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Date: 30 Mar 2009
Advisory Panel on Institutions and Market Structure - Volume V
INDIA’S FINANCIAL SECTOR
AN ASSESSMENT
 
 
 

Volume V

 
 

Contents

 

Chapter

Subject

Page No.

 

Cover Page

 

 

Composition of the Advisory Panel

 

 

List of Acronyms

 

I.

Approach to Assessment

7

II.

Assessment of Accounting Standards

17

III.

Assessment of Auditing Standards

71

IV.

Assessment of Corporate Governance Standards .

139

V.

Assessment of Payment and Settlement Systems

257

VI.

Assessment of Effective Insolvency and Creditor Rights Systems

393

VII.

Summary of Recommendations

563

 
 
 
 
 
 
INDIA’S FINANCIAL SECTOR
AN ASSESSMENT
 
 
 

Volume V
Advisory Panel
on
Institutions and Market Structure

 
 
 

Committee on Financial Sector Assessment

March 2009

 

1

2

 
 

©   Committee on Financial Sector Assessment, 2009

All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording and/or otherwise, without the prior written permission of the publisher.

 

Sale Price: Rs. 2,000
Volumes I-VI (including one CD)

 

Exclusively distributed by:

1

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Published by Dr. Mohua Roy, Director, Monetary Policy Department, Reserve Bank of India, Central Office, Mumbai - 400 001 and printed at Jayant Printery, 352/54, Girgaum Road, Murlidhar Temple Compound, Near Thakurdwar Post Office, Mumbai - 400 002
 

Composition of the Advisory Panel on Institutions and Market Structure

Shri C. M. Vasudev

Former Secretary Department of Economic Affairs Ministry of Finance Government of India

Chairman

Shri C. B. Bhave

Chairman and Managing Director National Securities Depository Ltd. (up to February 15, 2008)

Member

Dr. K. C. Chakraborty

Chairman and Managing Director Punjab National Bank

Member

Dr. R. Chandrasekhar

Dean, Academic Affairs
Institute for Financial Management and Research

Member

Dr. Ashok Ganguly

Chairman, Firstsource Solutions Ltd.

Member

Dr. Omkar Goswami

Chairman, CERG Advisory Pvt. Ltd.

Member

Shri Y. H. Malegam

Chartered Accountant

Member

Dr. Nachiket Mor

Deputy Managing Director, ICICI Bank Ltd.

Member

Shri T.V.Mohandas Pai

Member of the Board, Infosys Ltd.

Member

Shri Gagan Rai

Chairman and Managing Director National Securities Depository Ltd. (from February 25, 2008)

Member

Dr. Janmejaya Sinha

Managing Director Boston Consulting Group

Member

Special Invitees

Shri Jitesh Khosla

Joint Secretary
Ministry of Corporate Affairs
Government of India

 

Dr. K. P. Krishnan

Joint Secretary (Capital Markets) Department of Economic Affairs Ministry of Finance Government of India

 

Dr. R. B. Barman

Executive Director Reserve Bank of India

 

Shri Anand Sinha

Executive Director Reserve Bank of India

 

Shri C. R. Muralidharan

Member
Insurance Regulatory and
Development Authority

 

Shri Sandeep Parekh

Adviser (Legal)
Securities and Exchange Board of India

 

 
 
 

List of Acronyms

AAS

Auditing and Assurance Standards

CBLO

Collateralised Borrowing and Lending Obligation

AASB

Auditing and Assurance Standards Board 

CC

Clearing Corporation

ACH

Automated Clearing House

CCIL

Clearing Corporation of India Ltd.

ADR

American Depository Receipt

CCP

Central Counterparty

AGMs

Annual General Meetings

CDR

Corporate Debt Restructuring

AI

Approved Intermediary

CDSL

Central Depository Services    Limited                         

AoA

Articles of Association

CEO

Chief Executive Officer

APC

Auditing Practices Committee

CFO

Chief Financial Officer

AR

Audited Results

CG

Corporate Governance

AS

Accounting Standards

CGTSI

Credit Guarantee Fund Trust for Small Industries

ASB

Accounting Standards Board 

ASSOCHAM

Associated Chambers of Commerce and Industry of India

CH

Clearing House

BCBS

Basel Committee on Banking Supervision

CIC Act

Credit Information Companies Act

 

 

CII

Confederation of Indian Industry

BIFR

Board for Industrial and Financial Reconstruction

CLB

Company Law Board

CLS

Continuous Linked Settlement

BIS

Bank for International Settlements

CM

Clearing Members

BMC

Base Minimum Capital

CP

Custodial Participant

BO

Beneficial Owners

CPC

Civil Procedure Code

BoD

Board of Directors

CPE

Continuing Professional Education

BOISL

Bank of India Shareholding Ltd.

CPSIPS

Core Principles for Systemically Important Payment Systems

BOLT

BSE Online Trading System 

BPSS

Board for Regulation and Supervision of Payment & Settlement Systems

CPSS

Committee on Payment and Settlement Systems

CrPC

Criminal Procedure Code

BR Act

Banking Regulation Act

C & S

Clearing and Settlement

BSE

Bombay Stock Exchange

CSD

Central Securities Depository

CA

Companies Act

DBOD

Department of Banking

CAG

Comptroller and Auditor General

 

Operations and Development

CASLB

Committee on Accounting Standards for Local Bodies

DBS

Department of Banking Supervision

DICGC

Deposit Insurance and Credit Guarantee Corporation

CBDT

Central Board of Direct Taxes 

DIP

Disclosure and Investor Protection

HR

Human Resources

HVC

High Value Clearing

DNS

Deferred Net Settlement

HVCCS

High Value Cheque Clearing System

DP

Depository Participant 

DRT

Debt Recovery Tribunal

IAASB

International Auditing and Assurance Board

DvP

Delivery Versus Payment 

ECS

Electronic Clearing Services

IAPC

International Auditing Practices Committee

ECGC

Export Credit Guarantee Corporation of India

IAS

International Accounting Standards

EFT

Electronic Funds Transfer

 

 

EGM

Extraordinary General Meeting

IASB

International Accounting Standards Board

ELM

Extreme Loss Margin

IASC

International Accounting Standards Committee

ESOP

Employee Stock Option Scheme 

ESPS

Employee Share Purchase Scheme

IBA

Indian Banks’ Association

ICA

Inter-credit Agreement

EU

European Union

ICAI

Institute of Chartered Accountants of India

FASB

Financial Accounting Standards Board

ICSI

Institute of Companies Secretaries of India

FDR

Fixed Deposit Receipts

 

FICCI

Federation of Indian Chambers of Commerce and Industry

ICWAI

Institute of Cost and Works Accountants of India

FII

Foreign Institutional Investors

IDL

Intra-day Liquidity

F & O

Futures and Options

IEPF

Investors Education and Protection Fund

FRRB

Financial Reporting Review Board 

FSAP

Financial Sector Assessment Programme

IFAC

International Federation of Accountants

FSF

Financial Stability Forum

IFRIC

International Financial Reporting Interpretations Committee

GAAP

Generally Accepted Accounting Principles

IFRS

International Financial Reporting  
Standards.                

GASAB

Government Accounting Standards Advisory Board

IFTP

Inter-bank Funds Transfer Processor

GCC

General Credit Card

 

 

GDR

Global Depository Receipt

INTOSAI

International Organisation of Supreme Audit Institutions

GIC

General Insurance Corporation

IPSAB

International Public Sector

GoI

Government of India

 

Accounting Standards Board

GS Act

Government Securities Act

IMF

International Monetary Fund

HLCCFM

High Level Co-ordination Committee on Financial Markets

IMS

Institutions and Market Structure

IMSS

Integrated Market Surveillance Systems

MNSB

Multilateral Net Settlement Batch

IOSCO

International Organisation of Securities Commission

MTM

Mark-to-market

NABARD

National Bank for Agriculture and Rural Development

IPC

Indian Penal Code 

IPSASs

International Public Sector Accounting Standards

NACAS

National Advisory Committee on Accounting Standards

IPO

Initial Public Offer

NBFC

Non-banking Financial Companies

IRDA

Insurance Regulatory and Development Authority 

NCIT

Non-custodial Institutional Trade

IS

International Standards

NCLAT

National Company Law Appellate Tribunal

ISA

International Standards on Auditing

 

NCLT

National Company Law Tribunal

ISAE

International Standards on Assurance Engagement

NDS

Negotiated Dealing System

NDS-OM

Negotiated Dealing System Order Matching

ISIN

International Securities Identification Number 

NEAT

National Stock Exchange for Automated Trading

ISQC

International Standards on Quality Control 

NECS

National Electronic Clearing Services

ISRE

International Standards on
Review Engagement 

NEFT

National Electronic Funds Transfer

ISRS

International Standards on
Review Engagement

NGO

Non-governmental Organisation

NHB

National Housing Bank

ISSA

International Securities Services Association

NI Act

Negotiable Instrument Act

IT ACT

Information Technology Act

NPOs

Not-for-profit Organisations

KCC

Kisan Credit Card

NSCCL

National Securities Clearing Corporation Limited

LA

Listing Agreement

 

 

LIC

Life Insurance Corporation of India

NSDL

National Securities Depository Ltd.

LoC

Line of Credit

NSE

National Stock Exchange

MCA

Ministry of Corporate Affairs

NSS

National Standards-setter

MDA

Management Discussion and Analysis

OECD

Organisation of Co-operation and Economic Development

MoU

Memorandum of Understanding

O L

Official Liquidator

MF

Mutual Fund

PAN

Permanent Account Number

MICR

Magnetic Ink Character Recognition

PCM

Professional Clearing Member

PD

Primary Dealers

MMBCS

Magnetic Media-based Computer System

PDO

Public Debt Office

PI

Participant Interface

SIC

Standing Interpretations Committee

PU

Practice Unit 

QRB

Quality Review Board

SICA

Sick Industrial Companies (Special Provision) Act

RBI

Reserve Bank of India

SIPS

Systemically Important Payment Systems

RoC

Registrar of Companies 

ROSC

Report on the Observance of Standards and Codes

SLB

Securities Lending and Borrowing

RRBs

Regional Rural Banks

SMAC

Secondary Market Advisory Committee

RSE

Recognised Stock Exchange 

RTGS

Real Time Gross Settlement

SMCs

Small and Medium-sized Companies

SARFAESI

Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interests Act

SMEs

Small and Medium-sized Enterprises

SMP

Small and Medium Practitioners

SAST

Substantial Acquisition of Shares

SOX

Sarbanes Oxley Act

 

 

SQC

Standard on Quality Control

SBI

State Bank of India

SR

Special Resolution

SCB

Scheduled Commercial Banks

SRO

Self-regulatory Organisation

SCM

Self-clearing Members

SSS

Securities Settlement System

SCODA

SEBI Committee on Disclosures and Accounting Standards

STA

Share Transfer Agent

St CB

State Co-operative Bank

SCOPE

Standing Conference of Public Enterprises

STP

Straight-through Processing

SCRA

Securities Contracts (Regulation) Act

TMCM

Trading Member-cum-clearing member

SCRR

Securities Contracts (Regulations) Rules

TSR

Total Solution Release

UNCITRAL

United Nations Commission on International Trade Law

SE

Stock Exchange

SEBI

Securities and Exchange Board of India

URRBCH

Uniform Regulations and Rules for Bankers’ Clearing House

SEC

Securities and Exchange

VaR

Value-at-Risk

 

Commission

VAT

Value-added Tax

SHG

Self-help Group

WTD

Whole-time Director

 
 

Chapter I

 

Approach to Assessment

 

 
 

The Government of India in consultation with the Reserve Bank constituted the Committee on Financial Sector Assessment (CFSA) in September 2006, with a mandate to undertake a comprehensive assessment of the Indian financial sector focusing upon stability and development. The CFSA was chaired by Dr. Rakesh Mohan, Deputy Governor, Reserve Bank of India. The Co-chairmen were Shri Ashok Jha, Dr. D. Subbarao and Shri Ashok Chawla, Secretary, Department of Economic Affairs, Ministry of Finance, Government of India. The Committee also had officials from the Government of India as its members.

Taking into account the legal, regulatory and supervisory architecture in India, it was felt that there was a need for involving and associating closely all the major regulatory institutions, viz., Reserve Bank of India (RBI), Securities and Exchange Board of India (SEBI) and Insurance Regulatory and Development Authority (IRDA), in addition to representatives from the Government for this exercise. In order to leverage the available expertise to the maximum possible extent, it was also deemed fit to involve, besides the regulatory authorities, other agencies as relevant to the work.

To assist the Committee in the process of assessment, the CFSA constituted four Advisory  Panels  for  Financial  Stability Assessment and Stress Testing, Financial Regulation and Supervision, Institutions and Market Structure and Transparency Standards, in August 2007. While the Panel on Financial Stability Assessment and Stress Testing conducted macro-prudential surveillance to assess the soundness and stability and developmental aspects of financial system, the other three Panels identified and evaluated the implementation of relevant standards and codes in different areas. All Panels have dealt  with measures for strengthening the financial system from a medium-term perspective. The Panels were assisted by Technical Groups comprising mainly officials from relevant organisations to provide technical inputs and data support, as appropriate to the respective Advisory Panels. A Secretariat was constituted within the Monetary Policy Department in the Reserve Bank to provide logistical and  organisational support to the Advisory Panels and Technical Groups.

Advisory Panel on Institutions and Market Structure

As part of the assessment of standards and codes, the terms of reference of the Advisory Panel on Institutions and Market Structure were to identify and consider the relevant standards and codes as currently prescribed and applicable for accounting, auditing, bankruptcy laws, corporate governance and payment and settlement systems and evaluate their implementation in the Indian context; identify the gaps in adherence to these standards and codes and the reasons therefor; and suggest possible roadmaps addressing inter alia the developmental issues relating to these standards and codes, in a medium-term perspective. The Advisory Panel chaired by Shri C. M. Vasudev, comprised non-official experts as members and officials representing Government and other agencies as special invitees (Annex A).

Technical Group on Institutions and Market Structure

A Technical Group comprising officials drawn from government and other agencies who are directly associated with handling respective areas of work, assisted the Advisory Panel in preparing preliminary assessments and background material, which served as inputs to the Advisory Panel’s work (See Annex B for the composition of the Technical Group and terms of reference). Apart from the officials indicated in Annex B, the Panel also benefited from the inputs of the officials indicated in Annex C.

Approach and Methodology

The Technical Group identified the standards issued by the International Accounting Standards Board (IASB) and the International Auditing and Assurance Standards Board (IAASB) as the relevant standards applicable to the assessment of the accounting and auditing standards, respectively.

The assessment of adherence to bankruptcy laws was based on the revised draft of the ‘Principles and Guidelines for Effective Insolvency and Creditor Rights Systems’ issued by the World Bank.

Likewise, the OECD principles for Corporate Governance were identified as the relevant international standard applicable to assess corporate governance.

The adherence to payment and settlement systems was assessed on the standards developed by the Committee on Payment and Settlement Systems (CPSS) and the International Organisation of Securities Commission (IOSCO).

The preliminary assessments made by the Technical Groups were considered by the Advisory Panel with closer involvement of four sub-panels (Annex D) in the areas of accounting and auditing, bankruptcy laws, corporate governance and payment and settlement systems. The Advisory Panel had a total of five meetings to consider the assessments and recommendations and to finalise its Report.

Peer Review

At the request of the CFSA, seven national and also international experts on areas relating to accounting, auditing, bankruptcy laws, corporate governance and payment and settlement systems peer reviewed the draft Reports on respective assessments and recommendations (Annex E).

The Advisory Panel considered in-depth the comments made by the peer reviewers and appropriately modified the Report after incorporating the comments/suggestions. The Panel had also the option of not concurring with the peer reviewers’ comments, if they were considered not appropriate, particularly in the Indian context. In the interest of transparency, the comments of the peer reviewers and the stance taken by the Panel are provided appropriately in respective parts of this Report.

