ICSI submits recommendations on corporate governance

The Council of the Institute of Company Secretaries of India (ICSI), which went into the policy and regulatory aspects of the legal framework for corporate governance following the revelations about the fraud in IT services firm Satyam Computer Services in January this year, submitted its report to Minister for Corporate Affairs Salman Khurshid today.

Satyam's founder-chairman B Ramalinga Raju had disclosed on January 7 that the company's profits had been overstated for years and that about $ 1 billion of cash and bank balances on its books did not exist. He and some of his close associates are now under investigation by the Central Bureau of Investigation in what is India's biggest case of corporate fraud.

After the sensational revelations, the ICSI felt there was an urgent need to analyse the regulatory provisions that existed and it had, accordingly, constituted a core group to look into the issues and to, inter alia, make suitable recommendations for policy and regulatory changes in the legal framework.

An official press release said the core group undertook a detailed study of the prevailing corporate governance practices across the world, the recommendations of various committees and corporate governance codes, the best practices adopted by the industry and after benchmarking the best practices that can be mandated, made its recommendations.

The Ministry of Corporate Affairs has placed the recommendations on its website, http://www.mca.gov.in The Ministry has sought comments on the report by December 14 so that the Government could take a consolidated view on the recommendations.

The core group has recommended, among other things, that a maximum tenure of 6 years in aggregate should be specified for independent directors. It also felt that Clause 49 needed to be suitably amended by specifying positive attributes for independent directors such as integrity, experience and expertise, foresight, managerial qualities and ability to read and understand financial statements.

The report said there should be a clear demarcation of the roles and responsibilities of the Chairman of the Board and that of the Managing Director/ CEO. The roles of Chairman and CEO should be separated to promote balance of power. A “comply or explain” approach should be adopted, it said.

The core group said induction training of directors should be made mandatory covering roles, responsibilities and liabilities of a director.  There should be a statement to this effect by the Board in Annual Report. Further, Boards should adopt suitable training programmes for enhancing their skills, it said.

The report said the Board should undertake a formal and rigorous annual evaluation of its own  performance and that of its committees and individual directors. Individual evaluation should aim to show whether each director continues to contribute effectively and to demonstrate commitment to the role (including commitment of time for Board and committee meetings and any other duties).
 
It said the Chairman should act on the results of the performance evaluation by recognising the strengths and addressing the weaknesses of the Board and, where appropriate, proposing new members be appointed to the Board or seeking the resignation of directors.

The Board should state in the annual report how performance evaluation of the Board, its committees and its individual directors has been conducted.

According to the report, in case an individual is a managing or whole-time director in a listed company, the number of companies at which such an individual can serve as non-executive director, should be restricted to 10, and the number of listed companies at which such an individual can serve as a non-executive director, should be restricted to 2. The maximum number of listed companies in which an individual can serve as a director should be restricted to 7, it said.

The core group said the constitution of Corporate Compliance Committee should be made mandatory in respect of all public limited companies having a paid-up capital of Rs.5 crores or more. It said the Directors' Responsibility Statement should include a statement that proper systems are in place to ensure compliance of all laws applicable to the company.

It said Secretarial Audit should be made mandatory in respect of listed companies and certain other companies. The report on the audit of secretarial records shall be submitted by the secretarial auditor to the Corporate Compliance Committee of the Board of Directors of the company. The Secretarial Audit Report should form part of the Board's Report.

According to it, the audit partner should be rotated once every three years and the audit firm once every six years.

It said that there should be a standard structure of the Annual Report so as to increase its readability. The constitution of Investor Relations Cell should be made mandatory for Listed Companies. The Investor Relations meeting after declaration of financial results should be compulsorily webcast in case of companies having a market capitalization of Rs.1,000 Crores or more, the report added.

NNN