28.01.

2016

Note by Bala

Corporate Ethics, Corporate Governance &

Corporate Social Responsibility Hand out 2
Note: To be read in conjunction with PPT slides and other material
provided
1. Statutory provisions in India relating to Corporate Governance &
Corporate Social Responsibility

Background:
In handout 1, we could learn the fundamentals of business ethics, corporate
governance and corporate social responsibility. It should come as a pleasant
surprise to many of us that Indian system did not lag behind the western system
or the Japanese system in amending the regulations for Indian companies and
enforcing the same in right earnest. The gap was hardly six to seven years
between Cadbury Committee of Great Britain & the Kumar Mangalam Birla
Committee in India.
This means that Indian institutions and regulatory bodies were quick to adopt the
required rules and regulations in India, based more on the western model but
also incorporating the essence of the German and Japanese models. In this
handout, we will learn about the following:
1. Statutory provisions in India relating to Corporate governance and CSR
It is quite possible that as regards implementation of the rules and regulations
for corporate governance and corporate social responsibility, Indian companies
may be lagging behind to an extent their western counterparts. However this
deficit is not due to any slack on the part of statutory authorities in India.
Statutory provisions in India
The precursor for statutory provisions in India relating to corporate governance &
corporate social responsibility is the Cadbury committee recommendations of the
Great Britain adopted in 1992. This is the very first attempt by the international
community to lay down principles of business ethics. The gist of the committee
report is captured below. The full-fledged report is available in material under the
same heading.
Section I - Corporate ethics:
No specific statutory provisions anywhere in the world. In order to ensure
compliance with ethical practices by management and all concerned including
employees, Corporate Governance emerged.
There are specific rules and regulations for governance.

Section II: Corporate governance:

Cadbury Committee report:
1. Importance of auditing as a function
2. Ways to increase the effectiveness and value of the audit
3. Internal control
4. Dealing with frauds
5. Other illegal acts
6. Auditors liability
7. Accountability of boards to shareholders
8. Institutional shareholders
9. Shareholder communications
10.The code of best practice
a. BOD should retain full and effective control of the organization and
monitor the executive management
b. There should be a balance between power and authority
c. There should be an independent element in the board through
independent directors. The board should include non-executive
directors of sufficient calibre and number
d. Reporting and control systems should be robust and reliable
11.Recommendations:
a. Restriction on duration of service of directors appointed to the board
b. Companies interim reports to include financial information and
balance sheet details
c. Listed companies to disclose compliance with statutory
requirements
d. Institutional investors should disclose their policies on the use of
their voting rights
Kumar Mangalam Birla Committee report (1999):
1. Objective is enhancement of shareholder value, keeping in mind the
interests of other stakeholders.
2. The onus of achieving the objective lies more with the management of the
organization (within) rather than statutory requirements, rules and
regulations (without).
3. There should be a code of conduct for the board of directors
4. Board should have a balance between executive and non-executive
directors.
The Committee recommends that the board of a company have an
optimum combination of executive and non-executive directors with
not less than fifty percent of the board comprising the non-executive
directors. The number of independent directors (independence being
as defined in the foregoing paragraph) would depend on the nature of
the chairman of the board. In case a company has a non-executive
chairman, at least one-third of board should comprise of independent
directors and in case a company has an executive chairman, at least
half of board should be independent.
This is a mandatory recommendation

5. Non-executive directors would again be in two categories, independent

directors who are professionals from outside and those from within the
organization without executive powers.
6. Independent directors have a great role in corporate governance.
7. Independent directors are directors who apart from receiving directors
remuneration do not have any other material pecuniary relationship or
transactions with the company, its promoters, its management or its
subsidiaries, which in the judgement of the board may affect their
independence of judgement. Further, all pecuniary relationships or
transactions of the non-executive directors should be disclosed in the
annual report.
The BOD should decide on the remuneration of non-executive directors.
8. Nominee directors of institutions are another category of directors on the
board. Once they are appointed to the board, they have the same
responsibility as other executive and non-executive directors. Further they
should be able to maintain professional integrity and discretion while
dealing with other departments of the institution whom they represent on
the matters of the company as discussed in the board meetings. The
reports that they would generate for the institution should be strictly
confidential.

Audit committee should be appointed. This should act as a catalyst for

effective financial reporting. The Committee therefore recommends that a
qualified and independent audit committee should be set up by the board
of a company. This would go a long way in enhancing the credibility of the
financial disclosures of a company and promoting transparency.
This is a mandatory recommendation. The Committee therefore
recommends that
The audit committee should have minimum three members, all
being non executive directors, with the majority being independent,
and with at least one director having financial and accounting
knowledge;
The chairman of the committee should be an independent director;

The chairman should be present at Annual General Meeting to

answer shareholder queries;

The audit committee should 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 but on
occasions it may also meet without the presence of any executives
of the company. Finance director and head of internal audit and
when required, a representative of the external auditor should be
present as invitees for the meetings of the audit committee;

The Company Secretary should act as the secretary to the

committee.
9. There are mandatory recommendations relating to frequency of audit
committee meetings, their functions and frequency of their meetings.

10.Non-mandatory requirement Each board could have a remuneration

committee.
11.The BOD should meet at least 4 times a year with a provision that the
maximum gap between any two board meetings should not exceed 4
months.
12.A director on the board should not be on more than 10 internal
committees across all companies where he is a director or be a chairman
on more than 5 committees.
13.As a part of annual report, there should be a separate segment on
management discussion and analysis. This would include the following:
a. Industry structure and developments.
b. Opportunities and Threats
c. Segment-wise or product-wise performance.
d. Outlook.
e. Risks and concerns
f.

Internal control systems and their adequacy.

g. Discussion on financial performance with respect to operational

performance.
h. Material developments in Human Resources /Industrial Relations
front, including number of people employed.
14.The BOD should provide the shareholders with the following information
regarding any new director being appointed to the board:
1. A brief resume of the director;
2. Nature of his expertise in specific functional areas; and
3. Names of companies in which the person also holds the directorship
and the membership of Committees of the board.
This is a mandatory recommendation
15.Shareholders rights:
The Committee therefore recommends that as shareholders have a right
to participate in, and be sufficiently informed on decisions concerning
fundamental corporate changes, they should not only be provided
information as under the Companies Act, but also in respect of other
decisions relating to material changes such as takeovers, sale of assets or
divisions of the company and changes in capital structure which will lead
to change in control or may result in certain shareholders obtaining control
disproportionate to the equity ownership.