Scheme of the Report

The Report is divided into seven chapters. After the ‘Approach to Assessment’ in this chapter, chapter II covers assessment of adherence to accounting standards. Chapter III covers assessment of adherence to auditing standards. Chapter IV covers assesment of adherence to corporate governance principles. Chapter V covers the assessment of adherence to standards pertaining to payment and settlement systems. Chapter VI covers the assessment of adherence to principles for effective insolvency and creditor rights systems and chapter VII gives the summary of recommendations of the Panel.

 
 
 

Annex A

 
RESERVE BANK OF INDIA

CENTRAL OFFICE

SHAHID BHAGAT SINGH ROAD

MUMBAI – 400 001, INDIA

 

DEPUTY GOVERNOR

 
MEMORANDUM
 
 
Constitution of Advisory Panel on Institutions and Market Structure
 
A Committee on Financial Sector Assessment (CFSA) has been constituted by the Government of India in consultation with the Reserve Bank, with the objective of undertaking a self-assessment of financial sector stability and development. One of the analytical components of Financial Sector Assessment would encompass a comprehensive assessment of the status and implementation of various international financial standards and codes.

2.  In this connection, the CFSA has decided to constitute an Advisory Panel on Institutions & Market Structure comprising the following:
 

No

Name

Designation/Institution

 

1.

Shri C. M. Vasudev

Former Secretary, Economic Affairs, Government of India

Chairman

2.

Shri C. B. Bhave

Chairman and Managing Director, National Securities Depository Ltd.

Member

3.

Dr. K. C. Chakraborty

Chairman and Managing Director, Punjab National Bank

Member

4.

Dr. R. Chandrasekar

Dean, Academic Affairs, Institute
for Financial Management and Research

Member

5.

Dr. Ashok Ganguly

Chairman, Firstsource Solutions Ltd.

Member

6.

Dr. Omkar Goswami

Chairman, CERG Advisory Pvt. Ltd.

Member

7.

Shri Y. H. Malegam

Chartered Accountant

Member

8.

Dr. Nachiket Mor

Deputy Managing Director, ICICI Bank Ltd.

Member

9.

Shri T. V. Mohandas Pai

Member of the Board, Infosys Ltd.

Member

10.

Dr. Janmejaya Sinha

Managing Director, Boston Consulting Group

Member

11.

Shri Gagan Rai

Chairman and Managing Director, National Securities Depository Ltd.

Member

 

3.       In addition, the Advisory Panel can utilise the expertise of the following ex-officio Special Invitees:

 

No.

Name

Designation/Organisation

1.

Shri Jitesh Khosla

Joint Secretary (Corporate Affairs), Ministry of Corporate Affairs, Government of India

2.

Dr. K.P.Krishnan

Joint Secretary (Capital Markets), Department of Economic Affairs, Ministry of Finance, Government of India

3.

Dr. R.B.Barman

Executive Director, Reserve Bank of India

4.

Shri Anand Sinha

Executive Director, Reserve Bank of India

5.

Shri C.R.Muralidharan

Member, Insurance Regulatory and Development Authority

6.

Shri Sandeep Parekh

Advisor (Legal), Securities and Exchange Board of India

 

4.       The Advisory Panel will have the following terms of reference:

 

(i)   to identify and consider the relevant standards and codes as currently prescribed and applicable for institutions and market structure in terms of bankruptcy laws, accounting and auditing, payment and settlement systems and corporate governance policies and evaluate their implementation in the Indian context;

(ii)   to identify the gaps in adherence to the respective standards and codes and the reasons therefor; and

(iii)   to suggest possible roadmaps addressing, inter alia, the developmental issues relating to respective standards and codes, in a medium-term perspective.

 
5. The Advisory Panel would have the option of co-opting as Special Invitees any other experts as they deem fit.
 
6. The secretarial assistance to the Advisory Panel will be provided by the Reserve Bank of India. The Technical Group on Institutions and Market Structure constituted by the Reserve Bank at the instance of the Committee has already progressed with the technical work with regard to above terms of reference. The technical notes and background material prepared by these groups would inter alia form the basis for discussion by the Panel and in drafting of the Report.
 
7. The Advisory Panel will prepare a detailed Report covering the above aspects and the Government of India/Reserve Bank of India will have the discretion of making the Report public, after a peer review, as they may deem fit.
 
8. The Advisory Panel is expected to submit its Report in about three months from the date of its first meeting.
 
 
(Rakesh Mohan)

Deputy Governor and Chairman of the

Committee on Financial Sector Assessment

Mumbai
August 10, 2007
 
 
 

Annex B

 
RESERVE BANK OF INDIA

CENTRAL OFFICE

SHAHID BHAGAT SINGH ROAD

MUMBAI – 400 001, INDIA

 
DEPUTY GOVERNOR
 

MEMORANDUM

 

Constitution of Technical Group on Institutions & Market Structure

 

The Committee on Financial Sector Assessment (CFSA) will undertake a self-assessment of financial sector stability and development. One of the analytical components of Financial Sector Assessment would encompass a comprehensive assessment of the status and implementation of various international financial standards and codes. CFSA has decided to constitute a Technical Group on Institutions & Market Structure comprising the following:

 

No.

Name

Designation/Institution

 

1.

Shri K. D. Zacharias

Legal Adviser-in-Charge, LD, RBI

Member

2.

Dr. Janak Raj

Advisor, DEAP, RBI

Member

3.

Shri Chandan Sinha

Chief General Manager, FMD, RBI

Member

4.

Shri A. P. Hota

Chief General Manager, DPSS, RBI

Member

5.

Shri P. K. Panda

General Manager, DBS, RBI

Member

6.

Shri P. R. Ravimohan

General Manager, DBOD, RBI

Member

7.

Shri D. Rajagopala Rao

General Manager, DNBS, RBI

Member

8.

Shri Amarjeet Singh

Regional Manager, SEBI

Member

9.

Shri Pawan Kumar

Director, Ministry of Corporate Affairs

Member

10.

Ms. Mamta Suri

Deputy Director, IRDA

Member

11.

Shri K. Kanagasabapathy

Secretary to CFSA

Convenor

 

2. The Group will have the following terms of reference:

 

(i) to identify the relevant standards and codes as currently prescribed by various standard-setting bodies in relation to bankruptcy laws, accounting, auditing, payment and settlement systems and corporate governance policies;

(ii)  to compile relevant data and information on follow-up of earlier assessments and recommendations made by the earlier FSAP and also internally by the Standing Committee on   International Financial Standards and Codes on the relevant standards;

(iii) to contribute to technical work in the implementation of the remaining elements of standards and codes pertaining to bankruptcy laws, accounting, auditing,payment and settlement systems and corporate governance;

(iv) to identify the gaps in adherence to the respective standards and codes and the reasons therefor;

(v)   to suggest possible roadmaps addressing, inter alia, the developmental issues, in the medium-term perspective; and

(vi) to provide a fair and independent assessment on bankruptcy laws, accounting, auditing, payment and settlement systems and corporate governance in the form required by Advisory Groups constituted by the Reserve Bank and other regulatory agencies.

 
3. The Group would function under the overall guidance of Shri V.K. Sharma, Executive Director, Reserve Bank of India.
 
4. The Group will also be directed by decisions taken by the Advisory Panel on Institutions and Market Structure.
 
5. A list of Special Invitees who could act as resource persons to the Group and whose expertise can be called upon by the Group while preparing inputs for the Advisory Panels is provided in Annex C. The Group may co-opt as special invitees, one or more of the identified officials, or any other officials from the Reserve Bank, Government or other agencies as they deem appropriate.
 
6. The Group is expected to complete its task in the minimum possible time which, in any case, would not go beyond three months from the date of its constitution.
 
 
(Rakesh Mohan)
Chairman

March 1, 2007

 
 
 

Annex C

 
 

List of Officials who Assisted the Advisory Panel

The Panel acknowledges the contributions made by the following officials in preparation of the Report.

No.

Name

Designation

1.

Dr. Janak Raj

Adviser, RBI

2.

Shri T. B. Satyanarayana

General Manager, RBI

3.

Shri R. N. Kar

General Manager, RBI

4.

Shri Arun Pasricha

General Manager, RBI

5.

Ms. Sudha Damodar

General Manager, RBI

6.

Dr. Mohua Roy

Director, RBI

7.

Shri S. Dhamodaran

Senior General Manager, ICICI Bank

8.

Shri Jaikant Singh

Director, Accounting and Auditing, MCA

9.

Shri O. N. Ravi

Senior Vice-President, CCIL

10.

Ms. Bhavna Doshi

Senior Adviser, KPMG

11.

Shri Vijay Kapur

Director, AASB

12.

Shri P. Rama Rao

Official Liquidator, Ministry of Corporate Affairs, GoI

13.

Shri Himanshu Mohanty

Deputy General Manager, RBI

14.

Shri Sunil T. S. Nair

Deputy General Manager, RBI

15.

Ms. Jyoti Jindgar

Deputy General Manager, SEBI

16.

Ms. Nilima Ramteke

Assistant General Manager, RBI

17.

Shri Puneet Pancholy

Assistant General Manager, RBI

18.

Shri K. Vijay Kumar

Assistant General Manager, RBI

19.

Shri D. Sathish Kumar

Assistant General Manager, RBI

20.

Shri Nishanth Gopinath

Assistant General Manager, RBI

21.

Shri L. M. Devare

Official Liquidator, Bank of Karad

22.

Ms. Vandana Jindal

Assistant General Manager, SEBI

23.

Shri A. Abhilash

Legal Officer, RBI

24.

Shri B. Bohra

Legal Officer, RBI

 
 
Annex D
 

Details of Sub-Panels formed by the Advisory Panel on Institutions and Market Structure

Subject Area

Members of Sub-Panel

Accounting and Auditing

Shri Y. H. Malegam*

Bankruptcy Laws

Dr. Omkar Goswami

Dr. K. C. Chakraborty

Corporate Governance

Dr. Ashok Ganguly

Dr. R. Chandrasekar

Shri T. V. Mohandas Pai

Payment and Settlement Systems

Shri C. B. Bhave

Dr. Janmejaya Sinha

Dr. Nachiket Mor

Shri Gagan Rai

* Commented on the Draft Report on Assessment of Adhrence to Corporate Governance Principles also.

 
 
 
Annex E
 
 

List of Peer Reviewers who Reviewed the Assessments

No.

Subject

Name/s of the Peer Reviewer/s

1.

Accounting

Mr. Ian Mackintosh, Chairman, Accounting Standards Board, UK
Dr. Kamal Gupta, FCA

2.

Auditing

Mr. Ian Mackintosh, Chairman, Accounting Standards Board, UK
Shri N. P. Sarda, Chairman, Deloitte, Haskins and Sells

3.

Bankruptcy Laws

Mr. Thomas Baxter, Jr.
General Counsel and Executive Vice President
Federal Reserve Bank of New York
Shri T. R. Sridharan,
Former Chairman, Canara Bank

4.

Corporate Governance

Sir Andrew Large, Former Deputy Governor, Bank of England

5.

Payment and Settlement
Systems

Mr. Greg Johnston, Head of Banking,
Reserve Bank of Australia

 
 

Chapter II

 
Assessment of Accounting Standards
 

Contents

 

Assessment of Accounting Standards

Section
No.

Subject

Page No.

1.

Introduction

19

 

1.1

Significant Findings and Recommendations of Advisory Group-2001

20

 

1.2

Significant Findings and Recommendations of Report on Observance
of Standards and Codes -2004

20

2.

Accounting Standards – The International Benchmark

21

3.

Accounting Standards in India

23

 

3.1

Composition of the Accounting Standards Board

23

 

3.2

The Accounting Standard-setting Process

23

 

3.3

Recognition of Accounting Standards

24

4.

Present Status of Accounting Standards

25

 

4.1

Accounting Standards for Enterprises Engaged in Commercial, Industrial or Business Activities

25

 

4.2

Accounting Standards for Small & Medium-sized Enterprises

26

 

4.3

Accounting Standards for Not-for-Profit Organisations
(NPOs)/Non-governmental Organisations (NGOs)

27

 

4.4

Accounting Standards for Local Bodies

27

 

4.5

Accounting Standards for Governments

28

 

4.6

Accounting Standards for Business Enterprises Governed by Specific
Acts of Parliament

28

5.

Divergences between Basel Committee Norms and IFRS and the Indian Position

28

6.

Enforcing Compliance

29

 

6.1

The Companies Act

29

 

6.2

Listing Agreements

29

 

6.3

Disciplinary Action

29

 

6.4

Financial Reporting Review Board

29

 

6.5

Peer Review Board

29

 

6.6

Quality Review Board

30

7.

Status of Progress on Recommendations of Reports of 2001 and 2004

30

 

7.1

Bridging Gap Between Standards Issued by IASC/IASB & ICAI

30

 

7.2

Reducing Areas of Departures from IAS/IFRS

31

 

7.3

Mention of Deviation from IFRS and Reason There for in AS

32

 

7.4

Convergence with IFRSs

32

 

7.5

Single Standard-setting Authority

33

 

7.6

Emerging Issues Task Force

34

 

7.7

Monitoring Compliance with Accounting Standards

34

 

7.8

Rationalisation of Provisions of Companies Act with Accounting
Standards

34

8.

The Way Forward

34

 

8.1

Convergence with IFRSs

34

 

8.2

Greater Participation in International Standard-setting Process

35

 

8.3

Development of Accounting Standards

35

 

8.4

Sector-specific Application Guidance

35

 

8.5

Interpretations

35

 

8.6

Authority for Issuance of Standards

36

 

8.7

Accounting Standards for Government

36

 

8.8

Co-operative Banks

36

 

8.9

Harmonisation of Legal and Regulatory Positions with
Accounting Standards

37

 

8.10

Compliance Monitoring Programme

37

 

8.11

Compliance Guidance/Training Programmes

37

List of Appendices

 

 

Appendix A:

Composition of NACAS

38

 

Appendix B:

Comparative Statement of International Accounting Standards/International Financial Reporting Standards and Indian Accounting Standards (As on October 31, 2008)

39

 

Appendix C:

Definition of Small and Medium-sized Company as per Clause 2(f) of the Companies (Accounting Standards) Rules, 2006

43

 

Appendix D:

Harmonised Criteria for Classification of Non-corporate Entities as Decided by the Institute of Chartered Accountants of India

44

 

Appendix E:

Major Departures in Indian Accounting Standards from the Corresponding IFRSs

45

 

Appendix F:

Composition of the Task Force

64

 

Appendix G:

Accounting Standards:s A Peer Review of the Advisory Panel Report

65

 

Appendix H:

Accounting Standards: A Peer Review of the Advisory Panel Report

68

 
 
 

1.    Introduction

1 Accounting Standards provide the basis for accurate financial reporting which is essential in a modern market corporate-driven economy. Robustness, reliability and transparency of financial reports determine the effectiveness of financial decision-making process, resource allocation and functioning of capital markets.

2 Accounting Standards harmonise different accounting policies and practices in use in a country, leading to reduction in accounting alternatives used in the preparation of financial statements, standardisation of presentation and disclosure norms to achieve comparability of financial statements of the different enterprises functioning in a country.

3 This chapter of the Report describes the current status of observance of International Accounting Standards in India and the initiatives taken in this regard by the Institute of Chartered Accountants of India (ICAI), the premier accounting body stablished under an Act of Parliament. ICAI operates in association with and with the support of the Ministry of Corporate Affairs, the Reserve Bank and various other regulatory bodies like Securities and Exchange Board of India (SEBI).

4 This assessment builds on the two immediately preceding assessment reports on the subject:

(i) The Report (January 2001) of the Advisory Group on Accounting and Auditing appointed by the Reserve Bank to evaluate and report on observance of international standards and codes in various areas impacting overall financial system (Advisory Group-2001); and

(ii) The Report on Observance of Standards and Codes (December 2004) (ROSC) issued as a part of joint initiative of the World Bank and the International Monetary Fund (IMF) for reviewing the strengths and weaknesses of corporate accounting and auditing practices in India (ROSC-2004).

