
Central Government under this Act. Also the Act makes association with the Terrorist organisation, taking part
in their activities, etc. and even supporting or funding it as the offence under the Act.
 Lesson 17 n Anti-Corruption and Anti-Bribery Laws in India 529

Miscellaneous (Chapter VII):

At the end portion of the Act i.e. the Chapter VII thereof, the Act makes miscellaneous provisions, wherein the
Central Government is empowered to direct delegation of powers to the State Government and such State
Government can also with the prior approval from the Centre, direct the delegation of those powers to any
person subordinate to it. Further, provisions as to investigation, search, seizure, arrest, etc. have been provided
under subsequent provisions to the Act. And finally, the Act also makes other relevant provisions which are also
being important so far as the purpose of this Act is concerned.

(C) FOREIGN CORRUPT PRACTICES ACT, 1977 (THE FCPA)

The idea of Foreign Corrupt Practices Act (FCPA) is to make it illegal for companies and their supervisors to
influence foreign officials with any personal payments or rewards. The FCPA applies to any person who has a
certain degree of connection to the United States and engages in foreign corrupt practices. The Act also applies
to any act by U.S. businesses, foreign corporations trading securities in the U.S., American nationals, citizens,
and residents acting in furtherance of a foreign corrupt practice whether or not they are physically present in the
U.S. This is considered the nationality principle of the act. Any individuals that are involved in those activities
may face prison time.
The FCPA can apply to prohibited conduct anywhere in the world and extends to publicly traded companies
and their officers, directors, employees, stockholders, and agents. Agents can include third party agents,
consultants, distributors, joint-venture partners, and others.
The FCPA also requires issuers to maintain accurate books and records and have a system of internal controls
sufficient to, among other things, provide reasonable assurances that transactions are executed and assets are
accessed and accounted for in accordance with management’s authorization.
This act was passed to make it unlawful for certain classes of persons and entities to make payments to foreign
government officials to assist in obtaining or retaining business. In the case of foreign natural and legal persons,
the Act covers their deeds if they are in the U.S. at the time of the corrupt conduct. This is considered the
protective principle of the act. Further, the Act governs not only payments to foreign officials, candidates, and
parties, but any other recipient if part of the bribe is ultimately attributable to a foreign official, candidate, or party.
These payments are not restricted to monetary forms and may include anything of value. This is considered
the territoriality principle of the act.
In simple words, The Foreign Corrupt Practices Act (FCPA), enacted in 1977, generally prohibits the payment of
bribes to foreign officials to assist in obtaining or retaining business. The FCPA can apply to prohibited conduct
anywhere in the world and extends to publicly traded companies and their officers, directors, employees,
stockholders, and agents. Agents can include third party agents, consultants, distributors, joint-venture partners,
and others.
The Act concerns the intent of the bribery rather than the amount, there is no requirement of materiality. Offering
anything of value as a bribe, whether cash or non-cash items, is prohibited.
The FCPA also requires companies whose securities are listed in the U.S. to meet its accounting provisions.
These accounting provisions operate in tandem with the anti-bribery provisions of the FCPA, and require
respective corporations to make and keep books and records that accurately and fairly reflect the transactions
of the corporation and to devise and maintain an adequate system of internal accounting controls. An increasing
number of corporations are taking additional steps to protect their reputation and reduce their exposure by
employing the services of due diligence companies tasked with vetting third party intermediaries and identifying
easily overlooked government officials embedded in otherwise privately held foreign firms. This strategy is one
element of an effective FCPA Compliance Program, as it shows a sincere attempt to avoid business situations
where high risk (prior history or proximity to unethical behavior) individuals are concerned.
530 EP-GRMCE

Enforcement of the Foreign Corrupt Practices Act (FCPA) continues to be a high priority area for the US
Securities Exchange Commission (SEC). In 2010, the SEC’s Enforcement Division created a specialized unit to
further enhance its enforcement of the FCPA, which prohibits companies issuing stock in the U.S. from bribing
foreign officials for government contracts and other business.
The following is a list of the SEC’s FCPA enforcement actions listed in the calendar year 20201 :
l Alexion Pharmaceuticals - Boston-based pharmaceutical company Alexion Pharmaceuticals Inc.
agreed to pay more than $21 million to resolve charges that it violated the books and records and
internal accounting controls provisions of the FCPA. (2nd July, 2020)
l Novartis AG - Global pharmaceutical and healthcare company and its former Alcon subsidiary agreed
to pay over $340 million to resolve SEC and DOJ charges arising out of conduct in multiple jurisdictions.
(25th June, 2020)
l ENI S.P.A. - Italian multinational oil and gas company agreed to resolve charges that it violated the
books and records and internal accounting controls provisions of the FCPA in connection with an
improper payment scheme in Algeria. (17th April, 2020)
l Asante Berko - SEC charged a former executive of a financial services company with orchestrating a
bribery scheme to help a client to win a government contract to build and operate an electrical power
plant in the Republic of Ghana. (13th April, 2020)
l Cardinal Health - Ohio-based pharmaceutical company Cardinal Health, Inc. agreed to pay more than
$8 million to resolve charges that it violated the books and records and internal accounting controls
provisions of the FCPA in connection with its operations in China. (28th February, 2020)

(D) PREVENTION OF CORRUPTION ACT, 1988 (THE PCA)

The PCA criminalises the acceptance of gratification (pecuniary or otherwise) other than the acceptance of
legal remuneration by public servants which is paid by their employers in connection with the performance of
their duties. Aiding and abetting the commission of bribery is also an offence, such that any person, who bribes
or attempts to bribe a public servant or acts as a middleman for such bribing may also be held liable. Further,
the PCA creates an adverse presumption if a public servant’s assets are disproportionate in value to his or her
income and cannot be satisfactorily accounted for. The provisions of the PCA apply regardless of the location or
jurisdiction of the commission of an offence, as long as the same is committed by a ‘public servant’ as defined
under it. Judicial decisions have also interpreted the term ‘public servant’ in the PCA to include a wide variety of
persons, such as bank employees in both private and government owned banks.
The Prevention of Corruption Act, 1988 (No. 49 of 1988) is an Act of the Parliament of India enacted to combat
corruption in government agencies and public sector businesses in India. This law defines who a public servant
is and punishes public servants involved in corruption or bribery. It also punishes anyone who helps him or her
commit the crime corruption or bribery. It extends to the whole of India except the State of Jammu and Kashmir
and it applies also to all citizens of India outside India.
The Act is divided into five chapters:
l Chapter I (Sections 1 and 2): Preliminary
l Chapter II (Sections 3 to 6): Appointment of Special Judges
l Chapter III (Sections 7 to 16): Offences and Penalties:
l Chapter IV (Section 17 to 18): Investigation into cases under the Act
l Chapter IVA (Section 18 A): Attachment and Forfeiture of Property
1. https://www.sec.gov/spotlight/fcpa/fcpa-cases.shtml
 Lesson 17 n Anti-Corruption and Anti-Bribery Laws in India 531

l Chapter V (Sections 19 to 30): Sanction for Prosecution and Other Miscellaneous Provisions
The PCA deals only with bribery of public servants. It does not extend to bribery or corruption in the private
sector, i.e. where a public servant is not involved. That said, a private person/entity will be liable for inducing
a public servant to commit an act that is prohibited by the PCA, by corrupt or illegal means or by exercising
personal influence.
Who is Public Servant [Section 2(c)]:
“Public servant” means –
(i) any person in the service or pay of the Government or remunerated by the Government by fees or
commission for the performance of any public duty;
Public Duty has been defined by Section 2(b) of the Act, which means a duty in the discharge of which
the State, the public or the community at large has an interest.
(ii) any person in the service or pay of a local authority;
(iii) any person in the service or pay of a corporation established by or under a Central, Provincial or
State Act, or an authority or a body owned or controlled or aided by the Government or a Government
company as defined in section 617 of the Companies Act, 1956 (1 of 1956);
(iv) any Judge, including any person empowered by law to discharge, whether by himself or as a member
of any body of persons, any adjudicatory functions;
(v) any person authorised by a court of justice to perform any duty, in connection with the administration of
justice, including a liquidator, receiver or commissioner appointed by such court;
(vi) any arbitrator or other person to whom any cause or matter has been referred for decision or report by
a court of justice or by a competent public authority;
(vii) any person who holds an office by virtue of which he is empowered to prepare, publish, maintain or
revise an electoral roll or to conduct an election or part of an election;
(viii) any person who holds an office by virtue of which he is authorised or required to perform any public
duty;
(ix) any person who is the president, secretary or other office-bearer of a registered co-operative society
engaged in agriculture, industry, trade or banking, receiving or having received any financial aid from the
Central Government or a State Government or from any corporation established by or under a Central,
Provincial or State Act, or any authority or body owned or controlled or aided by the Government or a
Government company as defined in section 617 of the Companies Act, 1956 (1 of 1956);
(x) any person who is a chairman, member or employee of any Service Commission or Board, by whatever
name called, or a member of any selection committee appointed by such Commission or Board for the
conduct of any examination or making any selection on behalf of such Commission or Board;
(xi) any person who is a Vice-Chancellor or member of any governing body, professor, reader, lecturer
or any other teacher or employee, by whatever designation called, of any University and any person
whose services have been availed of by a University or any other public authority in connection with
holding or conducting examinations;
(xii) any person who is an office-bearer or an employee of an educational, scientific, social, cultural or other
institution, in whatever manner established, receiving or having received any financial assistance from
the Central Government or any State Government, or local or other public authority.
532 EP-GRMCE

Offence relating to Public Servant being bribed [Section 7]

Any public servant who, –
(a) obtains or accepts or attempts to obtain from any person, an undue advantage, with the intention
to perform or cause performance of public duty improperly or dishonestly or to forbear or cause
forbearance to perform such duty either by himself or by another public servant; or
(b) obtains or accepts or attempts to obtain, an undue advantage from any person as a reward for the
improper or dishonest performance of a public duty or for forbearing to perform such duty either by
himself or another public servant; or
(c) performs or induces another public servant to perform improperly or dishonestly a public duty or to
forbear performance of such duty in anticipation of or in consequence of accepting an undue advantage
from any person,
shall be punishable with imprisonment for a term which shall not be less than three years but which may extend
to seven years and shall also be liable to fine.

In terms of Section 2(d), “Undue advantage” means any gratification whatever, other than legal remuneration.
Explanation: For the purposes of this clause, –
(a) the word “gratification” is not limited to pecuniary gratifications or to gratifications estimable in money;
(b) the expression “legal remuneration” is not restricted to remuneration paid to a public servant, but
includes all remuneration which he is permitted by the Government or the organisation, which he
serves, to receive.
Explanation 1: Persons falling under any of the above sub-clauses are public servants, whether appointed
by the Government or not.
Explanation 2: Wherever the words “public servant” occur, they shall be understood of every person who is
in actual possession of the situation of a public servant, whatever legal defect there may be in his right to
hold that situation.

Explanation 1. – For the purpose of this section, the obtaining, accepting, or the attempting to obtain an undue
advantage shall itself constitute an offence even if the performance of a public duty by public servant, is not or
has not been improper.
Illustration. – A public servant, ‘S’ asks a person, ‘P’ to give him an amount of five thousand rupees to process
his routine ration card application on time. ‘S’ is guilty of an offence under this section.
Explanation 2. – For the purpose of this section, –
(i) the expressions “obtains” or “accepts” or “attempts to obtain” shall cover cases where a person being
a public servant, obtains or “accepts” or attempts to obtain, any undue advantage for himself or for
another person, by abusing his position as a public servant or by using his personal influence over
another public servant; or by any other corrupt or illegal means;
(ii) it shall be immaterial whether such person being a public servant obtains or accepts, or attempts to
obtain the undue advantage directly or through a third party.
Taking undue advantage to influence public servant by corrupt or illegal means or any exercise of
personal influence [Section7A]:
7A. Whoever accepts or obtains or attempts to obtain from another person for himself or for any other person
any undue advantage as a motive or reward to induce a public servant, by corrupt or illegal means or by
 Lesson 17 n Anti-Corruption and Anti-Bribery Laws in India 533

exercise of his personal influence to perform or to cause performance of a public duty improperly or dishonestly
or to forbear or to cause to forbear such public duty by such public servant or by another public servant, shall
be punishable with imprisonment for a term which shall not be less than three years but which may extend to
seven years and shall also be liable to fine.

Offence relating to bribing of a Public Servant [Section 8]

(1) Any person who gives or promises to give an undue advantage to another person or persons, with intention –
(i) to induce a public servant to perform improperly a public duty; or
(ii) to reward such public servant for the improper performance of public duty;
shall be punishable with imprisonment for a term which may extend to seven years or with fine or with both:
Provided that the provisions of this section shall not apply where a person is compelled to give such undue
advantage:
Provided further that the person so compelled shall report the matter to the law enforcement authority or
investigating agency within a period of seven days from the date of giving such undue advantage:
Provided also that when the offence under this section has been committed by commercial organisation, such
commercial organisation shall be punishable with fine.
Illustration. – A person, ‘P’ gives a public servant, ‘S’ an amount of ten thousand rupees to ensure that he is
granted a license, over all the other bidders. ‘P’ is guilty of an offence under this sub-section.
Explanation. – It shall be immaterial whether the person to whom an undue advantage is given or promised
to be given is the same person as the person who is to perform, or has performed, the public duty concerned,
and, it shall also be immaterial whether such undue advantage is given or promised to be given by the person
directly or through a third party.
(2) Nothing in section 8(1) shall apply to a person, if that person, after informing a law enforcement authority or
investigating agency, gives or promises to give any undue advantage to another person in order to assist such
law enforcement authority or investigating agency in it’s investigation of the offence alleged against the latter.