The Committee recommends that information like quarterly results,

presentation made by companies to analysts may be put on companys
web-site or may be sent in such a form so as to enable the stock
exchange on which the company is listed to put it on its own web-site.
This is a mandatory recommendation.
16.In order to encourage more and more shareholders participating in general
body meetings, postal ballot system has to be introduced. This has since
been introduced through a suitable amendment to The Companies Act.
17.The Committee recommends that a board committee under the
chairmanship of a non-executive director should be formed to specifically
look into the redressing of shareholder complaints like transfer of shares,
non-receipt of balance sheet, non-receipt of declared dividends etc. The
Committee believes that the formation of such a committee will help focus
the attention of the company on shareholders grievances and sensitise
the management to redressal of their grievances.
This is a mandatory recommendation
18.The Committee further recommends that to expedite the process of share
transfers the board of the company should delegate the power of share
transfer to an officer, or a committee or to the registrar and share transfer
agents. The delegated authority should attend to share transfer
formalities at least once in a fortnight.
This is a mandatory recommendation.
19.There should be stringent action against non-compliance with corporate
governance by listed companies at least to begin with. To this effect, the
statutory provisions should be strengthened in The Companies Act, the
listing agreement with stock exchanges, the SEBI regulations etc. There
should be a monetary penalty imposed on listed companies for noncompliance. To this effect, the stock exchanges should be given more
powers. To make compliance mandatory in this behalf, the following
mandatory recommendation has been made.
The Committee recommends that there should be a separate section on
Corporate Governance in the annual reports of companies, with a detailed
compliance report on Corporate Governance. Non-compliance of any
mandatory recommendation with reasons thereof and the extent to which
the non-mandatory recommendations have been adopted should be
specifically highlighted. This will enable the shareholders and the
securities market to assess for themselves the standards of corporate
governance followed by a company.
20.The Committee also recommends that the company should arrange to
obtain a certificate from the auditors of the company regarding
compliance of mandatory recommendations and annexe the certificate
with the directors report, which is sent annually to all the shareholders of
the company. The same certificate should also be sent to the stock
exchanges along with the annual returns filed by the company.
This is a mandatory recommendation
21.Suggested contents of the CG report that would be an integral part of
Annual report:
a. A brief statement on companys philosophy on code of governance.
b. Board of Directors:

i.

Composition and category of directors for example promoter,

executive, non-executive, independent non-executive, nominee
director, which institution represented as Lender or as equity
investor.
ii.
Attendance of each director at the BOD meetings and the last
AGM.
iii.
Number of BOD meetings held, dates on which held.
c. Audit Committee.
i.
Brief description of terms of reference
ii.

Composition, name of members and Chairperson

iii.
Meetings and attendance during the year
d. Remuneration Committee.
i.
Brief description of terms of reference
ii.

Composition, name of members and Chairperson

iii.

Attendance during the year

iv.

Remuneration policy

v.

Details of remuneration to all the directors, as per format in main

report.
e. Shareholders Committee.
i.
Name of non-executive director heading the committee

f.

ii.

Name and designation of compliance officer

iii.

Number of shareholders complaints received so far

iv.

Number not solved to the satisfaction of shareholders

v.
Number of pending share transfers
General Body meetings.
I.
Location and time, where last three AGMs held.
II.
Whether special resolutions
A. Were put through postal ballot last year, details of
voting pattern
B.

Person who conducted the postal ballot exercise

C.

Are proposed to be conducted through postal ballot

D. Procedure for postal ballot

g. Disclosures.
I.
Disclosures on materially significant related party transactions
i.e. transactions of the company of material nature, with its
promoters, the directors or the management, their subsidiaries
or relatives etc. that may have potential conflict with the
interests of company at large.
II.
Details of non-compliance by the company, penalties, and
strictures imposed on the company by Stock Exchange or SEBI or

any statutory authority, on any matter related to capital

markets, during the last three years.
h. Means of communication.
I.
Half-yearly report sent to each household of shareholders.
II.
Quarterly results
A. Which newspapers normally published in?
B. Any website, where displayed
C. Whether it also displays official news releases; and

i.

D. The presentations made to institutional investors or to the

analysts.
I.
Whether MD&A is a part of annual report or not
General Shareholder information
I.
AGM : Date, time and venue
II.

Financial Calendar

III.

Date of Book closure

IV.

Dividend Payment Date

V.

Listing on Stock Exchanges

VI.

Stock Code

VII.

Market Price Data : High., Low during each month in last financial
year

VIII.

Performance in comparison to broad-based indices such as BSE

Sensex, CRISIL index etc.

IX.

Registrar and Transfer Agents

X.

Share Transfer System

XI.

Distribution of shareholding

XII.

Dematerialization of shares and liquidity

XIII.

Outstanding GDRs/ADRs/Warrants or any Convertible

instruments, conversion date and likely impact on equity

XIV.

Plant Locations

XV.

Address for correspondence

The Companies Act provisions relating to Corporate governance

CA 2013 introduces significant changes to the composition of the boards

of directors.

Every company is required to appoint 1 (one) resident director on its

board.

Nominee directors shall no longer be treated as independent directors.

Listed companies and specified classes of public companies are required

to appoint independent directors and women directors on their boards.

CA 2013 for the first time codifies the duties of directors.

SEBI amends the Listing Agreement (with prospective effect from October
01, 2014) to align it with CA 2013.

The Government of India has recently notified Companies Act, 2013 ("CA
2013"), which replaces the erstwhile Companies Act, 1956 ("CA 1956"). In our
series of updates on the CA 2013 ("NDA CA 2013 Series"), we are analyzing
the key changes and their major implications for stakeholders, by setting out the
practical impact of the changes introduced by CA 2013. For a quick look at our
analysis so far on the changes brought forth by the CA 2013, please refer to our
previous hotlines in this series available through this link.
In this hotline, we shall analyse the important changes introduced by CA 2013
with respect to management and administration of companies. The changes in
law are aimed at ensuring higher standards of transparency and accountability,
and seek to align the corporate governance practices in India with global best
practices.
KEY CHANGES INTRODUCED BY CA 2013
I. BOARD COMPOSITION
CA 2013 has introduced significant changes in the composition of the board of
directors of a company. The key changes introduced are set out below:
NUMBER OF DIRECTORS: The following key changes have been introduced
regarding composition of the board:

A one person company shall have a minimum of 1 (one) director;

CA 1956 permitted a company to determine the maximum number of

directors on its board by way of its articles of association. CA 2013,
however, specifically provides that a company may have a maximum of 15
(fifteen) directors.

