National Events

Hony. Editor
Dr. Bindi Mehta
(Director, Research at ICSI - CCRT, Formerly, Chief economist, CRISIL









 
 
National News - Feb, 2003
Naresh Chandra Committee report on ‘Audit & Corporate Governance’ submitted

The Naresh Chandra Committee on “Audit & Corporate Governance” has taken forward the recommendations of the Kumarmangalam Birla Committee on Corporate Governance, which was set up by the Securities and Exchange Board of India (SEBI), on two counts:

  • Representation of independent directors on a company’s board and
  • The composition of the audit committee

The Naresh Chandra Committee has made no distinction between a board with an executive chairman and a non-executive chairman. It has recommended that all boards need to have at least half of its members as independent directors. As regards the audit committee, the Kumarmangalam Birla Committee had said it should have three non-executive directors as its member with at least two independent directors and that the chairman of the committee should be an independent director. But the Naresh Chandra Committee seems to be keen on lugging this avenue as well with its recommendation that all audit committee members should be independent directors.

The Naresh Chandra Committee has laid down stringent guidelines defining the relationship between auditors and their clients. In a move that could impact small audit firms, the committee has recommended that along with its subsidiary, associates or affiliated entities, an audit firm should not derive more than 25 percent of its business from a single corporate client. This, the committee has said, would improve the independence of audit firms. While turning down the proposal for a compulsory rotation of audit firms, the committee stressed that the partners and at least 50 per cent of the audit team working on the accounts of a company need to be rotated by a firm once every five years.

While the committee has said that it has no objection to an audit firm having subsidiaries or associate companies engaged in consulting or other specialised businesses, it has drawn up a list of prohibited non-audit services. The Naresh Chandra Committee on ‘Corporate audit and governance’ has recommended an increased role for independent directors by assigning them at least 50 per cent seats on the board of a public limited companies with a paid up capital of Rs. 10 crore and above, and a turnover of Rs. 50 crore and above. It has significantly said nominees of financial institutions (FIs) cannot be counted as independent directors.

It has recommended –

a) Tightening of the noose around the auditors by asking them to make an array of disclosures,

b) Called upon chief executive officers and chief financial officers of all listed companies to certify their companies annual account, besides suggesting

c) Setting up of quality review boards for the Institute of Chartered Accountants of India (ICAI), the Institute of Company Secretaries of India and Institute of Cost and Works Accountants of India, instead of a Public Oversight Board similar to the one in the United States.

At a time when people are shying away from accepting the post of an independent director in a company because of the liabilities that might follow the Naresh Chandra Committee has come up with recommendations that will help remove the fears. To attract quality independent directors on the board of directors of a company the committee has recommended that these directors should be exempt from criminal and civil liabilities under the Companies Act, the Negotiable Instrument Act, the Provident Fund Act, ESIS Act, the Factories Act, the Industrial Disputes Act and the Electricity Supply Act.

However, unlisted public companies that do not have more than 50 shareholders and carry no debt from the public, banks or financial institutions; and unlisted subsidiaries of listed companies have been exempted from the recommendations.



 
 
   
Frauds Office to lead market regulation

The Serious Fraud Office, to be set up by the government is likely to assume the role of lead regulator for the Indian capital markets. According to senior government sources, the Frauds Office will co-ordinate with various regulators and lead investigations into financial offenses of large magnitude from the front. It will comprise officials from the regulatory bodies, including the Securities and Exchange Board of India (SEBI), the Reserve Bank of India (RBI), the income tax department, the Department of Company Affairs (DCA) and the Central Bureau of Investigation (CBI).

The Finance Minister had announced setting up of a Serious Fraud Office along the lines of Serious Fraud Office in the UK. Government sources said that the office in India would be a multi disciplinary body and would be broad based by roping in tax, legal and forensic experts, besides those in the area of information technology and intellectual property rights. The office would be set up within the present legal framework. The Department of Company Affairs (DCA) would however, examine in due course whether a separate legislation is required for it.

 






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The Planning Commission in collaboration with the UNDP has prepared a compendium of successful governance initiatives and implementation practices in the states. The compendium submitted to the national Development Council has documented replicable success stories in implementation and delivery of public services, which could be used for experience sharing both at the national level as well as between state governments.

The Draft Tenth Plan Document had envisaged such a compendium to cater to the needs of the states, which wanted to improve the implementation and sought information on better ways of doing things. According to some sources, the priority areas that have been taken up in the document include interventions in the delivery of social services, land and water management and areas of major public interface with the government. The objective is to describe practices and experiences in the implementation of programmes and projects that have successfully addressed real life problems. The main criteria used for identification of initiatives include its relevance to the poor, benefits to large numbers, quantum of funds being deployed, potential of productivity enhancements of the target population, viability, level of community participation, sustainability and potential for replicability.

 





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India Inc. gear up for greater transparency

Indian companies are gearing up to become more transparent in the disclosure of both financial and non-financial information to the investors. A recent survey of more than 100 leading corporates conducted by the Confederation of Indian Industries (CII), reveals that around 90 per cent of the respondents expect to be more transparent in reporting financial information in the near term; whereas 63 per cent of the respondents say that they will be more transparent in disclosing non-financial information. Around 88 % of the respondents believe that they will benefit from greater transparency.

The ‘Corporate Social Responsibility Survey 2002’ was jointly conducted by the Confederation of Indian Industry, The British Council, PriceWaterhouseCoopers and the United Nations Development Programme. The survey reveals that more than 70 per cent of the respondent companies see themselves as entities that earn profits, but through ethical practices, complying with regulatory requirements and with substantial focus on protecting the environment and improving health and safety of their employees.

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DCA may dilute boards’ accountability

The Department of Company Affairs is considering a proposal to dilute the responsibility of the board of directors. Instead, it is planning to ask companies for a compliance audit on having legal obligations fulfilled by a company secretary. This proposal has been mooted by the Institute of Company Secretaries of India (ICSI).

The certificate from a company secretary could be company’s own, it has been pointed out. It was added that the Institute has proposed that the compliance certification from the company secretary cover all the relevant laws applicable to a company, including corporate and environmental laws. The rationale behind the move lies in the fact that directors are not involved in the day-to-day affairs of a company and therefore, should not be held responsible. In the case of the nominees of financial institutions, governed by Companies Act, 1956, and government nominees, the Centre had earlier this year granted an exemption from prosecution in case of default in payment obligation in certain types.

Section 383 (A) of the Companies Act says that firm with a paid up capital as prescribed by the government are required to have a whole time secretary. The section, however, allow other companies to file a certificate from a secretary in whole time practice with the registrar of companies.






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RBI asks FIs not to lend to directors


In a move to obviate conflicts of interest in lending operations of financial institutions, the Reserve Bank of India (RBI) has directed them “not to grant” loans or advances on the security of its own share or enter in any commitment on behalf of their directors, in which they may have interest. To address the issue of reciprocal arrangements among the Fls and Banks for extending credit and non funded facilities, awarding contracts to each others directors or their kin, the RBI said, Fls should not grant loans of Rs. 25 lakh and above to any director who “hold substantial interest or is interested as one or as a guarantor.”

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© 2001 Academy of Corporate Governance