Offence relating to bribing a public servant by a commercial organisation [Section 9]

(1) Where an offence under this Act has been committed by a commercial organisation, such organisation shall
be punishable with fine, if any person associated with such commercial organisation gives or promises to give
any undue advantage to a public servant intending –
(a) to obtain or retain business for such commercial organisation; or
(b) to obtain or retain an advantage in the conduct of business for such commercial organisation:
Provided that it shall be a defence for the commercial organisation to prove that it had in place adequate
procedures in compliance of such guidelines as may be prescribed to prevent persons associated with it from
undertaking such conduct.
(2) For the purposes of this section, a person is said to give or promise to give any undue advantage to a public
servant, if he is alleged to have committed the offence under section 8, whether or not such person has been
prosecuted for such offence.
(3) For the purposes of section 8 and this section, –
(a) “commercial organisation” means –
(i) a body which is incorporated in India and which carries on a business, whether in India or outside
India;
534 EP-GRMCE

(ii) any other body which is incorporated outside India and which carries on a business, or part of a
business, in any part of India;
(iii) a partnership firm or any association of persons formed in India and which carries on a business
whether in India or outside India; or
(iv) any other partnership or association of persons which is formed outside India and which carries
on a business, or part of a business, in any part of India;
(b) “business” includes a trade or profession or providing service;
(c) a person is said to be associated with the commercial organisation, if such person performs services for
or on behalf of the commercial organisation irrespective of any promise to give or giving of any undue
advantage which constitutes an offence under sub-section (1).
Explanation 1. – The capacity in which the person performs services for or on behalf of the commercial
organisation shall not matter irrespective of whether such person is employee or agent or subsidiary of such
commercial organisation.
Explanation 2. – Whether or not the person is a person who performs services for or on behalf of the commercial
organisation is to be determined by reference to all the relevant circumstances and not merely by reference to
the nature of the relationship between such person and the commercial organisation.
Explanation 3. – If the person is an employee of the commercial organisation, it shall be presumed unless the
contrary is proved that such person is a person who has performed services for or on behalf of the commercial
organisation.
(4) Notwithstanding anything contained in the Code of Criminal Procedure, 1973, the offence under sections
7A, 8 and this section shall be cognizable.
(5) The Central Government shall, in consultation with the concerned stakeholders including departments and
with a view to preventing persons associated with commercial organisations from bribing any person, being
a public servant, prescribe such guidelines as may be considered necessary which can be put in place for
compliance by such organisations.

Person in charge of commercial organization to be guilty of offence [Section 10]

Person in charge of commercial organization to be guilty of Offence [Section10]
Where an offence under section 9 is committed by a commercial organisation, and such offence is proved in
the court to have been committed with the consent or connivance of any director, manager, secretary or other
officer shall be of the commercial organisation, such director, manager, secretary or other officer shall be guilty
of the offence and shall be liable to be proceeded against and shall be punishable with imprisonment for a term
which shall not be less than three years but which may extend to seven years and shall also be liable to fine.
Explanation. – For the purposes of this section, ‘‘director’’, in relation to a firm means a partner in the firm.’’.

Public servant obtaining undue Advantage without consideration from person concerned in
proceeding or business transacted by such public servant [ Section 11]
Whoever, being a public servant, accepts or obtains or attempts to obtain for himself, or for any other person,
any undue Advantage without consideration, or for a consideration which he knows to be inadequate, from any
person whom he knows to have been, or to be, or to be likely to be concerned in any proceeding or business
transacted or about to be transacted by such public servant, or having any connection with the official functions
or public duty of himself or of any public servant to whom he is subordinate, or from any person whom he knows
to be interested in or related to the person so concerned, shall be punishable with imprisonment for a term
which shall be not less than six months but which may extend to five years and shall also be liable to fine.
 Lesson 17 n Anti-Corruption and Anti-Bribery Laws in India 535

Punishment for abetment of offences [ Section 12]

Whoever abets any offence punishable under this Act, whether or not that offence is committed in consequence
of that abetment, shall be punishable with imprisonment for a term which shall be not less than three years but
which may extend to seven years and shall also be liable to fine.

Criminal Misconduct by a Public Servant [Section 13]

(1) A public servant is said to commit the offence of criminal misconduct –
(a) if he dishonestly or fraudulently misappropriates or otherwise converts for his own use any property
entrusted to him or any property under his control as a public servant or allows any other person so to
do; or
(b) if he intentionally enriches himself illicitly during the period of his office.
Explanation 1. – A person shall be presumed to have intentionally enriched himself illicitly if he or any person
on his behalf, is in possession of or has, at any time during the period of his office, been in possession of
pecuniary resources or property disproportionate to his known sources of income which the public servant
cannot satisfactorily account for.
Explanation 2. – The expression ‘‘known sources of income’’ means income received from any lawful sources.
(2) Any public servant who commits criminal misconduct shall be punishable with imprisonment for a terms
which shall be not less than four years but which may extend to ten years and shall also be liable to fine.

Punishment for habitual Offender [Section 14]

Whoever convicted of an offence under this Act subsequently commits an offence punishable under this Act,
shall be punishable with imprisonment for a term which shall be not less than five years but which may extend
to ten years and shall also be liable to fine.

Punishment for attempt [Section 15]

Whoever attempts to commit an offence referred to in clause (a) of sub-section (1) of section 13 shall be
punishable with imprisonment for a term which shall not be less than two years but which may extend to five
years and with fine.

Matters to be taken into consideration for fixing fine [Section 16]

Where a sentence of fine is imposed under section 7 or section 8 or section 9 or section 10 or section 11 or
sub-section (2) of section 13 or section 14 or section 15, the court in fixing the amount of the fine shall take
into consideration the amount or the value of the property, if any, which the accused person has obtained by
committing the offence or where the conviction is for an offence referred to in clause (b) of sub-section (1) of
section 13, the pecuniary resources or property referred to in that clause for which the accused person is unable
to account satisfactorily.

CHAPTER IV
INVESTIGATION INTO CASES UNDER THE ACT

Persons authorised to investigate [Section 17]

Notwithstanding anything contained in the Code of Criminal Procedure, 1973 (2 of 1974), no police officer below
the rank,–
(a) in the case of the Delhi Special Police Establishment, of an Inspector of Police;
536 EP-GRMCE

(b) in the metropolitan areas of Bombay, Calcutta, Madras and Ahmedabad and in any other metropolitan
area notified as such under sub-section (1) of section 8 of the Code of Criminal Procedure, 1973 (2 of
1974), of an Assistant Commissioner of Police;
(c) elsewhere, of a Deputy Superintendent of Police or a police officer of equivalent rank, shall investigate
any offence punishable under this Act without the order of a Metropolitan Magistrate or a Magistrate of
the first class, as the case may be, or make any arrest therefor without a warrant:
Provided that if a police officer not below the rank of an Inspector of Police is authorised by the State
Government in this behalf by general or special order, he may also investigate any such offence without
the order of a Metropolitan Magistrate or a Magistrate of the first class, as the case may be, or make
arrest therefor without a warrant:
Provided further that an offence referred to in clause (b) of sub-section (1) of section 13 shall not be
investigated without the order of a police officer not below the rank of a Superintendent of Police.

Enquiry or Inquiry or investigation of offences relatable to recommendations made or decision

taken by public servant in discharge of official functions or duties [Section 17A]
No police officer shall conduct any enquiry or inquiry or investigation into any offence alleged to have been
committed by a public servant under this Act, where the alleged offence is relatable to any recommendation
made or decision taken by such public servant in discharge of his official functions or duties, without the previous
approval –
(a) in the case of a person who is or was employed, at the time when the offence was alleged to have been
committed, in connection with the affairs of the Union, of that Government;
(b) in the case of a person who is or was employed, at the time when the offence was alleged to have been
committed, in connection with the affairs of a State, of that Government;
(c) in the case of any other person, of the authority competent to remove him from his office, at the time
when the offence was alleged to have been committed:
Provided that no such approval shall be necessary for cases involving arrest of a person on the spot on the
charge of accepting or attempting to accept any undue advantage for himself or for any other person.
Provided further that the concerned authority shall convey its decision under this section within a period of three
months, which may, for reasons to be recorded in writing by such authority, be extended by a further period of
one month.

Power to inspect bankers’ books [Section 18]

If from information received or otherwise, a police officer has reason to suspect the commission of an offence
which he is empowered to investigate under section 17 and considers that for the purpose of investigation
or inquiry into such offence, it is necessary to inspect any bankers’ books, then, notwithstanding anything
contained in any law for the time being in force, he may inspect any bankers’ books in so far as they relate to
the accounts of the persons suspected to have committed that offence or of any other person suspected to be
holding money on behalf of such person, and take or cause to be taken certified copies of the relevant entries
therefrom, and the bank concerned shall be bound to assist the police officer in the exercise of his powers
under this section: Provided that no power under this section in relation to the accounts of any person shall be
exercised by a police officer below the rank of a Superintendent of Police, unless he is specially authorised in
this behalf by a police officer of or above the rank of a Superintendent of Police.
Explanation. – In this section, the expressions “bank” and “bankers’ books” shall have the meanings respectively
assigned to them in the Bankers’ Books Evidence Act, 1891 (18 of 1891).
 Lesson 17 n Anti-Corruption and Anti-Bribery Laws in India 537

CHAPTER V
SANCTION FOR PROSECUTION AND OTHER MISCELLANEOUS PROVISIONS

Previous sanction necessary for prosecution [Section 19]

(1) No court shall take cognizance of an offence punishable under 2 [sections 7, 11, 13 and 15] alleged to have
been committed by a public servant, except with the previous sanction 3 [save as otherwise provided in the
Lokpal and Lokayuktas Act, 2013 (1 of 2014)] –
(a) in the case of a person [who is employed, or as the case may be, was at the time of commission of the
alleged offence employed] in connection with the affairs of the Union and is not removable from his
office save by or with the sanction of the Central Government, of that Government;
(b) in the case of a person [who is employed, or as the case may be, was at the time of commission of the
alleged offence employed] in connection with the affairs of a State and is not removable from his office
save by or with the sanction of the State Government, of that Government;
(c) in the case of any other person, of the authority competent to remove him from his office:
Provided that no request can be made, by a person other than a police officer or an officer of an
investigation agency or other law enforcement authority, to the appropriate Government or competent
authority, as the case may be, for the previous sanction of such Government or authority for taking
cognizance by the court of any of the offences specified in this sub-section, unless –
(i) such person has filed a complaint in a competent court about the alleged offences for which the
public servant is sought to be prosecuted; and
(ii) the court has not dismissed the complaint under section 203 of the Code of Criminal Procedure,
1973 (2 of 1974) and directed the complainant to obtain the sanction for prosecution against the
public servant for further proceeding:
Provided further that in the case of request from the person other than a police officer or an officer of
an investigation agency or other law enforcement authority, the appropriate Government or competent
authority shall not accord sanction to prosecute a public servant without providing an opportunity of
being heard to the concerned public servant:
Provided also that the appropriate Government or any competent authority shall, after the receipt of
the proposal requiring sanction for prosecution of a public servant under this sub-section, endeavour
to convey the decision on such proposal within a period of three months from the date of its receipt:
Provided also that in case where, for the purpose of grant of sanction for prosecution, legal consultation
is required, such period may, for the reasons to be recorded in writing, be extended by a further period
of one month:
Provided also that the Central Government may, for the purpose of sanction for prosecution of a public
servant, prescribe such guidelines as it considers necessary.
Explanation. – For the purposes of sub-section (1), the expression “public servant” includes such
person –
(a) who has ceased to hold the office during which the offence is alleged to have been committed; or
(b) who has ceased to hold the office during which the offence is alleged to have been committed
and is holding an office other than the office during which the offence is alleged to have been
committed.
(2) Where for any reason whatsoever any doubt arises as to whether the previous sanction as required under
538 EP-GRMCE

sub-section (1) should be given by the Central Government or the State Government or any other authority,
such sanction shall be given by that Government or authority which would have been competent to remove the
public servant from his office at the time when the offence was alleged to have been committed.
(3) Notwithstanding anything contained in the Code of Criminal Procedure, 1973 (2 of 1974),—
(a) no finding, sentence or order passed by a special Judge shall be reversed or altered by a Court in
appeal, confirmation or revision on the ground of the absence of, or any error, omission or irregularity
in, the sanction required under sub-section (1), unless in the opinion of that court, a failure of justice has
in fact been occasioned thereby;
(b) no court shall stay the proceedings under this Act on the ground of any error, omission or irregularity in
the sanction granted by the authority, unless it is satisfied that such error, omission or irregularity has
resulted in a failure of justice;
(c) no court shall stay the proceedings under this Act on any other ground and no court shall exercise
the powers of revision in relation to any interlocutory order passed in any inquiry, trial, appeal or other
proceedings.
(4) In determining under sub-section (3) whether the absence of, or any error, omission or irregularity in, such
sanction has occasioned or resulted in a failure of justice the court shall have regard to the fact whether the
objection could and should have been raised at any earlier stage in the proceedings.
Explanation. – For the purposes of this section,– (a) error includes competency of the authority to grant sanction;
(b) a sanction required for prosecution includes reference to any requirement that the prosecution shall be at the
instance of a specified authority or with the sanction of a specified person or any requirement of a similar nature

Presumption where public servant accepts any undue advantage [Section 20]
Where, in any trial of an offence punishable under section 7 or under section 11, it is proved that a public servant
accused of an offence has accepted or obtained or attempted to obtain for himself, or for any other person, any
undue advantage from any person, it shall be presumed, unless the contrary is proved, that he accepted or
obtained or attempted to obtain that undue advantage, as a motive or reward under section 7 for performing or
to cause performance of a public duty improperly or dishonestly either by himself or by another public servant
or, as the case may be, any undue advantage without consideration or for a consideration which he knows to
be inadequate under section 11.

Accused person to be a competent witness [Section 21]

Any person charged with an offence punishable under this Act, shall be a competent witness for the defence
and may give evidence on oath in disproof of the charges made against him or any person charged together
with him at the same trial:
Provided that –
(a) he shall not be called as a witness except at his own request;
(b) his failure to give evidence shall not be made the subject of any comment by the prosecution or give
rise to any presumption against himself or any person charged together with him at the same trial;
(c) he shall not be asked, and if asked shall not be required to answer, any question tending to show that
he has committed or been convicted of any offence other than the offence with which he is charged, or
is of bad character, unless –
(i) the proof that he has committed or been convicted of such offence is admissible evidence to show
that he is guilty of the offence with which he is charged, or
 Lesson 17 n Anti-Corruption and Anti-Bribery Laws in India 539

(ii) he has personally or by his pleader asked any question of any witness for the prosecution with
a view to establish his own good character, or has given evidence of his good character, or
the nature or conduct of the defence is such as to involve imputations on the character of the
prosecutor or of any witness for the prosecution, or
(iii) he has given evidence against any other person charged with the same offence.

