Legislative Framework of Corporate Governance in India – CS Professional Study Material
Chapter 2 Legislative Framework of Corporate Governance in India – CS Professional Governance Risk Management Compliances and Ethics Notes is designed strictly as per the latest syllabus and exam pattern.
Legislative Framework of Corporate Governance in India – Governance, Risk Management, Compliances and Ethics Study Material
Question 1.
Write short note on:
Matters to be discussed under “Management Discussion and Analysis” to be disclosed in Annual Report of listed companies. (Dec 2020, 3 marks)
Answer:
As part of the Directors Report or as an addition thereto, a Management Discussion and Analysis Report should form part of the Annual Report. This Management Discussion and Analysis should include discussion on the following matters within the limits set by the company’s competitive position:
(a) Industry structure and developments
(b) Strength and weakness
(c) Opportunities and Threats
(d) Segment-wise or product-wise performance
(e) Outlook
(f) Risks and concerns
(g) Internal control systems and their adequacy
(h) Discussion on financial performance with respect to operational performance
(i) Material developments in Human Resources, Industrial Relations front, including number of people employed.
(j) Environmental Protection and Conservation, Technological conservation, Renewable energy developments, Foreign Exchange conservation
(k) Corporate social responsibility.
Question 2.
“Companies are not entirely free to decide on how they shall handle their risks.” Discuss this statement in the light of prescribed Regulation of the SEBI (Listing Obligations & Disclosure Requirements) Regulations, 2015. (June 2012, 6 marks)
Answer:
The statement is correct: In every country there are governmental and official regulations governing health and safety at work like precautions, hygiene, environmental pollution, welfare of employees, handling of dangerous substances and many other matters relating to properties, personal injuries and othef risks. The Central Government and State Governments have enacted compulsory insurance regulations for vehicles and individuals. And in addition a firm may be obliged to insure certain risks under provisions of leases, construction and other contracts. Failure to comply with both safety and compulsory insurance regulations may constitute a criminal offence and may lead to the closure of a plant or other establishments. Thus if a firm wishes to carry on certain activities it must comply with the relevant official risk handling regulations. These will remain however, broad areas where it can exercise its own discretion to control physical or financial loss.
On its own a firm can handle risk broadly in four ways:
- Risk Avoidance: It is rare possibility to avoid a risk completely. A riskless situation is rare. Generally risk avoidance is only feasible at the planning stage of an operation.
- Risk Reduction: In many ways physical risk reduction (or loss prevention, as it is often called) is the best way of dealing with any risk situation and usually, it is possible to take steps to reduce the probability of loss.
- Risk Retention: It also known as risk assumption or risk absorption. This technique is used to take care of losses ranging from minor to major break-down of operation.
- Risk Transfer: This refers to legal assignment of cost of certain potential losses to another. The insurance of risks is to occupy an important place as it deals with those risks that could be transferred to an organization that specialize in accepting them, at a price.
Legal Provisions on Risk Management under the SEBI (Listing Obligations & Disclosure Requirements) Regulations, 2015. In terms of Regulation 17(9) and 21 of the SEBI (Listing Obligations & Disclosure Requirements) Regulations, 2015 read with Part D of Schedule II:
(1) The board of directors shall constitute a Risk Management Committee.
(2) The Risk Management Committee shall have minimum three members with majority of them being members of the board of directors, including at least one independent director and in case of a listed entity having outstanding SR Equity shares, at least two thirds of the Risk Management Committee shall comprise independent directors.
(3) The Chairperson of the Risk management committee shall be a member of the board of directors and senior executives of the listed entity may be members of the committee.
(3A) The risk management committee shall meet at least twice in a year.
(3B) The quorum for a meeting of the Risk Management Committee shall be either two members or one third of the members of the committee, whichever is higher, including at least one member of the board of directors in attendance.
(3C) The meetings of the risk management committee shall be conducted in such a manner that on a continuous basis not more than one hundred and eighty days shall elapse between any two consecutive meetings.
(4) The board of directors shall define the role and responsibility of the Risk Management Committee and may delegate monitoring and reviewing of the risk management plan to the committee and such other functions as it may deem fit such function shall specifically cover cyber security.
Provided that the role and responsibilities of the Risk Management Committee shall mandatorily include the performance of functions specified in Part D of Schedule II.
(5) The provisions of this regulation shall be applicable to top 1000 listed entities, determined on the basis of market capitalisation, as at the end of the immediate previous financial year.
The provisions of this regulation shall be applicable to:
i. the top 1000 listed entities, determined on the basis of market capitalization as at the end of the immediate preceding financial year; and,
ii. a ‘high value debt listed entity’.
(6) The Risk Management Committee shall have powers to seek ‘ information from any employee, obtain outside legal or other
professional advice and secure attendance of outsiders with relevant expertise, if it considers necessary.
C. Risk Management Committee The role of the committee shall, inter alia, include the following:
(1) To formulate a detailed risk management policy which shall include:
(a) A framework for identification of internal and external risks specifically faced by the listed entity, in particular including financial, operational, sectoral, sustainability (particularly, ESG related risks), information, cyber Security risks or any other risk as may be determined by the Committee.
(b) Measures for risk mitigation including systems and processes for internal control of identified risks.
(c) Business continuity plan.
(2) To ensure that appropriate methodology, processes and systems are in place to monitor and evaluate risks associated with the business of the Company;
(3) To monitor and oversee implementation of the risk management policy, including evaluating the adequacy of risk management systems;
(4) To periodically review the risk management policy, at least once in two years, including by considering the changing industry dynamics and evolving complexity;
(5) To keep the board of directors informed about the nature and content of its discussions, recommendations and actions to be taken;
(6) The appointment, removal and terms of remuneration of the Chief Risk Officer (if any) shall be sdbject to review by the Risk Management Committee.
The Risk Management Committee shall coordinate its activities with other committees, in instances where there is any overlap with activities of such committees, as per the framework laid down by the board of directors.
Question 3.
As a Company Secretary of ABC Ltd., prepare a Board note listing out the items that should be included in the Board Charter. (June 2013, 6 marks)
Answer:
To
The Board of Directors
ABC Ltd.
A Model Board Charter may include the following:
- Code for Board of Directors and Board Committee.
- Board Charter and Role of Board of Directors.
- Duties of the Directors.
- Role of the Board and Management.
- Procedure for selection and appointment of the Board Members.
- Board membership criteria.
- Board orientation and induction.
- Board structure and performance.
- Size of the Board.
- Board composition.
- Tenure of Board Members.
- Compensation to Directors.
- Ethics and conflicts of interest.