 

5. After listing key findings and recommendations of Advisory Group-2001 and ROSC-2004, this chapter provides a brief description of the international initiatives for harmonisation of accounting practices and policies and the international benchmark used for this assessment. It then proceeds to provide the status of Indian Accounting Standards, the standard-setting process, legal and regulatory framework in this regard and a comparison of Indian Accounting Standards vis-à-vis International Accounting Standards. It then sets out the progress made in relation to the observations/recommendations made in the earlier reports, specifically, ROSC-2004. This is followed by recommendations of the Advisory Panel on the way forward.

 

1.1  Significant Findings and Recommendations of Advisory Group-2001

 

6. The Group compared the Indian Accounting and Auditing Standards with international standards, identified gaps and made recommendations to bridge the gaps. Its principal observations relating to Accounting Standards were:

(i)   There is a significant gap between Standards issued by International Accounting Standards Committee (IASC) and ICAI, especially in respect of standards relating to financial institutions.

(ii)   All standards issued by ICAI do not correspond to the standards issued by IASC.

Accordingly, it recommended that:
 

(i)   ICAI must take steps to reduce the gaps between Indian and International Accounting Standards and take up, on emergency basis, issuance of standards for financial institutions in line with (a) IAS30, Disclosures in Financial Statements of Banks and Similar Financial Institutions; (b) IAS32, Financial Instruments: Disclosure and Presentation; and (c) IAS39, Financial Instruments: Recognition and Measurement.

 

(ii)   It should be the endeavour of the Accounting Standards Board (ASB) that Indian Accounting Standards correspond, as far as possible with the International Accounting Standards and wherever there is departure, the Standard should identify the same and explain the reasons for departure.

 

(iii)   ASB should be an autonomous body within ICAI with its own staff and independent funding.

 

(iv)   There should be only one standard-setting authority in the country.

 

(v)  ASB should set up a separate committee to address issues requiring immediate pronouncements.

 

(vi)  There should be a mechanism in place to monitor compliance with the standards.

 

1.2  Significant Findings and Recommendations of Report on Observance of Standards and Codes-2004

 

7.  ROSC-2004 reported as under:

‘India’s accounting profession was among the earliest to develop historically when the Indian Companies Act was enacted in the mid-1800s, giving the accounting profession its start. Since then, considerable efforts have been made to align India’s accounting and auditing standards and practices with the internationally accepted standards and codes. However, there is room for improvement.

Indian accounting and auditing standards are developed on the basis of international standards; and the country has many accountants and auditors who are highly skilled and capable of providing international- standard services. However, in order to further improve the quality of corporate financial reporting in India, there is a need to improve the institutional framework and take steps for enhancing compliance with the applicable standards and rules.

Enhanced by significant inputs from stakeholders, this Report provides some principles-based policy recommendations aimed at strengthening the corporate financial reporting regime in India. These recommendations specifically focus on strengthening the monitoring and enforcement arrangements. Moreover, suggestions have been made on some important elements of an independent oversight body for the auditing profession, from a public interest perspective. The objectives of the recommendations are to build on the existing system and promote a gradual process of improvement’.

 

8. The key policy recommendations of ROSC-2004, so far as they relate to accounting and auditing practices, are, accordingly focussed on strengthening of monitoring and enforcement mechanism and the role of each link in the monitoring and enforcement chain:

(i)  the top management/preparers and issuers of financial statements;

(ii) the auditors reporting on the extent of compliance with Accounting Standards by the preparers of financial statements while conducting audit in accordance with applicable auditing standards; and

(iii) regulators preventing non-compliance with accounting and auditing standards through monitoring and enforcement of activities of both top management/ preparers of financial statements and auditors auditing and reporting on these financial statements.

The Report made the following key recommendations in relation to Accounting Standards/practices:

(i) Steps be taken to issue national standards for International Financial Reporting Standards (IFRSs) for which national standards are not yet issued.

(ii) Rationalise Companies Act, specifically, Schedule VI and the rates of depreciation, to bring it in line with Accounting Standards.

(iii) ICAI be recognised as single accounting standard-setting body.

(iv) Bring regulations and monitoring of financial reporting practice by all corporate banks under purview of the Reserve Bank.

(v) Scale up structured training programme for ICAI members.

(vi) Improve professional education and training arrangements.

 

2. Accounting Standards – The International Benchmark

 
9. The need for harmonising accounting practices and policies adopted in different countries was recognised by various accounting bodies of the world when, as result of an agreement between accountancy bodies in Australia, Canada, France, Germany, Japan, Mexico, the Netherlands, UK, Ireland and the US, the International Accounting Standards Committee (IASC) was constituted in 1973 for harmonising global accounting policies and practices by developing International Accounting Standards (IASs). This initiative towards the harmonisation of accounting policies received a boost with the constitution of the International Federation of Accountants (IFAC) in 1977. IFAC was established by agreement among 63 professional accounting bodies from 51 countries with the objective of strengthening the accountancy profession by developing high quality international standards and supporting their adoption and use.
 

10. The Standards issued by IASC were described as International Accounting Standards (IAS). In April 2001, IASC was reconstituted as the International Accounting Standards Board (IASB) and took over the responsibility of setting Accounting Standards from IASC. The Standards issued by IASB are known as the IFRS. IASC had issued 41 Standards till 2001, when a process of restructuring was undertaken and the role of development of International Accounting Standards was transferred to IASB. Since then, new IFRSs have been issued, many IASs have been revised and certain IASs have been withdrawn. As and when IASs are completely revised, they are issued as the IFRSs. As on date, 29 IASs are in force, the rest having been withdrawn. IASB has issued 8 IFRSs. IASs and IFRSs are collectively referred to as the IFRSs.

 

11. The interpretations of IASs and IFRSs are developed by the International Financial Reporting Interpretations Committee (IFRIC). IFRIC replaced the former Standing Interpretations Committee (SIC) in March 2002. IFRIC’s mission is ‘to interpret the application of International Accounting Standards (IASs) and International Financial Reporting Standards (IFRSs) and provide timely guidance on financial reporting issues not specifically addressed in IASs and IFRSs, in the context of the IASB framework, and undertake other tasks at the request of the IASB’.

 

12. Besides the IFRSs, which are currently adopted or adapted by large number of countries, the Accounting Standards developed by United States of America (commonly referred to as US GAAPs – Generally Accepted Accounting Practices) have also assumed significance in the world of global financial reporting because of the increased number of global enterprises seeking listing in US capital markets. This has resulted in two widely recognised and used financial reporting standards; IFRSs and US GAAPs.

 
13. Recognising the influence of these two sets of financial reporting standards in establishing a benchmark in setting the world’s financial reporting system, the Financial Accounting Standards Board (FASB) of the US and IASB felt that a sensible way to achieve a single set of the global financial reporting standards would be to move towards convergence of US GAAPs and IFRSs. A joint meeting between FASB and IASB held in October 2002 in Norwalk, USA formalised their commitment to the convergence of US GAAPs and IFRSs by issuing a memorandum of understanding (‘Norwalk Agreement’) and pledged to use their best efforts to make their existing financial reporting standards fully compatible as soon as is practicable, and to co­ordinate their future work programmes to ensure that once achieved, compatibility is maintained.
 
14. The Securities Exchange Commission (SEC) of the US announced on November 15, 2007 that non-US companies will be allowed to file their accounts based on the IFRSs without requiring to file the reconciliation statement between IFRSs and US GAAPs for the financial statements covering years ending after November 15, 2007 and 60 days after the relevant amendments to rule are published in the Federal Register.
 
15. The International Organisation of Securities Commission (IOSCO), recognising the need for standardisation of accounting practices followed globally in view of growing cross-border movement of capital, has propagated the use of the IFRSs as the uniform language of business.
 
16. The European Union (EU) has also adopted IFRSs as financial reporting standards for all EU- listed companies for preparing the consolidated financial statements from January 1, 2005. Australia has also adopted IFRSs from 2005 and New Zealand from 2007. Canada has announced that it will adopt IFRSs from 2011.
 

17.  The Report of Advisory Group-2001 and ROSC-2004 used IFRSs as the benchmark for their assessment. Accordingly, IFRSs have been used as the benchmark for this Report.

 

3.    Accounting Standards in India

 
18. The Indian accounting profession is among the oldest in the world. It was developed formally when the Indian Companies Act was enacted in the mid-1800s.
 
19. The process of codification of accounting practices in the form of Accounting Standards in India started with the establishment of the Accounting Standards Board (ASB) by ICAI in 1977. While formulating Indian Accounting Standards, ASB takes into consideration the applicable laws, customs, usages, level of development and business environment prevailing in the country and makes suitable modifications to International Accounting Standards.
 

3.1  Composition of the Accounting Standards Board

 

20.  ICAI has established the ASB as a committee of the Council of ICAI. The composition of the ASB is broad-based with a view to ensuring the participation of all interest groups in the standard-setting process. These interest groups include industry, various departments of government and regulatory authorities, financial institutions, academic and professional bodies. Industry is represented on the ASB by their apex level associations, viz., Associated Chambers of Commerce and Industry of India (ASSOCHAM), Federation of Indian Chambers of Commerce and Industry (FICCI) and Confederation of Indian Industries (CII). As regards government departments and regulatory authorities, the Reserve Bank, Insurance Regulatory Development Authority, Ministry of Corporate Affairs, Central Board of Direct Taxes, Comptroller & Auditor General of India, Controller General of Accounts, Securities and Exchange Board of India and Central Board of Excise and Customs are represented on the ASB. Besides these, representatives of academic and professional institutions such as universities, Indian Institutes of Management, Institute of Cost and Works Accountants of India and Institute of Company Secretaries of India are also represented on the ASB. Apart from these interest groups, members of the Central Council of ICAI are also nominated on the ASB.

 

3.2 The Accounting Standard-setting Process

 

21. Accounting standard-setting, by its very nature, involves an optimal balance of requirements of financial information for various interest groups having a stake in financial reporting. With a view to reaching consensus, to the extent possible, as to the requirements of the relevant interest groups and thereby bringing about general acceptance of Accounting Standards among such groups, considerable research, consultations and discussions with the representatives of the relevant interest groups at different stages of standard formulation becomes necessary.

The standard-setting procedure of the ASB, as briefly outlined below, is designed to ensure such consultation and discussions:

(i)   Identification of the broad areas by ASB for formulating Accounting Standards.

(ii)  Constitution of the study groups by ASB for preparing preliminary drafts of the proposed Accounting Standards.

(iii)  Consideration of the preliminary draft prepared by the study group by ASB and revisions, if any, of the draft on the basis of deliberations by ASB.

(iv)  Circulation of the draft, so revised, among Council members of ICAI and 12 specified outside bodies such as Standing Conference of Public Enterprises (SCOPE), Indian Banks’ Association, apex-level industry associations, SEBI, IRDA, Comptroller and Auditor General of India (C& AG) and Ministry of Corporate Affairs, for comments.

(v) Meeting with the representatives of specified outside bodies to ascertain their views on the draft of the proposed Accounting Standard.

(vi) Finalisation of the Exposure Draft of the proposed Accounting Standard on the basis of comments received.

(vii) Issuance of the Exposure Draft inviting public comments.

(viii) Consideration of the comments received on the Exposure Draft and finalisation of the draft Accounting Standard by ASB for submission to the Council of the ICAI for its consideration and approval for issuance.

(ix) Consideration of the draft Accounting Standard by the Council of ICAI, and if found necessary, modification of the draft in consultation with ASB.

(x) Issuance of the Accounting Standard, so finalised, under the authority of the Council of ICAI.

 
 

3.3 Recognition of Accounting Standards

 

22. Accounting Standards issued by ICAI received legal recognition in 1998 with the insertion of Sections 211(3A), (3B) and (3C) in the Companies Act, 1956. These sections require all companies (private or public) to prepare their financial statements in accordance with the Accounting Standards recommended by ICAI and prescribed by the Central Government in consultation with the National Advisory Committee on Accounting Standards (NACAS), which was constituted by the Central Government on 29 August 2001 under authority of Section 210 A of the Companies Act, 1956 with its secretariat at the ICAI. Its constitution is given in Appendix A.

 
23. The Standards issued by ICAI are deliberated at length by NACAS and recommended to the Central Government for notification. The Ministry of Corporate Affairs vide its Notification dated December 7, 2006 notified Accounting Standards 1 to 7 and 9 to 29. as formulated by ICAI for adoption by companies.
 

24. SEBI, through the Stock Exchange listing agreements, requires listed companies to mandatorily comply with all the Standards as prescribed or deemed to be prescribed under the Companies Act, 1956 issued by ICAI from time to time.

 

25. IRDA requires insurance companies to follow the Standards issued by ICAI.

 

26. The Reserve Bank requires commercial banks to follow the Standards issued by ICAI through its binding circulars/guidelines. It also provides guidance to the banks on the application of Standards, where required.

 

27. Apart from the corporate bodies, the Council of ICAI has made various Accounting Standards mandatory in respect of certain non­corporate entities such as partnership firms, sole-proprietary concerns/individuals, societies registered under the Societies Registration Act, trusts, associations of persons, and Hindu Undivided Families, where financial statements of such entities are statutorily required to be audited, for example, under Section 44AB of the Income-tax Act, 1961. The Council has cast a duty on its members to examine compliance with the Standards in the financial statements covered by their audit and in the event of any deviations therefrom, to make adequate disclosures in their audit reports so that the users of the financial statements are made aware of such deviations.

 
 

4. Present Status of Accounting Standards

 
 

4.1 Accounting Standards for Enterprises Engaged in Commercial, Industrial or Business Activities

 
28. Accounting Standards issued by the ICAI are applicable to enterprises engaged in industrial, commercial or business activities irrespective of the form of organisation (corporate, co-operative, partnership or even proprietorship concerns) and also irrespective of the objective for which it is established (charitable, religious or not-for-profit).
 
29. So far, 32 Indian Accounting Standards on the following subjects have been issued by ICAI:
 

AS 1   Disclosure of Accounting Policies

AS 2   Valuation of Inventories

AS 3   Cash Flow Statements

AS 4   Contingencies and Events Occurring after the Balance Sheet Date

AS 5   Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies

AS 6   Depreciation Accounting

AS 7   Construction Contracts (revised 2002)

AS 8   Accounting for Research and Development (withdrawn pursuant to the issuance of AS 26)

AS 9   Revenue Recognition

AS 10  Accounting for Fixed Assets

AS 11  The Effects of Changes in Foreign Exchange Rates (revised 2003)

AS 12   Accounting for Government Grants

AS 13   Accounting for Investments

AS 14   Accounting for Amalgamations

AS 15   Employee Benefits (Revised 2005)

AS 16   Borrowing Costs

AS 17   Segment Reporting

AS 18  Related Party Disclosures

AS 19  Leases

AS 20  Earnings Per Share

AS 21  Consolidated Financial Statements

AS 22   Accounting for Taxes on Income

AS 23  Accounting for Investments in Associates in Consolidated Financial Statements

AS 24  Discontinuing Operations

AS 25  Interim Financial Reporting

AS 26  Intangible Assets

AS 27  Financial Reporting of Interests in Joint Ventures

AS 28  Impairment of Assets

AS 29  Provisions, Contingent Liabilities and Contingent Assets

AS 30 Financial Instruments: Recognition and Measurement (Recommendatory from April 1, 2009 and mandatory from April 1, 2011) AS 31 Financial Instruments: Presentation (Recommendatory from April 1, 2009 and mandatory from April 1, 2011)

AS 32   Financial Instruments: Disclosures

 
All these standards use IFRSs as a base. A comparative statement setting out number and subject of IFRSs and IASs is given in Appendix B.
 
 

4.2 Accounting Standards for Small and Medium-sized Enterprises

 
 
30. Indian Accounting Standards are, in general, applicable to all entities whether there is public interest or not and irrespective of their form of organisation or size (share capital, turnover, number of employees). With the expansion in the coverage of Accounting Standards, it was felt that an application of all Accounting Standards to all entities (which includes even non-corporate entities who are required to get their financial statements audited by chartered accountants) would place too heavy a burden on small and medium enterprises in terms of cost and effort which would not be commensurate with the
benefits.
 