The Code of Criminal Procedure, 1973 to apply subject to certain modifications [Section 22]
The provisions of the Code of Criminal Procedure, 1973 (2 of 1974), shall in their application to any proceeding
in relation to an offence punishable under this Act have effect as if, –
(a) in sub-section (1) of section 243, for the words “The accused shall then be called upon”, the words “The
accused shall then be required to give in writing at once or within such time as the Court may allow, a
list of the persons (if any) whom he proposes to examine as his witnesses and of the documents (if any)
on which he proposes to rely and he shall then be called upon” had been substituted;
(b) in sub-section (2) of section 309, after the third proviso, the following proviso had been inserted,
namely:– “Provided also that the proceeding shall not be adjourned or postponed merely on the ground
that an application under section 397 has been made by a party to the proceeding.”;
(c) after sub-section (2) of section 317, the following sub-section had been inserted, namely:– “(3)
Notwithstanding anything contained in sub-section (1) or sub-section (2), the Judge may, if he thinks fit
and for reasons to be recorded by him, proceed with inquiry or trial in the absence of the accused or his
pleader and record the evidence of any witness subject to the right of the accused to recall the witness
for cross-examination.”;
(d) in sub-section (1) of section 397, before the Explanation, the following proviso had been inserted, namely
:– “Provided that where the powers under this section are exercised by a Court on an application made
by a party to such proceedings, the Court shall not ordinarily call for the record of the proceedings:–
(a) without giving the other party an opportunity of showing cause why the record should not be called
for; or (b) if it is satisfied that an examination of the record of the proceedings may be made from the
certified copies.”.

Particulars in a charge in relation to an offence under section 13(1)(a) – [Section 23]

Notwithstanding anything contained in the Code of Criminal Procedure, 1973 (2 of 1974), when an accused is
charged with an offence under clause (a) of sub-section (1) of section 13, it shall be sufficient to describe in the
charge the property in respect of which the offence is alleged to have been committed and the dates between
which the offence is alleged to have been committed, without specifying particular items or exact dates, and
the charge so framed shall be deemed to be a charge of one offence within the meaning of section 219 of the
said Code:
Provided that the time included between the first and last of such dates shall not exceed one year.
Section 24[Omitted]

Military, Naval and Air Force or other law not to be affected [Section 25]
(1) Nothing in this Act shall affect the jurisdiction exercisable by, or the procedure applicable to, any court or
other authority under the Army Act, 1950 (45 of 1950), the Air Force Act, 1950 (46 of 1950), the Navy Act, 1957
(62 of 1957), the Border Security Force Act, 1968 (47 of 1968), the Coast Guard Act, 1978 (30 of 1978) and the
National Security Guard Act, 1986 (47 of 1986).
(2) For the removal of doubts, it is hereby declared that for the purposes of any such law as is referred to in sub-
section (1), the court of a special Judge shall be deemed to be a court of ordinary criminal justice
540 EP-GRMCE

Special Judges appointed under Act 46 of 1952 to be special Judges appointed under this
Act [Section 26]
Every special Judge appointed under the Criminal Law Amendment Act, 1952, for any area or areas and is
holding office on the commencement of this Act shall be deemed to be a special Judge appointed under section
3 of this Act for that area or areas and, accordingly, on and from such commencement, every such Judge shall
continue to deal with all the proceedings pending before him on such commencement in accordance with the
provisions of this Act.

Appeal and Revision [Section 27]

Subject to the provisions of this Act, the High Court may exercise, so far as they may be applicable, all the
powers of appeal and revision conferred by the Code of Criminal Procedure, 1973 (2 of 1974) on a High Court
as if the court of the special Judge were a court of Session trying cases within the local limits of the High Court.

Act to be in addition to any other law [Section 28]

The provisions of this Act shall be in addition to, and not in derogation of, any other law for the time being in
force, and nothing contained herein shall exempt any public servant from any proceeding which might, apart
from this Act, be instituted against him.

Amendment of the Ordinance 38 of 1944 [Section 29]

In the Criminal Law Amendment Ordinance, 1944,–
(a) in sub-section (1) of section 3, sub-section (1) of section 9, clause (a) of section 10, sub-section (1) of
section 11 and sub-section (1) of section 13, for the words “State Government”, wherever they occur,
the words “State Government or, as the case may be, the Central Government” shall be substituted;
(b) in section 10, in clause (a), for the words “three months”, the words “one year” shall be substituted;
(c) in the Schedule,– (i) paragraph 1 shall be omitted; (ii) in paragraphs 2 and 4, –
(a) after the words “a local authority”, the words and figures “or a corporation established by or
under a Central, Provincial or State Act, or an authority or a body owned or controlled or aided by
Government or a Government company as defined in section 617 of the Companies Act, 1956 (1
of 1956) or a society aided by such corporation, authority, body or Government company” shall be
inserted;
(b) after the words “or authority”, the words “or corporation or body or Government company or
society” shall be inserted;
(iii) for paragraph 4A, the following paragraph shall be substituted, namely:– “4A.An offence punishable
under the Prevention of Corruption Act, 1988.”;
(iv) in paragraph 5, for the words and figures “items 2, 3 and 4”, the words, figures and letter “items 2,
3, 4 and 4A” shall be substituted.

(E) CENTRAL VIGILANCE COMMISSION ACT, 2003

The preamble of the Act provides that it is an Act to provide for the constitution of a Central Vigilance
Commission to inquire or cause inquiries to be conducted into offences alleged to have been committed under
the Prevention of Corruption Act, 1988 by certain categories of public servants of the Central Government,
corporations established by or under any Central Act, Government companies, societies and local authorities
owned or controlled by the Central Government and for matters connected therewith or incidental thereto.
The Central Vigilance Commission (CVC) is the body constituted by the Government in the year 1964 on the
 Lesson 17 n Anti-Corruption and Anti-Bribery Laws in India 541

proposal of the Santharam Committee on the Prevention of Corruption. The body was established with an
intention to check corruption in the Government departments. The Commission is an independent statutory
body exempted from the authority of the executive. The CVC attained statutory recognition by an ordinance
of 1998 and in September 12, 2003 the ordinance was replaced by The Central Vigilance Commission Act
enacted by the Legislative Department under the Ministry of Law and Justice. The main purpose of the Act was
to establish the Central Vigilance Commission to investigate the offences punishable under the Prevention of
Corruption Act, 1988 by the public servants working under the Central Government, Corporations constituted
under the Act of Parliament, Government companies, and local bodies owned and managed by the Centre.
The Act is divided in to 5 Chapters, details of which are as under:
Chapter I (Section 1 and 2): Preliminary
Chapter II (Sections 3 to 7): The Central Vigilance Commission
Chapter III (Sections 8 to 12): Functions and Powers of the Central Vigilance Commission
Chapter IV (Sections 13 and 14): Expenses and Annual Report
Chapter V (Section 15 to 27): Miscellaneous.
The important sections of the Act are being discussed hereunder:

The Central Vigilance Commission - Chapter II

Constitution of Central Vigilance Commission (Section 3):
(1) There shall be constituted a body to be known as the Central Vigilance Commission to exercise the powers
conferred upon, and to perform the functions assigned to it under this Act and the Central Vigilance Commission
constituted under sub-section (1) of section 3 of the Central Vigilance Commission Ordinance, 1999 (Ord. 4
of 1999) which ceased to operate, and continued under the Government of India in the Ministry of Personnel,
Public Grievances and Pensions (Department of Personnel and Training) Resolution No. 371/20/99-AVD. III,
dated the 4th April, 1999 as amended vide Resolution of even number, dated the 13th August, 2002 shall be
deemed to be the Commission constituted under this Act.
(2) The Commission shall consist of–
(a) a Central Vigilance Commissioner –Chairperson;
(b) not more than two Vigilance Commissioners –Members.
(3) The Central Vigilance Commissioner and the Vigilance Commissioners shall be appointed from amongst
persons–
(a) who have been or are in an All-India Service or in any civil service of the Union or in a civil post under
the Union having knowledge and experience in the matters relating to vigilance, policy making and
administration including police administration; or
(b) who have held office or are holding office in a corporation established by or under any Central Act
or a Government company owned or controlled by the Central Government and persons who have
expertise and experience in finance including insurance and banking, law, vigilance and investigations:
Provided that, from amongst the Central Vigilance Commissioner and the Vigilance Commissioners,
not more than two persons shall belong to the category of persons referred to either in clause (a) or
clause (b).
(4) The Central Government shall appoint a Secretary to the Commission on such terms and conditions as it
deems fit to exercise such powers and discharge such duties as the Commission may by regulations specify
in this behalf.
542 EP-GRMCE

(5) The Central Vigilance Commissioner, the other Vigilance Commissioners and the Secretary to the Commission
appointed under the Central Vigilance Commission Ordinance, 1999 (Ord. 4 of 1999) or the Resolution of the
Government of India in the Ministry of Personnel, Public Grievances and Pensions (Department of Personnel
and Training) Resolution No. 371/20/99-AVD. III, dated the 4th April, 1999 as amended vide Resolution of
even number, dated the 13th August, 2002 shall be deemed to have been appointed under this Act on the
same terms and conditions including the term of office subject to which they were so appointed under the said
Ordinance or the Resolution, as the case may be.
Explanation: For the purposes of this sub-section, the expression “term of office” shall be construed as the
term of office with effect from the date the Central Vigilance Commissioner or any Vigilance Commissioner has
entered upon his office and continued as such under this Act. (6) The headquarters of the Commission shall be
at New Delhi.
Appointment of Central Vigilance Commissioner and Vigilance Commissioners (Section 4):
(1) The Central Vigilance Commissioner and the Vigilance Commissioners shall be appointed by the President
by warrant under his hand and seal: Provided that every appointment under this sub-section shall be made after
obtaining the recommendation of a Committee consisting of–
(a) the Prime Minister –Chairperson;
(b) the Minister of Home Affairs –Member;
(c) the Leader of the Opposition in the House of the People –Member.
Explanation: For the purposes of this sub-section, “the Leader of the Opposition in the House of the People”
shall, when no such Leader has been so recognised, include the Leader of the single largest group in opposition
of the Government in the House of the People.
(2) No appointment of a Central Vigilance Commissioner or a Vigilance Commissioner shall be invalid merely
by reason of any vacancy in the Committee.
Terms and other conditions of service of Central Vigilance Commissioner (Section 5):
(1) Subject to the provisions of sub-sections (3) and (4), the Central Vigilance Commissioner shall hold office for
a term of four years from the date on which he enters upon his office or till he attains the age of sixty-five years,
whichever is earlier. The Central Vigilance Commissioner, on ceasing to hold the office, shall be ineligible for
reappointment in the Commission.
(2) Subject to the provisions of sub-sections (3) and (4), every Vigilance Commissioner shall hold office for a
term of four years from the date on which he enters upon his office or till he attains the age of sixty-five years,
whichever is earlier:
Provided that every Vigilance Commissioner, on ceasing to hold the office, shall be eligible for appointment as
the Central Vigilance Commissioner in the manner specified in sub-section (1) of section 4:
Provided further that the term of the Vigilance Commissioner, if appointed as the Central Vigilance Commissioner,
shall not be more than four years in aggregate as the Vigilance Commissioner and the Central Vigilance
Commissioner.
(3) The Central Vigilance Commissioner or a Vigilance Commissioner shall, before he enter upon his office,
make and subscribe before the President, or some other person appointed in that behalf by him, an oath or
affirmation according to the form set out for the purpose in Schedule to this Act.
(4) The Central Vigilance Commissioner or a Vigilance Commissioner may, by writing under his hand addressed
to the President, resign his office.
 Lesson 17 n Anti-Corruption and Anti-Bribery Laws in India 543

(5) The Central Vigilance Commissioner or a Vigilance Commissioner may be removed from his office in the
manner provided in section 6.
(6) On ceasing to hold office, the Central Vigilance Commissioner and every other Vigilance Commissioner
shall be ineligible for–
(a) any diplomatic assignment, appointment as administrator of a Union territory and such other assignment
or appointment which is required by law to be made by the President by warrant under his hand and
seal;
(b) further employment to any office of profit under the Government of India or the Government of a State.
(7) The salary and allowances payable to and the other conditions of service of–
(a) the Central Vigilance Commissioner shall be the same as those of the Chairman of the Union Public
Service Commission;
(b) the Vigilance Commissioner shall be the same as those of a Member of the Union Public Service
Commission:
Provided that if the Central Vigilance Commissioner or any Vigilance Commissioner is, at the time of his
appointment, in receipt of a pension (other than a disability or wound pension) in respect of any previous service
under the Government of India or under the Government of a State, his salary in respect of the service as the
Central Vigilance Commissioner or any Vigilance Commissioner shall be reduced by the amount of that pension
including any portion of pension which was commuted and pension equivalent of other forms of retirement
benefits excluding pension equivalent of retirement gratuity:
Provided further that if the Central Vigilance Commissioner or any Vigilance Commissioner is, at the time of
his appointment, in receipt of retirement benefits in respect of any previous service rendered in a corporation
established by or under any Central Act or a Government company owned or controlled by the Central
Government, his salary in respect of the service as the Central Vigilance Commissioner or, as the case may be,
the Vigilance Commissioner shall be reduced by the amount of pension equivalent to the retirement benefits:
Provided also that the salary, allowances and pension payable to, and the other conditions of service of, the
Central Vigilance Commissioner or any Vigilance Commissioner shall not be varied to his disadvantage after
his appointment.
Removal of Central Vigilance Commissioner and Vigilance Commissioner (Section 6):
(1) Subject to the provisions of sub-section (3), the Central Vigilance Commissioner or any Vigilance Commissioner
shall be removed from his office only by order of the President on the ground of proved misbehaviour or
incapacity after the Supreme Court, on a reference made to it by the President, has, on inquiry, reported that
the Central Vigilance Commissioner or any Vigilance Commissioner, as the case may be, ought on such ground
be removed.
(2) The President may suspend from office, and if deem necessary prohibit also from attending the office during
inquiry, the Central Vigilance Commissioner or any Vigilance Commissioner in respect of whom a reference has
been made to the Supreme Court under sub-section (1) until the President has passed orders on receipt of the
report of the Supreme Court on such reference.
(3) Notwithstanding anything contained in sub-section (1), the President may by order remove from office the
Central Vigilance Commissioner or any Vigilance Commissioner if the Central Vigilance Commissioner or such
Vigilance Commissioner, as the case may be,–
(a) is adjudged an insolvent; or
(b) has been convicted of an offence which, in the opinion of the Central Government, involves moral
turpitude; or
544 EP-GRMCE

(c) engages during his term of office in any paid employment outside the duties of his office; or
(d) is, in the opinion of the President, unfit to continue in office by reason of infirmity of mind or body; or
(e) has acquired such financial or other interest as is likely to affect prejudicially his functions as a Central
Vigilance Commissioner or a Vigilance Commissioner.
(4) If the Central Vigilance Commissioner or any Vigilance Commissioner is or becomes in any way, concerned
or interested in any contract or agreement made by or on behalf of the Government of India or participates in
any way in the profit thereof or in any benefit or emolument arising therefrom otherwise than as a member and
in common with the other members of an incorporated company, he shall, for the purposes of sub-section (1),
be deemed to be guilty of misbehaviour.
Power to make rules by Central Government for staff (Section 7):
The Central Government may, in consultation with the Commission, make rules with respect to the number of
members of the staff of the Commission and their conditions of service.

