Cheat Sheet: Corporate Governance

1. Meaning and Scope

1.1 Definition

1.2 Objectives

• Ensure accountability of management to shareholders and stakeholders
• Protect interests of minority shareholders
• Promote transparency in corporate operations
• Ensure ethical conduct and compliance with laws
• Enhance long-term shareholder value
• Balance interests of all stakeholders

1.3 Key Principles

2. SEBI Listing Obligations and Disclosure Requirements (LODR) Regulations, 2015

2.1 Key Provisions

2.2 Disclosure Requirements

• Annual Corporate Governance Report as part of Annual Report
• Quarterly compliance report on corporate governance
• Disclosure of Related Party Transactions
• Material subsidiaries disclosure
• Risk management framework disclosure
• Website disclosures: composition of committees, policies, code of conduct

2.3 Related Party Transactions

3. Board of Directors and Key Managerial Personnel

3.1 Board Composition under Companies Act, 2013

3.2 Independent Directors

3.2.1 Qualifications (Section 149(6))

• Person of integrity with relevant expertise and experience
• Not promoter or related to promoter or directors
• No material pecuniary relationship with company in preceding 2 years
• Not employed or partner in past 3 years
• Not material supplier, service provider, customer accounting for >2% transactions
• Not significant shareholder (holding 2% or more voting power)
• Not chief executive or director/KMP of non-profit receiving 25% or more from company

3.2.2 Tenure and Removal

• Maximum 2 consecutive terms of 5 years each
• Cannot be reappointed before cooling-off period of 3 years
• Removal requires special resolution
• Cannot hold office in more than 7 listed companies

3.2.3 Duties and Functions

• Bring independent judgment on strategy, performance, and resources
• Constructive challenge to management
• Monitor reporting of financial information
• Satisfy themselves on integrity of financial controls
• Scrutinize performance of management
• Moderate conflicts of interest

3.3 Key Managerial Personnel (Section 2(51) and Section 203)

4. Board Committees

4.1 Audit Committee (Section 177)

4.1.1 Composition

4.1.2 Functions and Powers

• Recommend appointment, remuneration, and terms of auditors
• Review financial statements and auditor's report before submission to board
• Approve Related Party Transactions and subsequent modifications
• Scrutinize inter-corporate loans and investments
• Valuation of undertakings or assets
• Evaluate internal financial controls and risk management systems
• Monitor end use of funds raised through public offers
• Review functioning of vigil mechanism/whistle blower mechanism

4.2 Nomination and Remuneration Committee (Section 178)

4.2.1 Composition

• Minimum 3 non-executive directors
• At least 50% independent directors
• Chairperson must be independent director

4.2.2 Functions

• Identify persons qualified to become directors and KMP
• Recommend appointment and removal of directors and senior management
• Evaluate performance of every director and board as whole
• Formulate criteria for determining qualifications, attributes, and independence
• Recommend remuneration policy for directors, KMP, and other employees
• Ensure level and composition of remuneration is reasonable and sufficient

4.3 Stakeholders Relationship Committee (Section 178)

4.4 Corporate Social Responsibility Committee (Section 135)

4.5 Risk Management Committee

• Mandatory for top 1000 listed companies by market capitalization
• Majority directors including at least one independent director
• Monitor and review risk management plan
• Review cybersecurity risks

5. Director Duties and Liabilities

5.1 General Duties (Section 166)

5.2 Fiduciary Duties

• Act honestly and in good faith in best interests of company
• Exercise powers for proper purpose
• Avoid conflicts of interest and duty
• Not make secret profits
• Preserve assets of company
• Not delegate discretionary powers unless authorized

5.3 Liabilities of Directors

5.3.1 Criminal Liability

• Fraud (Section 447): Imprisonment up to 10 years and fine
• False statements in prospectus (Section 34 & 35): Imprisonment up to 2 years or fine
• Non-payment of deposit (Section 74): Imprisonment up to 7 years and fine
• Non-compliance with statutory requirements: Various penalties under specific sections

5.3.2 Civil Liability

• Liable for acts and omissions causing loss to company
• Misfeasance proceedings (Section 448)
• Liability for fraudulent trading (Section 339)
• Compensation for fraud or breach of trust