31. Therefore, for the purpose of applying the standards, ICAI categorised enterprises into three levels, i.e., Level I, Level II and Level III. Level II and Level III are considered to be SMEs. However, as per the notification of the Accounting Standards under the Companies Act, companies have been classified into two categories only, i.e., Small and Medium Companies (SMCs) (Refer Appendix C for meaning of SMC) and other than SMCs. ICAI has recently harmonised its classification criteria with those under the Companies Act. Consequently, from accounting periods commencing on or after April 1, 2008 the position is as follows:
 

•   The criteria for being categorised as a Level I company of ICAI and those of companies other than SMCs under the Rules are now identical. Similarly, the criteria for being categorised as a Level II company under ICAI’s classification and those of SMCs under the Rules are the same.

•   Entities that are bodies corporate but not companies (e.g. a corporation set up under a Central or State Act) would be classified under the revised scheme of classification of ICAI under Levels I and II only.

•   Certain exemptions/relaxations have been given to enterprises falling in Levels II and III (i.e., small and medium-sized enterprises). The exemptions/relaxations are primarily in respect of disclosure requirements. In general, the recognition and measurement principles to be applied by SMCs are the same as those to be applied by Level I enterprises. The exemptions/relaxations available to Level II non-company entities as per ICAI’s classification would be the same as those available to SMCs under the Rules except that the aforesaid Level II entities that employ less than 50 employees during the accounting year will continue to enjoy certain exemptions/relaxations from AS 15, Employee Benefits, which are not available to SMCs under the Rules.

•   AS18 (Related Party Disclosures) and AS24 (Discontinuing Operations) apply to Level II non-company entities also. The Rules too do not give any exemption to SMCs from AS18 or AS 24.

 

The harmonised criteria applicable to non-companies are in Appendix D.

 
 

4.3   Accounting Standards for Not-for- Profit Organisations (NPOs)/Non- governmental Organisations (NGOs)

 
 

32. Accounting Standards issued by ICAI do not apply to only those NPOs/NGOs who carry on activities that are not commercial, industrial or business in nature. The Research Committee of ICAI has issued a Technical Guide on Accounting and Auditing in NPOs/NGOs which recommends that the Standards issued by ICAI should be applied by even NPOs/NGOs engaged in purely non-commercial, non-business or non- industrial activities. The Technical Guide explains the manner in which the Accounting Standards should be applied by NPOs/NGOs to their activities.

 

4.4 Accounting Standards for Local Bodies

 

33.  ICAI has been deeply involved in accounting reforms in government accounting, particularly, accounts of urban local bodies. It initially constituted a Sub-Committee of ASB for issuing Accounting Standards, for governments including urban local bodies in 1999. As a first step, it issued a Technical Guide on Accounting and Financial Reporting by urban local bodies, which contains recommendations relating to application of Accounting Standards, issued by ICAI, to urban local bodies. The purpose of this Technical Guide is to provide a broad framework for and directions to state governments and urban local bodies, ICAI members and others as they work to improve urban bodies’ accounting and financial reporting systems. The recommendations contained in the Technical Guide have received a positive response from many urban local bodies that have shifted or are in the process of shifting from cash basis accounting to accrual basis accounting. The process has gained momentum as these bodies are increasingly going to the capital markets for raising funds. However, these bodies are still following diverse accounting policies and practices in the preparation of their financial statements. Therefore, a need was felt for formulating a single set of high quality financial reporting standards for local bodies setting out recognition, measurement, presentation and disclosure requirements dealing with transactions and events in general purpose financial statements of local bodies.

 
34.Recognising this need to harmonise and improve accounting and financial reporting among local bodies, ICAI constituted an independent Committee on Accounting Standards for Local Bodies (CASLB) in March 2005. The composition of the CASLB is broad-based and ensures the participation of all interest-groups in the standard-setting process. Apart from the members of the Council of the ICAI, the CASLB comprises representatives of the Ministry of Urban Development, the Comptroller and Auditor General of India, Controller General of Accounts, National Institute of Urban Affairs, Ministry of Panchayati Raj, directorates of major local bodies, directorates of local fund audit departments, academic institutions and other eminent professionals co-opted by the ICAI.
 
35. CASLB has been constituted primarily for formulating standards for local bodies. It can also take steps for improving the accounting methodology and systems of local bodies, and act as a forum to receive feedback from local bodies regarding the problems faced by them in the adoption of accrual accounting and in the application of the standards. While formulating standards for local bodies, CASLB gives due consideration to the International Public Sector Accounting Standards (IPSASs) prepared by the International Public Sector Accounting ASB) of IFAC and tries to integrate them, to the extent possible, with a view to facilitating global harmonisation.
 
36.The Committee’s first publication, namely, ‘Preface to the Accounting Standards for Local Bodies’, sets out the objectives and operating procedures of CASLB and explains the scope and authority of the Standards for local bodies. Two Accounting Standards for local bodies (ASLB) are issued: ASLB3, Revenue from Exchange Transactions and ASLB4, Borrowing Costs. The Exposure Draft of the ‘Framework for Preparation and Presentation of Financial Reports by Local Bodies’ is being finalised on the basis of the comments received on its limited exposure among the specified outside bodies. The drafts of the proposed standards for local bodies on Presentation of Financial Statements (ASLB1), Property, Plant and Equipment (ASLB5) and Revenue from Exchange Transactions (ASLB3) are being finalised for issuance for limited exposure1 among specified outside bodies and Council Members. CASLB has also undertaken other projects for the preparation of standards for local bodies corresponding to IPSASs.
 

4.5 Accounting Standards for Governments

 

37.The Office of the Comptroller and Auditor General of India constituted the Government Accounting Standards Advisory Board (GASAB) in August 2002 in order to establish and improve standards of governmental accounting and financial reporting and enhance accountability mechanisms for Union and the State Government accounts. The recommendations made by GASAB will be considered by the Central Government for notification of the Standards to be adopted by governments. Amongst others, ICAI and the Reserve Bank are members of GASAB.

 

4.6  Accounting Standards for Business Enterprises Governed by Specific Acts of Parliament

 

38. Enterprises engaged in specified activities like banking, insurance or rate-regulated entities like electricity companies are governed by their specific statutes or regulations. These statutes or regulations, in general, set out the presentation and disclosure norms and, in specific cases, recognition and measurement principles. These norms and principles have an overriding effect over the norms and principles set out in the Indian Accounting Standards. These enterprises adopt Indian Accounting Standards in the absence of specific requirements or prescriptions under the statute or regulations governing an enterprise. Prescriptions under the statute or regulations are aimed at making more meaningful presentation of the financial information in the context of the activities of the concerned enterprise.

 
39. The banks in India, in addition to complying with the requirements of Indian Accounting Standards, are also required to adopt specific norms for certain items, e.g., loan-loss provisioning. The Reserve Bank has adopted the core principles for effective banking supervision ennunciated by the Basel Committee on Banking Supervision (BCBS). BCBS has set out 25 core principles (CPs) in September 1997 and revised them substantially in October 2006. CP 22 relates to Accounting and Disclosures.
 

5. Divergences between Basel Committee Norms and IFRS and the Indian Position

 

40. There is a significant divergence between the Basel Committee norms and the stipulations under IFRSs. These are more pronounced in the case of treatment of impairment of loans and

 

1’Limited exposure’ is used when it is exposed to limited number of bodies – these are specified bodies. After comments are received from these bodies, they are considered by the Board, modifications, if required, are carried out and then the draft is sent for general exposure.

 

loan-loss provisioning. Attempts are being made to achieve convergence between IASB and BCBS on various contentious issues. However, AS30 corresponding to IAS39 has not yet been implemented in India. A Group has been formed by the Reserve Bank comprising members from the Reserve Bank, ICAI and bankers under the umbrella of Indian Banks’ Association to iron out the differences and integrate the two approaches for smooth implementation by Indian banking system.

The insurance companies are required to adopt specific norms on income recognition, asset classification and provisioning as laid down by IRDA guidelines on the issue. Stipulations on insurance contracts as per the laws applicable to insurance companies in India and the one stipulated under IFRS4 on Insurance Contracts also have divergences from each other. Efforts have been initiated at ICAI and IRDA to integrate the two approaches and have a uniform standard. The ICAI has initiated steps to lay down the Accounting Standards with regard to insurance contracts.

 

6. Enforcing Compliance

 

6.1 The Companies Act

 

41. Companies governed by the Indian Companies Act, 1956 are required, by Section 211, to comply with Accounting Standards while preparing and presenting profit and loss account and balance sheet. The Section further requires that, in case of non-compliance, the company concerned shall disclose, in its profit and loss account and balance sheet, the deviation from the accounting standard, the reasons for such deviation, and the financial effect, if any, arising due to such deviation. Failure to comply with these requirements attracts fine upto Rs. 10,000 or imprisonment for a period up to six months or both.

 

6.2  Listing Agreement

 

42. The CEOs and CFOs of the companies, whose securities are listed on stock exchanges, are required to certify that the financial statements are in compliance with the Accounting Standards.

 

6.3 Disciplinary Action2

 

43.Auditors of companies are required to state whether, in their opinion, the profit and loss account and balance sheet comply with the accounting standards. This has been laid down in Section 227(3) of the Companies Act. Default by an auditor to report non-compliance invites disciplinary action. ICAI has a very robust system of dealing with complaints against members and it also takes suo motu action based on information relating to negligence or non- compliance of the provisions of the Companies Act and various other matters.

 

6.4  Financial Reporting Review Board

 

44.The Financial Reporting Review Board (FRRB) of the Institute undertakes a suo motu independent review of the published annual reports of the listed companies and certain other non-listed enterprises, as set out in the terms of reference of the FRRB, or based on any media reports and examines the same for any shortcomings in terms of financial reporting – compliance with the accounting standards, disclosures by the companies and also the adequacy of audit reports. Based on its findings, the FRRB can file a complaint with the relevant regulator, for example, SEBI, the Registrar of Companies or the Disciplinary Committee of the ICAI.

 

6.5 Peer Review Board

 

45. The Peer Review Board established by ICAI, in April 2002 aims at improving/enhancing the quality of service performed by members of

 

2 Disciplinary action comprises investigation, which is a detailed process and opportunity is given to the member to explain the case. If found guilty, the punishment could range from reprimand to permanent removal of the name of the member from the list of members, depending on the nature of default.

 

ICAI, especially in relation to compliance with the technical standards by a firm (Practice Unit). In this process, the adequacy of the audit procedures and documentation for specific attest engagements are reviewed by the peer reviewer and a report is filed with the Peer Review Board. The peer review is repeated after six months or so in case of Practise Units found wanting/deficient in processes and documentation for attest engagements. The process of peer review has a persuasive influence in improving the quality of compliance with technical standards, including Accounting Standards.

 

6.6 Quality Review Board

 

46.Although not directly concerned with the enforcement of Accounting Standards, the Quality Review Board, newly constituted in June 2007, will also have a persuasive influence and will encourage reporting of non-compliance with Accounting Standards. The Board will perform the following functions:

(i) make recommendations to the Council with regard to the quality of services provided by the members of the Institute;

(ii) review the quality of services provided by the members of the Institute including audit services; and

(iii) guide the members of the Institute to improve the quality of services and adherence to various statutory and regulatory requirements.

 

47. The Board has ten members, excluding the Chairman. Five are nominated by the Central Government and five by the Council of ICAI. The Chairman to the Board is nominated by the Central Government.

 

7. Status of Progress on Recommendations of Reports of 2001 and 2004

 

7.1 Bridging Gap between Standards Issued by IASC/IASB & ICAI

 

48. The process of formulation of Accounting Standards commenced in India in 1977 but got a momentum after the amendment of the Indian Companies Act, 1956 [Section 211(3C)] in 1998 which gave legal recognition to the Accounting Standards. Prior to 1998, there was no specific legal mechanism to enforce compliance with Accounting Standards by the enterprises although, through the pronouncement of the ICAI, it was mandatory for the auditors to report on non-compliance, if any. The compliance with Accounting Standards was mandated for listed companies through Listing Agreements with Stock Exchanges by SEBI.

 

49. The gap, as observed by the Advisory Group-2001, has since been significantly bridged. This is also recognised in the ROSC-2004. There are Indian Accounting Standard/ Standards issued or in the process of formulation, corresponding to all the relevant International Accounting Standards or the subjects are covered by guidance notes.

 

50. ICAI has so far issued 32 ASs. Recently, it issued AS30, Financial Instruments: Recognition and Measurement, AS31, Financial Instruments: Presentation, AS32, Financial Instruments: Disclosures corresponding to IAS39, IAS32 and IFRS7, respectively. The Indian markets did not and even at present do not have sophisticated financial instruments as are referred to and dealt with in the concerned IFRSs. It, therefore, has issued guidance notes that as and when a particular type of financial instrument is permitted, e.g., options and futures, then the ASs would become applicable.

 

51. AS1 to 7 and AS9 to 29, formulated by ICAI, have been notified by the Ministry of Corporate Affairs, on December 7, 2006 to come into effect in respect of accounting periods commencing on or after the aforesaid date and consequently, it is now obligatory for companies, whether a private company or public, listed on any stock exchange or not, to adopt these Accounting Standards in preparation and presentation of financial statements. Some of the notified Standards provide exemptions/relaxations to SMCs as defined in the notification (Refer Appendix C for the meaning of SMCs).

 

52. Banking companies, coming within the purview of the Companies Act, are required to follow the ASs in preparation and presentation of their financial statements as per the provisions of Section 211 of the Companies Act, 1956. For listed public sector banks, the stock exchange Listing Agreements make applicability of ASs mandatory.

 

53. The Reserve Bank requires banks, which are not governed by the Companies Act, 1956, to follow the ASs issued by ICAI in preparation and presentation of financial statements through binding circulars/guidelines. Similarly, other regulatory bodies like IRDA also require compliance with ASs issued by ICAI.

 

7.2     Reducing Areas of Departures from IAS/ IFRS

 

7.2.1   Reasons for Departures

 

54. IFRSs are adopted as a basis for formulation of Indian standards and due consideration is given to local customs, usage, practices, legal and regulatory environment. Departures have arisen:

•  On account of local legal and regulatory requirements – e.g. AS21 and IAS27, Consolidated Financial Statements due to definition of ‘control’ in terms of Indian Companies Act, 1956; AS25 and IAS34, Interim Financial Reporting as regards requirement of disclosure and presentation of interim statements.

•  On account of local economic environment – adoption of fair value – various IFRSs are based on fair value approach whereas markets in India were not considered to have necessary depth and breadth to provide reliable fair values for measurement purpose of accounting.

•  On account of conceptual differences – There are few areas of conceptual differences, e.g., recognition of provision on the basis of constructive obligation in IAS37, Provisions, Contingent Liabilities and Contingent Assets. As per this IAS, in case of restructuring, constructive obligation arises when an enterprise has detailed formal plan and the enterprise has raised valid expectation to those affected that it will carry out restructuring. ICAI feels that on aforesaid considerations, a liability does not crystallise and if a provision is required to be made on the aforesaid basis, it will be recognised at an early stage. In view of this aspect, AS29 does not specifically deal with constructive obligation. However, AS29 requires a provision to be created in respect of obligations arising from normal business practice, custom and a desire to maintain good business relation or act in an equitable manner. Hence, in such cases, general criteria for recognition of provision are required to be applied.

•  On account of level of preparedness – Accounting Standards in India, in general, apply to non-corporate entities as also to small and medium-sized enterprises. Further, Indian economy is in the developmental stage and, therefore, it was felt that the economy was not at a level that could have directly adopted International Standards; implementation of these Standards would have caused serious challenges.

 

55. A statement containing major departures in Indian Accounting Standards from the corresponding IFRSs is given in Appendix E.

7.2.2   Steps taken to Reduce Departures

Differences on account of local, legal and regulatory environment

 

56.  India has gained experience in applying Accounting Standards and as businesses are globalising, the ASB has taken a decision to include accounting treatments in accordance with IFRSs in the corresponding Indian Standards even though they may be inconsistent with legal or regulatory requirements on the basis that until the law is amended, the relevant legal requirement would prevail. For example, as per IAS32, redeemable preference shares, based on their substance, may be considered as a debt instrument instead of equity instrument. In the Indian legal framework, the settled position is to consider these as part of equity. ICAI has decided to retain the IAS32 position in AS31, Financial Instruments: Presentation, corresponding to IAS32. However, it is recognised in the standard itself that until the law is amended, legal position will prevail over the position set out in the AS.