- Board’s interaction with Institutional Investors, Press, Customer etc.
- Selection of Chairman and Chief Executive Officer.
- Selection of Lead Independent Director.
- Board interaction with senior management.
- Board meeting.
- Remuneration committee charter.
- Board Performance Evaluation.
- Director liability insurance.
Sd\-
Company Secretary
Question 4.
“Indian legislative framework supports transparency and disclosure by corporates.” Explain. (June 2014, 4 marks)
Answer:
Indian legislative framework supports transparency and disclosure by corporates
The heart of corporate governance is transparency, disclosure, accountability and integrity. Legal and regulatory framework of corporate governance in India is mainly covered under the SEBI guidelines, SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 and Companies Act, 2013, however, it is not restricted to only SEBI Guidelines and the Companies Act, 2013. A gamut of legislations like the Competition Act, the Consumer Protection Laws, the Labour Laws, the Environment Laws, the Anti-Money Laundering Laws etc. seeks to ensure good governance practices among the corporates.
It is to be borne in mind that mere legislation does not ensure good governance. Good governance flows from ethical business practices even when there is no legislation. Corporate governance is not just a legal concept, it is a governance concept, it is something which has to come from within. However, one can not have abstract concepts applicable to corporates at large and there lies the need for a legislative framework. In Indian context, there is no single apex regulatory body which can be said to – be the regulator of corporates but there exists a coordination mechanism among various functional regulators.
For example, in India, we have different regulators for the following:
- Corporates (MCA)
- Capital Market and Stock Exchanges (SEBI)
- Money Market and Banking (RBI) –
- Insurance Life and Non life (IRDA)
- Comrnunication (TRAI)
- Foreign Business (FIPB/SIA)
- Imports and Exports (FEMA, DGFT)
- Intermediaries, Banking Companies and Insurance Business (FIU India)
- Listed Companies, Stock Brokers (Stock Exchanges)
- Professions (Professional Institutes like ICSI, ICAI, ICAI (CMA) etc.)
The success of regulation rests on the intention and integrity of the regulator and the regulated.
A common law system operates in India. Entities are incorporated as companies in terms of the Companies Act, 2013 and governed by the Companies Act, 2013 (as amended from time to time). The Companies Act is administered by the Ministry of Corporate Affairs. The Securities and Exchange Board of India (SEBI) is the prime regulatory authority which regulates all aspects of securities market enforces the Securities Contracts (Regulation) Act including the stock exchanges. Companies that are listed on the stock exchanges are required to comply with the. SEBI (Listing Obligations & Disclosure Requirements) Regulations, 2015.
Question 5.
How is the Board size of companies determined? (June 2015, 2 marks)
Answer:
Board size is an important determinant of board effectiveness. The size should be large enough to secure sufficient expertise on the board, but not so large that productive discussion is impossible.
With regard to the Board size of companies, the applicable provisions are:
1. Section 149 of the Companies Act, 2013
2. Regulation 17(1) of the SEBI (Listing Obligations & Disclosure Requirements) Regulations, 2015
Section 149 (1) of the Companies Act, 2013 contains provisions regarding the composition of Board of Directors. It stipulates the minimum number of director as three in case of public company, two in case of private company and one in case of One Person Company. The maximum number of directors stipulated is 15. However, a company may appoint more than 15 directors after passing a special resolution in General Meeting.
(Or)
(i) You are Company Secretary of a listed company.
You have been asked to prepare report on corporate governance to be included in the annual report of the company. Briefly explain the major contents of such report. (June 2016, 5 marks)
Answer:
The following disclosures shall be made in the Section on the corporate governance of the annual report.
1. A brief statement on listed entity’s philosophy on code of governance.
2. Board of Directors:
- composition and category of directors;
- attendance of each director at the different types of meeting;
- number of other board of directors or committees in which a directors is a member or chairperson;
- number of meetings of the board of directors;
- disclosure of relationships between directors interse;
- number of shares and convertible instruments held by non-executive directors;
- web link where details of familiarisation programmes imparted to independent directors is disclosed.
3. Audit Committee:
- brief description of terms of reference;
- composition, name of members and chairperson;
- meetings and attendance during the year.
4. Nomination and Remuneration Committee:
- brief description of terms of reference;
- composition, name of members and chairperson;
- meeting and attendance during the year;
- performance evaluation criteria for independent directors.
5. Remuneration of Directors:
- all pecuniary relationship or transactions of the non-executive directors vis-a-vis the listed entity;
- criteria of making payments to non-executive directors;
- disclosures with respect to remuneration.
6. Stakeholders’ grievance committee:
- name of non-executive director heading the committee;
- name and designation of compliance officer;
- number of shareholders’ complaints received so far;
- number not solved to the satisfaction of shareholders;
- number of pending complaints.
7. General body meetings:
- location and time, where last three annual general meetings held;
- whether any special resolutions passed in the previous three annual general meetings;
- whether any special resolution passed last year through postal ballot details of voting pattern;
- person who conducted the postal ballot exercise;
- whether any special resolution is proposed to be conducted through postal ballot;
- procedure for postal ballot.
8. Means of communication
9. General shareholder information
10. Other Disclosures:
- disclosures on materially significant related party transactions;
- details of non-compliance by the listed entity, penalties, structures imposed on the listed entity by stock exchange(s) or the board or any statutory authority, on any matter related to capital markets, during the last three years;
- details of establishment of vigil mechanism, whistle blower policy, and affirmation that no personnel has been denied access to the audit committee;
- details of compliance with mandatory requirements and adoption of the non-mandatory requirements;
- web link where policy for determining ‘material’ subsidiaries is disclosed;
- web link where policy on dealing with related party transactions;
- disclosure of commodity price risks and commodity hedging activities.
11. Non-compliance of any requirement of corporate governance report of sub-paras (2) to (10) above, with reasons thereof shall be disclosed.
12. The corporate governance report shall also disclose the extent to which the discretionary requirements as specified in Part E of Schedule II have been adopted.
13. The disclosures of the compliance with corporate governance requirements specified in Regulation 17 to 27 and clauses (b) to (i) of sub-regulation (2) of Regulation 46 shall be made in the section on corporate governance of the annual report.
Question 6.
Answer the following in brief:
Briefly explain the role of due diligence report in helping to curb occurrence of related party transactions. (Dec 2016, 2 marks)
Answer:
A related-party transaction can also play a beneficial role by saving transaction costs and improving the operating efficiency of a company. In other words, all RPTs are not abusive. In fact, there may be several such transactions that are unavoidable because they make commercial sense for the company; if companies are prohibited from entering into such transactions, it might work against the principle of maximising the shareholder value.
