Compliance by Govt. Companies Vs. Non- Govt. Companies Part-III (Guidelines on Corporate Corporate Governance, 2010)

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COMPLIANCE BY GOVT. COMPANIES

Vs

NON- GOVT. COMPANIES

PART-III

 

GUIDELINES ON

CORPORATE GOVERNANCE

FOR CPSEs

2010

(Issued by Department of Public Enterprises)download

Since this post covers the comparison between Govt. and Non-Govt. Companies w. r. t. compliance of Corporate Governance Guidelines/provisions, at the outset, I would like to clarify that Corporate Governance Guidelines 2010 issued by Department of Public Enterprises (DPE) is mandatory for all Central Public Sector Enterprises (CPSEs) irrespective of status of their shares (listed or not listed). Accordingly, even a private limited CPSE has to comply the Guidelines on Corporate Governance, 2010.

There are 260 CPSEs and out of those 260 CPSEs, 7 CPSEs are Maharatna, 14 CPSEs are Navratna and 69 CPSEs are Miniratna. Further, out of these Maharatna, Navratna and Miniratna 50 CPSEs have shares listed on different stock exchanges. Those CPSEs which have their shares listed on various stock exchanges, have to comply the provisions relating to Corporate Governance as mentioned in Clause 49 of listing agreement as well as Guidelines on Corporate Governance, 2010 issued by DPE. Therefore it is essential for those listed CPSEs to compare the two different statutes to ensure the compliances thereof. Further comparison is also important for those professionals who want to assess the level of compliance being done in CPSEs as compared to that in a Private Sector.

Abridged contents of Guidelines on Corporate Governance, 2010 issued by DPE are as under (the same have been compared with the corresponding provisions of Clause 49 of listing agreement):

Corporate Governance involves a set of relationships between a company’s management, its Board, its shareholders and other stakeholders.

It is about commitment to values, ethical business conduct, transparency and makes a distinction between personal and corporate funds in the management of a company.

APPLICABILITY OF GUIDELINES

For the purpose of evolving Guidelines on Corporate Governance, CPSEs have been categorised into two groups, namely,

(i)            those listed on the Stock Exchanges:

– SEBI Guidelines + DPE Guidelines

(ii) those not listed on the Stock Exchanges:

– SEBI Guidelines (BROADLY ) + DPE Guidelines

The guidelines on Corporate Governance for listed and unlisted CPSEs are being dealt under the following headings.

  •  Board of Directors
  •  Audit Committee
  • Remuneration Committee
  • Subsidiary Companies
  • Disclosures
  • Report, Compliance and Schedule of Implementation

 

BOARD OF DIRECTORS

Composition of Board

  • Functional Directors = < 50% of the actual strength of the Board
  •  Nominee Directors appointed by Government/other CPSEs –  max. 2
  •  Independent directors –

(i)            Listed CPSEs BOD headed by an Executive Chairman = > 50% of Board   Members

(ii) listed on Stock Exchange but without an Executive Chairman, or not listed CPSEs= > 1/3rd of the Board Members

(Note – Nominee Directors appointed by an institution which has invested in or lent to the company shall be deemed to be Independent Directors)

[SAME AS CLAUSE 49]

Part-time Directors’ compensation and disclosures

  • fixed by the Board of Directors subject to the provisions in the DPE guidelines and the Companies Act, 1956

[SAME AS CLAUSE 49]

Other provisions as to Board and Committees

  • 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.
  •  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.

[CLAUSE 49 – MAX. TIME GAP BETWEEN 2 MEET. = 4 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.

[SAME AS CLAUSE 49]

Code of Conduct

  • The Board shall lay down a code of conduct for all Board members and senior management of the company
  • The Annual Report of the company shall contain a declaration to this effect signed by its Chief Executive.

[SAME AS CLAUSE 49]

Risk Management:

  • The Board should ensure the integration and alignment of the risk management system with the corporate and operational objectives

[CLAUSE 49 – NO SEPARATE CLAUSE ON RISK MANAGEMENT]

Training of Directors:

  • undertake training programme for ITS NEW BOARD MEMBERS
  • They shall also be imparted training on Corporate Governance, model code of business ethics and conduct applicable for the respective Directors.