CA 1956 required public companies to obtain Central Government's

approval for increasing the number of its directors above the limit
prescribed in its articles or if such increase would lead to the total number
of directors on the board exceeding 12 (twelve) directors. CA 2013
however, permits every company to appoint directors above the

prescribed limit of 15 (fifteen) by authorizing such increase through a

special resolution.
Key takeaway: Allowing companies to increase the maximum number of
directors on their boards by way of a special resolution would ensure greater
flexibility to companies.
CA 2013 requires companies to have the following classes of directors:

RESIDENT DIRECTOR: CA 2013 introduces the requirement of appointing a

resident director, i.e., a person who has stayed in India for a total period of not
less than 182 (one hundred and eighty two) days in the previous calendar year.
Key Takeaway: The requirement to have a resident director on the board of
companies has been viewed as a move to ensure that boards of Indian
companies do not comprise entirely of non-resident directors. This provision has
caused significant difficulties to companies, since it has been brought into force
with immediate effect, requiring companies to restructure their boards
immediately to ensure compliance with CA 2013.
Independent Directors
CA 1956 did not require companies to appoint an independent director on its
board. Provisions related to independent directors were set out in Clause 49 of
the Listing Agreement ("Listing Agreement").
a. Number of independent directors: As per the Listing Agreement, only
listed companies were required to appoint independent directors. The
number of independent directors on the board of a listed company was
required to be equal to (I) one third of the board, where the chairman of
the board is a non-executive director; or (ii) one half of the board, where
the chairman is an executive director. However, under CA 2013, the
following companies are required to appoint independent directors:
I.
II.

Public listed company: At least one third of the board to be

comprised of independent directors; and
Certain specified companies that meet the criteria listed below are
required to have at least 2 (two) independent directors:

Public companies which have paid up share capital of INR

100,000,000 (Rupees one hundred million only);

Public companies which have a turnover of 1,000,000,000

(Rupees one billion only); and

Public companies which have, in the aggregate, outstanding

loans, debentures and deposits exceeding INR 500,000,000
(Rupees five hundred million only)

b. Qualification criteria:
I.

II.

CA 2013 prescribes detailed qualifications for the appointment of an

independent director on the board of a company. Some important
qualifications include:

he / she should be a person of integrity, relevant expertise

and experience;

he / she is not or was not a promoter of, or related to the

promoter or director of the company or its holding, subsidiary
or associate company;

he / she has or had no pecuniary relationship with the

company, its holding, subsidiary or associate company, or
their promoters, or directors during the 2 (two) immediately
preceding financial years or during the current financial year;

a person, none of whose relatives have or had pecuniary

relationship or transaction with the company, its holding,
subsidiary or associate company, or their promoters, or
directors amounting to 2 (two) percent or more of its gross
turnover or total income or INR 5,000,000 (Rupees five million
only), whichever is lower, during the 2 (two) immediately
preceding financial years or during the current financial year.

CA 2013 also sets forth stringent provisions with respect to the

relatives of the independent director.

Key Takeaways: It is evident from provisions of CA 2013 that much emphasis

has been placed on ensuring greater independence of independent directors.
The overall intent behind these provisions is to ensure that an independent
director has no pecuniary relationship with, nor is he provided any incentives
(other than the sitting fee for board meetings) by it in any manner, which may
compromise his / her independence. In view of the additional criteria prescribed
in CA 2013, many listed companies may need to revisit the criteria used in
appointing their independent directors.
Observations: CA 2013 proposes to significantly escalate the independence
requirements of independent directors, when compared to the Listing
Agreement:
I.

The CA 2013 requires an independent director to be a person of

integrity, relevant expertise and experience; it fails to elaborate on the

requisite standards for determining whether a person meets such

criteria. Companies (acting through their respective nomination and
remuneration committees) would be able to exercise their own
judgment in the appointment of independent directors, diluting the
"independence" criteria.
II.

While the Listing Agreement provided that an independent director

must not have any material pecuniary relationship or transaction with
the company, CA 2013 states that an independent director must not
have had any pecuniary relationship with the company. Further, the
Listing Agreement stipulated earlier that an independent director
should not have had such transactions with the company, its holding
company etc., at the time of appointment as an independent director,
while CA 2013 extends this restriction to the current financial year or
the immediately preceding two financial years. However, this provision
in the Listing Agreement has been aligned with the CA 2013 by means
of the circular issued by the Securities and Exchange Board of India
("SEBI") dated April 17, 2014 titled Corporate Governance in Listed
Entities- Amendments to Clauses 35B and 49 of the Equity Listing
Agreement.

III.

The SEBI Circular has brought the provisions of the Listing Agreement
in line with the provisions of CA 2013, and would be applicable from
October 01, 2014. Further, the disqualification arising from any
pecuniary relationship in the previous 2 (two) financial years under CA
2013 may be unreasonably restrictive, as there may be situations
where a pecuniary transaction of the proposed independent director
may safely be considered to be of a nature which does not affect the
director's independence, for instance, a person proposed to be
appointed as an independent director may be the promoter or director
of a supplier (or a counter-party to an arm's length transaction) which
has in the past (either during or for a period prior to the two
immediately preceding financial years) been selected by the company
through an independent tender process.

Duties of independent directors: Neither the Listing Agreement nor the CA

1956 prescribed the scope of duties of independent directors. CA 2013 includes a
guide to professional conduct for independent directors, which crystallizes the
role of independent directors by prescribing facilitative roles, such as offering
independent judgment on issues of strategy, performance and key
appointments, and taking an objective view on performance evaluation of the
board. Independent directors are additionally required to satisfy themselves on
the integrity of financial information, to balance the conflicting interests of all
stakeholders and, in particular, to protect the rights of the minority shareholders.
The SEBI Circular however, states that the board is required to lay down a code
of conduct which would incorporate the duties of independent directors as set
out in CA 2013.
Key Takeaways: CA 2013 imposes significantly onerous duties on independent
directors, with a view to ensuring enhanced management and administration.
While a list of specific duties has been introduced under CA 2013, it should by no
means be considered to be exhaustive. Independent directors are unlikely to be
exempt from liability merely because they have fulfilled the duties specified in

CA 2013, and should be prudent and carry out all duties required for effective
functioning of the company.