(b) How does Audit Committee play a significant role in corporate governance in India? (2017, 5 marks)
(c) What are the guidelines provided in the Listing Obligation and Disclosure Requirements (LODR) Rules 2015 related to annual report of companies? (June 2017, 5 marks)
Answer:
(b) As per Part C of Schedule ‘ll (Corporate Governance) of SEBI (LODR) Regulations, 2015, the role of the audit committee shall include the following:
1. oversight of the listed entity’s financial reporting process and the disclosure of its financial information to ensure that the financial statement is correct, sufficient and credible;
2. recommendation for appointment, remuneration and terms of appointment of auditors of the listed entity;
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 and auditor’s report thereon before submission to the board for approval, with particular reference to:
(a) matters required to be included in the director’s responsibility statement to be included in the board’s report in terms of clause
(c) of sub-section (3) of Section 134 of the Companies Act, 2013;
(b) changes, if any, in accounting policies and practices and reasons for the same;
(c) major accounting entries involving estimates based on the exercise of judgment by management;
(d) significant adjustments made in the financial statements arising out of audit findings;
(e) compliance with listing and other legal requirements relating to financial statements;
(f) disclosure of any related party transactions;
(g) modified opinion(s) in the draft audit report;
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 and monitoring the auditor’s independence and performance, and effectiveness of audit process;
8. approval or any subsequent modification of transactions of the listed entity with related parties;
9. scrutiny of inter-corporate loans and investments;
10. valuation of undertakings or assets of the listed entity, wherever it is necessary;
11. evaluation of internal financial controls and risk management systems;
12. reviewing, with the management, performance of statutory and internal auditors, adequacy of the internal control systems;
13. 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;
14. discussion with internal auditors of any significant findings and follow up there on;
‘15. 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;
16. 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;
17. 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;
18. to review the functioning of the whistle blower mechanism;
19. approval of appointment of chief financial officer after assessing the qualifications, experience and background, etc. of the candidate;
20. carrying out any other function as is mentioned in the terms of reference of the audit committee.
21. reviewing the utilization of loans and/ or advances from/investment by the holding company in the subsidiary exceeding rupees 100 crore or 10% of the asset size of the subsidiary, whichever is lower including existing loans / advances / investments existing as on the date of coming into force of this provision.
22. consider and comment on rationale, cost-benefits and impact of schemes involving merger, demerger, amalgamation etc., on the listed entity and its shareholders.
(c) Annual Report [Regulation 34]
1. The listed entity shall submit to the stock exchange and publish on its website-
(a) a copy of the annual report sent to the shareholders along with the notice of the annual general meeting not later than the day of commencement of dispatch to its shareholders;
(b) in the event of any changes to the annual report, the revised copy along with the details of and explanation for the changes shall be sent not later than 48 hours after the annual general meeting.
2. The annual report shall contain the following:
(a) audited financial statements i.e. balance sheets, profit and loss accounts etc. [and Statement on Impact of Audit Qualifications as stipulated in regulation 33(3)(d), if applicable;]
(b) consolidated financial statements audited by its statutory auditors;
(c) dash flow statement presented only under the indirect method as prescribed in Accounting Standard-3 or Indian Accounting Standard 7, as applicable, specified in Section 133 of the Companies Act, 2013 read with relevant rules framed thereunder or as specified by the Institute of Chartered Accountants of India, whichever is applicable;
(d) directors report;
(e) management discussion and analysis report – either as a part of directors report or addition thereto;
(f) for the top one thousand listed entities based on market capitalization, a business responsibility report describing the initiatives taken by the listed entity from an environmental, social and governance perspective, in the format as specified by the Board from time to time:
Provided that the requirement of submitting a business responsibility report shall be discontinued after the financial year
2021- 22 and thereafter, with effect from the financial year
2022- 23, the top one thousand listed entities based on market capitalization shall submit a business responsibility and sustainability report in the format as specified by the Board from time to time:
Provided further that even during the financial year 2021 -22, the top one thousand listed entities may voluntarily submit a business responsibility and sustainability report in place of the mandatory business responsibility report:
Provided further that the remaining listed entities including the entities which have listed their specified securities on the SME Exchange, may voluntarily submit such reports.
Explanation: For the purpose of this clause, market capitalization shall be calculated as on the 31 st day of March of every financial year.
Question 7.
“Corporate governance is needed to create a corporate culture of transparency, accountability and disclosure”, comment. (Dec 2017, 5 marks)
Answer:
Corporate Governance is needed to create a corporate culture of transparency, accountability and disclosure. It refers to compliance with all the moral and ethical values, legal framework and voluntarily adopted practices.
(a) Corporate Performance
(b) Enhanced Investor Trust
(c) Better Access To Global Market
(e) Easy Finance From Institutions
(f) Enhancing Enterprise Valuation
(g) Reduced Risk of Corporate Crisis and Scandals
(h) Accountability
Question 8.
Answer the following in brief:
What are Companies (Meeting of Board and its Powers) Second Amendment Rules 2017? Briefly explain. (June 2018, 2 marks)
Answer:
The details of Companies (Meeting of Board and its Powers) Second Amendment Rules, 2017 are as under:
- Meeting through electronic mode: Any director who intends to participate in the meeting through electronic mode may intimate about such participation at the beginning of the calendar year and such declaration shall be valid for one year. Such declaration shall not debar him from participation in the meeting in person in which case he shall intimate the company efficiently in advance of his intention to participate in person.
- Preservation of draft minutes of video conferencing: When a Board meeting is held through video conferencing or other audio visual means, the draft minutes recorded shall be preserved by the company till the confirmation of the draft minutes in accordance with rule 3(12).
- Committees of the Board: The Board of directors of every listed public company and a company covered under rule 4 of the Companies (Appointment and Qualification of Directors) Rules, 2014 shall constitute an ‘Audit Committee’ and a ‘Nomination and Remuneration Committee of the Board’.
(Or)
(i) With the increasing use of internet, the listed entities have started adopting a functional website for publication of information. In the context of this, analyze the major elements to be considered in Website Disclosure Regulations. (June 2018, 5 marks)
Answer:
WEBSITE Disclosures [Regulation (46)]
The listed entity shall maintain a functional website. The listed entity shall ensure that the contents of the website are correct and shall update any change in the content of its website within two working days from the date of such change in content. The listed entity shall disseminate the following information under a separate section on its website.
