(The responsibility of auditors…)
K S Mehta
Companies Bill, 2012, takes giant strides in privileging corporate governance. Directors face severe restrictions, auditors will be rotated, independent directors (IDs) have been strengthened, more powers are vested in shareholders, private companies lose many exemptions and transparency gets a boost. Extensive
controls on loans and investments are another limb of governance. Greater involvement by shareholders will replace government approvals, a welcome move. Loans to all parties — not only corporates — will be covered in the loan limits and investments by companies.
Companies Bill, 2012, takes giant strides in privileging corporate governance. Directors face severe restrictions, auditors will be rotated, independent directors (IDs) have been strengthened, more powers are vested in shareholders, private companies lose many exemptions and transparency gets a boost. Extensive
controls on loans and investments are another limb of governance. Greater involvement by shareholders will replace government approvals, a welcome move. Loans to all parties — not only corporates — will be covered in the loan limits and investments by companies.
Contracts with related parties will require prior approval by the
board and, in some cases, by shareholders. By a unique provision,
shareholders interested in the matter cannot vote on these general
meeting resolutions. Small shareholders are ensured board participation
by one director representing them. Related-party contracts must be
justified and fully disclosed in the Director's Report. These approvals
will, however, not be required if the transactions are on arm's-length
basis. The directors, promoters, key management personnel and top 10
shareholders in listed companies must report any share purchase or sale
within 15 days to the registrar.
All listed or notified classes of companies must have at least one-third directors as IDs. Any director's associated party cannot do business with the company except on an arm'slength basis. Directors will be responsible only for acts of omission or commission or negligence if they do not act on information that should come to their knowledge as board members. They must oversee the welfare of all stakeholders. No conflict of interest is allowed between the company and another organisation with which they are connected; or hold office beyond two terms of three years each followed by rest of one term. All board resolutions must be approved by at least one ID. If a third of the directors so notify, resolutions moved by circulation have to be considered by the board.
The Bill provides additional matters to be resolved upon only at board meetings, viz, (a) issue of securities, (b) granting of loans or guarantees, etc, (c) diversification of company's business, (d) approval of any merger or reconstruction, (e) taking a substantial stake in another company, (f) related-party transaction, or (g) other prescribed matters. For many matters, shareholders' Special Resolution is now needed, not just ordinary resolution, viz, selling or leasing out undertakings, borrowing money or to remit or give time for debt repayment by a director. Even private companies cannot give a loan to a director or associated parties except by shareholders' prior Special Resolution approval.
Working directors and senior management staff have been prohibited from entering into any call or put option on securities of the company, subsidiary or associates. Insider trading in any company will fetch penalties. The Remuneration Committee, headed by an ID, shall decide a remuneration policy, having fixed and variable pay, and pay relationship between directors and senior management, and to be disclosed to shareholders.
Audit committee responsibility has been expanded to include monitoring of auditors' independence, their performance evaluation, approval of modification of related-party transactions, scrutiny of loans and investments, valuation of assets and evaluation of internal controls and risk management. They have to establish a vigil mechanism and protection for any whistle-blower. The members must be able to understand financial statements and have a majority of IDs. Large companies must mandatorily have professional internal auditors.
All listed or notified classes of companies must have at least one-third directors as IDs. Any director's associated party cannot do business with the company except on an arm'slength basis. Directors will be responsible only for acts of omission or commission or negligence if they do not act on information that should come to their knowledge as board members. They must oversee the welfare of all stakeholders. No conflict of interest is allowed between the company and another organisation with which they are connected; or hold office beyond two terms of three years each followed by rest of one term. All board resolutions must be approved by at least one ID. If a third of the directors so notify, resolutions moved by circulation have to be considered by the board.
The Bill provides additional matters to be resolved upon only at board meetings, viz, (a) issue of securities, (b) granting of loans or guarantees, etc, (c) diversification of company's business, (d) approval of any merger or reconstruction, (e) taking a substantial stake in another company, (f) related-party transaction, or (g) other prescribed matters. For many matters, shareholders' Special Resolution is now needed, not just ordinary resolution, viz, selling or leasing out undertakings, borrowing money or to remit or give time for debt repayment by a director. Even private companies cannot give a loan to a director or associated parties except by shareholders' prior Special Resolution approval.
Working directors and senior management staff have been prohibited from entering into any call or put option on securities of the company, subsidiary or associates. Insider trading in any company will fetch penalties. The Remuneration Committee, headed by an ID, shall decide a remuneration policy, having fixed and variable pay, and pay relationship between directors and senior management, and to be disclosed to shareholders.
Audit committee responsibility has been expanded to include monitoring of auditors' independence, their performance evaluation, approval of modification of related-party transactions, scrutiny of loans and investments, valuation of assets and evaluation of internal controls and risk management. They have to establish a vigil mechanism and protection for any whistle-blower. The members must be able to understand financial statements and have a majority of IDs. Large companies must mandatorily have professional internal auditors.
Firms of auditors of listed and specified classes of companies must
have a rest period after two consecutive terms of five years each. Their
continuation can be reviewed at every AGM. During their tenure, partner
and team are to be rotated. A sole proprietary firm has to retire at
the end of five years. The auditor will not be eligible for appointment,
if he is providing other services to the company, its subsidiary or
associates. In this scenario, we will surely see a concentration of
large audits amongst the Big Four audit firms as per the trend in the
developed world.
The responsibility of auditors and penalty for negligence/wrongdoing has gone up, including criminal liability on the entire firm for even one partner's collusion in a fraud. This measure will be counterproductive by keeping good talent away. Disciplinary process is to be transferred from ICAI to a statutory board.
For private companies, many exemptions have been withdrawn. All loans to working directors and other parties, related-party transactions, a business diversification or capital raising, etc, will need board or general body approval. Disclosure requirements to shareholders have been enhanced.
(The author is managing partner at SS Kothari Mehta & Co
The responsibility of auditors and penalty for negligence/wrongdoing has gone up, including criminal liability on the entire firm for even one partner's collusion in a fraud. This measure will be counterproductive by keeping good talent away. Disciplinary process is to be transferred from ICAI to a statutory board.
For private companies, many exemptions have been withdrawn. All loans to working directors and other parties, related-party transactions, a business diversification or capital raising, etc, will need board or general body approval. Disclosure requirements to shareholders have been enhanced.
(The author is managing partner at SS Kothari Mehta & Co
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