Liability of independent directors

Under CA 1956, independent directors were not considered to be "officers in
default" and consequently were not liable for the actions of the board. CA 2013
however, provides that the liability of independent directors would be limited to
acts of omission or commission by a company which occurred with their
knowledge, attributable through board processes, and with their consent and
connivance or where they have not acted diligently.
Key Takeaways: CA 2013 proposes to empower independent directors with a
view to increase accountability and transparency. Further, it seeks to hold
independent directors liable for acts or omissions or commission by a company
that occurred with their knowledge and attributable through board processes.
While CA 2013 introduces these provisions with a view of increase accountability
in the board this may discourage a lot of persons who could potentially have
been appointed as independent directors from accepting such a position as they
would be exposed to greater liabilities while having very limited control over the
board.
Position of Nominee Directors

While the Listing Agreement stated that the nominee directors appointed by
an institution that has invested in or lent to the company are deemed to be
independent directors, CA 2013 states that a nominee director cannot be an
independent director. However, the SEBI Circular in line with the provisions of
CA 2013 has excluded nominee directors from being considered as
independent directors.
CA 2013 defines nominee director as 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 the Government or any other
person to represent its interests.

Key Takeaways: The concept of independent director was introduced as part of

the CA 2013 with a view to bring in independent judgement on the board. A
director, once appointed, has to serve the interest of the shareholders as a
whole. Directors appointed by private equity investors shall also be covered
under the definition of nominee directors, and would no longer be eligible for
appointment as independent directors.
Woman Director

Listed companies and certain other public companies shall be required to

appoint at least 1 (one) woman director on its board.

Companies incorporated under CA 2013 shall be required to comply with this

provision within 6 (six) months from date of incorporation. In case of
companies incorporated under CA 1956, companies are required to comply

with the provision within a period of 1 (one) year from the commencement of
the act.
Key Takeaway: While the mandatory requirement for appointment of women
directors is expected to bring diversity on to the boards, companies may find it
difficult to be in compliance with CA 2013 unless they have already identified or
internally groomed women candidates that are qualified to be appointed to the
board.
Duties of directors
CA 1956 did not contain any provisions that specifically identified the duties of
directors. CA 2013 has set out the following duties of directors:

To act in accordance with company's articles;

To act in good faith to promote the objects of the company for benefit of the
members as a whole, and the best interest of the company, its employees,
shareholders, community and for protection of the environment;

Exercise duties with reasonable care, skill and diligence, and exercise of
independent judgment;

The director is not permitted to:

Be involved in a situation in which he may have direct or indirect interest that

conflicts, or may conflict, with the interest of the company;

Achieve or attempt to achieve any undue gain or advantage, either to himself

or his relatives, partners or associates.

Key Takeaways: CA 2013 seeks to bring about greater standards of corporate

governance, by imposing higher duties and liabilities for directors. While the act
sets out specific duties, it does not clarify whether the duties of directors listed
therein are exhaustive. Therefore, it would be prudent for directors to comply
with all duties required for the effective functioning of the company and not be
merely be directed by the specified duties which are at best very broadly
phrased principles that should guide their behavior.
Further, every director should take care to ensure that it acts in the best
interested of all the shareholders as a whole. These provisions become
particularly significant in case of nominee directors appointed by private equity
investors, who have been known to represent the interests of the investors
appointing them in direct contravention of their duties to the shareholders as a
whole.
II. COMMITTEES OF THE BOARD
CA 2013 envisages 4 (four) types of committees to be constituted by the board:

a. AUDIT COMMITTEE: Under CA 1956, public companies with a paid up capital

in excess of INR 50,000,000 (Rupees fifty million only) were required to set up
an audit committee comprising of not less than 3 (three) directors. At least
one third had to be comprised of directors other than Managing Directors or
Whole Time Directors. CA 2013 however, requires the board of every listed
company and certain other public companies to constitute the audit
committee consisting of a minimum of 3 (three) directors, with the
independent directors forming a majority. It prescribes that a majority of
members, including its Chairman, have to be persons with the ability to read
and understand financial statements. The audit committee has been
entrusted with the task of providing recommendations for appointment and
remuneration of auditors, review of independence of auditors, providing
approval of related party transactions and scrutiny over other financial
mechanisms of the company.
b. NOMINATION AND REMUNERATION COMMITTEE: While CA 1956 did not
require companies to set up nomination and remuneration committee, the
Listing Agreement provided companies with the option to constitute a
remuneration committee. However, CA 2013 requires the board of every
listed company to constitute the Nomination and Remuneration Committee
consisting of 3 (three) or more non-executive directors out of which not less
than one half are required to be independent directors. The committee has
the task of identifying persons who are qualified to become directors and
provide recommendations to the board regarding their appointment and
removal, as well as carry out their performance evaluation
c. STAKEHOLDERS RELATIONSHIP COMMITTEE: CA 1956 did not require a
company to set up a stakeholder's relationship committee. The Listing
Agreement required listed companies to set up a shareholders / investors
grievance committee to examine complaints and issues of shareholders. CA
2013 requires every company having more than 1000 (one thousand)
shareholders, debenture holders, deposit holders and any other security
holders at any time during a financial year to constitute a stakeholders
relationship committee to resolve the grievances of security holders of the
company.
d. CORPORATE SOCIAL RESPONSIBILITY COMMITTEE ("CSR Committee"):
CA 1956 did not impose any requirement on companies relating to corporate
social responsibility ("CSR"). CA 2013 however, requires certain companies to
constitute a CSR Committee, which would be responsible to devise,
recommend and monitor CSR initiatives of the company. The committee is

also required to prepare a report detailing the CSR activities undertaken and if
not, the reasons for failure to comply.
Key Takeaways: CA 2013 sets out an advanced framework for board
functioning by division of core board functions and their delegation to
committees of the board. While the audit committee and the nomination and
remuneration committee provide the back end infrastructure for boards, the
stakeholder's relationship committee and CSR Committee have been entrusted
with the task of interaction with key stakeholders. Irrespective of their function,
each of the committees would act as a "check and balance" on the powers of the
board, by ensuring greater transparency and accountability in its functioning.
III. BOARD MEETINGS AND PROCESSES
The key changes introduced by CA 2013 with respect to board meetings and
processes are as under:

First board meeting of a company to be held within 30 (thirty) days of

incorporation;

Notice of minimum 7 (seven) days must be given for each board meeting.
Notice for board meetings may be given by electronic means. However, board
meetings may be called at shorter notice to transact "urgent business"
provided such meetings are either attended by at least 1 (one) independent
director or decisions taken at such meetings on subsequent circulation are
ratified by at least 1 (one) independent director.