(a) details of its business;
(b) terms and conditions of appointment of independent directors;
(c) composition of various committees of board of directors;
(d) code of conduct of board of directors and senior management personnel;
(e) details of establishment of vigil mechanism/ Whistle Blower policy;
(f) criteria of making payments to non-executive directors, if the same has not been disclosed in annual report;
(g) policy of dealing with related party transactions;
(h) policy for determining ‘material’ subsidiaries;
(i) details of familiarization programmes imparted to independent directors including the following details:-
i. number of programmes attended by independent directors (during the year and on a cumulative basis till date),
ii. number of hours spent by independent directors in such programmes (during the year and on cumulative basistill date), and
iii. other relevant details
(j) the email address for grievance redressal and other relevant details;
(k) contact information of the designated officials of the listed entity who are responsible for assisting and handling investor grievances;
(l) financial information including:
i. notice of meeting of the board of directors where financial results shall be discussed; ^.
ii. financial results, on conclusion of the meeting of the board of directors where the financial results were approved;
iii. complete copy of the annual report including balance sheet, profit and loss account, directors report, corporate governance report etc;
(m) shareholding pattern;
(n) details of agreements entered into with the media companies and/or their associates, etc;
(o) schedule of analysts or institutional investors meet and presentations made by the listed entity to analysts or institutional investors.
Explanation: For the purpose of this clause ‘meet’ shall mean group meetings or group conference calls conducted physically or through digital means;
(a) audio or video recordings and transcripts of post earnings/quarterly calls, by whatever name called, conducted physically or through digital means, simultaneously with submission to the recognized stock exchange(s), in the following manner:
(i) the presentation and the audio/video recordings shall be promptly made available on the website and in any case, before the next trading day or within twenty-four hours from the conclusion of such calls, whichever is earlier;
(ii) the transcripts of such calls shall be made available on the website within five working days of the conclusion of such calls: Provided that— a. The information under sub-clause (i) shall be hosted on the website
of the listed entity for a minimum period of five years and thereafter as per the archival policy of the listed entity, as disclosed on its website.
b. The information under sub-clause (ii) shall be hosted on the website of the listed entity and preserved in accordance with clause (a) of regulation 9.
The requirement for disclosure(s) of audio/video recordings and transcript shall be voluntary with effect from April 01, 2021 and mandatory with effect from April 01,2022;
(p) new name and the old name of the listed entity for a continuous period of one year, from the date of the last name change;
(q) items in sub-regulation (1) of regulation 47.
(r) with effect from October 1,2018, all credit ratings obtained by the entity for all its outstanding instruments, updated immediately as and when there is any revision in any of the ratings.
(s) separate audited financial statements of each subsidiary of the listed entity in respect of a relevant financial year, uploaded at least 21 days prior’to the date of the annual general meeting which has been called to inter alia consider accounts of that financial year.
Provided that a listed entity, which has a subsidiary incorporated outside India:
(a) where such subsidiary is statutorily required to prepare consolidated financial statement under any law of the country of its incorporation, the requirement of this proviso shall be met if consolidated financial statement of such subsidiary is placed on the website of the listed entity;
(b) where such subsidiary is not required to get its financial statement audited under any law of the country of its incorporation and which does not get such financial statement audited, the holding Indian listed entity may place such unaudited financial statement on its website and where such financial statement is in a language other than English, a translated copy of the financial statement in English shall also be placed on the website;
(t) secretarial compliance report as per sub-regulation (2) of regulation 24A of these regulations;
(u) disclosure of the policy for determination of materiality of events or information required under clause (ii), sub-regulation (4) of regulation 30 of these regulations;
(v) disclosure of contact details of key managerial personnel who are authorized for the purpose of determining materiality of an event or information and for the purpose of making disclosures to stock exchange(s) as required under sub-regulation (5) of regulation 30 of these regulations;
(w) disclosures under sub-regulation (8) of regulation 30 of these regulations;
(x) statements of deviation(s) or variation(s) as specified in regulation 32 of these regulations;
(y) dividend distribution policy by listed entities based on market capitalization as specified in sub-regulation (1) of regulation 43A;
(z) annual return as provided under section 92 of the Companies Act, 2013 and the rules made thereunder.
(b) In Indian context, there is no single apex regulatory body which can be said to be the regulator of corporate but there exists a coordination, mechanism among various functional regulators. Explain by providing examples. (June 2018, 5 marks)
Answer:
In Indian context, there is no single apex regulatory body which can be said to be the regulator of corporate but there exists a coordination mechanism among various functional regulators.
For example, in India, we have different regulators for the following:
- Corporates (MCA)
- Capital Market and Stock Exchange (SEBI)
- Money Market and Banking (RBI)
- Insurance – Life and Non-Life (IRDA)
- Communication (TRAI)
- Import and Export (FEMA, DGFT)
- Professionals (Professionals Institutes like ICAI, ICSI, ICWAI etc.)
(c) Now the days, protection of. the Investors’ wealth is big challenge before the Government. In insurance sector, under IRDA’s Regulation, various committees are mandatorily required to be constituted by the Companies. Highlight the name of the committees and describe the role of With Profit Committee. (Dec 2019, 3 marks)
Answer:
IRDA advises all insurers that it is mandatory to establish Committees for Audit, Investment, Risk Management, Policyholder Protection, Nomination and Remuneration, Corporate Social Responsibility (only for insurers earning profits).
Following are the names of few committees:
- Audit Committee (mandatory)
- Investment Committee (mandatory)
- Risk Management Committee (mandatory)
- Policyholder Protection. Committee (mandatory)
- Nomination and Remuneration Committee (mandatory)
- Corporate Social Responsibility Committee (’CSR Committee’) (mandatory)
- With Profits Committee:
With Profits Committee
The Authority has issued IRDA (Non-Linked Insurance Products) Regulations 2013, which lay down the framework about the With Profit Fund Management and Asset sharing, among other things. In terms of these Regulations, every Insurer transacting life insurance business shall constitute a With Profits Committee comprising of an Independent Director, the CEO, The Appointed Actuary and an independent Actuary.
The Committee shall meet as often as is required to transact the business and carry out the functions of determining the following:
- The share of assets attributable to the policyholders.
- The investment income attributable to the participating fund of policyholders.
- The expenses allocated to the policyholders.
The report of the With Profits Committee in respect of the above matters should be attached to the Actuarial Report and Abstract furnished by the insurers to the Authority.