Functions and Powers of the Central Vigilance Commission (Chapter III)

Functions and powers of Central Vigilance Commission (Section 8):
(1) The functions and powers of the Commission shall be to–
(a) exercise superintendence over the functioning of the Delhi Special Police Establishment in so far as
it relates to the investigation of offences alleged to have been committed under the Prevention of
Corruption Act, 1988 (49 of 1988) or an offence with which a public servant specified in sub-section (2)
may, under the Code of Criminal Procedure, 1973 (2 of 1974), be charged at the same trial;
(b) give directions to the Delhi Special Police Establishment for the purpose of discharging the responsibility
entrusted to it under sub-section (1) of section 4 of the Delhi Special Police Establishment Act, 1946
(25 of 1946): Provided that while exercising the powers of superintendence under clause (a) or giving
directions under this clause, the Commissions shall not exercise powers in such a manner so as to
require the Delhi Special Police Establishment to investigate or dispose of any case in a particular
manner;
(c) inquire or cause an inquiry or investigation to be made on a reference made by the Central Government
wherein it is alleged that a public servant being an employee of the Central Government or a corporation
established by or under any Central Act, Government company, society and any local authority owned
or controlled by that Government, has committed an offence under the Prevention of Corruption Act,
1988 (49 of 1988) or an offence with which a public servant may, under the Code of Criminal Procedure,
1973 (2 of 1974), be charged at the same trial;
(d) inquire or cause an inquiry or investigation to be made into any complaint against any official belonging
to such category of officials specified in sub-section (2) wherein it is alleged that he has committed an
offence under the Prevention of Corruption Act, 1988 (49 of 1988) and an offence with which a public
servant specified in sub-section (2) may, under the Code of Criminal Procedure, 1973 (2 of 1974), be
charged at the same trial;
(e) review the progress of investigations conducted by the Delhi Special Police Establishment into offences
alleged to have been committed under the Prevention of Corruption Act, 1988 (49 of 1988) or the public
servant may, under the Code of Criminal Procedure, 1973 (2 of 1974), be charged at the same trial;
(f) review the progress of applications pending with the competent authorities for sanction of prosecution
under the Prevention of Corruption Act, 1988 (49 of 1988);
(g) render advice to the Central Government, corporations established by or under any Central Act,
 Lesson 17 n Anti-Corruption and Anti-Bribery Laws in India 545

Government companies, societies and local authorities owned or controlled by the Central Government
on such matters as may be referred to it by that Government, said Government companies, societies
and local authorities owned or controlled by the Central Government or otherwise;
(h) exercise superintendence over the vigilance administration of the various Ministries of the Central
Government or corporations established by or under any Central Act, Government companies, societies
and local authorities owned or controlled by that Government:
Provided that nothing contained in this clause shall be deemed to authorise the Commission to exercise
superintendence over the Vigilance administration in a manner not consistent with the directions relating
to vigilance matters issued by the Government and to confer power upon the Commission to issue
directions relating to any policy matters;
(2) The persons referred to in clause (d) of sub-section (1) are as follows:–
(a) members of All-India Services serving in connection with the affairs of the Union and Group ‘A’ officers
of the Central Government;
(b) such level of officers of the corporations established by or under any Central Act, Government
companies, societies and other local authorities, owned or controlled by the Central Government, as
that Government may, by notification in the Official Gazette, specify in this behalf:
Provided that till such time a notification is issued under this clause, all officers of the said corporations,
companies, societies and local authorities shall be deemed to be the persons referred to in clause (d)
of sub-section (1).
(c) on a reference made by the Lokpal under the proviso to sub-section (1) of section 20 of the Lokpal and
Lokayuktas Act, 2013 (1 of 2014), the persons referred to in clause (d) of sub-section (1) shall also
include–
(i) members of Group B, Group C and Group D services of the Central Government;
(ii) such level of officials or staff of the corporations established by or under any Central Act,
Government companies, societies and other local authorities, owned or controlled by the Central
Government, as that Government may, by notification in the Official Gazette, specify in this behalf:
Provided that till such time a notification is issued under this clause, all officials or staff of the said
corporations, companies, societies and local authorities shall be deemed to be the persons referred in
clause (d) of sub-section (1).
Action on preliminary inquiry in relation to public servants (Section 8A):
(1) Where, after the conclusion of the preliminary inquiry relating to corruption of public servants belonging
to Group C and Group D officials of the Central Government, the findings of the Commission disclose, after
giving an opportunity of being heard to the public servant, a prima facie violation of conduct rules relating to
corruption under the Prevention of Corruption Act, 1988 (49 of 1988) by such public servant, the Commission
shall proceed with one or more of the following actions, namely:–
(a) cause an investigation by any agency or the Delhi Special Police Establishment, as the case may be;
(b) initiation of the disciplinary proceedings or any other appropriate action against the concerned public
servant by the competent authority;
(c) closure of the proceedings against the public servant and to proceed against the complainant under
section 46 of the Lokpal and Lokayuktas Act, 2013 (1 of 2014).
(2) Every preliminary inquiry referred to in sub-section (1) shall ordinarily be completed within a period of ninety
546 EP-GRMCE

days and for reasons to be recorded in writing, within a further period of ninety days from the date of receipt of
the complaint.
Action on investigation in relation to public servants (Section 8B):
(1) In case the Commission decides to proceed to investigate into the complaint under clause (a) of sub-section
(1) of section 8A, it shall direct any agency (including the Delhi Special Police Establishment) to carry out the
investigation as expeditiously as possible and complete the investigation within a period of six months from the
date of its order and submit the investigation report containing its findings to the Commission: Provided that
the Commission may extend the said period by a further period of six months for the reasons to be recorded in
writing.
(2) Notwithstanding anything contained in section 173 of the Code of Criminal Procedure, 1973 (2 of 1974),
any agency (including the Delhi Special Police Establishment) shall, in respect of cases referred to it by the
Commission, submit the investigation report to the Commission.
(3) The Commission shall consider every report received by it under sub-section (2) from any agency (including
the Delhi Special Police Establishment) and may decide as to–
(a) file charge-sheet or closure report before the Special Court against the public servant;
(b) initiate the departmental proceedings or any other appropriate action against the concerned public
servant by the competent authority.
Proceedings of Commission (Section 9):
(1) The proceedings of the Commission shall be conducted at its headquarters.
(2) The Commission may, by unanimous decision, regulate the procedure for transaction of its business as also
allocation of its business amongst the Central Vigilance Commissioner and other Vigilance Commissioners.
(3) Save as provided in sub-section (2), all business of the Commission shall, as far as possible, be transacted
unanimously.
(4) Subject to the provisions of sub-section (3), if the Central Vigilance Commissioner and other Vigilance
Commissioners differ in opinion on any matter, such matter shall be decided according to the opinion of the
majority.
(5) The Central Vigilance Commissioner, or, if for any reason he is unable to attend any meeting of the
Commission, the senior-most Vigilance Commissioner present at the meeting, shall preside at the meeting. (6)
No act or proceeding of the Commission shall be invalid merely by reason of–
(a) any vacancy in, or any defect in the constitution of, the Commission; or
(b) any defect in the appointment of a person acting as the Central Vigilance Commissioner or as a
Vigilance Commissioner; or
(c) any irregularity in the procedure of the Commission not affecting the merits of the case.
Vigilance Commissioner to act as Central Vigilance Commissioner in certain circumstances (Section
10):
(1) In the event of the occurrence of any vacancy in the office of the Central Vigilance Commissioner by
reason of his death, resignation or otherwise, the President may, by notification, authorise one of the Vigilance
Commissioners to act as the Central Vigilance Commissioner until the appointment of a new Central Vigilance
Commissioner to fill such vacancy.
(2) When the Central Vigilance Commissioner is unable to discharge his functions owing to absence on leave
or otherwise, such one of the Vigilance Commissioners as the President may, by notification, authorise in this
 Lesson 17 n Anti-Corruption and Anti-Bribery Laws in India 547

behalf, shall discharge the functions of the Central Vigilance Commissioner until the date on which the Central
Vigilance Commissioner resumes his duties.
Power relating to inquiries (Section 11):
The Commission shall, while conducting any inquiry referred to in clauses (b) and (c) of sub-section (1) of
section 8, have all the powers of a civil court trying a suit under the Code of Civil Procedure, 1908 (5 of 1908)
and in particular, in respect of the following matters, namely:–
(a) summoning and enforcing the attendance of any person from any part of India and examining him on
oath;
(b) requiring the discovery and production of any document;
(c) receiving evidence on affidavits;
(d) requisitioning any public record or copy thereof from any court or office;
(e) issuing commissions for the examination of witnesses or other documents; and
(f) any other matter which may be prescribed.
Director of Inquiry for making preliminary inquiry (Section 11A):
(1) There shall be a Director of Inquiry, not below the rank of Joint Secretary to the Government of India, who
shall be appointed by the Central Government for conducting preliminary inquiries referred to the Commission
by the Lokpal.
(2) The Central Government shall provide the Director of Inquiry such officers and employees as may be
required for the discharge of his functions under this Act.
Proceedings before Commission to be judicial proceedings (Section 12):
The Commission shall be deemed to be a civil court for the purposes of section 195 and Chapter XXVI of the
Code of Criminal Procedure, 1973 (2 of 1974) and every proceeding before the Commission shall be deemed
to be a judicial proceeding within the meaning of sections 193 and 228 and for the purposes of section 196 of
the Indian Penal Code (45 of 1860).

Expenses and Annual Report (Chapter IV)

Expenses of Commission to be charged on the Consolidated Fund of India (Section 13):
The expenses of the Commission, including any salaries, allowances and pensions payable to or in respect of
the Central Vigilance Commissioner, the Vigilance Commissioners, Secretary and the staff of the Commission,
shall be charged on the Consolidated Fund of India.
Annual Report (Section 14):
(1) It shall be the duty of the Commission to present annually to the President a report as to the work done by
the Commission within six months of the close of the year under report. (2) The report referred to in sub-section
(1) shall contain a separate part on the functioning of the Delhi Special Police Establishment in so far as it
relates to sub-section (1) of section 4 of the Delhi Special Police Establishment Act, 1946 (25 of 1946). (3) On
receipt of such report, the President shall cause the same to be laid before each House of Parliament.

Miscellaneous (Chapter V)
Protection of action taken in good faith (Section 15):
No suit, prosecution or other legal proceeding shall lie against the Commission, the Central Vigilance
548 EP-GRMCE

Commissioner, any Vigilance Commissioner, the Secretary or against any staff of the Commission in respect of
anything which is in good faith done or intended to be done under this Act.
Central Vigilance Commissioner, Vigilance Commissioner and staff to be public servants (Section 16):
The Central Vigilance Commissioner, every Vigilance Commissioner, the Secretary and every staff of the
Commission shall be deemed to be a public servant within the meaning of section 21 of the Indian Penal Code
(45 of 1860).
Report of any inquiry made on reference by Commission to be forwarded to that Commission (Section
17):
(1) The report of the inquiry undertaken by any agency on a reference made by the Commission shall be
forwarded to the Commission.
(2) The Commission shall, on receipt of such report and after taking into consideration any other factors relevant
thereto, advise the Central Government and corporations established by or under any Central Act, Government
companies, societies and local authorities owned or controlled by that Government, as the case may be, as to
the further course of action.
(3) The Central Government and the corporations established by or under any Central Act, Government
companies, societies and other local authorities owned or controlled by that Government, as the case may be,
shall consider the advice of the Commission and take appropriate action:
Provided that where the Central Government, any corporation established by or under any Central Act,
Government company, society or local authority owned or controlled by the Central Government, as the case
may be, does not agree with the advice of the Commission, it shall, for reasons to be recorded in writing,
communicate the same to the Commission.
Power to call for information (Section 18):
The Commission may call for reports, returns and statements from the Central Government or corporations
established by or under any Central Act, Government companies, societies and other local authorities owned
or controlled by that Government so as to enable it to exercise general supervision over the vigilance and anti-
corruption work in that Government and in the said corporations, Government companies, societies and local
authorities.
Consultation with Commission in certain matters (section 19):
The Central Government shall, in making any rules or regulations governing the vigilance or disciplinary matters
relating to persons appointed to public services and posts in connection with the affairs of the Union or to
members of the All-India Services, consult the Commission.
Power to make rules (section 20):
(1) The Central Government may, by notification in the Official Gazette, make rules for the purpose of carrying
out the provisions of this Act.
(2) In particular, and without prejudice to the generality of the foregoing power, such rules may provide for all or
any of the following matters, namely:–
(a) the number of members of the staff and their conditions of service under section 7;
(b) any other power of the civil court to be prescribed under clause (f) of section 11; and
(c) any other matter which is required to be, or may be, prescribed.
Power to make regulations (Section 21):
(1) The Commission may, with the previous approval of the Central Government, by notification in the Official
 Lesson 17 n Anti-Corruption and Anti-Bribery Laws in India 549