CA 2013 has permitted directors to participate in board meetings through

video conferencing or other audio visual means which are capable of
recording and recognising the participation of directors. Participation of
directors by audio visual means would also be counted towards quorum.

Requirement for holding board meeting every quarter has been discontinued.
Now at least 4 (four) meetings have to be held each year, with a gap of not
more than 120 (one hundred and twenty) days between 2 (two) board
meetings.

Certain new actions have been identified, that require approval by directors in
a board meeting. These include issuance of securities, grant of loans,
guarantee or security, approval of financial statement and board's report,
diversification of business etc.

Approval of circular resolution will be by a majority of directors or members

who are entitled to vote on the resolution, irrespective of whether they are
present in India or otherwise.

Key Takeaways: In the backdrop of global corporate transactions, the changes

relating to participation of directors by audio visual and electronic means are a
welcome step, aimed at keeping pace with technological advancements.
CONCLUSION

CA 2013 has introduced significant changes regarding the board composition and
has a renewed focus on board processes. Whilst certain of these changes may
seem overly prescriptive, a closer analysis leads to a compelling conclusion that
the emphasis is on board processes, which over a period of time would
institutionalize good corporate governance and not make governance overdependent on the presence of certain individuals on the board.
Footnote
1. http://www.sebi.gov.in/cms/sebi_data/attachdocs/1397734478112.pdf
The content of this article is intended to provide a general guide to the subject
matter. Specialist advice should be sought about your specific circumstances.

Provisions Related to Corporate Governance

The Companies (Amendment) Act, 2000 has inducted good corporate governance [CG] leading to
more transparent, ethical and fair business practice to be adopted by corporates at large. The
following are the provisions which have brought good CG:
1.

2.

Section 217(2AA) dealing with Directors Responsibility Statement [DRS] to be included in the
Directors Report
Section 292A bringing in constitution of Audit Committee

3.

Section 274(1)(g) debarring a person to act as a Director of a company if default in filing

Annual Return/Accounts or repayment of deposits/interest/debentures/dividend has taken place

4.

Section 275 providing for appointment of a person as a Director in a maximum of 15

companies

5.

Clause 49 of the Listing Agreement of the Stock Exchanges providing for promoting and
raising the standards of CG in respect of listed companies.

6.

Corporate Governance Voluntary Guidelines, 2009 released in December, 2009 by the

Ministry of Corporate Affairs for voluntary adoption by the Corporate Sector

Directors Responsibility Statement [DRS] [Section 217 (2AA)]

The Directors Report is required to include a DRS on the following aspects:
1.

2.
3.

Applicable accounting standards have been followed in preparation of the annual accounts
along with proper reasons/explanations for material departures.
Accounting policies as selected are consistently applied.
Judgments and estimates are made in a reasonable and prudent manner to ensure true and
fair view of the state of affairs at the end of financial year and of the profit or loss for that period.

4.

5.

Adequate accounting records are maintained in accordance with the provisions of the
Companies Act, 1956 for safeguarding the assets of the company and for preventing and detecting
frauds and other irregularities.
Annual accounts have been prepared on a Going Concern basis.

Constitution of Audit Committee [Section 292A]

It is provided that every public company having paid-up capital of ` 5 crores or more to constitute a
Committee of the Board known as the Audit Committee. The following are the salient features:
1.

The Audit Committee to consist of a minimum of 3 Directors such that 2/3rd of the strength to
be other than managing/whole-time Directors.

2.

Functions of an Audit Committee to be in accordance with the terms of reference specified in

writing by the Board.

3.

The members of the Audit Committee to appoint Chairman of the Audit Committee.

4.

Annual Report of the Company to disclose the composition of the Audit Committee.

5.

The auditors, internal auditors and the finance director to attend/participate Audit Committee
meetings without any right to vote.

6.

The Audit Committee to have periodical discussions with the auditors regarding internal
control systems, scope of audit, observations of auditors, review of half-yearly annual financial
statements and to ensure compliance of internal control systems.

7.

The Audit Committee to have authority to investigate on any matter referred to by the Board of
Directors and have full access to information contained in the records of the company and also
have power to seek external professional advice as expedient.

8.

All recommendations of the Audit Committee on any matter relating to financial management
and audit reporting to be binding on the Board. If the Board does not accept any
recommendations, it is required record its reasons in writing and communicate the same to the
shareholders.

9.

The Chairman of the Audit Committee to attend every AGM to provide clarifications on
matters relating to audit.

10.

Default in compliance with Audit Committee provisions to render the company/every officer in
default liable to imprisonment up to 1 year and fine up to ` 50,000/- or both.

Disqualification of Directors [Section 274(1)(g)]

The Companies (Amendment) Act, 2000 has inserted clause (g) to section 274(1) of the Companies
Act, 1956 providing for the following:

A person would not be eligible to be appointed as a Director if such person is a Director of a public
company which:
1.

has not filed its annual returns/accounts for continuous 3 years commencing on/after 1-41999; or

2.

has failed to repay its deposits/interest/debenture redemption on due date or failed to pay
dividend and such failure continues for more than 1 year.

Such a Director not to be eligible to be appointed as a Director of any other public company for a
period of 5 years from the date of the above referred default.
This restrictive provision is not being applicable to:
1.
2.

a special Director appointed by BIFR under section 10(4) of SICA.

Default of privately placed bonds/debentures of Public Financial Institutions (Circular No.
5/2003 dt. 14-1-2003).

Clause 49 of the Listing Agreement

The SEBI inserted Clause 49 in the Listing Agreement in January, 2000 to enforce compliance with
Corporate Governance standards as amended in 2004 and further amended in 2008 and again in
2010. The highlights are:
I. Board of Directors
A. Composition of Board
1.

Non-executive directors not to be less than 50% of the total board.

2.