(Or)
(ii) You are the Company Secretary of XYZ Insurance Co. Ltd. The Board of Directors of your company requires you to draw up a policy based on the principles spelt out in the stewardship code for insurers in India. (Dec 2020, 5 marks)
Answer:
Policy of XYZ Insurance Co. Ltd. based on the Principles of Stewardship Code for Insurers
IRDAI has issued the guidelines on Stewardship Code for Insurers in India in the form of a set of principles to be adopted by them. It requires the insurers to draft a policy as regards their conduct at general meetings of their investee companies to improve their governance. The Policy shall be duly approved by the Board of Directors. As an insurance company, XYZ Insurance Co. Ltd. shall approve a policy in this regard.
The Policy of XYZ Insurance Co. Ltd. shall incorporate the following:
(i) The company discharges its stewardship responsibilities and publicly disclose it. The company’s stewardship responsibilities are monitoring and engaging with companies on matters such as strategy, performance, risk, capital structure, and corporate governance, including culture and remuneration.
(ii) The company manages conflicts of interest in fulfilling its stewardship responsibilities and publicly disclose it. The company identifies and manages conflicts of interest with the aim of taking all reasonable steps to put the interests of their client or beneficiary first.
(iii) The Company monitors its investee companies. The company regularly monitors its investee companies in respect of its performance, leadership effectiveness, succession planning, corporate governance, reporting and other parameters. The company nominates directors on the board of its investee company for active involvement.
(iv) The company intervenes in its investee companies. The company intervenes when it has concerns about the investee company’s strategy, performance, governance, remuneration or approach to risks, including those that may arise from social and environmental matters. In case of non-resolution of company’s concerns, the company escalates the matter
(v) The company collaborates with other institutional investors, where required, to preserve the interests of the policyholders (ultimate investors) and discloses the collaboration.
(vi) The voting decisions of the company aims to promote the overall growth of the investee companies and, in turn, enhance the value of their investors. The voting policy of the company, voting decisions and the rationale is disclosed on its website.
(vii) The company reports periodically on its stewardship activities. The company also provides a periodic report to its policyholders of how the company has discharged its responsibilities, in a easily understandable format. But the company do not intend to manage the affairs of the investee company. The company may also at any time decide to sell its holding in the investee company, if it is in the best interest of clients or beneficiaries.
Question 9.
(a) The ‘Fit and Proper’ criteria for nomination of directors
applies only to private sector banks. Do you agree with the statement? Describe the phrase‘Fit and Proper’. (Aug 2021, 5 marks)
Answer:
Yes, some of the recommendations made by the Ganguly Committee are applicable only to private sector banks. Among some of the recommendations, one of the eligibility criteria for nomination of directors is ‘fit and proper’. The recommendations in this regard are as under:
(a) The Board of Directors of the banks while nominating/co-opting directors should be guided by certain broad lit and proper’ norms for directors, viz. formal qualification, experience, track record, integrity etc. For assessing integrity and suitability features like criminal records, financial position, civil actions initiated to pursue personal debts, refusal of admission to or expulsion from professional bodies, sanctions applied by regulators or similar bodies, previous questionable business practices etc. should be considered. The Board of Directors may, therefore, evolve appropriate systems for ensuring ‘fit and proper’ norms for directors, which may include calling for information by way of self-declaration, verification reports from market, etc.
(b) The following criteria, which is in vogue in respect of nomination to the boards of public sector banks, may also be followed for nominating independent/ non-executive directors on private sector banks:
(i) The candidate should normally be a graduate (which can be relaxed while selecting directors for the categories of farmers, depositors, artisans, etc.)
(ii) He/she should be between 35 and 65 years of age.
(iii) He/she should not be a Member of Parliament/Member of Legislative Assembly/Member of Legislative Council.
(Or)
(i) Which Authority issued code on Stewardship for Insurer in India ? What are the Principles of such Guidelines? (Aug 2021, 5 marks)
Answer:
IRDAI had issued a code for stewardship for the insurance companies vide its circular ref: IRDA/F&A/GDL/CMP/059/03/2017 on 20th March, 2017. The code was in the form of a set of principles which the insurance companies needed to adopt and made applicable from FY 2017-18. Guidelines for each principle under the code had also been prescribed by IRDAI. As per the code, insurer should have a board approved stewardship policy which should identify and define the stewardship responsibilities that the insurer wishes to undertake and how the policy intends to fulfill the responsibilities to enhance the wealth of its policyholders who are ultimate beneficiaries.
Further, the IRDAI decided to review the existing guidelines on stewardship code based on the experience in implementation, compliance by the insurers and the recent developments in this regard. Accordingly, a revised guidance on stewardship code has been prepared and known as Revised Guidelines on Stewardship Code for Insurers in India. The Principles Under this code are:
Principles
- Insurers should formulate a policy on the discharge of their stewardship responsibilities and publicly disclose it.
- Insurers should have a clear policy on how they manage conflicts of interest in fulfilling their stewardship responsibilities and publicly disclose it.
- Insurers should monitor their investee companies.
- Insurers should have a clear policy on intervention in their investee companies.
- Insurers should have a clear policy for collaboration with other institutional investors, where required, to preserve the interests of the policyholders (ultimate investors), which should be disclosed.
- Insurers should have a clear policy on voting and disclosure of voting activity.
- Insurers should report periodically on their stewardship activities.
Question 10.
“Good governance is a hallmark of the organisational objectives and values. A properly structured Board capable of taking independent and objective decisions is the pivot of Corporate Governance. A Board should, therefore, be a mix of executive and independent directors with a variety of experience and core competence so that it may effectively fulfil its responsibilities by laying down policies and strategies, monitoring managerial performance objectively.”
In the light of the above statement, discuss the role of independent directors in the Corporate Governance with specific reference to the code of conduct of independent directors as per the provisions of the Companies Act, 2013. [Old Syllabus] (Dec 2014, 10 marks)
Answer:
Section 149 (8) of the Act prescribes that the company and independent directors shall abide by the provisions specified in Schedule IV regarding code for independent directors. It is a guide to professional conduct for independent directors. Adherence to these standards by independent directors and fulfilment of their responsibilities in a professional and faithful manner will promote confidence of the investment community, particularly minority shareholders, regulators and companies in the institution of independent directors.
Code of Conduct includes:
- Guidelines of professional conduct,
- Role and functions, duties,
- Manner of appointment, re-appointment,
- Resignation or removal,
- Separate meetings,
- Evaluation mechanism.
