Corporate Governance and The Companies Act, 2013

The last speaker of the seminar, Professor Arjya B. Majumdar, Jindal Global Law School addressed various aspects of Corporate Governance and its implications under The Companies Act, 2013.

The need for Corporate Governance was seen in year 2000-2001 due to the infamous accounting frauds involving Enron and WorldCom. Subsequently, the Sarbanes-Oxley Act, 2002 was enacted in the US. This Act specifically provided for disclosure controls, conduct of audits and auditor independence, corporate responsibility, conflicts of interest for securities analysts and accountability for corporate fraud and recognized the need for Corporate Governance.

The speaker then discussed the Corporate Governance framework in India prior to 2013. The old Act did not address the need for Corporate Governance in India. The Naresh Chandra Report on Corporate Audit and Governance and the Narayan Murthy Committee on Corporate Governance addressed the need for Corporate Governance in India. The Committee’s recommendations were implemented through an amendment of Clause 49 of the Listing Agreement to include Independent Directors, annual and quarterly disclosures, Committees of the Board of Directors on audit, remuneration and shareholders grievances.

This led to the discussion on Corporate Governance under the 2013 Act. The key points discussed by the speaker include the following:

• Directors: The Board of Directors must include at least one director who is a resident of India, one woman director for a prescribed class of companies and certain public companies are required to have one director elected by small shareholders. The fiduciary capacity of the directors require that they act in accordance with the Articles, act in good faith, promote the objects of the company, exercise due and reasonable care, skill and diligence, not get involved in situations of conflict of interest and not to achieve any undue gain or influence. 
• Independent Directors (ID): One-third of the Board should comprise of ID if the Chairman is a non-executive director or half of the board should comprise of ID if the Chairman is an executive director. The ID should be a person of integrity and should possess relevant skill and experience. Further the ID should have no material pecuniary relationship or transactions with the company or related parties. Schedule IV of The Companies Act 2013 provides for a code for independent directors which may have drawbacks.
• Board Committees:
• Audit: The Audit Committee is to comprise of at least three directors of whom only one-third should be managing or whole time directors. Further a majority of the members should be financially literate.
• Nomination and Remuneration: The Committee is to comprise of three or more non-executive directors, of which at least half must be ID.
• Stakeholders Relationships: A company having more than 1000 shareholders, debenture holders, deposit holders and other security holders must constitute a Stakeholders Relationships Committee. The Chairman of the Committee must be a non-executive director.
• Internal Audit: Certain companies (as may be prescribed) must appoint an internal auditor to evaluate the functions and activities of the company. This auditor is separate from the statutory auditors.

Note: This post is part of the report on a conference titled 'Reflections on The Companies Act, 2013' organised by the Michigan-Jindal Centre for Global Corporate and Financial Law and Policy on the 24th of October, 2013