Differences on account of local economic environment

 

57.  In the context of changing economic environment, the ASB has now decided to adopt fair value basis for valuation adopted in IAS39 in AS30, Financial Instruments: Recognition and Measurement, corresponding to IAS39.

 

58. The development and growth of the economy has led to more maturity and stability in the Indian businesses, leading to an enhancement of the ability of businesses to absorb structural changes, e.g., accounting for employee benefits, AS15, Employee Benefits, (Revised 2005) is now generally in consonance with the corresponding IAS19, despite complexities in the recognition and measurement requirements in relation to employee benefits.

 

7.3   Mention of Deviation from IFRS and Reason Therefor in AS

 

59. ICAI has started the practice of including an Appendix in all new/revised Accounting Standards which brings out major deviations, if any, from the corresponding International Standards (now IFRSs) and the reasons therefor.

 

7.4  Convergence with IFRSs

 

60. Although convergence with IFRSs has always been the endeavour and changes made in ASs are only minimal, recently, the Council of ICAI considered whether there should be total convergence with IFRSs, especially since more than 105 countries in the world have either adopted or permit the adoption of IFRSs in their countries and many more are expected to follow suit soon. The Council felt that convergence with IFRSs is an important policy decision and will significantly affect not only the status of accounting discipline in the country but also its economy. Therefore, it decided that before taking any decision, it would be useful to develop a concept paper laying down the strategy for convergence with IFRS. For this purpose, the ASB constituted a Task Force for developing a concept paper with the objective of exploring the approach for achieving convergence with the IFRSs and laying down a road-map for achieving convergence with IFRSs, with a view to make Indian standards IFRS-compliant. Composition of the Task Force is enclosed at Appendix F.

 

61. Accounting Standards are considered IFRS-compliant if a country adopts IFRSs in full. However, as per IASB’s Statement of Best Practices: Working Relationship between IASB and Other Country Standard-setters, adding disclosure requirements or removing optional treatments does not create non-compliance with IFRSs.

 

62. The Task Force considered the nature of IFRSs considering their complexity, interface with various legal and regulatory requirements and conceptual differences, if any, and the types of entities in respect of which the IFRSs can be adopted. The Task Force submitted the Concept Paper to the ASB which was accepted by the ASB and it submitted the same to the Council for its approval. The Council approved the Concept Paper, including its recommendation to fully adopt IFRSs issued by the IASB from the accounting periods commencing on or after April 1, 2011 for the listed entities and other public interest entities, such as banks, insurance companies and large-sized entities subject to its confirmation from the government and other legal and regulatory authorities. In respect of entities other than public interest entities, [termed as ‘small and medium-sized entities’ (SMEs)], it has been recommended that a separate standard for SMEs may be formulated based on the IFRS for Small and Medium-sized Enterprises when finally issued by the IASB, after modifications, if necessary. Compliance with this IFRS for SMEs is not necessary to make India IFRS-compliant. For a smooth transition to the IFRSs from April 1, 2011 ICAI has taken up the matter of convergence of IFRSs with NACAS, and various regulators such as the Reserve Bank, SEBI and IRDA. ICAI has also formulated its work-plan to ensure that IFRSs are effectively adopted from April 1, 2011. The Ministry of Corporate Affairs, has issued a statement that India would converge with IFRSs by April 1, 2011.

 

63. ASB has constituted a Group on Implementation of Convergence with IFRSs, broadly with the following objectives:

•   To approach various ministries and agencies such as NACAS and regulators for seeking their co-operation for this purpose, particularly, in changing various laws and regulations, where appropriate, with a view to achieve convergence.

•  To liaise with the industry associations, such as, ASSOCHAM, FICCI, CII, IBA, etc., for getting the industry ready for convergence with the IFRSs.

•   To prepare the work plan for the ASB regarding fixing the priority for revising certain existing Standards and issuing new Standards corresponding to IFRSs prior to 2011.

•  To look into the requirements of training the preparers and auditors and to formulate ways to meet the requirements.

•   To consider any other aspect, such as, liaising with IASB, where required, to settle conceptual issues.

 

64. In summary, the gap between Indian and International Accounting Standards has been narrowing and is expected to reach full convergence with IFRSs in 2011 when IFRSs are expected to be adopted in India for listed and other public interest entities.

 

7.5  Single Standard-setting Authority

 

65. There are several regulators for different sectors in India, e.g., the Reserve Bank for banking sector, SEBI for listed companies, IRDA for insurance companies, with each one having authority for setting Accounting Standards for the entities regulated by them. However, in practice, all these regulators have accepted the standards formulated by ICAI and do not issue separate standards. The income tax department issued two standards based on AS1, Disclosure of Accounting Policies and AS5, Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies for Taxation Purposes but discontinued it. Thus, ICAI is now the single standard-setting body for establishing standards for all entities other than Central and State Governments.

 

66.So far as Accounting Standards for preparation of financial statements of Central and State Governments are concerned, as stated earlier, the Standards are being developed by the Comptroller and Auditor General of India in terms of Article 150 of the Constitution. The Standards so developed are recommended for implementation of the Government. The process is in a nascent stage.

 

7.6   Emerging Issues Task Force

 

67. The Research Committee of the ICAI considers on a regular basis emerging issues and makes pronouncements on these issues on a timely basis. It is generally assisted by specifically constituted Task Forces comprising members having experience and expertise in relevant areas.

 

7.7.  Monitoring Compliance with Accounting Standards

 

68. ICAI has established the Financial Reporting Review Board which reviews financial statements from compliance perspective and recommends appropriate action to Ministry of Corporate Affairs, SEBI and other regulators. The Ministry, too, has started the process of considering recommendations and initiating inquiry.

 

7.8   Rationalisation of Provisions of Companies Act with Accounting Standards

 

69. The process has started as observed by ROSC-2004 and a number of suggestions of the Naresh Chandra Committee have been implemented. The work relating to revision of Schedule VI with inputs from ICAI is nearing completion. Certain other modifications suggested by ROSC-2004, especially relating to depreciation rates, are under evaluation

 

8.  The Way Forward

 

8.1 Convergence with IFRSs

 

70.  ICAI should make its best efforts to achieve convergence with IFRSs by April 1, 2011 as far as listed entities and other public interest entities are concerned. Apart from seeking the co-operation of regulatory and other authorities, ICAI should create awareness about the requirements of IFRSs amongst preparers, auditors and others, particularly, to ensure that entities get sufficient time to put in place the systems and procedures to be able to comply with IFRSs. At the same time, ICAI should continue with its efforts to issue new as well as revised standards to bridge the existing gap between the two sets of standards. This will smoothen the process of transition to IFRSs and also ensure that Indian standards are largely IFRS-compliant even if full convergence with IFRSs cannot be achieved due to any reason by April 1, 2011.

 

8.2 Greater Participation in the International Standard-setting Process

 

71. If, as proposed by the Council of the ICAI, there is to be total convergence with IFRSs in India by April 1, 2011 it is essential that India should have a more significant influence, both in the agenda-setting of the IASB as also in its technical output. ICAI, therefore, needs to identify individuals within the country who can play a more active role in various organisations of IASB. ICAI also needs to constitute a group of academicians and professionals which would be more pro-active in suggesting items for the agenda of IASB and IFRIC as also for consideration of exposure drafts issued by these bodies.

 

8.3 Development of Accounting Standards

 

72. Currently, the Standards issued by ICAI are anchored in the standards issued by IASB. Its work programme, therefore, follows the work programme of IASB. But situations may arise when India finds that there is no international standard on a subject of importance for the country and there is imminent need to have one, e.g., on emission rights. ASB ought to consider the development of a standard on such subjects if the work programme of IASB does not permit taking up development of standard on that subject. If and when ICAI commences work of development of a new standard, it ought to keep IASB informed and seek their comments on the basic principles being enunciated in the standard. Such standard(s) ought to be replaced by the standard on the subject, as and when issued by IASB.

 

8.4 Sector-specific Application Guidance

 

73. Accounting Standards issued by ICAI and IASB are general purpose Accounting Standards and the principles enunciated in the standards apply across the board to all industries alike. Typical issues, specific to an industry, do arise in application of these standards, e.g., the insurance sector or the banking sector. ICAI needs to consider providing sector-specific guidance in application of these standards. Such guidance, in a sense, is rule-based guidance in the application of principle-based standard(s). Such an approach will lead to uniformity in application of standards in specific, complex and typical issues relating to a sector/industry segment. Care and caution must, however, be excercised in issuing such a guidance to ensure that the guidance does not travel beyond the principles set out in standards. It should not lead to establishment of new principles.

 

8.5  Interpretations

 

74. Current Indian Standards are based on international standards and, therefore, in an ideal scenario, all issues relating to interpretations ought to be referred to IFRIC. This is necessary since, if each country which has adopted or adapted international standards starts issuing interpretations, it could frustrate the very objective of convergence and global adoption of a common set of Accounting Standards. Having said that, one should also bear in mind that IFRIC may not be able to provide a timely response to each of the issues referred to it for interpretation.

 

75. ICAI will need, therefore, as an interim measure, an institution for providing interpretations/address issues relating to interpretations, on need basis. The issues requiring interpretation, ought to be brought to the notice of IFRIC and the interpretations that are issued also ought to be brought to the attention of IFRIC. The interpretations issued by India may need to be modified if interpretations, as and when issued by IFRIC, are different from the ones issued by the ICAI. It is, therefore, necessary that an independent ‘Interpretation Committee’ be constituted by ICAI and that the same ‘due process’ be followed before an ‘interpretation’ is issued. Interpretations issued by IFRIC or its predecessor, Standing Interpretations Committee (SIC), may be adopted by the ‘Interpretations Committee’ of the ICAI where the issue relates to a matter on which Indian Accounting Standard is identical or substantively similar to corresponding IFRS.

 

8.6 Authority for Issuance of Standards

 

76. The ASB is a committee of ICAI and the standards are issued by the Council of ICAI and not by the ASB. Though it has representation from outside, it is not truly autonomous. It is true that insofar as companies are concerned, the Standards issued by the Council of ICAI are only recommendatory and have to be prescribed by the Central Government in consultation with NACAS. This lends some degree of outside review. Nonetheless, the autonomy of the ASB would be greatly enhanced if it is given the authority to issue the standards and if the Council of ICAI confines itself to administrative, but not the functional, control of ASB. Also, codifying the constitution of ASB, total number of members, number of members to be nominated by ICAI, representatives of regulators, trade, industry, academics as also independent professionals will add to the transparency of the process adopted by ICAI.

 

8.7 Accounting Standards for Government

 

77. The Government Accounting Standards Advisory Board (GASAB), set up by the C&AG, should accelerate its activities and have a time- bound program to:

(a)  have research conducted to identify and articulate reforms in government accounting in countries like the US, the UK, Canada, New Zealand, Australia, etc.,

(b)  lay down a time-bound program for reforms in the existing system, such as:

•  Sharper distinction between revenue and capital receipts and disbursements in the existing cash-based accounting system.

•   Accounting for indirect subsidies.

•  Transition towards modified accrual-based or full accrual-based accounting system. Depending upon the experience of other countries, the extent and the manner in which elements of accrual-based system can be introduced in India should be determined and introduced.

•  Issue standards that improve the usefulness of financial reports based on the needs of financial report users. The attempt should be to enhance the primary characteristics of understandability, relevance and reliability and the qualities of comparability and consistency.

•  Keep standards current to reflect changes in Governmental environment.

•  Provide guidance on implementation of standards.

•  Consider significant areas of accounting and financial reporting that can be improved through the standard-setting process.

•  Improve the common understanding of the nature and the purpose of information contained in government financial reports.

 

8.8 Co-operative Banks

 

78. There is need for scheduled co-operative banks to adopt the same principles as applicable to commercial banks. Similarly, even large non-scheduled co-operative banks need to adopt the same accounting principles as applicable to commercial banks.

 

79. Smaller co-operative banks may, however, be given some concessions in the application of accounting principles just as concessions are given to medium and small-sized enterprises. The government, in consultation with the Reserve Bank, should consider taking steps that require scheduled co-operative banks to immediately adopt the accounting principles being adopted by commercial banks.

 

80. The same may be required of the large non-scheduled co-operative banks gradually and a time-bound programme should be drawn up. More time may be given to smaller co-operative banks to apply duly modified accounting principles, but a time-bound implementation programme should be drawn up at the earliest.

 

8.9  Harmonisation of Legal and Regulatory Positions with Accounting Standards

 

81. The ICAI should also continuously hold dialogues with regulatory bodies and take early action for formulation or implementation of standards in developing areas and work with such agencies to bring about change in policy or legal provisions leading to robust accounting, presentation and disclosure norms and to remove disparities, if any, between legal provisions, policies and recommended accounting treatment. These agencies should also provide early responses and facilitation in this direction.

 

8.10  Compliance Monitoring Programme

 

82.  The Financial Reporting Review Board established by ICAI has commenced the process of monitoring compliance by reporting entities. It has recommended action to the authorities who need to initiate action where gross non- compliances are brought to their notice by the FRRB.

 

83. Monitoring of compliance with Accounting Standards by the Reserve Bank in respect of banks and financial institutions
regulated by it and IRDA in respect of insurance companies regulated by it would be useful and needs to be continued. Where there are interpretational issues in respect of any standard or in matters where there are no standards, the regulator should take up such issues with the ICAI on an on-going basis.

 

8.11  Compliance Guidance/Training Programme

 

84. ICAI has been conducting training programmes for its members and also for accountants in the industry. It should continue to do so and take steps to enhance and broaden the scope, possibly together with regulators, to impart more formalised training to preparers of financial statements.

 

85. As the standards become more complex, the need will arise for guidance, both for the preparers of financial statements as also for those who audit them, on the application of the standards. It is, therefore, necessary that ICAI increases the scope and frequency of its training programmes on the implementation of Accounting Standards.

 
86. ICAI should consider focussing more on the practical aspects of applying standards. Some of the Standards are of recent origin and may require more guidance in implementation. ICAI should establish a mechanism where members who implement standards can approach for advice. ICAI has different mechanisms to address issues, such as the Expert Advisory Committee, but a more informal approach ought to be encouraged. ICAI should also conduct special programs for educating members on IFRSs and their applications as also US GAAPs to provide broader outlook to its members.
 
 

 

Appendix A

 

 

Composition of NACAS

 

Section 210A of the Companies Act, provides for composition of the NACAS as under:

 

(i) a chairperson who shall be a person of eminence and well-versed in accountancy, finance, business, administration, business law, economics or similar discipline;

 

(ii) one member each nominated by the ICAI constituted under the Chartered Accountants Act, 1949 (38 of 1949), the Institute of Cost and Works Accountants of India constituted under the Cost and Works Accountants Act, 1959 (23 of 1959) and the Institute of Company Secretaries of India constituted under the Company Secretaries Act, 1980 (56 of 1980);

 

(iii)  one representative of the Central Government to be nominated by it;

 

(iv)  one representative of the Reserve Bank to be nominated by it;

 

(v) one representative of the Comptroller and Auditor General of India to be nominated by him;

 

(vi) a person who holds or has held the office of professor in accountancy, finance or business management in any university or deemed university;

 

(vii) the Chairman of the Central Board of Direct Taxes constituted under the Central Boards of Revenue Act, 1963 (54 of 1963) or his nominee;

 

(viii)   two members to represent the chambers of commerce and industry to be nominated by the Central Government; and

 

(ix)  one representative of SEBI to be nominated by it.

 

 

 

Appendix B

 

Comparative Statement of International Accounting Standards/International

Financial Reporting Standards and Indian Accounting Standards

(As on October 31, 2008)

 

I.   Indian Accounting Standards already issued by the Institute of Chartered Accountants of India (ICAI) corresponding to the International Accounting Standards/International Financial Reporting Standards

Sr. No.

International Accounting Standards (IASs)/International Financial
Reporting Standards (IFRSs)3

Indian Accounting Standards (ASs)

No.