Role and functions:
The independent directors shall:
(1) help in bringing an independent judgment to bear on the Board’s deliberations especially on. issues of strategy, performance, risk management, resources, key appointments and standards of conduct;
(2) bring an objective view in the evaluation of the performance of board and management;
(3) scrutinize the performance of management in meeting agreed goals and objectives and monitor the reporting of performance;
(4) satisfy themselves on the integrity of financial information and that financial controls and the systems of risk management are robust and defensible;
(5) safeguard the interests of all stakeholders, particularly the minority shareholders;
(6) balance the conflicting interest of the stakeholders;
(7) determine appropriate levels of remuneration of executive directors, key managerial personnel and senior management and have a prime role in appointing and where necessary recommend removal of executive directors, key managerial personnel and senior management;
(8) moderate and arbitrate in the interest of the company as a whole, in situations of conflict between management and shareholder’s interest.
Question 11.
Priya Ltd. declared dividend but failed to pay the dividend in time which created grievances among shareholders and debentureholders. Describe the provisions of law available for the beneficiaries. (Dec 2015, 5 marks)
Answer:
Shareholders/ Investors Grievance Committee looking into the reasons for substantial defaults in the payments to the depositors, debenture holders, shareholders (in case of non-payment of declared dividends) and creditors. Further, In terms of Regulation 20 of the SEBI (Listing Obligations & Disclosure Requirements) Regulations, 2015, a board committee under the chairmanship of a non-executive director shall be formed to specifically look into various aspects of interest of shareholders, debenture holders and other security holders. This Committee shall be designated as ‘Shareholders/ Investors Grievance Committee’.
Question 12.
Ms. Nidhi is the Company Secretary of ZYCO Bank, the merchant banker for Synergy Ltd., which had recently carried out an issue and allotment of Equity Shares. Draft a post issue advertisement to be circulated in daily newspapers. (June 2017, 5 marks)
Answer:
The post-issue merchant banker shall ensure that advertisement giving details relating to oversubscription, basis of allotment, number, value and percentage of all applications including ASBA (Application Supported by Blocked Amount) number, value and percentage of successful allottees for all applications, date of completion of despatch of refund orders or instructions to Self Certified Syndicate Banks by the Registrar, date of despatch of certificates and date of filing of listing application, etc. is released.
An assumed format of advertisement:
| Post Issue Advertisement of Synergy Ltd. (Equity Shares) Carried out by Zyco Bank was a huge success Shares issued:-100,000 Shares subscribed: 328,000 Oversubscription: 3.28 times Basis of Allotment: Pro-rata allotment made to 150,000 share (Green Shoe Option) Applied through ASBA: 80% Process complete: 30/09/2016 Date of completion of despatch of refund orders: 08/10/16 Date of despatch of Certificates: 15/10/16 Date of filing of listing application: 10/10/16 |
Merchant Banker to the Issue
Place: ____________
Date : ____________
Question 13.
India has been flooded with various Ponzi schemes that take advantage of suspicious investors looking for alternate banking options. Lacking access to formal banks, low-income Indians often rely on informal banking. These informal banks invariably consist of money lenders who charge interest at inflated rates and are soon replaced by more sophisticated methods of cunning people through disguised Ponzi schemes. Fund raising is done through legal activities such as collective investment schemes, non¬convertible debentures and preference shares, as well as illegally through hoax financial instruments such as fictitious ventures in construction and tourism. The rapid spread of Ponzi schemes, especially in North India has various causes, not the least of which, include the lack of awareness about banking norms, steadily falling interest rates, lack of legal action against such activities and the security of political patronage.
The Ponzi scheme run by Saradha Group, collected money from investors by issuing redeemable bonds and secured debentures and promising incredulously high profits from reasonable investments. Local agents were hired throughout the State of West Bengal and given huge cash payouts from investor deposits to expand quickly, eventually forming a conglomerate of more than 200 companies.
SEBI first detected something suspicious in the group’s activities in 2009. It challenged Saradha because the company had not complied with the provisions of Indian Companies Act, which requires any company raising money from more than 50 investors to have a formal prospectus, and categorical permission from SEBI, the market regulator. The Saradha Group sought to evade prosecution by expanding the number of companies, thus creating a convoluted web of interconnected players. This created innumerable complications for SEBI, which labored to investigate Saradha in spite of them. In 2012, Saradha decided to switch it up by resorting to different fundraising activities, such as collective investment schemes (CIS) that were disguised as tourism packages, real estate projects, and the like. Many investors were duped into investing in what they thought was a chit fund. This too, was an attempt to get SEBI off its back, as chit funds fall under the jurisdiction of the State Government, not SEBI. However, SEBI managed to identify that group was not, in fact, raising capital through a chit fund scheme and ordered Saradha to immediately stop its activities until cleared by SEBI. SEBI had previously warned the State Government of West Bengal about Saradha Group’s hoax chit fund activities in 2011 but to no avail. Both, the Government as well as Saradha, generally ignored SEBI until the company finally went bust in 2013.
After the scandal broke, an inquiry commission investigated the group, and a relief fund of approximately US $90 million was created to protect low- income investors. In 2014, the Supreme Court transferred all investigations in the Saradha case to the Central Bureau of Investigation (CBI) amid allegations of political interference in the state-ordered investigation. In the light of the above, you are required to answer the following questions:
(i) Explain Ponzi scheme run by Saradha Group. Why chit funds or Ponzi schemes still persists in India inspite of many scams? Comment. (5 marks)
(ii) Discuss Indian legislations and provisions to curb Ponzi schemes. (June 2018, 5 marks)
Answer:
(i) The Ponzi Scheme run by Saradha Group, collected money from investors by issuing redeemable bonds and secured debentures and promising incredulously high profits from reasonable investments.
Chit funds or Ponzi schemes still persists in India inspite of many scams due to the following reasons:
- Lack of awareness about banking norms
- Steadily falling interest rate
- Lack of legal action against such activities
- The security of political patronage
- Under the jurisdiction of the State Government, not SEBI
(ii) Provisions to curb Ponzi schemes
Chit funds in India are governed by the Chit Funds Act, 1982 and other State laws. Under the Act, the Central Government can choose to notify the Act in different states on different dates. State are responsible for notifying rules and have the power to exempt certain chit funds from the provisions of the Act.
SEBI (Collective Investment Schemes) Regulation, 1999 provides details of compulsory registration, business activities and obligations, trustees and their obligations, collective investment scheme, general obligations, inspection and audit, etc., of Collective Investment Management Company.
Though SEBI’s CIS Regulations are in force since 1.999, yet till date only one company got its registration with the SEBI. Many other entities are playing and raising crores of Rupees from the public by portraying the rosy pictures in the name/activity of real estate, plantation, teak-wood, mutual investment, etc., but the real motto of such entities behind the curtain is the greed to create their own financial empire. Looking to the increasing number of cases of violations of the CIS Regulations, it is high time to give more powers to the SEBI to arrest such cases at the early stage.