Independent directors
1. Where the Chairman is a non-promoter, non-executive director, at least one-third of
the Board to comprise of independent directors
2. Where the Non-executive Chairman is a promoter of the company or is related to any
promoter or person occupying management positions at the Board level or at one
level below the Board, at least 50% of the Board of the company to consist of
independent directors.
3. Where the Chairman is an executive director, at least 50% of the Board to comprise
of independent directors.

B. Non-executive directors compensation and disclosures

1.

All fees/compensation, if any paid to Non-executive directors, including independent directors,

to be fixed by the Board of Directors with previous approval of shareholders in general meeting.

2.

The shareholders resolution to specify the limits for the maximum number of stock options
that can be granted to non-executive directors, including independent directors, in any financial
year and in aggregate.

3.

Prior approval of shareholders in general meeting to not apply to payment of sitting fees to
non-executive directors, if made within the limits prescribed under the Companies Act, 1956 for
payment of sitting fees without approval of the Central Government.

C. Other provisions as to Board and Committees

1.

The board to meet at least four times a year, with a maximum time gap of four months
between any two meetings. The minimum information to be made available to the board is given in
Annexure I A to clause 49.

2.

A director to not be a member in more than 10 committees or act as Chairman of more than 5
committees across all companies in which he is a director.

3.

Every director to inform the company about the committee positions he occupies in other
companies and notify changes as and when they take place.

4.

The Board to 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 noncompliances.

5.

An independent director who resigns or is removed from the Board of the Company to be
replaced by a new independent director within a period of not more than 180 days.

D. Code of Conduct
1.

The Board to lay down a code of conduct for all Board members and senior management of
the company and post the same on the website of the company.

2.

All Board members and senior management personnel to affirm compliance with the code on
an annual basis. The Annual Report of the company to contain a declaration to this effect signed
by the CEO.

II. AUDIT COMMITTEE

A. Qualified and Independent Audit Committee
1.
2.

Minimum 3 directors to be members with two-thirds being independent directors.

All members to be financially literate and at least one member having accounting or related
financial management expertise.

3.

The Chairman of the Audit Committee to be an independent director and to remain present at
the AGM to answer shareholders queries.

4.

The Chairman of the Audit Committee to be present at Annual General Meeting to answer
shareholder queries.

5.

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, but on
occasions it may also meet without the presence of any executives of the company.

6.

The Company Secretary to act as the secretary to the committee.

B. Meeting of Audit Committee

The Audit Committee to meet at least four times in a year with gap of not more than four months
between two meetings. The quorum to be higher of two members or one-third with minimum of two
independent members present.
C. Powers of Audit Committee
The powers of the Audit Committee to include:
1.

To investigate any activity within its terms of reference

2.

To seek information from any employee

3.

To obtain outside legal or other professional advice

4.

To secure attendance of outsiders with relevant expertise, if necessary

5.

A very elaborate role is prescribed for the Audit Committee in Clause 49.

D. Role of Audit Committee

The role of the Audit Committee to include the following:
1.

Oversight of the companys financial reporting process and the disclosure of its financial
information to ensure that the financial statement is correct, sufficient and credible.

2.

Recommending to the Board, the appointment, re-appointment and, if required, the

replacement or removal of the statutory auditor and the fixation of audit fees.

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 before submission to the
board for approval, with particular reference specified particulars.

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, with the management, performance of statutory and internal auditors, adequacy of
the internal control systems.

8.

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.

9.

Discussion with internal auditors, any significant findings and follow up thereon.

10.

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.

11.

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.

12.

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.

13.

To review the functioning of the Whistle Blower mechanism, in case the same is existing.

14.

Approval of appointment of CFO (i.e., the whole-time Finance Director or any other person
heading the finance function or discharging that function) after assessing the qualifications,
experience and background, etc. of the candidate.

15.

Carrying out any other function as is mentioned in the terms of reference of the Audit
Committee.

E. Review of information by Audit Committee

The Audit Committee to 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.
5.

Internal audit reports relating to internal control weaknesses; and

The appointment, removal and terms of remuneration of the Chief internal auditor to be
subject to review by the Audit Committee.

III. Subsidiary Companies

1.

At least one independent director of the holding company to be a director on the Board of a
material non-listed Indian subsidiary company.

2.

The Audit Committee of the listed holding company to also review the financial statements, in
particular, the investments made by the unlisted subsidiary company.

3.

The minutes of the Board meetings of the unlisted subsidiary company and a statement of all
significant transactions and arrangements entered into by the unlisted subsidiary company to be
placed at the Board meeting of the listed holding company.

IV. Disclosures
A. Disclosures
The following disclosure requirements are specified:
1.

Basis of related party transactions

2.

Disclosure of Accounting Treatment

3.

Risk assessment and minimization procedures to the Board

4.

Proceeds from public issues, rights issues, preferential issues, etc.

5.

Remuneration of Directors

6.

Management Discussion and Analysis report

7.

Brief resume of the Director and other specified particulars at the time of his appointment or
re-appointment

8.

Disclosure of relationships between directors inter se

9.

Quarterly results and presentations to analysts to be put on companys web-site

10.

Annual Report on Corporate Governance to the Shareholders, suggested list of items to Be

included in Annexure I C, and Quarterly compliance report to the Stock Exchange within 15 days
from close of the quarter as per the format given in Annexure IB.

B. Shareholders/Investors Grievance Committee

1.

This Committee is be formed to specifically look into the redressal of shareholders and
investors complaints like transfer of shares, non-receipt of balance sheet, non-receipt of declared
dividends, etc.

2.

To expedite the process of share transfers, the Board to delegate the power of share transfer
to an officer or a committee or to the registrar and share transfer agents. The delegated authority
to attend to share transfer formalities at least once in a fortnight.

V. CEO/CFO certification
The CEO; i.e., the Managing Director or Manager appointed in terms of the Companies Act, 1956 and
the CFO; i.e., the whole-time Finance Director or any other person heading the finance function
discharging that function to certify to the Board specified particulars.
VI. Report on Corporate Governance
1.

A separate section on Corporate Governance to be included in the Annual Reports of

company, with a detailed compliance report on Corporate Governance. Non-compliance of any
mandatory requirement of this clause with reasons thereof and the extent to which the nonmandatory requirements have been adopted to be specifically highlighted. The suggested list of
items to be included in this report is given in Annexure IC and list of non-mandatory requirements
is given in Annexure ID to clause 49.