Title of the Standard

AS No.

Title of the Standard

1

2

3

4

1.

IAS1

Presentation of Financial Statements

AS 1

Disclosure of Accounting Policies Statements

2.

IAS 2

Inventories

AS 2

Valuation of Inventories

3.

 

Corresponding IAS has been withdrawn since the matter is now covered by IAS 16 and IAS 38

AS 6

Depreciation Accounting

4.

IAS 7

Cash Flow Statements

AS 3

Cash Flow Statements

5.

IAS 8

Accounting Policies, Changes in Accounting Estimates and Errors

AS 5

Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies

6.

IAS 10

Events After the Balance Sheet Date

AS 4

Contingencies and Events Occurring after the Balance Sheet Date

7.

IAS 11

Construction Contracts

AS 7

Construction Contracts

8.

IAS 12

Income Taxes

AS 22

Accounting for Taxes on Income

9.

IAS 14

Segment Reporting4

AS 17

Segment Reporting

10.

IAS 16

Property, Plant and Equipment

AS 10

Accounting for Fixed Assets

11.

IAS 17

Leases

AS 19

Leases

12.

IAS 18

Revenue

AS 9

Revenue Recognition

13.

IAS 19

Employee Benefits

AS 15

Employee Benefits

14.

IAS 20

Accounting for Government Grants and Disclosure of Government Assistance

AS 12

Accounting for Government Grants

3 It may be noted that International Accounting Standards nos. 3, 4, 5, 6, 9, 13, 15, 22, 25, 30 and 35 have already been withdrawn by the International Accounting Standards Board (IASB).
4 IAS14 will be withdrawn on IFRS8, Operating Segments, coming into effect, from 1-1-2009. Since it has still to come into effect, it has not been included for reconciliation purposes.

 
 

15.

IAS 21

The Effects of Changes in Foreign Exchange Rates

AS 11

The Effects of Changes in Foreign Exchange Rates

16.

IAS 23

Borrowing Costs

AS 16

Borrowing Costs

17.

IAS 24

Related Party Disclosures

AS 18

Related Party Disclosures

18.

IAS 27

Consolidated and Separate Financial Statements

AS 21

Consolidated Financial Statements

19.

IAS 28

Investments in Associates

AS 23

Accounting for Investments in Associates in Consolidated Financial Statements

20.

IAS 31

Interests in Joint Ventures

AS 27

Financial Reporting of Interests in Joint Ventures

21.

IAS 32

Financial Instruments: Presentation

AS 31

Financial Instruments:
Presentation
(AS 31 will come into effect in respect of accounting periods commencing on or after 1-4-2009 and will be recommendatory in nature for an initial period of two years)

22.

IAS 33

Earnings Per Share

AS 20

Earnings Per Share

23.

IAS 34

Interim Financial Reporting

AS 25

Interim Financial Reporting

24.

IAS 36

Impairment of Assets

AS 28

Impairment of Assets

25.

IAS 37

Provisions, Contingent Liabilities and Contingent Assets

AS 29

Provisions, Contingent Liabilities and Contingent Assets

26.

IAS 38

Intangible Assets

AS 26

Intangible Assets

27.

IAS 39

Financial Instruments:Recognition and Measurement

AS 30

Financial Instruments:
Recognition and Measurement
(AS 30 will come into effect in respect  of  accounting  periods commencing on or after 1-4-2009 and will be recommendatory in nature for an initial period of two years)

28.

 

Corresponding IAS has been withdrawn since the matter is now covered by IAS 32, 39, 40 and IFRS 7

AS 13

Accounting for Investments
(AS 13 shall also stand withdrawn
on the date, AS 30, AS 31 and AS 32 becoming mandatory except to
the extent it relates to accounting for investment properties)

29.

IFRS 3

Business Combinations

AS 14

Accounting for Amalgamations

30.

IFRS 5

Non-current Assets Held for Sale and Discontinued Operations

AS 24

Discontinuing Operations5.
Further, AS 10 deals with accounting for fixed assets retired from active use.

31.

IFRS 7

Financial Instruments: Disclosures

AS 32

Financial Instruments:
Disclosures
(AS 32 will come into effect in respect  of  accounting  periods commencing on or after 1-4-2009 and will be recommendatory in nature for an initial period of two years)

 

II.   Accounting Standards Presently Under Preparation Corresponding to the International Accounting Standards/International Financial Reporting Standards

Sr. No.

International Accounting Standards/International Financial Reporting Standards

Indian Accounting Standards (ASs)

No.

Title of the Standard

Status

1

2

3

1.

IAS 40

Investment Property

Under preparation. At present, covered by Accounting Standard (AS) 13, Accounting for Investments.

2.

IFRS 2

Share-based Payment

Under preparation. At present, Employee-Share based Payments, are covered by a Guidance Note issued by the ICAI, which is based on IFRS 2. Further, some other pronouncements deal with other share-based payments, e.g., AS 10, Accounting for Fixed Assets.

3.

IFRS 6

Exploration for and Evaluation of Mineral Resources

Under preparation. At present, Guidance Note on Accounting for Oil and Gas Producing Activities issued by the ICAI.

5 IASB has issued IFRS 5 and withdrew IAS 35, Discontinuing Operations, on which AS 24 is based. An Indian Accounting Standard corresponding to IFRS 5 is under preparation. After the issuance of this Indian AS, AS 24 is proposed to be withdrawn.

 

4.

IAS 26

Accounting and Reporting by Retirement Benefit Plans

Under preparation.

5.

IAS 29

Financial Reporting in Hyper-inflationary Economies

Under preparation.

6.

IAS 41

Agriculture

Under preparation.

7.

IFRS1

First-time Adoption of International Financial Reporting Standards

Under preparation.

8.

IFRS 4

Insurance Contracts

Under preparation.

 

Reconciliation of the International Accounting Standards/International Financial

Reporting Standards with the Indian Accounting Standards

(As on October 31, 2008)

 

A)    International Accounting Standards/International Financial Reporting Standards issued
by the International Accounting Standards Board

Number of International Accounting Standards (IASs) issued by the International Accounting Standards Board

41

Number of International Financial Reporting Standards issued by the IASB

7

Less: Number of IASs since withdrawn

(11)

Add: IAS 4 and IAS 25 have been withdrawn, but, included here for reconciliation purposes because corresponding Accounting Standards of the ICAI (i.e., AS 6 and AS 13) are still in force

2

39

B)    Accounting Standards (ASs) and other documents issued by the Institute of Chartered Accountants of India

1.  Number of Indian Accounting Standards issued (excluding AS 8 which is withdrawn pursuant to AS 26 becoming mandatory)

31

2.   Number of Accounting Standards under preparation

8

 

39

 

 

 

Appendix C

 

Definition of Small and Medium-sized Company as per Clause 2(f) of the

Companies (Accounting Standards) Rules, 2006

‘Small and Medium Sized Company’ (SMC) means, a company –

 

(i)  whose equity or debt securities are not listed or are not in the process of listing on any stock exchange, whether in India or outside India;

(ii) which is not a bank, financial institution or an insurance company;

(iii) whose turnover (excluding other income) does not exceed rupees fifty crore in the immediately preceding accounting year;

(iv) which does not have borrowings (including public deposits) in excess of rupees ten crore at any time during the immediately preceding accounting year; and

(v) which is not a holding or subsidiary company of a company which is not a small and medium-sized company.

 
 
Explanation: For the purpose of the above clause, a company shall qualify as a Small and Medium-sized Company, if the conditions mentioned therein are satisfied as at the end of the relevant accounting period.
 
 

Appendix D

Harmonised Criteria for Classification of Non-corporate Entities as

Decided by the Institute of Chartered Accountants of India

Level I Entities

 

Non-corporate entities which fall in any one or more of the following categories, at the end of the relevant accounting period, are classified as Level I entities:

 

(i) Entities whose equity or debt securities are listed or are in the process of listing on any stock exchange, whether in India or outside India.

(ii) Banks (including co-operative banks), financial institutions or entities carrying on insurance business.

(iii) All commercial, industrial and business reporting entities, whose turnover (excluding other income) exceeds rupees fifty crore in the immediately preceding accounting year.

(iv) All commercial, industrial and business reporting entities having borrowings (including public deposits) in excess of rupees ten crore at any time during the immediately preceding accounting year.

(v)    Holding and subsidiary entities of any one of the above.

 

Level II Entities (SMEs)

 

Non-corporate entities which are not Level I entities but fall in any one or more of the following categories are classified as Level II entities:

 

(i) All commercial, industrial and business reporting entities, whose turnover (excluding other income) exceeds rupees forty lakh but does not exceed rupees fifty crore in the immediately preceding accounting year.

(ii) All commercial, industrial and business reporting entities having borrowings (including public deposits) in excess of rupees one crore but not in excess of rupees ten crore at any time during the immediately preceding accounting year.

(iii)  Holding and subsidiary entities of any one of the above.

 

Level III Entities (SMEs)

 

Non-corporate entities which are not covered under Level I and Level II are considered as Level III entities.

 
 

Appendix E

 

Major Departures in Indian Accounting Standards from the Corresponding IFRSs

The present position of Indian Accounting Standards has been depicted in the following comparative statements of International Financial Reporting Standards and Indian Accounting Standards.

 

I.      Indian Accounting Standards Already Issued by the Institute of Chartered Accountants of
India (ICAI) Corresponding to the International Financial Reporting Standards

Sr. No.

International Financial Reporting Standards (IFRSs)6

Indian Accounting Standards (ASs)7

Major Differences

No.

Title of the Standard

No.

Title of the Standard

1.

IAS 1

Presentation of Financial Statements

AS 1

Disclosure of Accounting Policies

AS 1 is based on the pre-revised IAS 1. AS 1 is presently under revision to bring it in line with IAS 1. The draft of the revised AS 1 has been prepared and the same will be considered by the ASB for circulation amongst specified outside bodies and council members.

2.

IAS 2

Inventories

AS 2

Valuation of Inventories

AS 2 is based on IAS 2 (revised 1993). IAS 2 has been revised in 2003 as a part of the IASB’s improvement project. Major differences between AS 2 and IAS 2 (revised 2003) are as follows:

Differences due to level of preparedness

1.   IAS 2 specifically deals with costs
of inventories of an enterprise
providing services. However, keeping in view the level of understanding
that was prevailing in the country regarding the treatment of inventories of an enterprise
providing services at the time of last revision of AS 2, the same are excluded from the scope of AS 2.

2. Keeping in view the level of
preparedness in the country at the time of last revision of AS 2, AS 2 requires lesser disclosures as compared to IAS 2.

6 It may be noted that International Accounting Standards nos. 3, 4, 5, 6, 9, 13, 15, 22, 25, 30 and 35 have already been
withdrawn by the International Accounting Standards Board (IASB).
7 It may be noted that the existing ASs are in the process of revision to converge with IFRSs, where they are not presently converged with IFRSs.

 

 

 

 

 

 

3. IAS 2 specifically provides that the measurement requirements of the Standard do not apply to the measurement of inventories held by commodity broker-traders who measure their inventories at fair value less costs to sell. AS 2 does not contain any exclusion or separate provisions relating to inventories held by commodity broker-traders. (Broker-traders are those who buy or sell commodities for others or on their own account. The inventories are principally acquired by a broker-trader with the purpose of selling in the near future and generating a profit from fluctuations in price or broker-traders’ margin.) By implication, the measurement basis laid down in the Standard, viz., lower of cost and net realisable value, applies to inventories of commodity broker-traders.

 

 

 

 

 

Conceptual differences

 

 

 

 

 

4. AS 2 specifically excludes ‘selling and distribution costs’ from the cost of inventories and provides that it is appropriate to recognise them as expenses in the period in which they are incurred. However IAS 2 excludes only ‘Selling Costs’ and not ‘Distribution Costs’.

5. AS 2 does not deal with the issues relating to recognition of inventories as an expense including the write­down of inventories to net realisable value and any reversal of such write­down.

6. AS 2 provides that the cost of inventories of items other than those which are not ordinarily interchangeable and goods or services produced and segregated for specific projects should be assigned by using the first-in, first-out (FIFO) principle, or weighted average cost formula. It is specifically required by AS 2 that the formula used should reflect the fairest possible approximation to the cost incurred in bringing the items of inventory to their present location and condition. However, IAS 2 does not require the same for the choice of the formula to be used, rather it requires that same cost formula should be used for all inventories having a similar nature and use to the entity.

 

 

 

 

 

There is no difference between the ED and IAS 2.

3.

 

Corresponding IAS has been withdrawn since the matter is now covered by IAS 16 and IAS 38.

AS 6

Depreciation Accounting

AS 6 was formulated on the basis of IAS 4, Depreciation Accounting which has since been withdrawn. The corresponding Indian Accounting Standard (AS) 10, Accounting for Fixed Assets, has been revised to bring it in line with IAS 16. The Council has approved the draft of the revised AS 10 and the same will be issued shortly. Upon issuance of the revised AS 10, AS 6 would be withdrawn.

4.

IAS 7

Cash Flow Statements

AS 3

Cash Flow Statements

AS 3 is based on the current IAS 7. The major differences between IAS 7 and AS 3 are as below:

Differences due to removal of alternatives

1.In case of enterprises other than financial enterprises, unlike IAS 7, AS 3 does not provide any option with regard to classification of interest paid. It requires interest paid to be classified as financing cash flows.

2. In case of enterprises other than financial enterprises, AS 3 does not provide any option with regard to classification of interest and dividend received. It requires interest and dividend received to be classified as investing cash flows.

 

 

 

 

 

3. AS 3 also does not provide any option regarding classification of dividend paid. It requires dividend paid to be classified as financing cash flows.

5.

IAS 8

Accounting Policies, Changes in Accounting Estimates and Errors

AS 5

Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies

AS 5 is based on the earlier IAS 8. AS 5 is presently under revision to bring it in line with the current IAS 8.

6.

IAS 10

Events After the Balance Sheet Date

AS 4

Contingencies and Events Occurring after the Balance Sheet Date

AS 4 is based on the pre-revised IAS 10 which dealt with the contingencies as well as the events occurring after the balance sheet date. On the lines of IAS 37, the ICAI has issued AS 29. Pursuant to the issuance of AS 29, the portion of AS 4 dealing with the contingencies, except to the extent of impairment of assets not covered by other Accounting Standards, stands superseded. AS 4 now deals with the events after the balance sheet date. AS 4 is presently under revision to bring it in line with the corresponding IAS 10.

Difference due to legal and
regulatory environment

1. As per IAS 10, proposed dividend is a non-adjusting event. However, as per the Indian law governing companies, provision for proposed dividend is required to be made, probably as a measure of greater accountability  of  the  company concerned towards investors in respect of payment of dividend. While attempts are made at various levels, from time to time, to persuade the Government for changes in law, it is a time-consuming process.

 

 

 

 

 

2. As per IAS 10, non-adjusting events, which are material, are required to be disclosed in the financial statements. However, as per AS 4, such disclosures are required to be made in the report of the approving authority and not in the financial statements.

7.

IAS 11

Construction Contracts

AS 7

Construction Contracts

AS 7 is based on the current IAS 11. There is no difference between AS 7 and IAS 11.

8.

IAS 12

Income Taxes

AS 22

Accounting for Taxes on Income

Differences due to level of preparedness

•  Keeping in view the level of preparedness in the country at the time of issuance of AS 22, AS 22 was based on the Income Statement Approach.

•  ICAI is revising AS 22 to bring it in line with IAS 12.

9.

IAS 14

Segment Reporting

AS 17

Segment Reporting

AS 17 is based on the current IAS 14. The major differences between IAS 14 and AS 17 are described below.

Differences due to removal of alternatives

1. IAS 14 encourages, but does not require, the reporting of vertically integrated activities as separate segments. However, under AS 17, in case a vertically integrated segment meets the quantitative norms for being a reportable segment, the relevant disclosures are required to be made.

2. As per IAS 14, a segment identified as a reportable segment in the immediately preceding period on satisfying the relevant 10 per cent threshold,   shall   be   reportable segment in the current period also if the management judges it to be of continuing significance. However, as per AS 17, this reporting is mandatory without considering the management’s judgement.