SEBI Act made it mandatory for money pooling schemes collecting in excess of ? 100 crore to register with SEBI unless already registered with another regulatory agency and also prescribes penalties where such schemes operate without SEBI registration. The expanded definition of “collective investment scheme” now enables SEBI to curb, contract and prevent such schemes.
Besides this, most of the States in India have enacted Protection of Interest of Depositors in Financial Establishments Act. Many States have started State level co-ordination for exchange of information on fraudulent fund raising.
Question 14.
ABC Ltd. is a public limited company listed on NSE and BSE. The company is enjoying cash credit limit of ? 10 crores with Trust Bank against the book debts. The said cash credit limit is renewed from time to time and for this purpose the Trust Bank requires the financial papers from the company which include the Balance Sheet and Profit and Loss Account, list of sundry debtors (with age-wise outstanding) and projected financial data viz: Turnover, Profit, Non-performing debtors, etc.
The company was in the process of the finalisation of its annual accounts as of 31st March, 2018 and the same was to be put before the Audit Committee of Board (ACB), meeting of which was scheduled to be held on 5th July, 2018, for recommendation to the Board of Directors. The CC limit with the Trust Bank which was due for renewal from 31st March, 2018, renewed on ad-hoc basis for three months only on the basis of provisional data, subject to the submission of final papers, else the CCJimit account of the company will turned in to non-performing account. Since the Trust Bank also wants the CC Limit account in performing status, it insisted the company to submit the final data even before the approval of the ACB/Board in order to renew the limit and prevent the account from turning into NPA.
Based on the above facts the Company approaches you, being a Corporate Law Consultant. ,
Answer the following queries raised by the ABC Ltd.:
(a) Whether HP Ltd. can provide the financial information (which is price sensitive information) to its banker without getting it perused and approved by the ACB and Board? Quote your answer with relevant provisions of law.
(b) If the Manager of the Trust Bank Branch, where the CC Limit account is maintained, is provided the unapproved financial papers and on the basis of these financial papers, he comes to know that company has shown profit with a rise of 20% from the previous year, so he purchased the shares of the company from the market with lesser price (in expectation of high jump in price after declaration of the result). When the results were officially declared by the company, the shares jumped to 30% and the branch manager off loaded the purchases so made. Whether the Manager will be treated as Insider as per the SEBI (Prohibition of Insider Trading) Regulations, 2015?
(c) What are the provisions relating to the trading when a person is in possession of unpublished price sensitive information as per the SEBI , (Prohibition of Insider Trading) Regulations, 2015 ?
(d) What are the penal provisions for insider trading as prescribed in the Companies Act, 2013 and SEBI Act, 1992. (June 2019, 5 marks each)
Answer:
(a) In terms of Sub-Regulation (1) of Regulation 3 of SEBI (Prohibition of Insider Trading) Regulations, 2015, no insider shall communicate, provide, or allow access to any unpublished price sensitive information, relating to a company or securities listed or proposed to be listed, to any . person including other insiders except where such communication is in furtherance of legitimate purposes, performance of duties or discharge of legal obligations.
Sub-Regulation (2) of Regulation 3 states that no person shall procure from or cause the communication by any insider of unpublished price sensitive information relating to a company or securities listed or proposed to be listed, except in furtherance of legitimate purposes, performance of duties or discharge of legal obligations.
Sub-Regulation (2A) of Regulation 3 provides that the board of directors of a listed company shall make a policy for determination of “legitimate purposes” as a part of “Codes of Fair Disclosure and Conduct” formulated under regulation 8.
The Explanation to Sub-Regulation (2A) of Regulation 3 further * clarifies that for the purpose of illustration, the term “legitimate purpose” shall include sharing of unpublished price sensitive information in the ordinary course of business by an insider with partners, collaborators, lenders, customers, suppliers, merchant bankers, legal advisors, auditors, insolvency professionals or other advisors or consultants, provided that such sharing has not been carried out to evade or circumvent the prohibitions of these regulations.
Thus, as a prudent rule the price sensitive information should not be passed on until it is for legitimate purposes. However, as per Explanation to Sub-Regulation (2A), unpublished price sensitive information can be shared with banker/lender for legitimate purposes like renewal of Credit limits provided that such sharing has not been carried out to evade or circumvent the prohibitions of these regulations.
(b) Sub-Regulation (2B) of Regulation 3 of SEBI (Prohibition of Insider Trading) Regulations, 2015 provides that any person in receipt of unpublished price sensitive information pursuant to a “legitimate purpose” shall be considered an “insider” for purposes of these regulations and due notice shall be given to such persons to maintain confidentiality of such unpublished price sensitive information in compliance with these regulations.
According to the above para, the branch manager who is in receipt of unpublished price sensitive information for the legitimate purpose is an insider under the regulations.
Also as per Regulation 4(1), no insider shall trade in securities that are listed or proposed to be listed on a stock exchange when in possession of unpublished price sensitive information. When a person who has traded in securities has been in possession of unpublished price sensitive information, his trades would be presumed to have been motivated by the knowledge and awareness of such information in his possession.
(c) Regulation 4 of SEBI (Prohibition of Insider Trading) Regulations, 2015 deals with the provisions relating to trading when in possession of unpublished price sensitive information.
Regulation 4(1): No insider shall trade in securities that are listed or proposed to be listed on a stock exchange when in possession of unpublished price sensitive information:
Explanation: When a person who has traded in securities has been in possession of unpublished price sensitive information, his trades would be presumed to have been motivated by the knowledge and awareness of such information in his possession.
Provided that the insider may prove his innocence by demonstrating the circumstances including the following:
(i) The transaction is an off-market inter-se transfer between insiders who were in possession of the same unpublished price sensitive information without being in breach of regulation 3 and both parties had made a conscious and informed trade decision. Provided that such unpublished price sensitive information was not obtained under sub-regulation (3) of regulation 3 of these regulations. Provided further that such off-market trades shall be reported by the insiders to the company within two working days. Every company shall notify the particulars of such trades to the stock exchange on which the securities are listed within two trading days from receipt of the disclosure or from becoming aware of such information.
(ii) The transaction was carried out through the block deal window mechanism between persons who were in possession of the unpublished price sensitive information without being in breach of regulation 3 and both parties had made a conscious and informed trade decision; Provided that such unpublished price sensitive information was not obtained by either person under sub-regulation (3) of regulation 3 of these regulations.
(iii) The transaction in question was carried out pursuant to a statutory or regulatory obligation to carry out a bona fide transaction.