Gazette, make regulations not inconsistent with this Act and the rules made thereunder to provide for all matters
for which provision is expedient for the purposes of giving effect to the provisions of this Act.
(2) In particular, and without prejudice to the generality of the foregoing power, such regulations may provide for
all or any of the following matters, namely:–
(a) the duties and the powers of the Secretary under sub-section (4) of section 3; and
(b) the procedure to be followed by the Commission under sub-section (2) of section 9.
Notification, rule, etc., to be laid before Parliament (Section 22):
Every notification issued under clause (b) of sub-section (2) of section 8 and every rule made by the Central
Government and every regulation made by the Commission under this Act shall be laid, as soon as may be
after it is issued or made, before each House of Parliament, while it is in session, for a total period of thirty days
which may be comprised in one session or in two or more successive sessions, and if, before the expiry of the
session immediately following the session or the successive sessions aforesaid, both Houses agree in making
any modification in the notification or the rule or the regulation, or both Houses agree that the notification or
the rule or the regulation should not be made, the notification or the rule or the regulation shall thereafter have
effect only in such modified form or be of no effect, as the case may be; so, however, that any such modification
or annulment shall be without prejudice to the validity of anything previously done under that notification or rule
or regulation.
Power to remove difficulties (Section 23):
(1) If any difficulty arises in giving effect to the provisions of this Act, the Central Government may, by order, not
inconsistent with the provisions of this Act, remove the difficulty:
Provided that no such order shall be made after the expiry of a period of two years from the date of commencement
of this Act.
(2) Every order made under this section shall, as soon as may be after it is made, be laid before each House
of Parliament.
Provisions relating to existing Vigilance Commission (Section 24):
With effect from the constitution of the Commission under sub-section (1) of section 3, the Central Vigilance
Commission set up by the Resolution of the Government of India in the Ministry of Home Affairs No. 24/7/64-
AVD, dated the 11th February, 1964 (hereafter referred to in this section as the existing Vigilance Commission)
shall, insofar as its functions are not inconsistent with the provisions of this Act, continue to discharge the said
functions and–
(a) all actions and decisions taken by the Vigilance Commission insofar as such actions and decisions are
relatable to the functions of the Commission constituted under this Act shall be deemed to have been
taken by the Commission;
(b) all proceedings pending before the Vigilance Commission, insofar as such proceedings relate to the
functions of the Commission, shall be deemed to be transferred to the Commission and shall be dealt
with in accordance with the provisions of this Act;
(c) the employees of the Vigilance Commission shall be deemed to have become the employees of the
Commission on the same terms and conditions;
(d) all the assets and liabilities of the Vigilance Commission shall be transferred to the Commission.
Appointments, etc., of officers of Directorate of Enforcement (Section 25):
Notwithstanding anything contained in the Foreign Exchange Management Act, 1999 (42 of 1999) or any other
law for the time being in force,–
550 EP-GRMCE

(a) the Central Government shall appoint a Director of Enforcement in the Directorate of Enforcement in
the Ministry of Finance on the recommendation of the Committee consisting of–
i) the Central Vigilance Commissioner –Chairperson;
ii) Vigilance Commissioners –Members;
iii) Secretary to the Government of India in-charge of the Ministry of Home Affairs in the Central
Government –Member;
iv) Secretary to the Government of India in-charge of the Ministry of Personnel in the Central
Government –Member;
v) Secretary to the Government of India in-charge of the Department of Revenue, Ministry of Finance
in the Central Government –Member;
(b) while making a recommendation, the Committee shall take into consideration the integrity and
experience of the officers eligible for appointment;
(c) no person below the rank of Additional Secretary to the Government of India shall be eligible for
appointment as a Director of Enforcement;
(d) a Director of Enforcement shall continue to hold office for a period of not less than two years from the
date on which he assumes office;
(e) a Director of Enforcement shall not be transferred except with the previous consent of the Committee
referred to in clause (a);
(f) the Committee referred to in clause (a) shall, in consultation with the Director of Enforcement,
recommend officers for appointment to the posts above the level of the Deputy Director of Enforcement
and also recommend the extension or curtailment of the tenure of such officers in the Directorate of
Enforcement;
(g) on receipt of the recommendation under clause (f), the Central Government shall pass such orders as
it thinks fit to give effect to the said recommendation.
Amendment of Act 25 of 1946 (Section 26):
In the Delhi Special Police Establishment Act, 1946,–
(a) after section 1, the following section shall be inserted, namely:–
“1A. Interpretation section.–Words and expressions used herein and not defined but defined in the
Central Vigilance Commission Act, 2003 (45 of 2003), shall have the meanings, respectively, assigned
to them in that Act.”;
(b) for section 4, the following sections shall be substituted, namely:–
“4. Superintendence and administration of Special Police Establishment.–
(1) The superintendence of the Delhi Special Police Establishment in so far as it relates to investigation
of offences alleged to have been committed under the Prevention of Corruption Act, 1988 (49 of
1988), shall vest in the Commission.
(2) Save as otherwise provided in sub-section (1), the superintendence of the said police establishment
in all other matters shall vest in the Central Government.
(3) The administration of the said police establishment shall vest in an officer appointed in this behalf
by the Central Government (hereinafter referred to as the Director) who shall exercise in respect
of that police establishment such of the powers exercisable by an Inspector-General of Police in
 Lesson 17 n Anti-Corruption and Anti-Bribery Laws in India 551

respect of the police force in a State as the Central Government may specify in this behalf.
4A. Committee for appointment of Director.–
(1) The Central Government shall appoint the Director on the recommendation of the Committee
consisting of–
(a) the Central Vigilance Commissioner –Chairperson;
(b) Vigilance Commissioners –Members;
(c) Secretary to the Government of India incharge of the Ministry of Home Affairs in the Central
Government –Member;
(d) Secretary (Coordination and Public Grievances) in the Cabinet Secretariat –Member.
(2) While making any recommendation under sub-section (1), the Committee shall take into
consideration the views of the outgoing Director.
(3) The Committee shall recommend a panel of officers–
(a) on the basis of seniority, integrity and experience in the investigation of anticorruption cases;
and
(b) chosen from amongst officers belonging to the Indian Police Service constituted under
the All-India Services Act, 1951 (61 of 1951), for being considered for appointment as the
Director.
4B. Terms and conditions of service of Director
(1) The Director shall, notwithstanding anything to the contrary contained in the rules relating to his
conditions of service, continue to hold office for a period of not less than two years from the date
on which he assumes office.
(2) The Director shall not be transferred except with the previous consent of the Committee referred
to in sub-section (1) of section 4A.
4C. Appointment for posts of Superintendent of Police and above, extension and curtailment of
their tenure, etc.
(1) The Committee referred to in section 4A shall, after consulting the Director, recommend officers for
appointment to the posts of the level of Superintendent of Police and above and also recommend
the extension or curtailment of the tenure of such officers in the Delhi Special Police Establishment.
(2) On receipt of the recommendation under sub-section (1), the Central Government shall pass such
orders as it thinks fit to give effect to the said recommendation.”;
(c) after section 6, the following section shall be inserted, namely:–
“6A. Approval of Central Government to conduct inquiry or investigation.
(1) The Delhi Special Police Establishment shall not conduct any inquiry or investigation into any
offence alleged to have been committed under the Prevention of Corruption Act, 1988 (49 of
1988) except with the previous approval of the Central Government where such allegation relates
to–
(a) the employees of the Central Government of the level of Joint Secretary and above; and
(b) such officers as are appointed by the Central Government in corporations established by
or under any Central Act, Government companies, societies and local authorities owned or
controlled by that Government.
552 EP-GRMCE

(2) Notwithstanding anything contained in sub-section (1), no such approval shall be necessary for
cases involving arrest of a person on the spot on the charge of accepting or attempting to accept
any gratification other than legal remuneration referred to in clause (c) of the Explanation to
section 7 of the Prevention of Corruption Act, 1988 (49 of 1988).”.
Repeal and saving (Section 27):
(1) The Government of India in the Ministry of Personnel, Public Grievances and Pensions (Department
of Personnel and Training) Resolution No. 371/20/99-AVD. III, dated the 4th April, 1999 as amended vide
Resolution of even number, dated the 13th August, 2002 is hereby repealed.
(2) Notwithstanding such repeal and the cesser of operation of the Central Vigilance Commission Ordinance, 1999
(Ord. 4 of 1999), anything done or any action taken under the said Resolution and the said Ordinance including
the appointments made and other actions taken or anything done or any action taken or any appointment made
under the Delhi Special Police Establishment Act, 1946 (25 of 1946) and the Foreign Exchange Regulation Act,
1973 (46 of 1973) as amended by the said Ordinance shall be deemed to have been made or done or taken
under this Act or the Delhi Special Police Establishment Act, 1946 and the Foreign Exchange Regulation Act,
1973 as if the amendments made in those Acts by this Act were in force at all material times.

(F) LOKPAL AND LOKAYUKTA ACT, 2013 (LLA)

The Parliament of India also enacted the LLA to constitute a Lokpal for the Union and Lokayukta for States
to inquire into allegations of corruption against certain public functionaries. The LLA requires each State to
establish a Lokayukta by law under the state legislature. The Lokpal has the jurisdiction to inquire into all
complaints arising from the Prevention of Corruption Act against certain public functionaries, including an
incumbent or past Prime Minister, an incumbent or past Union Minister and any person who is or has been a
member of Parliament. The LLA provides that after the completion of investigation with respect to a complaint
under the PCA, the Lokpal can itself initiate prosecution against the accused and/or impose penalties via its
prosecution wing or initiate prosecution in the special court proposed to be established to try offences under
the PCA.
The Act consists of 15 Chapters, details of which are as under:

Part Chapter Section Particulars

I 1 Preliminary

II I 2 Definitions

II 3 to 10 Establishment of Lokpal

III 11 Inquiry Wing

IV 12 Prosecution Wing

V 13 Expenses of Lokpal to be charged on Consolidated Fund of India

VI 14 to 19 Jurisdiction in respect of Inquiry

VII 20 to 24 Procedure in respect of Preliminary Inquiry and Investigation

VIII 25 to 34 Power of Lokpal

IX 35 & 36 Special Courts

 Lesson 17 n Anti-Corruption and Anti-Bribery Laws in India 553

X 37 & 38 Complaints against Chairperson, Members and Official of Lokpal

XI 39 Assessment of Loss and Recovery thereof by Special Court

XII 40 to 43 Finance, Account and Audit

XIII 44 to 45 Declaration of Assets

XIV 46 & 47 Offences and Penalties

XV 48 to 62 Miscellaneous

Part III 63 Establishment of the Lokayukta

Here, we shall discuss the important provisions of the LLA:

Establishment of Lokpal (Section 3):
(1) On and from the commencement of this Act, there shall be established, for the purpose of this Act, a body
to be called the “Lokpal”.
(2) The Lokpal shall consist of–
(a) a Chairperson, who is or has been a Chief Justice of India or is or has been a Judge of the Supreme
Court or an eminent person who fulfills the eligibility specified in clause (b) of sub-section (3); and
(b) such number of Members, not exceeding eight out of whom fifty per cent. shall be Judicial Members:
Provided that not less than fifty per cent. of the Members of the Lokpal shall be from amongst the persons
belonging to the Scheduled Castes, the Scheduled Tribes, Other Backward Classes, Minorities and women.
(3) A person shall be eligible to be appointed,–
(a) as a Judicial Member if he is or has been a Judge of the Supreme Court or is or has been a Chief
Justice of a High Court;
(b) as a Member other than a Judicial Member, if he is a person of impeccable integrity and outstanding
ability having special knowledge and expertise of not less than twenty-five years in the matters relating
to anti-corruption policy, public administration, vigilance, finance including insurance and banking, law
and management.
(4) The Chairperson or a Member shall not be–
i. a member of Parliament or a member of the Legislature of any State or Union territory;
ii. a person convicted of any offence involving moral turptitude;
iii. a person of less than forty-five years of age, on the date of assuming office as the Chairperson or
Member, as the case may be;
iv. a member of any Panchayat or Municipality;
v. a person who has been removed or dismissed from the service of the Union or a State, and shall not
hold any office of trust or profit (other than his office as the Chairperson or a Member) or be affiliated
with any political party or carry on any business or practise any profession and, accordingly, before he
enters upon his office, a person appointed as the Chairperson or a Member, as the case may be, shall,
if–
a. he holds any office of trust or profit, resign from such office; or
554 EP-GRMCE

b. he is carrying on any business, sever his connection with the conduct and management of such
business; or
c. he is practising any profession, cease to practise such profession.
Appointment of Chairperson and Members on recommendations of Selection Committee (Section 4):
(1) The Chairperson and Members shall be appointed by the President after obtaining the recommendations of
a Selection Committee consisting of–
(a) the Prime Minister–Chairperson;
(b) the Speaker of the House of the People–Member;
(c) the Leader of Opposition in the House of the People–Member; 7
(d) the Chief Justice of India or a Judge of the Supreme Court nominated by him–Member;
(e) one eminent jurist, as recommended by the Chairperson and Members referred to in clauses (a) to (d)
above, to be nominated by the President–Member.
(2) No appointment of a Chairperson or a Member shall be invalid merely by reason of any vacancy in the
Selection Committee.
(3) The Selection Committee shall for the purposes of selecting the Chairperson and Members of the Lokpal
and for preparing a panel of persons to be considered for appointment as such, constitute a Search Committee
consisting of at least seven persons of standing and having special knowledge and expertise in the matters
relating to anti-corruption policy, public administration, vigilance, policy making, finance including insurance and
banking, law and management or in any other matter which, in the opinion of the Selection Committee, may be
useful in making the selection of the Chairperson and Members of the Lokpal:
Provided that not less than fifty per cent. of the members of the Search Committee shall be from amongst the
persons belonging to the Scheduled Castes, the Scheduled Tribes, Other Backward Classes, Minorities and
women:
Provided further that the Selection Committee may also consider any person other than the persons
recommended by the Search Committee.
(4) The Selection Committee shall regulate its own procedure in a transparent manner for selecting the
Chairperson and Members of the Lokpal.
(5) The term of the Search Committee referred to in sub-section (3), the fees and allowances payable to its
members and the manner of selection of panel of names shall be such as may be prescribed.
Inquiry Wing (Section 11):
(1) Notwithstanding anything contained in any law for the time being in force, the Lokpal shall constitute an
Inquiry Wing headed by the Director of Inquiry for the purpose of conducting preliminary inquiry into any offence
alleged to have been committed by a public servant punishable under the Prevention of Corruption Act, 1988
(49 of 1988):
Provided that till such time the Inquiry Wing is constituted by the Lokpal, the Central Government shall make
available such number of officers and other staff from its Ministries or Departments, as may be required by the
Lokpal, for conducting preliminary inquiries under this Act.
(2) For the purposes of assisting the Lokpal in conducting a preliminary inquiry under this Act, the officers of the
Inquiry Wing not below the rank of the Under Secretary to the Government of India, shall have the same powers
as are conferred upon the Inquiry Wing of the Lokpal under section 27.
 Lesson 17 n Anti-Corruption and Anti-Bribery Laws in India 555

Prosecution Wing (Section 12):