 

 

 

 

 

Differences due to level of preparedness

3. IAS 14 prescribes certain additional disclosure requirements regarding enterprise’s share of profit or loss of associates and joint ventures and regarding restatement of prior year information, etc. At the time of issuance of AS 17, there were no Accounting Standards in India dealing with accounting for investments in associates and joint ventures, etc. Accordingly, these disclosures are not specifically covered in AS 17.

4. As per IAS 14, for a segment to qualify as a reportable segment, it is required for it to earn the majority of its revenue from external customers in addition to meeting the 10 per cent threshold criteria of revenue, operating results or total assets required in AS 17.

10.

IAS 16

Property, Plant and Equipment

AS 10

Accounting for Fixed Assets

AS 10 is based on the earlier IAS 16. AS 10 is being revised to bring it in line with the current IAS 16. The draft revised AS 10 has been approved by the Council and the same has also been cleared by the NACAS. The following is the major difference between IAS 16 and the revised AS 10:

 

 

 

 

 

Differences due to legal and regulatory environment

In India, the law governing the companies prescribes minimum rates of depreciation. Keeping this in view, the revised AS 10 recognises that depreciation rates prescribed by the statute would be the minimum rates of depreciation.

11.

IAS 17

Leases

AS 19

Leases

AS 19 is based on IAS 17 (revised 1997). IAS 17 has been revised in 2004. The major differences between IAS 17 and AS 19 (revised 2004) are described below.

Conceptual differences

1. Keeping in view the peculiar land lease practices in the country, lease agreements to use lands are specifically excluded from the scope of AS 19 whereas IAS 17 does not contain this exclusion.

2. IAS 17 specifically provides that the Standard shall not be applied as the basis of measurement for:

(a) property held by lessees that is accounted for as investment property;

(b) investment property provided by lessors under operating leases;

(c) biological assets held by lessees under finance leases; or

(d) biological assets provided by lessors under operating leases.
However, AS 19 does not exclude the above from its scope.

5. AS 19 specifically prohibits upward revision in estimate of unguaranteed residual value during the lease term. However, IAS 17 does not prohibit the same.

6. As per IAS 17, initial direct costs incurred by a lessor other than a manufacturer or dealer lessor have to be included in the amount of lease receivable in the case of finance lease resulting in reduced amount of income to be recognised over lease term and in the carrying amount of the asset in the case of operating lease as to expense it over the lease term on the same basis as the lease income. However, as per AS 19, these can be either charged off at the time of incurrence in the statement of profit and loss or can be amortised over the lease period.

12.

IAS 18

Revenue

AS 9

Revenue Recognition

AS 9 is based on the earlier IAS 18. AS 9 is presently under revision to bring it in line with the current IAS 18.

13.

IAS 19

Employee Benefits

AS 15

Employee Benefits

AS 15 is based on the current IAS 19. The major differences between IAS 19 and AS 15 are described below.

Difference due to removal of alternatives

1. Unlike IAS 19, AS 15 does not provide any option with regard to recognition of actuarial gains and losses. It requires such gains and losses to be recognised immediately in the statement of profit and loss.

Conceptual Difference

2. Regarding recognition of termination benefits as a liability, it is felt that merely on the basis of a detailed formal plan, it would not be appropriate to recognise a provision since a liability cannot be considered to be crystallised at this stage. Accordingly, AS 15 provides criteria for recognition of a provision for liability in respect of termination benefits on the basis of the general criteria for recognition of provision as per AS 29, Provisions, Contingent Liabilities and Contingent Assets (corresponding to IAS 37).

 

 

 

 

 

It may be noted that the IASB had issued an Exposure Draft of the proposed Amendments to IAS 19 whereby the criteria regarding recognition of termination benefits as a liability are proposed to be amended. The Exposure Draft proposes that voluntary termination benefits should be recognised when employees accept the entity’s offer of those benefits. ICAI in its comments on the Exposure Draft, have pointed out that in a country such as India, such a requirement would give erroneous results since the schemes generally have the following characteristics in terms of the steps involved in implementing the scheme:

(i) Announcement of the scheme by an employer, which is considered as an ‘invitation to offer’ to the employees rather than the offer to the employees for voluntary termination of their services.

(ii) Employees tender their applications under the scheme. This does not confer any right to the employees under the scheme to claim termination benefits. In other words, tendering of application by an employee is considered as an ‘offer’ in response to ‘invitation to offer’, rather than acceptance of the offer by the employee.

(iii) The acceptance of the offer made by the employees as per (ii) above by the management.

Keeping in view the above, ICAI has suggested that as per the abovescheme, liabilities with regard to voluntary termination benefits should be recognised at the time when the management accepts the offer of the employees rather than at the time the employees tender their applications in response to the ‘invitation to offer’ made by the management.

 

 

 

 

 

If ICAI’s comments on the Exposure Draft are accepted, the amended criteria in IAS 19 would result in the recognition of the liability broadly at the same time as under the criteria prescribed in AS 15.

Incidentally, it may be mentioned that the treatment prescribed in AS 15 is also in consonance with the legal position in India.

14.

IAS 20

Accounting for Government Grants and Disclosure of Government Assistance

AS 12

Accounting for Government Grants

AS 12 revised corresponding to IAS 20 has been approved by the Council and has been cleared by NACAS and is likely to be issued shortly. There is no difference between the Draft of the standard and IAS 20.

15.

IAS 21

The Effects of Changes in Foreign Exchange Rates

AS 11

The Effects of Changes in Foreign Exchange Rates

Difference due to level of preparedness

1. AS 11 is based on the integral and non-integral foreign operations approach, i.e., the approach which was followed in the earlier IAS 21 (revised 1993).

2. The current IAS 21, which is based on ‘Functional Currency’ approach, gives similar results as that under pre-revised IAS 21, which was based on integral/non-integral foreign operations approach. Accordingly, there are no significant differences between IAS 21 and AS 11.

 

 

 

 

 

3. The current AS 11 has recently become effective, i.e., from April 1, 2004. It is felt that some experience should be gained before shifting to the current IAS 21. However, AS 11 is under revision to bring it in line with revised IAS 21.

16.

IAS 23

Borrowing Costs

AS 16

Borrowing Costs

There is no major difference between AS 16 and IAS 23 (revised 2007).

17.

IAS 24

Related Party Disclosures

AS 18

Related Party Disclosures

AS 18 is based on IAS 24 (reformatted in 1994) and following are the major differences between the two.

Conceptual differences

1. According to AS 18, as notified by the Government, a non-executive director of a company should not be considered as a key management person by virtue of merely his being a director unless he has the authority and responsibility for planning, directing and controlling the activities of the reporting enterprise. However, IAS 24 provides for including non-executive director in key management personnel.

2. In AS 18, the term ‘relative’ is defined as ‘the spouse, son, daughter, brother, sister, father and mother who may be expected to influence, or be influenced by, that individual in his/her dealings with the reporting enterprise’ whereas the comparable concept in IAS 24 is that of ‘close members of the family of an individual’ who are ‘those family members who may be expected to influence, or be influenced by, that individual in their dealings with the entity. They may include:

(a) the individual’s domestic partner and children;

(b) children of the individual’s domestic partner; and

(c) dependants of the individual or the individual’s domestic partner.’

18.

IAS 27

Consolidated and Separate Financial Statements

AS 21

Consolidated Financial Statements

AS 21 is based on IAS 27 (revised 2000).

Difference due to legal and regulatory environment

Keeping in view the requirements of the law governing the companies, AS 21 defines control as ownership of more than one-half of the voting power of an enterprise or as control over the composition of the governing body of an enterprise so as to obtain economic benefits. This definition is different from IAS 27, which defines control as ‘the power to govern the financial and operating policies of an enterprise so as to obtain benefits from its activities’.

Conceptual Differences

Goodwill/capital reserve is calculated by computing the difference between the cost to the parent of its investment in the subsidiary and the parent’s portion of equity in the subsidiary in AS 21 whereas in IAS 27 fair value approach is followed.

19.

IAS 28

Investments in Associates

AS 23

Accounting for Investments in Associates in Consolidated Financial Statements

AS 23 is based on the IAS 28 (revised 2000).

20.

IAS 31

Interests in Joint Ventures

AS 27

Financial Reporting of Interests in Joint Ventures

Conceptual Differences

The   conceptual     differences, explained in relation to IAS 27, are relevant in this case also.

AS 27 is based on the IAS 31 (revised 2000).

Difference due to removal of alternatives

1. Unlike IAS 31, AS 27 does not provide any option for accounting of interests in jointly controlled entities in the consolidated financial statements of the venturer. It requires proportionate consolidation to be followed and venturer’s share of each of the assets, liabilities, income and expenses of a jointly controlled entity to be reported as separate line items.

 

 

 

 

 

Conceptual Differences

2. The conceptual differences, explained in relation to IAS 27, are relevant in this case also.

21.

IAS 32

Financial Instruments: Presentation

AS 31

Financial Instruments: Presentation

ICAI has recently issued AS 31 corresponding to IAS 32 and which will come into effect in respect of accounting periods commencing on or after 1-4-2009 and will be recommendatory in nature for an initial period of two years. There is no difference between AS 31 and corresponding IAS 32.

22.

IAS 33

Earnings Per Share

AS 20

Earnings Per Share

AS 20 is based on the IAS 33 (issued 1997). AS 20 is being revised to bring it in line with IAS 33.

Differences due to level of preparedness

1.   As per IAS 33 (revised), basic and diluted amounts per share for the discontinued operation are required to be disclosed. However, AS 20 does not require such disclosures.

2.    IAS 33 (revised) requires the
disclosure of antidilutive
instruments also which is not
required by AS 20.

23.

IAS 34

Interim Financial Reporting

AS 25

Interim Financial Reporting

AS 25 is based on the current IAS 34. The major differences between IAS 34 and AS 25 are described below.

Differences due to legal and regulatory environment

1. In India, at present, the statement of changes in equity is not presented in the annual financial statements since, as per the law, this information is required to be disclosed partly in the profit and loss account below the line and partly in the balance sheet and schedules thereto. Keeping this in view, unlike IAS 34, AS 25 presently does not require presentation of the condensed statement of changes in equity. However, as a result of proposed revision to AS 1, limited revision to AS 25 has also been proposed, which requires the presentation of the condensed statement of changes in equity as part of condensed financial statements and limited exposure for the same has been made.

 

 

 

 

 

2. Keeping in view the legal and regulatory requirements prevailing in India, AS 25 provides that in case a statute or a regulator requires an enterprise to prepare and present interim information in a different form and/or contents, then that format has to be followed. However, the recognition and measurement principles as laid down in AS 25 have to be applied in respect of such information.

24.

IAS 36

Impairment of Assets

AS 28

Impairment of Assets

AS 28 is based on IAS 36 (issued in 1998). At the time of issuance of AS 28, there was no major difference between AS 28 and IAS 36.

IASB, pursuant to its project on Business Combinations, has made certain changes in IAS 36.

25.

IAS 37

Provisions, Contingent Liabilities and Contingent Assets

AS 29

Provisions, Contingent Liabilities and Contingent Assets

AS 29 is based on the current IAS 37. The major differences between IAS 37 and AS 29 are described below.

 

 

 

 

 

Difference due to level of preparedness

1. AS 29 requires that the amount of a provision should not be discounted to its present value since financial statements in India are prepared generally on historical cost basis and not on present value basis. However, a limited revision is being proposed to bring it in line with IAS 39 insofar as this aspect is concerned.

Conceptual Differences

2. IAS 37 deals with ‘constructive obligation’ in the context of creation of a provision. The effect of recognising provision on the basis of constructive obligation is that, in some cases, provision will be required to be recognised at an early stage. For example, in case of a restructuring, a constructive obligation arises when an enterprise has a detailed formal plan for the restructuring and the enterprise has raised a valid expectation in those affected that it will carry out the restructuring by starting to implement that plan or announcing its main features to those affected by it. It is felt that merely on the basis of a detailed formal plan and announcement thereof, it would not be appropriate to recognise a provision since a liability cannot be considered to be crystallised at this stage. Further, the judgment whether the management has raised valid expectations in those affected may be a matter of considerable argument.

In view of the above, AS 29 does not specifically deal with ‘constructive obligation’. AS 29, however, requires a provision to be created in respect of obligations arising from normal business practice, custom and a desire to maintain good business relations or act in an equitable manner. In such cases, general criteria for recognition of provision are required to be applied.

 

 

 

 

 

Incidentally, it may be mentioned that the treatment prescribed in AS 29 is also in consonance with the legal position in India.

3. Unlike IAS 37, as a measure of prudence, AS 29 does not require contingent assets to be disclosed in the financial statements.

26.

IAS 38

Intangible Assets

AS 26

Intangible Assets

AS 26 is based on IAS 38 (issued 1998). IASB, as a part of its project on Business Combinations, has revised IAS 38. Following are the major differences between AS 26 and IAS 38:

Conceptual Differences

1. An intangible asset is defined as an identifiable non-monetary asset, without physical substance, held for use in the production or supply of goods or services, for rental to others, or for administrative purposes whereas IAS 38 defines an intangible asset ‘as an identifiable non-monetary asset without physical substance’.

2. AS 26 is based on the assumption that the useful life of the intangible asset is always definite. In regard to assets with definite life also there is a rebuttable presumption that the useful life of an intangible asset will not exceed ten years from the date when the asset is available for use. Whereas IAS 36 recognises that an intangible asset may have an indefinite   life,   in   respect   of intangible assets having a definite life, the Standard does not contain rebuttable presumption about their useful life.

 

 

 

 

 

3. As per AS 26, if control over the future economic benefits from an intangible asset is achieved through legal rights that have been granted for a finite period, it is required that the useful life of the intangible asset should not exceed the period of the legal rights unless:

(a) the legal rights are renewable; and

(b) renewal is virtually certain.

However, IAS 38 requires ‘evidence to support renewal’ instead of virual certainty for renewal.

27.

IAS 39

Financial Instruments: Recognition and Measurement

AS 30

Financial Instruments: Recognition and Measurement

ICAI has recently issued AS 30 corresponding to IAS 39 and which will come into effect in respect of accounting periods commencing on or after 1-4-2009 and will be recommendatory in nature for an initial period of two years. There is no difference between AS 30 and IAS 39.

28.

 

Corresponding IAS has been withdrawn since the matter is now covered by IAS 32, 39, 40 and IFRS 7.

AS 13

Accounting for Investments

AS 13 was formulated on the basis of IAS 25, Accounting for Investments. Pursuant to the issuance of IAS 32, IAS 39, IAS 40 and IFRS 7, IAS 25 has been superceded.

AS 13 shall also stand withdrawn on the date, with AS 30 and AS 31 becoming mandatory except to the extent it relates to accounting for investment properties.

29.

IAS 40

Investment Property

-

Dealt with by Accounting Standard 13

The proposed Indian Accounting Standard corresponding to IAS 40 is under preparation.

30.

IFRS 3

Business Combinations

AS 14

Accounting for Amalgamations

i.AS 14 was formulated on the basis of earlier IAS 22, Business Combinations.

ii.Pursuant to the issuance of IFRS 3, Business Combinations, IAS 22 has been superseded.

 

 

 

 

 

iii. AS 14 is presently under revision to bring it in line with the IFRS 3.

31.

IFRS 5

Non-current Assets Held for Sale and Discontinued Operations

AS 24

Discontinuing Operations. Further, AS 10 deals with accounting for fixed assets retired from active use.

i. AS 24 is based on the IAS 35, Discontinuing     Operations, which has been superseded pursuant to the issuance of IFRS 5, Non-current Assets Held for Sale       and       Discontinued Operations.

ii.An Indian Accounting Standard corresponding to IFRS 5 is under preparation.

32.

IFRS 7

Financial Instruments: Disclosures

AS 32

Financial Instruments: Disclosures

ICAI has recently issued AS 32 corresponding to IFRS 7 which will come into effect in respect of accounting periods commencing on or   after  1-4-2009  and   will  be recommendatory in nature for an initial period of two years. There is no difference between AS 32 and IFRS 7.

