This article is written by Chandana Lakshman, pursuing a Diploma in Companies Act, Corporate Governance and SEBI Regulations from LawSikho.com. Here she discusses “Five points to be included in the corporate governance annual report section”.

Introduction

There is a common saying which goes like this”a company without corporate governance is like an aircraft without control of safety mechanism”. While the captain of an aircraft is responsible for a successful and safe flight, he is aided by numerous guidelines, safety standards, and policies he must follow and corporate governance is an exact thing. What rules the companies is corporate governance.

It is regulated by the duo process.

1. The first one is regulated by statute, which is imposed by law[Companies Act, notifications and regulations which are issued by the Registrar of Companies, Ministry of Corporate Governance].
2. The second one is regulated within the internal management which is developed within a company and includes shareholders, directors, officers.

Corporate Governance Report

Corporate governance report in general parlance is a report which is given by the company to the management. Corporate governance report significant varies from one company to another company. Each company follows it’s own set of rules, practices and process and ensures that the company is being managed in a proper way which does not jeopardize with working of the company. The ultimate aim of all the companies is to meet the stakeholders and shareholders expectations. It is further said that good corporate governance practices steps from the dynamic culture and positive mindset of the organisation.

Infosys corporate governance report states” to manage the company’s affairs in a fair and transparent manner”.

EMGS corporate governance report states” committed to healthy corporate governance practices which strengthens and maintains confidence in the company, and thereby contributing to optimal long-term value creation for shareholders and other stakeholders”.

Objectives of Corporate Governance

The primary objective of Corporate Governance is to ensure that shareholders wealth is maximized. 

Few are some of the objectives of good Corporate Governance:

• The board should be in the right position to take independent and objective decision.
• The board should adopt transparent procedures and practices.
• The board from time to time must monitor the functioning of the management team.

When is a corporate governance report filed? And which are the companies which are mandatory to file corporate governance reports?

Corporate governance reports are to be filed every quarter. As per SEBI listing regulations, 2015(LODR) regulation 27(2)states every listed company is mandatory to submit corporate governance report within fifteen days from the quarter-end. As from March 28, 2016, all the listed entities to file corporate governance reports. 

A listed entity is the entity whose shares are listed on the stock exchanges and such listed entities are required to file corporate governance. 

Therefore all the public entities need to comply with the provision.

However, there are certain exceptions:

1. A listed entity having paid-up equity share capital which is not exceeding ten crores and
2. Listed entity not having a net worth which is exceeding twenty-five crores as on the last day of the previous financial year.
3. Which has listed its securities on the SME exchange.

As per the recent amendment of SEBI(LODR) regulations, 2015 states that:

1. Regulation 27(2) of SEBI(LODR) 2015 states that all the listed entities shall submit quarterly compliance report on corporate governance in the format which is prescribed by the board within fifteen days from the close of the quarter.
2. Formats for filing of compliance report on corporate governance as per annexure I, II  and III being prescribed:

• Annexure I- on a quarterly basis;
• Annexure II- at the end of the financial year;
• Annexure III- within six months from the end of the financial year.
• Regulation 17(3) states the board of directors shall periodically review the compliance reports pertaining to all laws which are applicable to the listed entity.
• Secretarial audit report which is to be prepared as per rule 9 of companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014 under section 204 of companies act, 2013 which related to securities law.

The above reports have to be placed before the board of directors of the listed entities in its next meeting.

Consequences of non-compliance of corporate governance

Penalties under SEBI(LODR) obligations:

As per regulation 27(2) when there is a failure to submit the corporate governance report within fifteen days from close to the quarter shall be punishable with fine of INR 2,000 per day.

The other consequences can be a suspension in trading of the securities and freezing of promoter holdings.

Corporate Governance and Companies Act, 2013

The Companies Act, 2013 contemplates absolute changes in the sphere of Corporate Governance in India. It is set to provide a major overhaul in Corporate Governance norms and has far-reaching implications on the manner in which corporate operates in India.