(1) The Lokpal shall, by notification, constitute a Prosecution Wing headed by the Director of Prosecution for the
purpose of prosecution of public servants in relation to any complaint by the Lokpal under this Act: Provided that
till such time the Prosecution Wing is constituted by the Lokpal, the Central Government shall make available
such number of officers and other staff from its Ministries or Departments, as may be required by the Lokpal, for
conducting prosecution under this Act.
(2) The Director of Prosecution shall, after having been so directed by the Lokpal, file a case in accordance
with the findings of investigation report, before the Special Court and take all necessary steps in respect of the
prosecution of public servants in relation to any offence punishable under the Prevention of Corruption Act,
1988 (49 of 1988).
(3) The case under sub-section (2), shall be deemed to be a report, filed on completion of investigation, referred
to in section 173 of the Code of Criminal Procedure, 1973 (2 of 1974).
Jurisdiction of Lokpal to include Prime Minister, Ministers, members of Parliament, Groups A, B, C and
D officers and officials of Central Government (section 14):
(1) Subject to the other provisions of this Act, the Lokpal shall inquire or cause an inquiry to be conducted into
any matter involved in, or arising from, or connected with, any allegation of corruption made in a complaint in
respect of the following, namely:–
(a) any person who is or has been a Prime Minister: Provided that the Lokpal shall not inquire into any
matter involved in, or arising from, or connected with, any such allegation of corruption against the
Prime Minister,–
(i) in so far as it relates to international relations, external and internal security, public order, atomic
energy and space;
(ii) unless a full bench of the Lokpal consisting of its Chairperson and all Members considers the
initiation of inquiry and at least two-thirds of its Members approves of such inquiry:
Provided further that any such inquiry shall be held in camera and if the Lokpal comes to the
conclusion that the complaint deserves to be dismissed, the records of the inquiry shall not be
published or made available to anyone;
(b) any person who is or has been a Minister of the Union;
(c) any person who is or has been a member of either House of Parliament;
(d) any Group ‘A’ or Group ‘B’ officer or equivalent or above, from amongst the public servants defined in
sub-clauses (i) and (ii) of clause (c) of section 2 of the Prevention of Corruption Act, 1988 (49 of 1988)
when serving or who has served, in connection with the affairs of the Union;
(e) any Group ‘C’ or Group ‘D’ official or equivalent, from amongst the public servants defined in sub-
clauses (i) and (ii) of clause (c) of section 2 of the Prevention of Corruption Act, 1988 (49 of 1988) when
serving or who has served in connection with the affairs of the Union subject to the provision of sub-
section (1) of section 20;
(f) any person who is or has been a chairperson or member or officer or employee in any body or Board
or corporation or authority or company or society or trust or autonomous body (by whatever name
called) established by an Act of Parliament or wholly or partly financed by the Central Government or
controlled by it: Provided that in respect of such officers referred to in clause (d) who have served in
connection with the affairs of the Union or in any body or Board or corporation or authority or company
or society or trust or autonomous body referred to in clause (e) but are working in connection with the
affairs of the State or in any body or Board or corporation or authority or company or society or trust or
556 EP-GRMCE

autonomous body (by whatever name called) established by an Act of the State Legislature or wholly
or partly financed by the State Government or controlled by it, the Lokpal and the officers of its Inquiry
Wing or Prosecution Wing shall have jurisdiction under this Act in respect of such officers only after
obtaining the consent of the concerned State Government;
(g) any person who is or has been a director, manager, secretary or other officer of every other society or
association of persons or trust (whether registered under any law for the time being in force or not), by
whatever name called, wholly or partly financed by the Government and the annual income of which
exceeds such amount as the Central Government may, by notification, specify;
(h) any person who is or has been a director, manager, secretary or other officer of every other society or
association of persons or trust (whether registered under any law for the time being in force or not) in
receipt of any donation from any foreign source under the Foreign Contribution (Regulation) Act, 2010
(42 of 2010) in excess of ten lakh rupees in a year or such higher amount as the Central Government
may, by notification, specify.
Explanation: For the purpose of clauses (f) and (g), it is hereby clarified that any entity or institution, by whatever
name called, corporate, society, trust, association of persons, partnership, sole proprietorship, limited liability
partnership (whether registered under any law for the time being in force or not), shall be the entities covered
in those clauses:
Provided that any person referred to in this clause shall be deemed to be a public servant under clause (c)
of section 2 of the Prevention of Corruption Act, 1988 (49 of 1988) and the provisions of that Act shall apply
accordingly.
(2) Notwithstanding anything contained in sub-section (1), the Lokpal shall not inquire into any matter involved
in, or arising from, or connected with, any such allegation of corruption against any member of either House of
Parliament in respect of anything said or a vote given by him in Parliament or any committee thereof covered
under the provisions contained in clause (2) of article 105 of the Constitution.
(3) The Lokpal may inquire into any act or conduct of any person other than those referred to in sub-section
(1), if such person is involved in the act of abetting, bribe giving or bribe taking or conspiracy relating to any
allegation of corruption under the Prevention of Corruption Act, 1988 (49 of 1988) against a person referred to
in sub-section (1):
Provided that no action under this section shall be taken in case of a person serving in connection with the
affairs of a State, without the consent of the State Government.
(4) No matter in respect of which a complaint has been made to the Lokpal under this Act, shall be referred for
inquiry under the Commissions of Inquiry Act, 1952 (60 of 1952).
Explanation: For the removal of doubts, it is hereby declared that a complaint under this Act shall only relate to
a period during which the public servant was holding or serving in that capacity.
Constitution of benches of Lokpal (Section 16):
(1) Subject to the provisions of this Act,–
(a) the jurisdiction of the Lokpal may be exercised by benches thereof;
(b) a bench may be constituted by the Chairperson with two or more Members as the Chairperson may
deem fit;
(c) every bench shall ordinarily consist of at least one Judicial Member;
(d) where a bench consists of the Chairperson, such bench shall be presided over by the Chairperson;
 Lesson 17 n Anti-Corruption and Anti-Bribery Laws in India 557

(e) where a bench consists of a Judicial Member, and a non-Judicial Member, not being the Chairperson,
such bench shall be presided over by the Judicial Member;
(f) the benches of the Lokpal shall ordinarily sit at New Delhi and at such other places as the Lokpal may,
by regulations, specify.
(2) The Lokpal shall notify the areas in relation to which each bench of the Lokpal may exercise jurisdiction.
(3) Notwithstanding anything contained in sub-section (2), the Chairperson shall have the power to constitute
or reconstitute benches from time to time.
(4) If at any stage of the hearing of any case or matter it appears to the Chairperson or a Member that the case
or matter is of such nature that it ought to be heard by a bench consisting of three or more Members, the case
or matter may be transferred by the Chairperson or, as the case may be, referred to him for transfer, to such
bench as the Chairperson may deem fit.
Provisions relating to complaints and preliminary inquiry and investigation (Section 20):
(1) The Lokpal on receipt of a complaint, if it decides to proceed further, may order–
(a) preliminary inquiry against any public servant by its Inquiry Wing or any agency (including the Delhi
Special Police Establishment) to ascertain whether there exists a prima facie case for proceeding in the
matter; or
(b) investigation by any agency (including the Delhi Special Police Establishment) when there exists a
prima facie case:
Provided that the Lokpal shall if it has decided to proceed with the preliminary inquiry, by a general or special
order, refer the complaints or a category of complaints or a complaint received by it in respect of public servants
belonging to Group A or Group B or Group C or Group D to the Central Vigilance Commission constituted under
sub-section (1) of section 3 of the Central Vigilance Commission Act, 2003 (45 of 2003):
Provided further that the Central Vigilance Commission in respect of complaints referred to it under the first
proviso, after making preliminary inquiry in respect of public servants belonging to Group A and Group B, shall
submit its report to the Lokpal in accordance with the provisions contained in sub-sections (2) and (4) and in
case of public servants belonging to Group C and Group D, the Commission shall proceed in accordance with
the provisions of the Central Vigilance Commission Act, 2003 (45 of 2003):
Provided also that before ordering an investigation under clause (b), the Lokpal shall call for the explanation of
the public servant so as to determine whether there exists a prima facie case for investigation:
Provided also that the seeking of explanation from the public servant before an investigation shall not interfere
with the search and seizure, if any, required to be undertaken by any agency (including the Delhi Special Police
Establishment) under this Act.
(2) During the preliminary inquiry referred to in sub-section (1), the Inquiry Wing or any agency (including the
Delhi Special Police Establishment) shall conduct a preliminary inquiry and on the basis of material, information
and documents collected seek the comments on the allegations made in the complaint from the public servant
and the competent authority and after obtaining the comments of the concerned public servant and the
competent authority, submit, within sixty days from the date of receipt of the reference, a report to the Lokpal.
(3) A bench consisting of not less than three Members of the Lokpal shall consider every report received under
sub-section (2) from the Inquiry Wing or any agency (including the Delhi Special Police Establishment), and
after giving an opportunity of being heard to the public servant, decide whether there exists a prima facie case,
and proceed with one or more of the following actions, namely:–
(a) investigation by any agency or the Delhi Special Police Establishment, as the case may be;
558 EP-GRMCE

(b) initiation of the departmental proceedings or any other appropriate action against the concerned public
servants by the competent authority;
(c) closure of the proceedings against the public servant and to proceed against the complainant under
section 46.
(4) Every preliminary inquiry referred to in sub-section (1) shall ordinarily be completed within a period of ninety
days and for reasons to be recorded in writing, within a further period of ninety days from the date of receipt of
the complaint.
(5) In case the Lokpal decides to proceed to investigate into the complaint, it shall direct any agency (including
the Delhi Special Police Establishment) to carry out the investigation as expeditiously as possible and complete
the investigation within a period of six months from the date of its order:
Provided that the Lokpal may extend the said period by a further period not exceeding of six months at a time
for the reasons to be recorded in writing.
(6) Notwithstanding anything contained in section 173 of the Code of Criminal Procedure, 1973 (2 of 1974), any
agency (including the Delhi Special Police Establishment) shall, in respect of cases referred to it by the Lokpal,
submit the investigation report under that section to the court having jurisdiction and forward a copy thereof to
the Lokpal.
(7) A bench consisting of not less than three Members of the Lokpal shall consider every report received by it
under sub-section (6) from any agency (including the Delhi Special Police Establishment) and after obtaining
the comments of the competent authority and the public servant may–
(a) grant sanction to its Prosecution Wing or investigating agency to file charge-sheet or direct the closure
of report before the Special Court against the public servant;
(b) direct the competent authority to initiate the departmental proceedings or any other appropriate action
against the concerned public servant.
(8) The Lokpal may, after taking a decision under sub-section (7) on the filing of the charge-sheet, direct its
Prosecution Wing or any investigating agency (including the Delhi Special Police Establishment) to initiate
prosecution in the Special Court in respect of the cases investigated by the agency.
(9) The Lokpal may, during the preliminary inquiry or the investigation, as the case may be, pass appropriate
orders for the safe custody of the documents relevant to the preliminary inquiry or, as the case may be,
investigation as it deems fit.
(10) The website of the Lokpal shall, from time to time and in such manner as may be specified by regulations,
display to the public, the status of number of complaints pending before it or disposed of by it.
(11) The Lokpal may retain the original records and evidences which are likely to be required in the process of
preliminary inquiry or investigation or conduct of a case by it or by the Special Court.
(12) Save as otherwise provided, the manner and procedure of conducting a preliminary inquiry or investigation
(including such material and documents to be made available to the public servant) under this Act, shall be such
as may be specified by regulations.
Persons likely to be prejudicially affected to be heard (Section 21):
If, at any stage of the proceeding, the Lokpal–
(a) considers it necessary to inquire into the conduct of any person other than the accused; or
(b) is of opinion that the reputation of any person other than an accused is likely to be prejudicially affected
by the preliminary inquiry, the Lokpal shall give to that person a reasonable opportunity of being heard
 Lesson 17 n Anti-Corruption and Anti-Bribery Laws in India 559

in the preliminary inquiry and to produce evidence in his defence, consistent with the principles of
natural justice.
Lokpal may require any public servant or any other person to furnish information, etc (section 22):
Subject to the provisions of this Act, for the purpose of any preliminary inquiry or investigation, the Lokpal or
the investigating agency, as the case may be, may require any public servant or any other person who, in its
opinion, is able to furnish information or produce documents relevant to such preliminary inquiry or investigation,
to furnish any such information or produce any such document.
Power of Lokpal to grant sanction for initiating prosecution (Section 23);
(1) Notwithstanding anything contained in section 197 of the Code of Criminal Procedure, 1973 (2 of 1974) or
section 6A of the Delhi Special Police Establishment Act, 1946 (25 of 1946) or section 19 of the Prevention
of Corruption Act, 1988 (49 of 1988), the Lokpal shall have the power to grant sanction for prosecution under
clause (a) of sub-section (7) of section 20.
(2) No prosecution under sub-section (1) shall be initiated against any public servant accused of any offence
alleged to have been committed by him while acting or purporting to act in the discharge of his official duty, and
no court shall take cognizance of such offence except with the previous sanction of the Lokpal.
(3) Nothing contained in sub-sections (1) and (2) shall apply in respect of the persons holding office in pursuance
of the provisions of the Constitution and in respect of which a procedure for removal of such person has been
specified therein.
(4) The provisions contained in sub-sections (1), (2) and (3) shall be without prejudice to the generality of the
provisions contained in article 311 and sub-clause (c) of clause (3) of article 320 of the Constitution.
Action on investigation against public servant being Prime Minister, Ministers or members of Parliament
(Section 24):
Where, after the conclusion of the investigation, the findings of the Lokpal disclose the commission of an
offence under the Prevention of Corruption Act, 1988 (49 of 1988) by a public servant referred to in clause (a)
or clause (b) or clause (c) of sub-section (1) of section 14, the Lokpal may file a case in the Special Court and
shall send a copy of the report together with its findings to the competent authority.