(iv) The transaction in question was undertaken pursuant to the exercise of stock options in respect of which the exercise price was pre-determined in compliance with applicable regulations.
(v) In the case of non -individual insiders:
(a) The individuals who were in possession of such unpublished price sensitive information were different from the individuals taking trading decisions and such decision-making individuals were not in possession of such unpublished price sensitive information when they took the decision to trade; and
(b) Appropriate and adequate arrangements were in place to ensure that these regulations are not violated and no unpublished price sensitive information was communicated by the individuals. Possessing the information to the individuals taking trading decisions and there is no evidence of such arrangements having been breached.
(vi) The trades were pursuant to a trading plan set up in accordance with regulation 5.
Regulation 4(2): In the case of connected persons the onus of establishing, that they were not in possession of unpublished price sensitive information, shall be on such connected persons and in other cases, the onus would be on the Board.
Regulation 4(3): The Board may specify such standards and requirements, from time to time, as it may deem necessary for the purpose of these regulations.
(d) Section 195 of the Companies Act 2013, which was dealing with the matter relating to insider trading has been omitted by the Companies Amendment Act, 2017 w.e.f 09/ 02/ 2018.
However, penalty for insider trading is provided under Section 15G of the SEBI Act, 1992. It provides that if any insider who,:
(i) either on his own behalf or on behalf of any other person, deals in securities of a body corporate listed on any stock exchange on the basis of any unpublished price-sensitive information; or
(ii) communicates any unpublished price-sensitive information to any person, with or without his request for such information except as required in the ordinary course of business or under any |aw: or
(iii) counsels, or procures for any other person to deaf in any securities of anybody corporate on the basis of unpublished price-sensitive information, shall be liable to a penalty which shall not be less than ten lakh rupees but which may extend to twenty-five crore rupees or three times the amount Of profits made out of insider trading, whichever is higher.
Question 15.
Z Finance Pvt. Ltd. (Z) is a deposit taking Non-Banking Financial Company (NBFC-D) registered with the Reserve Bank of India (RBI) and incorporated on 7th January, 2020. Z is engaged in the business of lending and accepting deposits. The newly appointed statutory auditor of the company advised the board that the company should have board committees in place as part of corporate governance compliances, but the board of directors disagreed as the company was newly incorporated private company. Do you agree with the advice of the statutory auditor ? Explain in brief. Would your answer have been different if Z had been a non-deposit accepting NBFC ? (Dec 2021, 5 marks)
Answer:
The Reserve Bank of India in the public interest and to regulate the credit system to the advantage of the country, issued directions known as the Non-Banking Financial Companies- Corporate Governance (Reserve Bank) Directions, 2015, relating to Corporate Governance vide Notification dated April 10, 2015 and vide master circular dated July 1,2015.
These Directions require every non-deposit accepting Non-Banking Financial Company with asset size of 1500 crore and above (NBFCs-ND-SI), as per its last audited balance sheet, and all deposit accepting Non-Banking Financial Companies (NBFCs-D), henceforth called as Applicable NBFCs to constitute the following committees of the board:
(i) Audit Committee, consisting of not less than three members of its Board of Directors. And in accordance with the provisions of Section 177 of the Companies Act, 2013. The Audit Committee must ensure that an Information System Audit of the internal systems and processes is conducted at least once in two years to assess operational risks faced by the NBFCs.
(ii) Nomination committee, to ensure ‘fit and proper’ status of proposed/ existing directors with the same powers, functions and duties as laid down in Section 178 of the Companies Act, 2013.
(iii) Risk Management committee, to manage the integrated risk, all Applicable NBFCs shall form a Risk Management Committee, besides the Asset Liability Management Committee.
Legislative Framework of Corporate Governance in India Notes
Initial Disclosure Regulation 7 (1):
(a) Every person on appointment as a key managerial personnel or a director of the company or upon becoming a promoter or member of the promoter group shall disclose his holding of securities of the company as on the date of appointment or becoming a promoter, to the company within seven days of such appointment or becoming a promoter.
Continual Disclosures: Regulation 7(2):
(a) Every promoter, member of the promoter group, designated person and director of every company shall disclose to the company the number of such securities acquired or disposed of within two trading days of such transaction if the value of the securities traded, whether in one transaction or a series of transactions over any calendar quarter, aggregates to a traded value in excess of ten lakh rupees or such other value as may be specified;
(b) Every company shall notify the particulars of such trading to the stock exchange on which the securities are listed within two trading days of receipt of the disclosure or from becoming aware of such information. Explanation: It is clarified for the avoidance of doubts that the disclosure of the incremental transactions after any disclosure under this sub-regulation, shall be made when the transactions effected after the prior disclosure cross the threshold specified in clause (a) of sub-regulation (2).
(c) The above disclosures shall be made in such form and such manner as may be specified by the Board from time to time.
Definition of related party transaction:
“Related Party Transaction” means a transaction involving a transfer of resources, services or obligations between:
(i) a listed entity or any of its subsidiaries on one hand and a related party of the listed entity or any of its subsidiaries on the other hand; or
(ii) a listed entity or any of its subsidiaries on one hand, and any other person or entity on the other hand, the purpose and effect of which is to benefit a related party of the listed entity or any of its subsidiaries, with effect from April 1,2023;
regardless of whether a price is charged and a “transaction” with a related party shall be construed to include a single transaction or a group of transactions in a contract:
Provided that the following shall not be a related party transaction:
(a) the issue of specified securities on a preferential basis, subject to compliance of the requirements under the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2018;
(b) the following corporate actions by the listed entity which are uniformly
applicable/offered to all shareholders in proportion to their . shareholding:
i. payment of dividend;
ii. subdivision or consolidation of securities;
iii. issuance of securities by way of a rights issue or a bonus issue; and iv. buy-back of securities.
(c) acceptance of fixed deposits by banks/Non-Banking Finance Companies at the terms uniformly applicable/offered to all shareholders/public, subject to disclosure of the same along with the disclosure of related party transactions every six months to the stock exchange(s), in the format as specified by the Board:
Provided further that this definition shall not be applicable for the units issued by mutual funds which are listed on a recognised stock
Vigil Mechanism:
It is a mechanism called ‘Vigil Mechanism’ for all the Directors and employees to report to the management instances of unethical behavior, actual or suspected fraud or violation of the Company’s code of conduct or ethics policy.
Global Depository Receipt:
A global depositary receipt or GDR is a bank certificate issued in more than one country for shares in a foreign company.
Whistle blower:
A whistle blower is a person who publicly complains concealed misconduct on the part of an organization or a body of people, usually from within the same organization. It is now a mandatory requirement for listed companies.