[CLAUSE 49= TRAINING NOT MANDATORY]

 AUDIT COMMITTEE

Qualified and Independent Audit Committee :

  • minimum 3 Directors as members. 2/3rd of the members of AC shall be IDs.
  •  Chairman = ID
  • All members = have knowledge of financial matters of Company, and at least one member shall have good knowledge of accounting and related financial management expertise.
  • Chairman of the AC shall be present at AGM to answer shareholder queries, if not, he may nominate any member
  • The CS shall act as the Secretary to the Audit Committee.

[SAME AS CLAUSE 49]

Role of Audit Committee :

  • Oversight of the company’s financial reporting process and the disclosure of its financial information
  • Reviewing, with the management, the annual and quarterly financial statements before submission to the Board
  • Discussion with internal auditors and/or auditors any significant findings and follow-up there on.
  • 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 etc.

[SIMILAR TO CLAUSE 49]

Powers of Audit Committee :

  • investigate any activity within its terms of reference.
  • To seek information on and from any employee.
  • To obtain outside legal or other professional advice, subject to the approval of the Board of Directors.
  • To secure attendance of outsiders with relevant expertise, if it considers necessary.
  • To protect whistle blowers

[CLAUSE 49- NO PROVISION FOR PROTECTION TO WHISTLE BLOWERS]

Meeting of Audit Committee :

  • at least 4 times in a year and not more than four months shall elapse between two meetings
  • quorum shall be either 2 members or 1/3rd of the members of the Audit Committee whichever is greater, but a minimum of two independent members must be present

[SAME AS CLAUSE 49]

REMUNERATION COMMITTEE

  • consisting of at least 3 Directors, all of whom should be part-time Directors.
  • The Committee should be headed by an ID.
  • 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.

SUBSIDIARY COMPANIES

  • At least one ID on the Board of Directors of the holding company shall be a Director on the Board of Directors of its subsidiary company.
  •  The AC 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.

[SAME AS CLAUSE 49]

DISCLOSURES

Transactions

  •  transactions with related parties in the normal and ordinary course of business shall be placed periodically before the AC.

Accounting Standards

  •  treatment different from that prescribed in an AS, 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.

[SAME AS CLAUSE 49]

Board disclosures – Risk management

  •  The company shall lay down procedures to inform Board members about the risk assessment and minimization procedures.

Remuneration of Directors

  •  All pecuniary relationship or transactions of the part-time Directors vis-à-vis the company shall be disclosed in the Annual Report

[SAME AS CLAUSE 49]

Management

  • Management Discussion and Analysis Report should form part of the Annual Report
  • 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

[SAME AS CLAUSE 49, CLAUSE 49 HAVE ADDITIONAL PROVISION FOR PROCEEDS FROM PUBLIC ISSUES, RIGHTS ISSUES, PREFERENTIAL ISSUES ETC. CEO/CFO CERTIFICATION]

REPORT, COMPLIANCE AND SCHEDULE OF IMPLEMENTATION

  • separate section on CG in each Annual Report
  •  a certificate from either the auditors or PCS regarding compliance of conditions of CG should also be included in the Annual Report
  •  Chairman’s speech in AGM should also carry a section on compliance with CG guidelines/norms and should form part of the Annual Reports
  • The grading of CPSEs may be done by DPE on the basis of the compliance with CG guidelines/norms.
  • The CPSEs shall submit quarterly progress reports, within 15 days from the close of each quarter,
  •  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

[REPORTING IS DIFFERENT IN CLAUSE 49]

There are few provisions which could be discussed in-depth but for the sake of providing summarised information, the same could not be done. By study of provisions of Guidelines on Corporate Governance, 2010 we can observe that even a private limited CPSE has to appoint independent directors, formulate and adhere to the policy of Code of Conduct, Risk Management, they have to provide training to new Directors, to constitute Audit Committee and Remuneration Committee, to submit quarterly compliance report. What else requires to ensure good Corporate Governance in CPSEs. Further it is pertinent to mention here that majority of the CPSEs do comply the provisions of various Guidelines of DPE including Guidelines on Corporate Governance, 2010.

Hope this post would be fruitful for all of us and enhance our knowledge.

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