Powers of Lokpal (Chapter VIII)

Supervisory powers of Lokpal (Section 25):
(1) The Lokpal shall, notwithstanding anything contained in section 4 of the Delhi Special Police Establishment
Act, 1946 (25 of 1946) and section 8 of the Central Vigilance Commission Act, 2003 (45 of 2003), have the
powers of superintendence over, and to give direction to the Delhi Special Police Establishment in respect of the
matters referred by the Lokpal for preliminary inquiry or investigation to the Delhi Special Police Establishment
under this Act: Provided that while exercising powers of superintendence or giving direction under this sub-
section, the Lokpal shall not exercise powers in such a manner so as to require any agency (including the Delhi
Special Police Establishment) to whom the investigation has been given, to investigate and dispose of any case
in a particular manner.
(2) The Central Vigilance Commission shall send a statement, at such interval as the Lokpal may direct, to
the Lokpal in respect of action taken on complaints referred to it under the second proviso to sub-section (1)
of section 20 and on receipt of such statement, the Lokpal may issue guidelines for effective and expeditious
disposal of such cases.
(3) Any officer of the Delhi Special Police Establishment investigating a case referred to it by the Lokpal, shall
not be transferred without the approval of the Lokpal.
560 EP-GRMCE

(4) The Delhi Special Police Establishment may, with the consent of the Lokpal, appoint a panel of Advocates,
other than the Government Advocates, for conducting the cases referred to it by the Lokpal.
(5) The Central Government may from time to time make available such funds as may be required by the Director
of the Delhi Special Police Establishment for conducting effective investigation into the matters referred to it by
the Lokpal and the Director shall be responsible for the expenditure incurred in conducting such investigation.
Search and seizure (Section 26):
(1) If the Lokpal has reason to believe that any document which, in its opinion, shall be useful for, or relevant
to, any investigation under this Act, are secreted in any place, it may authorise any agency (including the
Delhi Special Police Establishment) to whom the investigation has been given to search for and to seize such
documents.
(2) If the Lokpal is satisfied that any document seized under sub-section (1) may be used as evidence for the
purpose of any investigation under this Act and that it shall be necessary to retain the document in its custody
or in the custody of such officer as may be authorised, it may so retain or direct such authorised officer to retain
such document till the completion of such investigation: Provided that where any document is required to be
returned, the Lokpal or the authorised officer may return the same after retaining copies of such document duly
authenticated.
Lokpal to have powers of civil court in certain cases (Section 27):
(1) Subject to the provisions of this section, for the purpose of any preliminary inquiry, the Inquiry Wing of the
Lokpal shall have all the powers of a civil court, under the Code of Civil Procedure, 1908 (5 of 1908), while trying
a suit in respect of the following matters, namely:–
(i) summoning and enforcing the attendance of any person and examining him on oath;
(ii) requiring the discovery and production of any document;
(iii) receiving evidence on affidavits;
(iv) requisitioning any public record or copy thereof from any court or office;
(v) issuing commissions for the examination of witnesses or documents: Provided that such commission,
in case of a witness, shall be issued only where the witness, in the opinion of the Lokpal, is not in a
position to attend the proceeding before the Lokpal; and
(vi) such other matters as may be prescribed.
(2) Any proceeding before the Lokpal shall be deemed to be a judicial proceeding within the meaning of section
193 of the Indian Penal Code (45 of 1860).
Power of Lokpal to utilise services of officers of Central or State Government (Section 28):
(1) The Lokpal may, for the purpose of conducting any preliminary inquiry or investigation, utilise the services
of any officer or organisation or investigating agency of the Central Government or any State Government, as
the case may be.
(2) For the purpose of preliminary inquiry or investigating into any matter pertaining to such inquiry or
investigation, any officer or organisation or agency whose services are utilised under sub-section (1) may,
subject to the superintendence and direction of the Lokpal,–
(a) summon and enforce the attendance of any person and examine him;
(b) require the discovery and production of any document; and
(c) requisition any public record or copy thereof from any office.
 Lesson 17 n Anti-Corruption and Anti-Bribery Laws in India 561

(3) The officer or organisation or agency whose services are utilised under sub-section (2) shall inquire or, as
the case may be, investigate into any matter pertaining to the preliminary inquiry or investigation and submit a
report thereon to the Lokpal within such period as may be specified by it in this behalf
Provisional attachment of assets (Section 29):
(1) Where the Lokpal or any officer authorised by it in this behalf, has reason to believe, the reason for such
belief to be recorded in writing, on the basis of material in his possession, that–
(a) any person is in possession of any proceeds of corruption;
(b) such person is accused of having committed an offence relating to corruption; and
(c) such proceeds of offence are likely to be concealed, transferred or dealt with in any manner which may
result in frustrating any proceedings relating to confiscation of such proceeds of offence,
the Lokpal or the authorised officer may, by order in writing, provisionally attach such property for a period
not exceeding ninety days from the date of the order, in the manner provided in the Second Schedule to the
Income-tax Act, 1961 (43 of 1961) and the Lokpal and the officer shall be deemed to be an officer under sub-
rule (e) of rule 1 of that Schedule.
(2) The Lokpal or the officer authorised in this behalf shall, immediately after attachment under sub-section
(1), forward a copy of the order, along with the material in his possession, referred to in that sub-section, to the
Special Court, in a sealed envelope, in the manner as may be prescribed and such Court may extend the order
of attachment and keep such material for such period as the Court may deem fit.
(3) Every order of attachment made under sub-section (1) shall cease to have effect after the expiry of the
period specified in that sub-section or after the expiry of the period as directed by the Special Court under sub-
section (2).
(4) Nothing in this section shall prevent the person interested in the enjoyment of the immovable property
attached under sub-section (1) or sub-section (2), from such enjoyment.
Explanation:–For the purposes of this sub-section, “person interested”, in relation to any immovable property,
includes all persons claiming or entitled to claim any interest in the property.
Confirmation of attachment of assets (Section 30):
(1) The Lokpal, when it provisionally attaches any property under sub-section (1) of section 29 shall, within a
period of thirty days of such attachment, direct its Prosecution Wing to file an application stating the facts of
such attachment before the Special Court and make a prayer for confirmation of attachment of the property till
completion of the proceedings against the public servant in the Special Court.
(2) The Special Court may, if it is of the opinion that the property provisionally attached had been acquired
through corrupt means, make an order for confirmation of attachment of such property till the completion of the
proceedings against the public servant in the Special Court.
(3) If the public servant is subsequently acquitted of the charges framed against him, the property, subject to
the orders of the Special Court, shall be restored to the concerned public servant along with benefits from such
property as might have accrued during the period of attachment.
(4) If the public servant is subsequently convicted of the charges of corruption, the proceeds relatable to the
offence under the Prevention of Corruption Act, 1988 (49 of 1988) shall be confiscated and vest in the Central
Government free from any encumbrance or leasehold interest excluding any debt due to any bank or financial
institution. Explanation: For the purposes of this sub-section, the expressions “bank”, “debt” and “financial
institution” shall have the meanings respectively assigned to them in clauses (d), (g) and (h) of section 2 of the
Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (51 of 1993).
562 EP-GRMCE

Confiscation of assets, proceeds, receipts and benefits arisen or procured by means of corruption in
special circumstances (Section 31):
(1) Without prejudice to the provisions of sections 29 and 30, where the Special Court, on the basis of prima
facie evidence, has reason to believe or is satisfied that the assets, proceeds, receipts and benefits, by
whatever name called, have arisen or procured by means of corruption by the public servant, it may authorise
the confiscation of such assets, proceeds, receipts and benefits till his acquittal.
(2) Where an order of confiscation made under sub-section (1) is modified or annulled by the High Court
or where the public servant is acquitted by the Special Court, the assets, proceeds, receipts and benefits,
confiscated under sub-section (1) shall be returned to such public servant, and in case it is not possible for any
reason to return the assets, proceeds, receipts and benefits, such public servant shall be paid the price thereof
including the money so confiscated with interest at the rate of five per cent. per annum thereon calculated from
the date of confiscation.
Power of Lokpal to recommend transfer or suspension of public servant connected with allegation of
corruption (Section 32):
(1) Where the Lokpal, while making a preliminary inquiry into allegations of corruption, is prima facie satisfied,
on the basis of evidence available,–
(i) that the continuance of the public servant referred to in clause (d) or clause (e) or clause (f) of sub-
section (1) of section 14 in his post while conducting the preliminary inquiry is likely to affect such
preliminary inquiry adversely; or
(ii) such public servant is likely to destroy or in any way tamper with the evidence or influence witnesses,
then, the Lokpal may recommend to the Central Government for transfer or suspension of such public
servant from the post held by him till such period as may be specified in the order.
(2) The Central Government shall ordinarily accept the recommendation of the Lokpal made under sub-section
(1), except for the reasons to be recorded in writing in a case where it is not feasible to do so for administrative
reasons.
Power of Lokpal to give directions to prevent destruction of records during preliminary inquiry
(Section 33):
The Lokpal may, in the discharge of its functions under this Act, issue appropriate directions to a public servant
entrusted with the preparation or custody of any document or record–
(a) to protect such document or record from destruction or damage; or
(b) to prevent the public servant from altering or secreting such document or record; or (c) to prevent the
public servant from transferring or alienating any assets allegedly acquired by him through corrupt
means.
Power to delegate (Section 34):
The Lokpal may, by general or special order in writing, and subject to such conditions and limitations as may
be specified therein, direct that any administrative or financial power conferred on it may also be exercised or
discharged by such of its Members or officers or employees as may be specified in the order.

Complaints against Chairperson, Members and Officials of Lokpal (Chapter X)

Removal and suspension of Chairperson and Members of Lokpal (Section 37):
(1) The Lokpal shall not inquire into any complaint made against the Chairperson or any Member.
(2) Subject to the provisions of sub-section (4), the Chairperson or any Member shall be removed from his office
 Lesson 17 n Anti-Corruption and Anti-Bribery Laws in India 563

by order of the President on grounds of misbehaviour after the Supreme Court, on a reference being made to
it by the President on a petition signed by at least one hundred Members of Parliament has, on an inquiry held
in accordance with the procedure prescribed in that behalf, reported that the Chairperson or such Member, as
the case may be, ought to be removed on such ground.
(3) The President may suspend from office the Chairperson or any Member in respect of whom a reference
has been made to the Supreme Court under sub-section (2), on receipt of the recommendation or interim order
made by the Supreme Court in this regard until the President has passed orders on receipt of the final report of
the Supreme Court on such reference.
(4) Notwithstanding anything contained in sub-section (2), the President may, by order, remove from the office,
the Chairperson or any Member if the Chairperson or such Member, as the case may be,–
(a) is adjudged an insolvent; or
(b) engages, during his term of office, in any paid employment outside the duties of his office; or
(c) is, in the opinion of the President, unfit to continue in office by reason of infirmity of mind or body.
(5) If the Chairperson or any Member is, or becomes, in any way concerned or interested in any contract or
agreement made by or on behalf of the Government of India or the Government of a State or participates in any
way in the profit thereof or in any benefit or emolument arising therefrom otherwise than as a member and in
common with the other members of an incorporated company, he shall, for the purposes of sub-section (2), be
deemed to be guilty of misbehaviour.
Complaints against officials of Lokpal (Section 38):
(1) Every complaint of allegation or wrongdoing made against any officer or employee or agency (including the
Delhi Special Police Establishment), under or associated with the Lokpal for an offence punishable under the
Prevention of Corruption Act, 1988 (49 of 1988) shall be dealt with in accordance with the provisions of this
section.
(2) The Lokpal shall complete the inquiry into the complaint or allegation made within a period of thirty days
from the date of its receipt.
(3) While making an inquiry into the complaint against any officer or employee of the Lokpal or agency engaged
or associated with the Lokpal, if it is prima facie satisfied on the basis of evidence available, that–
(a) continuance of such officer or employee of the Lokpal or agency engaged or associated in his post
while conducting the inquiry is likely to affect such inquiry adversely; or
(b) an officer or employee of the Lokpal or agency engaged or associated is likely to destroy or in any way
tamper with the evidence or influence witnesses, then, the Lokpal may, by order, suspend such officer
or employee of the Lokpal or divest such agency engaged or associated with the Lokpal of all powers
and responsibilities hereto before exercised by it.
(4) On the completion of the inquiry, if the Lokpal is satisfied that there is prima facie evidence of the commission
of an offence under the Prevention of Corruption Act, 1988 (49 of 1988) or of any wrongdoing, it shall, within a
period of fifteen days of the completion of such inquiry, order to prosecute such officer or employee of the Lokpal
or such officer, employee, agency engaged or associated with the Lokpal and initiate disciplinary proceedings
against the official concerned:
Provided that no such order shall be passed without giving such officer or employee of the Lokpal, such officer,
employee, agency engaged or associated, a reasonable opportunity of being heard.
564 EP-GRMCE

Assessment of Loss and Recovery thereof by Special Court ( Chapter XI)

Assessment of loss and recovery thereof by Special Court(Section 39):
If any public servant is convicted of an offence under the Prevention of Corruption Act, 1988 (49 of 1988) by
the special Court, notwithstanding and without prejudice to any law for the time being in force, it may make
an assessment of loss, if any, caused to the public exchequer on account of the actions or decisions of such
public servant not taken in good faith and for which he stands convicted, and may order recovery of such
loss, if possible or quantifiable, from such public servant so convicted: Provided that if the Special Court, for
reasons to be recorded in writing, comes to the conclusion that the loss caused was pursuant to a conspiracy
with the beneficiary or beneficiaries of actions or decisions of the public servant so convicted, then such loss
may, if assessed and quantifiable under this section, also be recovered from such beneficiary or beneficiaries
proportionately

Offences and Penalties (Chapter XIV)

Prosecution for false complaint and payment of compensation, etc., to public servant (section 46):
(1) Notwithstanding anything contained in this Act, whoever makes any false and frivolous or vexatious complaint
under this Act shall, on conviction, be punished with imprisonment for a term which may extend to one year and
with fine which may extend to one lakh rupees.
(2) No Court, except a Special Court, shall take cognizance of an offence under sub-section (1).
(3) No Special Court shall take cognizance of an offence under sub-section (1) except on a complaint made by
a person against whom the false, frivolous or vexatious complaint was made or by an officer authorised by the
Lokpal.
(4) The prosecution in relation to an offence under sub-section (1) shall be conducted by the public prosecutor
and all expenses connected with such prosecution shall be borne by the Central Government.
(5) In case of conviction of a person being an individual or society or association of persons or trust (whether
registered or not), for having made a false complaint under this Act, such person shall be liable to pay
compensation to the public servant against whom he made the false complaint in addition to the legal expenses
for contesting the case by such public servant, as the Special Court may determine.
(6) Nothing contained in this section shall apply in case of complaints made in good faith.
Explanation: For the purpose of this sub-section, the expression “good faith” means any act believed or done by
a person in good faith with due care, caution and sense of responsibility or by mistake of fact believing himself
justified by law under section 79 of the Indian Penal Code (45 of 1860).
False complaint made by society or association of persons or trust (Section 47):
(1) Where any offence under sub-section (1) of section 46 has been committed by any society or association
of persons or trust (whether registered or not), every person who, at the time the offence was committed, was
directly in charge of, and was responsible to, the society or association of persons or trust, for the conduct of
the business or affairs or activities of the society or association of persons or trust as well as such society or
association of persons or trust shall be deemed to be guilty of the offence and shall be liable to be proceeded
against and punished accordingly: Provided that nothing contained in this sub-section shall render any such
person liable to any punishment provided in this Act, if he proves that the offence was committed without his
knowledge or that he had exercised all due diligence to prevent the commission of such offence.
(2) Notwithstanding anything contained in sub-section (1), where an offence under this Act has been committed
by a society or association of persons or trust (whether registered or not) and it is proved that the offence has
been committed with the consent or connivance of, or is attributable to any neglect on the part of, any director,
 Lesson 17 n Anti-Corruption and Anti-Bribery Laws in India 565

manager, secretary or other officer of such society or association of persons or trust, such director, manager,
secretary or other officer shall also be deemed to be guilty of that offence and shall be liable to be proceeded
against and punished accordingly.

