This article is written by Amarnath Simha, pursuing a Diploma in Companies Act, Corporate Governance and SEBI Regulations from LawSikho.com. Here he discusses “Ten Requirements of the LODR in Relation to Corporate Governance”.

Introduction

A company is the form of a business entity/person wherein the ownership and management can be vested with different persons, if not in all cases necessarily.  However, in the case of a listed entity, the above statement holds good to a greater extent. Corporate governance is the mechanism through which the interactions and the relationship between the owner and the management is being sought to be strengthened and through which the desires of the shareholders are given more prominence in the actual functioning of the company.   Corporate governance takes various hues.

The Listing Obligations and Disclosure Requirements (i.e., the LODR) regulations formulated by the Securities and Exchange Board of India is one of the steps which goes a long way in the corporate governance process.  In one sense, it can be said the whole of the SEBI (LODR) Regulations, 2015 is dealing with only corporate governance. It is because the LODR regulations compliances will automatically require the company to be more transparent in its dealings and all the relevant information will be received by the stakeholders.  It also provides for committees performing oversight and nominating functions and hence the board of directors is not all powerful when it comes to dealing with all the affairs of the company. This automatically increases the power in the hands of even one single shareholder for a say in the affairs of the company as he will be sufficiently be informed without even having to go to the company offices for the same.

Of the many provided under and compliances mandated under the LODR in respect of corporate governance, some of them are examined hereunder.

1. Audit Committee: Regulation 18

Every listed entity has to have a qualified and independent audit committee with the 2/3rd of members being independent directors.  All the members have to be financially literate and at least one member should have accounting or related financial management expertise.

The chairperson of the audit committee should be an independent director and he should be present at AGM for answering the shareholder queries.

The audit committee can invite the finance director/head to its meetings and a representative of the statutory auditor.  They should meet at least four times a year.

They have the powers to investigate the activity and seek outside legal or other professional advice.

The role of the audit committee, amongst others, includes

1. Oversight of the company’s financial reporting process
2. Recommendations for appointment of the auditors
3. Approval of the transactions with related parties
4. Scrutiny of inter-corporate loans and investments
5. Evaluation of internal financial controls and risk management systems
6. Reviewing the internal audit function.

All these and more will definitely make the role of the board of directors very minutely observed by independent directors which will ultimately help the shareholders.  All the shareholders may not be financially literate but the audit committee consisting of independent directors will lay his apprehensions as to financials and it is by the company at ease, if not fully at rest.

2. Nomination and Remuneration Committee: Regulation 19

The directors cannot recommend any qualification for a director of their liking.  The Nomination and remuneration committee comprising of at least 50% independent directors formulates the criteria for determining qualifications, positive attributes etc., required of a director.  That committee also recommends a policy as to the remuneration for the Directors, KMP and other employees. Hence, a shareholder will know as to how the salaries of the management are being fixed and how much percentage of his profit is being diverted to that purpose. 

This committee formulates the criteria for evaluation of the performance of the independent directors and the board of directors.  Hence, the shareholders will know what exactly to be looking for in the directors’ performance.

This committee identifies the persons qualified to be directors and hence the shareholders need not go to the personal trouble of knowing the qualifications of the would be directors.

3. Stakeholders Relationship Committee: Regulation 20

The committee shall consist of at least one independent director.  This committee looks into the grievances of the shareholders, debenture holders and other security holders and tries to resolve them including the grievances related to transfer/transmission of shares, non-receipt of annual reports/dividends etc.,  The committee also looks into the adherence to the service standards adopted by the listed entity in respect of various services rendered by the Registrar and Share Transfer Agent.

4. Grievance Redressal Mechanism: Regulation 13

The listed entity has to register on the SCORES platform or other platform approved by SEBI for electronic handling of the investor complaints.  The listed entity has to file on a quarterly basis a statement giving the number of investor complaints pending at the beginning of the quarter, those received during the quarter, disposed of during the quarter and those remaining unresolved.  No shareholder complaint can now go ignored by the board of directors. No shareholder complaint can now be kept pending for a long time without taking any action. Hence, this mechanism is a step in aid for corporate governance.

5. Preservation of Records: Regulation 9

The listed entity has to maintain a policy of classifying documents which are to preserved permanently or for a period of not less than eight years from the completion of any transaction.  This will help the shareholder from getting access to any records long after the transaction is completed to find out about the correctness or otherwise of any transaction. No director can individually take a decision to destroy documents on his whims and fancies.  All transactions will be recorded and will be preserved. There will be no question of cover up by the directors or board of directors.

6. Compliance Officer: Regulation 6

A qualified company secretary is to be appointed as a compliance officer.  This officer has to see that all the compliances are taken off properly. He has to ensure that all the correct procedures have been followed that would result in the correctness, authenticity and comprehensiveness of the information to be provided under LODR.  He has to further monitor the email address of grievance redressal division as designated for the purpose of registering complaints by investors. This basically means, the compliance is not just by the board of directors but a separate company secretary is appointed the whole time for the compliances.  The shareholder is now assured that his complaints to the email address are properly monitored and not ignored. Hence, the protection and interests of the shareholder are to that extent increased.

7. Vigil Mechanism: Regulation 22

The listed entity is mandated to formulate a vigil mechanism for directors and employees for reporting of genuine concerns.  The vigil mechanism has to provide for sufficient safeguards against victimisation of the directors or employees or any other person.  It also has to provide for direct access to the chairperson of the audit committee in appropriate or exceptional cases.

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The shareholder need not only be concerned about what information he actually receives.  If there is any information which is affecting the company, and only a few people are in possession of that information, the process of that information being publicised without affecting the publisher’s well being is also taken care of.  Hence, the shareholder rest assured that the whistleblowers can come forward without any risk of being targeted and thereby provide for more transparent and ethical transactions in the company.

8. Related Party Transactions: Regulation 23

All the related party transactions require the prior approval of the audit committee.  

9. Prior Intimations: Regulation 29

The LODR regulations require that the listed entity provides prior information to the stock exchange about the meetings of the board of directors in which the following, among others, proposals are considered.

1. Financial results whether quarterly, half yearly or annually as the case may be.
2. Fundraising by way of a public offer, rights issue, debt issue or any other method.
3. Recommendation of dividend.

This will also be available to the shareholders and they are now in a better position to understand how the board meetings are held.

10. Documents and Information to Shareholders: Regulation 36

The listed entity is mandated to send an annual report to the shareholders either by way of soft copies through email or hard copy, if requested or if their email addresses are not registered.

In the report, the details of the appointment/re-appointment of a director have to be provided.  It should include, among others, nature of the person’s expertise and disclosure of relationships and the names of listed entities wherein he holds the directorships.  The shareholder also has to be informed about the shareholding of the non-executive directors.

The shareholder is very much benefited from the LODR regulations.

It makes the remote e-voting facility mandatory by which the shareholder’s voice can be heard without being physically present. Hence, apart from the above-mentioned requirements mandated by the LODR, there are many in it which are ultimately beneficial to the shareholders and thereby increases the standards of corporate governance.  Since SEBI keeps updating its regulations, the corporate governance to that extent is only getting stronger through the regulations.

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.