5.3.3 Specific Liabilities

6. Meetings and Procedures

6.1 Board Meetings (Section 173)

6.2 Matters Requiring Board Resolution

• Making calls on shareholders for unpaid share capital
• Authorizing buyback of securities
• Issuing securities including debentures
• Borrowing powers beyond prescribed limits
• Investment of company funds
• Granting loans or giving guarantee or providing security
• Approval of financial statements and board's report
• Diversification of business

6.3 General Meetings

6.3.1 Annual General Meeting (Section 96)

6.3.2 Extraordinary General Meeting (Section 100)

• Called when deemed fit or on requisition by members holding 10% voting power
• Board must call within 45 days of receipt of valid requisition
• If board fails, requisitionists can call within 3 months
• Same notice period and quorum as AGM

7. Transparency and Disclosures

7.1 Mandatory Disclosures under Companies Act

7.2 Disclosure of Interest (Section 184)

• Every director must disclose nature of concern or interest in any company/firm
• Disclosure at first board meeting after appointment and first meeting of every financial year
• Must disclose interest in any contract or arrangement before consideration
• Register of contracts maintained (Section 189)

7.3 Business Responsibility Report

• Mandatory for top 1000 listed companies by market capitalization
• Describes initiatives from environmental, social, and governance perspective
• Business Responsibility and Sustainability Reporting (BRSR) from FY 2022-23
• 9 principles covering ethics, sustainability, stakeholder engagement

7.4 Secretarial Audit (Section 204)

8. Insider Trading Regulations

8.1 SEBI (Prohibition of Insider Trading) Regulations, 2015

8.1.1 Key Definitions

8.1.2 Prohibitions

• Insider cannot trade in securities when in possession of UPSI
• Cannot communicate UPSI to any person
• Cannot counsel or procure any person to deal in securities based on UPSI
• Violation punishable with imprisonment up to 10 years or fine up to Rs. 25 crores or both

8.1.3 Trading Window and Closure

8.2 Code of Conduct

• Listed companies must frame Code of Internal Procedures and Conduct
• Code of Practices and Procedures for Fair Disclosure of UPSI
• Maintain Structured Digital Database of persons with whom UPSI shared
• Designated Persons must submit disclosure of holdings and transactions

9. Investor Protection Mechanisms

9.1 Minority Shareholders Rights

9.2 Remedies Available

• Tribunal can regulate company conduct of affairs
• Can remove or appoint directors/managing director
• Order purchase of shares by company or other members
• Terminate or set aside agreements
• Recovery of undue gains made
• Winding up of company in extreme cases

9.3 Investor Education and Protection Fund (IEPF)

9.4 Vigil Mechanism/Whistle Blower Policy (Section 177(9))

• Mandatory for listed companies and prescribed class of companies
• Provides mechanism for directors and employees to report unethical behavior
• Direct access to chairperson of Audit Committee in appropriate cases
• Adequate safeguards against victimization provided
• Access to Audit Committee must be available

10. Compliance and Enforcement

10.1 Regulatory Authorities

10.2 Penalties and Consequences

10.2.1 Corporate Violations

• Non-compliance with corporate governance norms: Penalty up to Rs. 25 lakhs
• Non-constitution of board committees: Fine on company and officers
• Failure to file returns: Company liable for fine; officers liable for imprisonment and fine
• Misstatement in prospectus: Liability for loss or damage caused

10.2.2 Director Violations

10.3 Disqualification of Directors (Section 164)

• Found to be of unsound mind by competent court
• Undischarged insolvent
• Convicted of offense involving moral turpitude with imprisonment for 6 months or more
• Non-payment of calls on shares held for 6 months from last date of payment
• Disqualified by order of court or Tribunal
• Not filed financial statements or annual returns for 3 consecutive years
• Convicted of insider trading offense

10.4 E-Governance Initiatives

• MCA-21 portal for electronic filing of documents
• Director Identification Number (DIN) mandatory
• Digital Signature Certificate (DSC) for filing
• Integrated data system for tracking compliance
• SPICe+ for incorporation

11. International Best Practices

11.1 OECD Principles of Corporate Governance

11.2 Key Global Practices

• Separation of Chairman and CEO roles for checks and balances
• Board diversity including gender, skills, experience
• Robust risk management and internal control systems
• Regular board evaluation and succession planning
• Sustainability reporting and ESG integration
• Stakeholder engagement mechanisms
• Clawback provisions for executive remuneration

11.3 Committee Reports on Corporate Governance