2.

The companies to submit a quarterly compliance report to the stock exchanges within 15 days
from the close of quarter as per the format given in Annexure IB. The report to be signed either by
the Compliance Officer or the Chief Executive Officer of the company.

VII. Compliance
1.

The company to obtain a certificate from either the auditors or practising company secretaries
regarding compliance of conditions of corporate governance as stipulated and annex the certificate
with the directors report sent annually to all the shareholders of the company and the Stock
Exchanges.

2.

The non-mandatory requirements given in Annexure ID may be implemented as per the

discretion of the company. However, the disclosures of the compliance with mandatory
requirements and adoption (and compliance)/non-adoption of the non-mandatory requirements to
be made in the section on corporate governance of the Annual Report.

VIII. Non-Mandatory Requirements

The non-mandatory requirements are specified in Annexure ID to Clause 49 that include:
1.

A non-executive Chairman may be entitled to maintain a Chairmans office at the companys

expense and also allowed reimbursement of expenses incurred in performance of his duties.

2.

Independent Directors may have a tenure not exceeding, in the aggregate, a period of nine
years, on the Board of a company.

3.

The board may set up a remuneration committee to determine on their behalf and on behalf of
the shareholders with agreed terms of reference, the companys policy on specific remuneration
packages for executive directors including pension rights and any compensation payment.

4.

A half-yearly declaration of financial performance including summary of the significant events

in last six months, may be sent to each household of shareholders.

5.

Company may move towards a regime of unqualified financial statements.

6.

A company may train its Board members in the business model of the company as well as the
risk profile of the business parameters of the company, their responsibilities as directors, and the
best ways to discharge them.

7.

The performance evaluation of non-executive directors could be done by a peer group

comprising the entire Board of Directors, excluding the director being evaluated; and Peer Group
evaluation could be the mechanism to determine whether to extend /continue the terms of
appointment of non-executive directors.

8.

The company may establish a Whistle Blower Policy.

Corporate Governance Voluntary Guidelines 2009

The Corporate Governance Voluntary Guidelines 2009, has been released in December 2009 for
voluntary adoption by the Corporate Sector have taken into account the recommendations of the Task
Force set up by Confederation of Indian Industry (CII) under Chairmanship of Shri Naresh Chandra in
February, 2009 to recommend ways to further improve corporate governance standards and
practices. The voluntary guidelines address a number of current concerns in the area of corporate
governance. These guidelines do not substitute any extant Law or regulation but are essentially for
voluntary adoption by the corporates.
While it is expected that more and more corporates should make sincere efforts to consider adoption
of these guidelines, there may be genuine reasons for some companies in not being able to adopt
them completely. In such a case it is expected that such companies should inform their shareholders
about the guidelines which the companies have not been able to apply either fully or partially.
Over a period of time these guidelines will progressively converge towards a framework of best
corporate governance standards and practices. After considering the experience of adoption of these
guidelines by Indian corporate sector and consideration of relevant feedback and other related issues,
the Government may initiate the exercise for review of these guidelines for further improvement after
one year.
[Note: A copy of the Corporate Governance Voluntary Guidelines, 2009 can be accessed at the
following link] Corporate Governance Voluntary Guidelines 2009

- See more at: http://taxguru.in/company-law/provisions-related-corporategovernance.html#sthash.OU3b2iv8.dpuf

Clause 49 of the Listing Agreement with Stock Exchanges all

listed companies have to enter into this agreement before listing
Main provisions and not a detailed one
The company agrees to comply with the following provisions:
1. Optimum composition of board of directors with not less than 50% of the
directors being non-executive directors
2. Independent director would mean a non-executive director
3. Non-executive directors compensation and disclosures
4. Other provisions relating to BOD and various committees
5. Code of conduct compliance
6. Audit committee:
a. Qualified and independent audit committee
b. Meeting of audit committee
c. Powers of audit committee
d. Role of audit committee
e. Review of information by audit committee
7. Subsidiary companies:
a. Holding company director being on the board of subsidiary
companies
8. Disclosures:
a. Basis of related party transactions
b. Disclosure of accounting treatment
c. Board disclosures relating to risk management
d. Proceeds from public issues, rights issues, preferential issues etc.
e. Remuneration of directors
f. Management
g. Shareholders
9. CEO/CFO certification
10.Report on corporate governance
11.Compliance certificate from auditors or independent practicing company
secretaries
12.Information to be placed before the BOD
13.Format of quarterly compliance report on CG
14.Non-mandatory requirements

Section III Corporate Social Responsibility

Section 135 of the Companies Act
(1) Every company having net worth of rupees five hundred crores or more, or
turnover of rupees one thousand crores or more or a net profit of rupees five
crores or more
during any 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.
(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
as
specified in Schedule VII;
(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, 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.
Explanation.For the purposes of this section average net profit shall be
calculated
in accordance with the provisions of section 198.

Source: Handbook of CII on Corporate Social Responsibility

The global context
While there may be no single universally accepted definition of CSR, each
definition that currently exists underpins the impact that businesses have on
society at large and the societal expectations of them. Although the roots of CSR
lie in philanthropic activities (such as donations, charity, relief work, etc.) of
corporations, globally, the concept of CSR has evolved and now encompasses all
related concepts such as triple bottom line, corporate citizenship, philanthropy,
strategic philanthropy, shared value, corporate sustainability and business
responsibility. This is evident in some of the definitions presented below:
The EC1 defines CSR as the responsibility of enterprises for their impacts on
society. To completely meet their social responsibility, enterprises should have
in place a process to integrate social, environmental, ethical human rights and
consumer concerns into their business operations and core strategy in close
collaboration with their stakeholders
The WBCSD defines CSR as2 the continuing commitment by business to
contribute to economic development while improving the quality of life of the
workforce and their families as well as of the community and society at large.
According to the UNIDO3, Corporate social responsibility is a management
concept whereby companies integrate social and environmental concerns in
their business operations and interactions with their stakeholders. CSR is
generally understood as being the way through which a company achieves a
balance of economic, environmental and social imperatives (Triple-Bottom-Line
Approach), while at the same time addressing the expectations of shareholders
and stakeholders. In this sense it is important to draw a distinction between CSR,
which can be a strategic business management concept, and charity,
sponsorships or philanthropy. Even though the latter can also make a valuable
contribution to poverty reduction, will directly enhance the reputation of a
company and strengthen its brand, the concept of CSR clearly goes beyond
that.
From the above definitions, it is clear that:
The CSR approach is holistic and integrated with the core business strategy for
addressing social and environmental impacts of businesses.
CSR needs to address the well-being of all stakeholders and not just the
companys shareholders.
Philanthropic activities are only a part of CSR, which otherwise constitutes a
much larger set of activities entailing strategic business benefits.