Establishment of the Lokayukta (Part III)

Establishment of Lokayukta (Section 63):
Every State shall establish a body to be known as the Lokayukta for the State, if not so established, constituted
or appointed, by a law made by the State Legislature, to deal with complaints relating to corruption again.

(G) ICSI ANTI BRIBERY CODE

Objective
To ensure that neither the company nor any of its employees, directors or authorised representatives indulge
in bribery in any of their actions taken for and on behalf of the company in the course of economic, financial or
commercial activities of any kind.

Scope
The Code shall be applicable to the company and its
(i) Board of Directors,
(ii) Employees (full time or part-time or employed through any third party contract),
(iii) Agents, Associates, Consultants, Advisors, Representatives and Intermediaries, and
(iv) Contractors, Sub-contractors and Suppliers of goods and/or services.

Definitions
For the purpose of The Code, unless the context otherwise requires,
‘Bribery’ includes giving or receiving bribe and third party gratification. The act of giving bribe is when committed
intentionally in the course of economic, financial or commercial activities and when it is established that there is
a promise, offering or giving, directly or indirectly, of an undue advantage to any person who directs or works,
in any capacity, for a commercial entity, for the person himself or for another person, in order that he in breach
of his duties, act or refrain from acting.
‘Facilitation payment’ means a payment made to government or private official that acts as an incentive for the
official to complete some action or process expeditiously to the benefit of the party making the payment.
‘Foreign public official’ means any person holding a legislative, executive, administrative or judicial office of a
foreign country, whether appointed or elected, whether permanent or temporary, whether paid or unpaid and
includes a person who performs a public function or provides service for a foreign country.
Words and expressions used and not defined in this Code shall have the meaning assigned to them in their
respective Acts.
Clause 1: Adherence to Anti-Corruption Laws
The company shall follow all anti-corruption laws applicable in India. Clause 2 : Bribery in Private Sector
Clause 2: Bribery in Private Sector
The company or its employees, directors, agents, associates, consultants, advisors, representatives or
intermediaries shall not involve in bribery.
566 EP-GRMCE

Clause 3: Facilitation Payments

No facilitation payment shall be made by the company either directly or through its employees, directors, agents,
associates, consultants, advisors, representatives or intermediaries.
Clause 4: Bribery to Foreign Public Officials
The company, either directly or through its employees, directors, agents, associates, consultants, advisors,
representatives or intermediaries in the conduct of international business shall not offer, promise or give any
undue pecuniary or other advantage, to a foreign public official, for that official or for a third party, in order that
the official acts or refrains from acting in relation to the performance of official duties, in order to obtain or retain
business or other improper advantage.
Clause 5: Policy for Gifts, Hospitality & Expenses
The company shall follow a policy for gifts, hospitality and expenses as approved by its Board.
Clause 6: Whistle Blower Mechanism
The company shall set up a Whistle Blower Mechanism as approved by its Board to enable its employees or
others to raise concerns and report violation(s) of the Code.
Clause 7: Anti- Bribery Training and Awareness Programmes
The company shall put in place an annual Corporate Anti-Bribery Code awareness-cum-training program
as approved by its Board for all its employees, agent, associates, advisors, representatives, intermediaries,
consultants, contractors, sub-contractors and suppliers.
Clause 8: Monitoring Mechanism for Anti-Bribery Code
The company shall set up mechanism as approved by its Board for regular monitoring of its Anti- Bribery Code.
Clause 9: Sanctions for Non-compliance
Any non-compliance of the Code is subject to disciplinary mechanism. The company shall set up disciplinary
mechanism as approved by its Board, for non-compliance of any part of t he Corporate Anti- Bribery Code.
The disciplinary mechanism shall include:
l Nature of offence
l Penalty of the office
l Competent Authority

Guiding Instructions for Implementation of the Code:

1. Corporate Anti-Bribery Code is to be adopted voluntarily.
2. The Code shall be approved by the Board of Directors of the company. Any change in the Code shall
be made with the approval of the Board of the Company.
3. The Code shall be communicated to all existing employees, management and Board members.
4. All the existing employees, management and Board members shall confirm in writing that they shall
unconditionally follow the Code in its entirely throughout their employment/association with the company.
5. All the new appointees shall be required to confirm in writing, at the time of their induction in the
company that they shall be bound by the Code.
6. All agents, associates, consultants, advisors, all the contractors, sub-contracts and suppliers of goods
and/or services, representatives and intermediaries engaged by the company shall also be required to
 Lesson 17 n Anti-Corruption and Anti-Bribery Laws in India 567

follow the Code while carrying on their assignments for and on behalf of the company at any time during
their association with the company. It shall also be made a mandatory condition while confirming their
appointment.

7. Anti-Bribery Code of the company shall be put on company’s website. Any change in the Code shall be
immediately updated.

8. The Annual Report of the Board shall contain an assertion that the company has an Anti-Bribery Code
and the same is being followed by all employees, agents, associates, consultants, advisors, all the
contractors, sub-contracts and suppliers of goods and/or services, representatives and intermediaries
as well as members of the Board of the company. Any incident of bribery noticed or reported and action
taken by the Board shall also be reported.

9. With a view to facilitate the companies, the following model suggested policies which may be adopted
by the Board of Directors of the company are annexed to the Code:

a.
Model Policy on Gifts, Hospitality & Expenses

b.
Model Policy on Purchase through Supplier and other Service Provider

c.
Guidelines for Whistle Blower Policy

10. Disclaimer: Due care and diligence is taken in developing the Corporate Anti-Bribery Code. This Code
does not substitute or supplant any existing laws. If any of the parameter of this Code are or become
inconsistent with the applicable laws, provisions of the related laws shall prevail.

[for more details the students may refer to the ICSI publication on the Corporate Anti-Bribery Code ]

GLOSSARY OF TECHNICAL WORDS

– Bribery: ‘Bribery’ includes giving or receiving bribe and third party gratification. The act of giving bribe
is when committed intentionally in the course of economic, financial or commercial activities and
when it is established that there is a promise, offering or giving, directly or indirectly, of an undue
advantage to any person who directs or works, in any capacity, for a commercial entity, for the
person himself or for another person, in order that he in breach of his duties, act or refrain from
acting.

– Facilitaion payment: ‘Facilitation payment’ means a payment made to government or private official that
acts as an incentive for the official to complete some action or process expeditiously to the benefit of
the party making the payment.

– Foreign Public Official: ‘Foreign public official’ means any person holding a legislative, executive,
administrative or judicial office of a foreign country, whether appointed or elected, whether permanent
or temporary, whether paid or unpaid and includes a person who performs a public function or provides
service for a foreign country.

– PCA: The Prevention of Corruption Act, 1988 is an Act of the Parliament of India enacted to combat
corruption in government agencies and public sector businesses in India.

– CVC: Central Vigilance Commission is an apex Indian governmental body created in 1964 to address
governmental corruption. Recently, in 2003, the Parliament enacted a law conferring statutory status on
the CVC.
568 EP-GRMCE

LESSON ROUND-UP
– A change in attitude of enforcement agencies, which have started enforcing anti-corruption laws
aggressively in India, and have been supported in their efforts by the judiciary (which has taken up an
active role in monitoring corruption cases).
– Corruption has been seen as an immoral and unethical practice since biblical times.
– The cost of implementing an enhanced and extensive anti-corruption compliance program should be
weighed against that of defending a claim due to violation of anticorruption legislation.
– The PCA criminalizes the acceptance of gratification (pecuniary or otherwise) other than the
acceptance of legal remuneration by public servants which is paid by their employers in connection
with the performance of their duties.
– Due care and diligence is taken in developing the Corporate Anti-Bribery Code. This Code does
not substitute or supplant any existing laws. If any of the parameter of this Code are or become
inconsistent with the applicable laws, provisions of the related laws shall prevail.
– The LLA requires each State to establish a Lokayukta by law under the state legislature.
– The functions of the SPE then were to investigate cases of bribery and corruption in transactions with
the War & Supply Deptt. of India during World War II.
– ‘Facilitation payment’ means a payment made to government or private official that acts as an incentive
for the official to complete some action or process expeditiously to the benefit of the party making the
payment.
– The Unlawful Activities (Prevention) Act, 1967’ (Act no. 37 of 1967) was enacted to make provisions
as to more effective prevention of Individual’s and associations’ certain unlawful activities.

TEST YOURSELF
(These are meant for recapitulation only. Answers to these questions are not to be submitted for evaluation)
1. Enumerate the laws and enforcement regimes behind Anti-Corruption and Anti-Bribery Laws in India.
2. Brief description of the Prevention of Corruption, 1988.
3. What is the composition of the Lokpal?
4. What are the grounds basis which the President can remove the Chairman and members on the
board under Central Vigilance Commission Act, 2003?
5. What is the scope of Anti Bribery code as applicable by the ICSI?
6. Liability of individual directors and officers under Prevention of Corruption Act, 1988.
7. Define the following terms;
– Bribery
– Facilitation payment
– Foreign public official
Lesson 17 n Anti-Corruption and Anti-Bribery Laws in India 569
570 EP-GRMCE
 571

PROFESSIONAL PROGRAMME

GOVERNANCE, RISK MANAGEMENT, COMPLIANCES AND ETHICS

PP-GRMCE

WARNING
It is brought to the notice of all students that use of any malpractice in Examination is misconduct as
provided in the explanation to Regulation 27 and accordingly the registration of such students is liable to
be cancelled or terminated. The text of regulation 27 is reproduced below for information:
“27. Suspension and cancellation of examination results or registration.
In the event of any misconduct by a registered student or a candidate enrolled for any examination conducted
by the Institute, the Council or any Committee formed by the Council in this regard, may suo motu or on
receipt of a complaint, if it is satisfied that, the misconduct is proved after such investigation as it may deem
necessary and after giving such student or candidate an opportunity of being heard, suspend or debar him
from appearing in any one or more examinations, cancel his examination result, or registration as student,
or debar him from re-registration as a student, or take such action as may be deemed fit.
572 PP-GRMCE

PROFESSIONAL PROGRAMME
GOVERNANCE, RISK MANAGEMENT, COMPLIANCES AND ETHICS
TEST PAPER
[This Test Paper is for recapitulate and practice for the student. Student need not submit
responses/answers to this Test Paper]
Time Allowed: 3 Hours Maximum Marks: 100

PART - I
1. (a) “Good corporates are not born, but are made by the combined efforts of all stakeholders, board
of directors, government and the society at large.” In the light of this statement discuss the OECD
Principles have each played a major role in the development of corporate governance codes around
the world. (10 marks)
(b) During a Board meeting of ABC Ltd., some of the directors who were dissatisfied with the Chairman
on various issues, proposes his removal, which was acceded to by majority of directors at the meeting.
Being a Company Secretary you were requested to give your views on such removal of chairman.
(5 marks)
(c) Enumerate various committees of the Board of directors which are required to be mandatorily
constituted under the Companies Act, 2013 and state their functions? (5 marks)
(d) Discuss why it is considered a good practice to separate the role of Chairman and CEO in a
company. (5 marks)
Attempt all parts of either Question No. 2 or Question No. 2A
2. (a) “Independent directors are known to bring an objective view in Board deliberations. They act as
guardians of the interest of all stakeholders, especially in the areas of potential conflicts.” In the light of
this statement discuss the role and functions of independent directors in a company.
(b) The Board of ABC Ltd. wishes to establish a vigil mechanism in the company. As a Company
Secretary, guide company on the legal framework under the Companies Act, 2013.
(c) “The institutional investors use different tools to assess the health of a company before investing
resources in it.” Elaborate. (5 marks each)
Or (Alternate Question to Question No. 2)
2A. Discuss in brief the following:
(a) CSR Policy
(b) Rotation of Auditors
(c) Website Disclosures under SEBI (LODR) Regulations, 2015
(d) Class Action Suit
(e) The Clarkson Principles of Stakeholder Management
(3 marks each)
3. (a) You are company secretary of an Insurance company. The Board of Directors of your company
requires you to draw up a policy based on the principles spelt out in the Stewardship Code for Insurers
in India.
(b) In order to ensure good governance, Companies (Meetings of Board and its Powers) Rules, 2014
 Test Paper 573

specifies certain matters not to be dealt with in a meeting through Video Conferencing or other Audio
Visual Means. What are these matters? (5 marks each)

PART - II

Attempt all parts of either Question No. 4 or Question No. 4A

4. (a) “Risk is inherent in every business, whether it is of financial nature or non-financial nature.” Explain
in brief the risk management process for a company.
(b) What do you understand by Fraud Risk Management? Discuss the role of Company Secretary in
Risk Management.
(c) Explain risk mitigation strategies.
(d) Elaborate on the classification of risk. (5 marks each)
Or (Alternate question to Question No. 4)
4A. Discuss in brief the following:
(a) Enterprise Risk Management
(b) Risk Governance
(c) Reputation Risk Management
(d) ISO 31000 (5 marks each)

PART - III

Attempt all parts of either Question No. 5 or Question No. 5A

5. (a) Discuss the significance of compliance and the essentials of an effective compliance program.
(b) Discuss the Internal Compliance Reporting Mechanism (ICRM).
(c) Write a brief note on COSO’s Internal Control Framework
(d) Discuss the scope and limitations of financial reporting (5 marks each)
OR (Alternate Question to Question No. 5)
5A. (a) Discuss the role of Company Secretaries in Compliance Management.
(b) Write a note on the roles and responsibilities of Internal Control System.
(c) Your Company is planning to bring out the sustainability report. As a Company Secretary prepare a
note for the Board of Directors highlighting the importance of Sustainability Reporting and the available
framework.
(d) You are Company Secretary of XYZ Limited. You are required by the Chairman of your company to
prepare a note for the Board of directors highlighting the benefits of integrated reporting.
(5 marks each)
PART - IV
574 PP-GRMCE

Attempt all parts of either Question No.6 or Question No. 6A

6. (a) Explain the concept of CSR and why companies should adopt CSR in its strategy of growth?
(b) Write a note on context and relevance of business ethics. (5 marks each)
OR (Alternate Question to Question No. 6)
6A. Discuss in brief the following:
(a) Code of Ethics
(b) Global Compact Self Assessment Tool
(c) Dow-Jones Sustainability Index
(d) Altman Z-Score
(e) Powers of Lokpal (2 marks each)