Steps implemented by Companies Act with regard to Corporate Governance

The Ministry of Company Affairs appointed various committees on the subject of corporate governance which lead to the amendment of the companies Act in 2000.  These amendments aimed at increasing transparency and accountabilities of the Board of Directors in the management of the company, thereby ensuring good corporate governance.  The dealt with the following:

1. COMPLIANCE WITH ACCOUNTING STANDARDS – SECTION 210A

As per this subsection inserted by the Companies Act, every profit and loss account and balance sheet of the company shall comply with the accounting standards.  The compliance of Indian Accounting standards was made mandatory and the provisions for setting up of National Committee on accounting standards were incorporated in the Act.

2. INVESTORS EDUCATION AND PROTECTION FUND – SECTION 205C

This section was inserted by the Companies Act 1999which provides that the central government shall establish a fund called the Investor Education and protection Fund and amount credited to the fund relate to unpaid dividend, unpaid matured deposits, unpaid matured Debenture, unpaid application money received by the companies for allotment of securities and due for refund and interest accrued on above amounts.

3. DIRECTOR’S RESPONSIBILITY STATEMENT- SECTION 217(2AA)

Subsection (2AA)added by the Companies Act, 2000 provides that the Boards report shall also include a Director’s Responsibility statement with respect to the following matters:

  1. Whether accounting standards had been followed in the preparation of annual accounts and reasons for material departures, if any;
  2. Whether appropriate accounting policies have been applied and on consistent basis;
  3. Whether directors had made judgments and estimate that are reasonable prudent so as to give a true and fair view of the state of affair and profit and loss of the company;
  4. Whether the directors had prepared the annual accounts on a going concern basis.
  5. Whether directors had taken proper and sufficient care for the maintenance of adequate accounting records for safeguarding the assets of the company.

4. NUMBER OF DIRECTORSHIPA- SECTION 275

As per this section of Companies Act, 2000 a person cannot hold office at same time as director in more than fifteen companies.

5. AUDIT COMMITTEES – SECTION 292A

This section of the companies Act, 2000 provides for the constitution of audit committees by every public company having a paid- up capital of Rs. 5 crores or more.  Audit Committee is to consist of at least 3 directors.  Two of the members of the Audit Committee shall be directors other than managing or whole time director.  Recommendation of the Audit Committee on any matter related to financial management including audit report shall be binding on the Board.

6. PROHIBITION ON INVITIN OR ACCEPTING PUBLIC DPOSIT

The Companies Act, 2000 has prohibited companies to invite/accept deposit from public.

7. SMALL DEPOSITOR- SECTIONS 58AA AND 58AAA

The Companies Act, 2000 had added two new sections, viz, section a 58AA and 58AAA, for the protection of small depositors.  These provisions are designed to protect depositors who have invested upto Rs. 20, 000 in a financial year in a company.

8. CORPORATE IDENTITY NUMBER

Registrar of Companies is to allot a Corporate Identity Number to each company registered on or after November 1, 2000 (Valid circular No.)12/2000 dated 25-10-2000)

9. POWERS TO SEBI – SECTION 22A

This section added Companies Act, 2000 empowers SEBI to administer the provisions contained in section 44 to 48, 59 to 84, 10, 109, 110, 112, 113, 116, 117, 118, 119, 120, 121, 122, 206, 206A and 207 so far as they relate to issue and transfer ofsecurities and non payment  of dividend.  However, SEBI’S power in this regard is limited to listed companies.

10.  DISQUALIFICATION OF A DIRECTOR- SETION 274 CLAUSE (G)

Clause (g) of Section 2i7i4, added by the companies Act, 200 disqualifies a person who is already director of a public company which (a) has not filed the annual accounts and annual returns for any continuous three financial years commencing on and after the first day of
April 1999; or (b) has failed or repay its deposit or interest thereon on due date or redeem its debentures on due date or pay dividend and such failure to continues for one year or more,  however, the aforesaid disqualification will last for five years only.

11.  SECRETARIAL AUDIT – SECTION383A

Secretarial Audit Section 383A was amended to provide for secretarial audit with respect to companies having a paid up share capital of Rs. 10 lakhs or more but less than, present Rs. 2 crores.  As per the Companies Act, 2000 a whole time company secretary has to file with ROC a certificate as to whether the company has complied with all the provisions of the Act.  A copy of this certificate shall also be attached with the report of Board of Directors.

Thus, the importance of codification of good Corporate governance practices having mandatory force cannot be mitigates.  But in order to ensure implementation and compliance in true spirit, Corporate Governance practices need to be legislated by one regular or body so as to avert duplicity, confusion and uncertainty.

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