CSR in India
CSR in India has traditionally been seen as a philanthropic activity. And in
keeping with the Indian tradition, it was an activity that was performed but not
deliberated. As a result, there is limited documentation on specific activities
related to this concept. However, what was clearly evident that much of this had
a national character encapsulated within it, whether it was endowing institutions
to actively participating in Indias freedom movement, and embedded in the idea
of trusteeship.
As some observers have pointed out, the practice of CSR in India still remains
within the philanthropic space, but has moved from institutional building
(educational, research and cultural) to community development through various
projects. Also, with global influences and with communities becoming more
active and demanding, there appears to be a discernible trend, that while CSR
remains largely restricted to community development, it is getting more strategic
in nature (that is, getting linked with business) than philanthropic, and a large
number of companies are reporting the activities they are undertaking in this
space in their official websites, annual reports, sustainability reports and even
publishing CSR reports. The Companies Act, 2013 has introduced the idea of CSR
to the forefront and through its disclose-or-explain mandate, is promoting greater
transparency and disclosure. Schedule VII of the Act, which lists out the CSR
activities, suggests communities to be the focal point. On the other hand, by
discussing a companys relationship to its stakeholders and integrating CSR into
its core operations, the draft rules suggest that CSR needs to go beyond
communities and beyond the concept of philanthropy. It will be interesting to
observe the ways in which this will translate into action at the ground level, and
how the understanding of CSR is set to undergo a change.

CSR and sustainability

Sustainability (corporate sustainability) is derived from the concept of
sustainable development which is defined by the Brundtland Commission as
development that meets the needs of the present without compromising the
ability of future generations to meet their own needs 4. Corporate sustainability
essentially refers to the role that companies can play in meeting the agenda of
sustainable development and entails a balanced approach to economic progress,
social progress and environmental stewardship. CSR in India tends to focus on
what is done with profits after they are made. On the other hand, sustainability is
about factoring the social and environmental impacts of conducting business,
that is, how profits are made.
Hence, much of the Indian practice of CSR is an important component of
sustainability or responsible business, which is a larger idea, a fact that is
evident from various sustainability frameworks. An interesting case in point is
the NVGs for social, environmental and economic responsibilities of business
issued by the Ministry of Corporate Affairs in June 2011. Principle eight relating to
inclusive development encompasses most of the aspects covered by the CSR
clause of the Companies Act, 2013. However, the remaining eight principles
relate to other aspects of the business. The UN Global Compact, a widely used
sustainability framework has 10 principles covering social, environmental,
human rights and governance issues, and what is described as CSR is implicit
rather than explicit in these principles.

Globally, the notion of CSR and sustainability seems to be converging, as is

evident from the various definitions of CSR put forth by global organisations. The
genesis of this convergence can be observed
from the preamble to the recently released draft rules relating to the CSR clause
within the Companies Act, 2013 which talks about stakeholders and integrating it
with the social, environmental and economic objectives, all of which constitute
the idea of a triple bottom line approach. It is also acknowledged in the
Guidelines on Corporate Social Responsibility and
Sustainability for Central Public Sector Enterprises issued by the DPE in April
2013.
The new guidelines, which have replaced two existing separate guidelines on
CSR and sustainable development, issued in 2010 and 2011 respectively,
mentions the following:
Since corporate social responsibility and sustainability are so closely entwined,
it can
be said that corporate social responsibility and sustainability is a companys
commitment
to its stakeholders to conduct business in an economically, socially and
environmentally
sustainable manner that is transparent and ethical.

Why is the CSR clause of the new Companies Act, 2013 so critical
for SMEs?
By requiring companies, with a minimum turnover of 5 crores INR, to spend on
CSR activities, the
Companies Act, 2013 is likely to bring in many SMEs into the CSR fold. This will
usher in a fresh set of challenges to a sector that is increasingly being asked
by its B2B customers to comply with environmental and social standards, while
remaining competitive in terms of price and quality. Thus, SMEs will have to
quickly learn to be compliant with these diverse set of requirements and it is
hoped that this handbook will
facilitate their ability to comply with the CSR clause of the Companies Act,
2013.

Sustainability reporting in India for the top 100 listed companies (known
as BRR):

Business responsibility reporting (BRR)

The other reporting requirement mandated by the government of India,
including CSR is by the SEBI
which issued a circular on 13 August 2012 mandating the top 100 listed
companies to report their ESG
initiatives. These are to be reported in the form of a BRR as a part of the
annual report. SEBI has provided a
template for filing the BRR. Business responsibility reporting is in line with the
NVG published by the Ministry of Corporate Affairs in July 2011. Provisions
have also been made in the listing agreement to incorporate the submission of
BRR by the relevant companies. The listing agreement also provides the

format of the BRR. The BRR requires companies to report their performance on
the nine NVG principles. Other listed companies have also been encouraged by
SEBI to voluntarily disclose information on their ESG performance in the BRR
format.

Role of the board and the CSR committee:

Applicable to listed companies conforming to one of the following conditions:
Net worth > 500 Crores INR
Turnover > 1000 Crores INR
Net profit > 5 Crores INR

Role of the board:

1. Form a CSR committee
2. Approve the CSR policy
3. Ensure implementation of the activities under CSR policy
4. Ensure 2% spend as per statutory requirements
5. Disclose the reasons for not spending the prescribed amount (if applicable)
Role of CSR committee:
1. Three or more directors with at least one independent director
2. Formulate and recommend CSR policy to the board
3. Recommend activities and the amount of expenditure to be incurred
4. Monitor the CSR policy from time to time
CSR processes:
1.
I.
Developing a CSR strategy and policy
II.
Operationalising the institutional mechanism
2.
I.
Due diligence of the implementation partner
II.
Project development
3.
I.
Project approval
II.
Finalising the arrangement with the project implementation agency
Project implementation
4. Project monitoring and reporting
5.
I.
II.

Impact measurement
Report consolidation and communication