Some of the provisions of Companies Act, 2013 related to Corporate Governance are:

• Exclusion of nominee director from the definition of Independent Director.
• Mandatory to have atleast one woman director on the board of the company.
• Mandatory to constitute Nomination and Remuneration Committee and chairman of the said committee to be independent.
• Compulsory whistle blower mechanism.
• Before entering in Related Party Transactions there is a need to get the approval from the Audit Committee.
• Separate meeting should be held for Independent Directors.
• Constitution of Stakeholders Relationship Committee.
• Enhanced disclosure of remuneration policies.
• Performance evaluation of Independent Directors and the Board of Directors.

Things to be included in the Corporate Governance Report section in the annual report

Every listed company is mandatorily required to prepare the Corporate Governance Report in accordance with the Schedule V(Part C) of listing Regulations.

All the contents of Corporate Governance Report- (Disclosure under Schedule V- Part C of Listing Regulations) are placed at Annexure-IV

The following disclosures shall be made in the section on the corporate governance of the annual report:

1. A brief statement on listed entity philosophy on code of corporate governance

It shall contain a brief statement of philosophy on code of corporate governance.

 Few of them are:

•  It ensures that shareholders interest in not prejudiced.
• The company is formed only for lawful purposes and deals in an ethical manner.
• Adequate opportunity is given to the shareholders to participate in the governance of the company
• The audit committee acts independently from management.

2. Board of directors

1. It shall contain composition and category of directors.

The directors may be a promoter, executive, non-executive, independent non-executive, nominee director.

2. It shall also ensure the attendance of every director who has attended the last meeting of the annual general meeting.

3. The number of other boards of directors or committees in which the director is a member of the chairperson.

4. It also provides details of meetings of the board of directors and along with that specify the dates on which it was held.

5. Disclosure of the relationship between directors of any

6. It also has to specify the number of shares held by each shareholder and convertible instruments held by non-executive directors

7. Which have details of familiarisation programmes imparted to independent directors are disclosed.

3. Audit Committee

1. There must be a brief description of the terms of the reference.
2. Every composition, names of members and chairperson should be mentioned.
3. Meetings to be attended by the audit committee and the presence of them in those meetings.

4. Nomination and Remuneration Committee

1.  There must be a brief description of the terms of the reference.
2. Every composition, names of members and chairperson should be mentioned.
3. Meetings to be attended by the audit committee and the presence of them in those meetings.

5. Remuneration of directors

• Non-executive directors should disclose all the pecuniary interest that they have in their annual report.
• Criteria for making payments to non-executive directors alternatively.
• All the disclosures with respect to remuneration along with the further disclosure to be made as per Companies Act 2013, the following disclosures to be made:

1. remuneration packages of individual directors and which is grouped under the following categories such as salary, benefits, bonuses, stock options, pension.
2. details of fixed components and performance linked incentives, along with the performance criteria.
3. service contracts, notice period, severance fees
4. all the details of stock options and whether the company is issued at a discount and the period over which they are accrued and over which it is exercisable.

6. Stakeholders grievance committee

1. All the names of non-executive directors heading the committee.
2. Name of the compliance officer and designation.
3. Complaints received by the shareholders.
4. The dissatisfaction of shareholders complaints not resolved.
5. And the number of pending complaints.

7. General body meetings

1. Place and times of the last three annual general meetings held.
2. If any special resolutions passed in the previous meetings of AGM and to mention about it.
3. If any special resolutions passed in the previous year through postal ballot and also to mention about the postal ballot exercise.
4. To mention the names of the person who conducted the postal ballot exercise.
5. Whether any special resolutions are proposed to be conducted through postal ballot.
6. And at last to mention the procedure for postal ballot.

8. Means of communication

1. Quarterly results.
2. Newspaper wherein results normally published.
3. Any website, where it is to be displayed.
4. Whether it also displays official news releases and
5. Presentation made to institutional investors or to analysis.

Conclusion

Good corporate governance is truly the need of the hour. The main objective of corporate governance is not only to protect the shareholders but also to enhance shareholders value. It is rightly said that corporate governance is a philosophy which touches every facet of the functioning of a corporate and it’s stakeholders. It is not an end itself but a means to practice and bring about corporate democracy at all levels of the corporate entity.

Students of Lawsikho courses regularly produce writing assignments and work on practical exercises as a part of their coursework and develop themselves in real-life practical skill.