 

II.    Accounting Standards Presently Under Preparation Corresponding to the International
Financial Reporting Standards

Sr. No.

International Financial Reporting Standards

Status of the Corresponding Indian Standard

No.

Title of the Standard

 

1.

IAS 40

Investment Property

Under preparation. At present, covered by Accounting Standard (AS) 13, Accounting for Investments.

2.

IFRS 2

Share-based Payment

Under preparation. At present, Employee-Share based Payments are covered by a Guidance Note issued by the ICAI, which is based on IFRS 2. Further, some other pronouncements deal with other share-based payments, e.g., AS 10, Accounting for Fixed Assets.

3.

IFRS 6

Exploration for and Evaluation of Mineral Resources

Under preparation. At present, Guidance Note on Accounting for Oil and Gas Producing Activities, issued by the ICAI, which is comprehensive as it deals with all accounting aspects and is based on the corresponding US GAAP.

4.

IAS 26

Accounting and Reporting by Retirement Benefit Plans

Under preparation.

5.

IAS 29

Financial Reporting in Hyper-inflationary Economies

Under preparation.

6.

IAS 41

Agriculture

Under preparation.

7.

IFRS1

First-time Adoption of International Financial Reporting Standards

Under preparation.

8.

IFRS 4

Insurance Contracts

Under preparation.

 

 

 
 

Appendix F

 

 

Composition of the Task Force

 

The Accounting Standards Board in consultation with the then President of the ICAI, constituted the Task Force on October 15, 2006 with the following members:

 

1.       CA. S. C. Vasudeva

(The then Chairman, ASB, as the Convenor of the Task Force)

2.       CA. Jayant Gokhale

(The then Vice-Chairman, ASB)

3.       CA. N. P. Sarda

Past President, ICAI

4.       CA. V. Rajaraman

Past President, ICAI

5.       CA. T. V. Mohandas Pai

Member of Trustees of the International Accounting Standards Committee Foundation (IASCF)

6.       CA. Shailesh Haribhakti

Member – Standards Advisory Council of the International Accounting Standards Board

7.       CA. Uday Phadke

Nominee on the ASB from Confederation of Indian Industries (CII)

8.       CA. Dolphy D’Souza

Alternate Nominee on the ASB from Federation of Indian Chambers of Commerce & Industry (FICCI)

9.       Shri P. R. Ravi Mohan

Nominee of the Reserve Bank of India on the ASB

10.       Dr. Kamal Gupta

Former Technical Director, ICAI

11.       Prof. S. Sundararajan

Indian Institute of Management, Bangalore

12.       CA. Amal Ganguli

Senior Chartered Accountant

 

 

 

Appendix G

 

Accounting Standards8

A Peer Review of the Advisory Panel Report
 
 

By Dr. Kamal Gupta

Para 30 in the Report

 

At the beginning of this para, the words ‘In general’ may be added since, in respect of some specific Accounting Standards, exemptions/relaxations have been given to enterprises based on size, e.g., AS 3 and AS 17 do not apply to small and medium enterprises.

Para 31 in the Report

 

This para may be redrafted to bring out the following facts more clearly:

 

(a) It may be clarified that entities that are bodies corporate but not companies (e.g., a corporation set up under a Central or State Act) would be classified under the revised scheme of classification of ICAI under Levels I and II only. In other words, Levels I and II would cover (i) bodies corporate that are not companies and (ii) non-corporate bodies that meet Level I/II criteria.

(b) ICAI’s announcement relating to classification of enterprises into three levels refers to exemption from disclosure requirements, though in the case of AS 15, there are some exemptions even from recognition and measurement requirements.

 

The following is a suggestive redraft of para 31:

 

For the purpose of the application of Accounting Standards, ICAI has categorised the enterprises into three levels, i.e., Level I, Level II and Level III enterprises. Level II and Level III are considered to be SMEs. However, as per the notification of the Accounting Standards under the Companies Act, companies have been classified into two categories only, i.e., Small and Medium Companies (SMCs) (Refer Appendix C for meaning of SMC) and other than SMCs. The ICAI has recently harmonised its classification criteria with those under the Companies Act. Consequently, from accounting periods commencing on or after 1 April 2008, the position would be as follows:

 

– The criteria of Level I of the ICAI and those of companies other than SMCs under the Rules are now identical. Similarly the criteria of Level II under ICAI’s classification and those of SMCs under the Rules are the same.

– Entities that are bodies corporate but not companies (e.g., a corporation set up under a Central or State Act) would be classified under the revised scheme of classification of ICAI under Levels I and II only.

– Certain exemptions/relaxations have been given to enterprises falling in Levels II and III (i.e., small and medium-sized enterprises). The exemptions/relaxations are primarily in respect of disclosure requirements. In general, the recognition and measurement principles to be applied by SMCs are the same as those to be applied by Level I enterprises. The exemptions/relaxations available to Level II non-company entities as per ICAI’s

 

8The response of the Advisory Panel vis-à-vis the observations made by the Peer Reviewer are indicated in bold and italics.

 

classification would be the same as those available to SMCs under the Rules except that the aforesaid Level II entities that employ less than 50 employees during the accounting year will continue to enjoy certain exemptions/relaxations from AS 15, Employee Benefits, which are not available to SMCs under the Rules.

– AS 18, Related Party Disclosures, and AS 24, Discontinuing Operations, would apply to Level II non-company entities also. In this regard, it may be noted that the Rules too do not give any exemption to SMCs from AS 18 or AS 24.

 

The   harmonised   criteria   applicable   to   non-companies   have   been   provided   in
Appendix D.

Stance of the Panel: Accepted. The suggestions have been incorporated in the Report.

 

Para 38 in the Report

 

A slight modification of this para may be necessary to bring out the position that recognition and measurement principles laid down in the statute or regulations governing an entity override those prescribed in an accounting standard. This is clearly recognised in the Preface to the Statements of Accounting Standards, according to which ‘the Accounting Standards by their very nature cannot and do not override the local regulations which govern the preparation and presentation of financial statements in the country.’

 

Stance of the Panel: Accepted. The suggestions have been incorporated in the Report.

 
Para 51 in the Report

• The expression ‘Ministry of Company Affairs’ may be replaced by the expression ‘Ministry of Corporate Affairs’.

• The word ‘corporate entities’ may be replaced by the word ‘companies’ in view of the fact that notified Accounting Standards apply only to companies and not other bodies corporate.
 
Stance of the Panel: Accepted. The suggestions have been incorporated in the Report.

Para 54 in the Report

ICAI’s official paper on convergence with IFRSs also cites ‘level of preparedness’ as another reason for departures from IFRSs in the past. Its inclusion may be considered, specially in view of the fact that in Appendix E, this has been cited as a reason in respect of some of the standards.

Stance of the Panel: Accepted. The suggestions have been incorporated in the Report.

Section 18 – The Way Forward (Section 8 in the Report)


•  This section may start with convergence with IFRSs as the first point, since this arguably is the single most important step towards improved financial reporting.

•  Another point that may be made is that while striving to achieve the goal of convergence, the ICAI should continue with its process of issuing new standards and revising the existing ones in line with IFRSs. This process will create a greater awareness and understanding about the requirements under IFRSs among preparers, auditors, etc., in the intervening period. Also, it would ensure that even if wholesale adoption of IFRSs is delayed (say, due to the number of regulatory changes which are required in this regard), the process of convergence still goes on.

• As far as issuance of interpretations is concerned, it may be added that in respect of issues where the Indian Accounting Standards are similar to corresponding IFRSs, the interpretations issued by IFRIC/Standing Interpretation Committee (SIC) may be adopted.

The following suggestive draft may be considered.

 

‘8.1 Convergence with IFRSs

 

ICAI should make its best efforts to achieve convergence with IFRSs by 1.4.2011 as far as listed entities and other public interest entities are concerned. Apart from seeking the co-operation of regulatory and other authorities, ICAI should create awareness about the requirements of IFRSs amongst preparers, auditors, etc., particularly to ensure that entities get sufficient time to put in place the systems and procedures to be able to comply with IFRSs. At the same time, ICAI should continue with its efforts to issue new as well as revised standards to bridge the existing gap between the two sets of standards. This will smoothen the process of transition to IFRSs and also ensure that Indian standards are largely IFRS-compliant even if full convergence with IFRSs cannot be achieved due to any reason by 1.4.2011.’

 

The following may be added towards the end of existing para 75.

 

‘—————’ interpretation’ is issued. Interpretations issued by the International Financial Reporting Interpretations Committee (IFRIC) or its predecessor, the Standing Interpretations Committee (SIC) may be adopted by the ‘Interpretation Committee’ of the ICAI where the issue relates to a matter on which Indian Accounting Standard is identical or substantively similar to the corresponding IFRS.’

 

Stance of the Panel: Accepted. The suggestions have been incorporated in the Report.

 

 

Appendix H

 

Accounting Standards9

A Peer Review of the Advisory Panel Report

 

By Mr. Ian Mackintosh,

I have reviewed both documents10. In both cases I cannot comment on the accuracy of the reporting of the history and the present situation. I have no personal knowledge of these matters. My comments are therefore contained to the situation going forward.

 

Accounting

 

I would firstly say that I agree with the actions for convergence in paragraphs 60 to 64 in the Report. I think this plan, if implemented, will be a major step forward for financial reporting in India.

Also, the items mentioned in paragraphs 65 to 69 in the Report.

I would call for caution in the development of country-specific Accounting Standards, sector-specific guidance and interpretations. Taking them one at a time,

•     One should be very certain that standards labelled as country-specific are indeed country-specific. The example given of accounting for emission rights is not a country-specific issue and guidance on this matter is needed all over the world. In such a case, it is not for a national standard-setter to pre-empt the international standard-setter. The preferred solution is to get the IASB to act on the matter and to provide an international solution for national application. I would see country-specific matters as being very rare.

•   I would also advise that care should be taken with sector-specific guidance, so that you are not seen as setting standards in conflict with international standards. It is not something to be precluded entirely, but to be handled with great care.

•   Interpretations should generally be referred to IFRIC and only in the very rare circumstances of a purely Indian issue should the standard-setter be involved.

Stance of the Panel: As regards the country and sector-specific standards, the Panel observed that there may be areas where IASB may not come out with a standard but it could be an area of importance for India. Accordingly, ICAI could come out with sector or country-specific guidance in respect of these areas. However, as and when the IASB comes out with IFRSs in these areas, the standards issued by ICAI would be replaced by the IFRSs.

 

9 The response of the Advisory Panel vis-à-vis the observations made by the peer reviewer are indicated in bold and italics.
10 Mr. Mackintosh had reviewed both accounting and auditing documents. His comments relating to auditing are in the
separate Chapter on auditing standards.

 
 

I agree that, as recommended in paragraph 76, the standard-setter should have sole authority over technical matters.

In relation to paragraphs 78 to 80, I agree that banks across sectors should use the same accounting principles.

I also agree with the sentiments in paragraph 81.

I agree in general with the paragraphs on monitoring and training, but care will need to be taken that the ICAI is not seen as interpreting the standards. While advice can be given on general principles, the accounting treatment will depend on the nature of the transaction involved and professional judgement will be required.

 

Stance of the Panel: Accepted. This has been incorporated in the report

 

The way forward section might also give some consideration as to how the standard-setter might be organised and operate to influence the IASB both as to its agenda and as to the technical output it produces. How is the voice of India to be heard in the global situation going forward? I see this as a very major role for the board.

 
 
Chapter III
 
 
Assessment of Auditing Standards

 

Contents

 

Assessment of Auditing Standards

Section No.

Subject

Page No.

1.

Introduction

73

2.

Auditing – The International Benchmark

73

 

2.1

The International Federation of Accountants

73

 

2.2

The International Auditing Practices Committee

73

 

2.3

International Auditing Standards and the Indian Contribution

74

 

2.4

International Auditing and Assurance Board – The Clarity Project

75

3.

International Acceptance of International Standards on Auditing

77

4.

Auditing Standards in India

77

 

4.1

Legislative History

77

 

4.2

The Emergence of the Institute of Chartered Accountants of India

78

5.

Formation of Auditing Practices Committee

78

 

5.1

Composition of Auditing Practices Committee

79

 

5.2

Auditing Standard-setting – Considerations and Process

79

 

5.3

Standards, Statements and Guidance Notes

80

 

5.4

Developments at the Auditing and Assurance Standards BoardPursuant to the International Auditing and Assurance Board’s Clarity Project


81

6.

Encouraging Implementation and Enforcing Compliance of Standards

82

 

6.1

Encouraging Implementation

82

 

6.2

Enforcing Compliance – Disciplinary Mechanism

84

 

6.3

Enforcing Compliance – Supervisory Mechanism

85

7.

India and the World – Report on the Observance of Standards and Codes-2004

87

 

7.1

Report on the Observance of Standards and Codes’ Evaluation Process

87

 

7.2

Significant Findings of the Report on the Observance of Standards and Codes-2004

87

 

7.3

Institute of Chartered Accountants of Indias Response to the
Report on Observance of Standards and Codes Findings

88

8.

On the Road to Convergence – Ironing out the Standard-specific Differences

89

 

8.1

Access to Working Papers

89

 

8.2

Assessment of Professional Competence

89

 

8.3

Quality of Audit Practices

90

 

8.4

Manner of Making Qualified Reports

90

9.

2008 – Four Years After Report on the Observance of Standards and Codes-2004

91

 

9.1

Towards Risk-based Auditing

92

 

9.2

On the Road to Convergence with International Standards on Auditing
– the Strategy

92

 

9.3

On the Road to Convergence with the International Standards on
Auditing – the Progress

93

10.

The Way Forward

94

 

10.1

Convergence with International Standards on Auditing

94

 

10.2

Implementation of Auditing Standards

94

 

10.3

Strengthening Peer Review

95

 

10.4

An Independent Oversight Mechanism

96

 

10.5

The Board of Discipline and the Disciplinary Committee

96

 

10.6

Enforcing Stricter Reporting Requirements for Listed Companies.

96

 

10.7

Access to Working Papers

97

 

10.8

Functional Independence to the Auditing and Assurance Standards Board

97

 

10.9

Rationalising and Strengthening Auditor Independence

98

 

10.10

Free Flow of Information Among Different Players in the Regulatory Framework

98

References

99

List of Appendices

 

Appendix A:

List of Publications

100

Appendix B:

New Categorisation and Re-numbering of Auditing Standards

101

Appendix C:

Statements on Auditing

104

Appendix D:

Extracts from the Chartered Accountants Act, 1949 – The First Schedule & the Second Schedule


106

Appendix E:

A Comparative Study Between Standards on Auditing of ICAI and International Standards on Auditing of IAASB as on October 23, 2008


110

Appendix F:

Auditing Standards – A Peer Review of the Advisory Panel Report

136

Appendix G:

Auditing Standards – A Peer Review of the Advisory Panel Report

137

 
 
 

1. Introduction

1. Credible auditing of accounts is critical to modern economies. This Report begins by giving a brief description of the international scenario with respect to auditing and goes on to give a brief history of the evolution of the auditing profession in India as well as how auditing standards are implemented and enforced. It then reviews the findings of the World Bank’s ROSC-2004 Report as well as the initiatives taken by the ICAI to bridge the gap between the international and national auditing standards. The Report contains an assessment of the international standards vis-à-vis auditing standards in India. There is also an overview of the developments and major trends in auditing since the ROSC-2004 about the shape of things to come in future. Finally, having regard to comparative assessment and current trends around the world, the Report makes recommendations as to the way forward.
 

2.  Auditing – the International Benchmark

 

2.1 The   International   Federation   of Accountants

2. Sixty-three professional accountancy bodies from 51 nations came together in 1977 to form the International Federation of Accountants (IFAC). The ICAI was one of the founding  members.  IFAC  has  four-fold objectives; developing high quality international standards and supporting their adoption and use; facilitating collaboration and co-operation among its member bodies; collaborating and co­operating with other international organisations; and serving as the international spokesperson for the accountancy profession. The Federation is headed by a Council with a term of three years. The ICAI, too, had its representatives on the Board of the IFAC Council since its inception in 1977 through 1995, from 1997 to 1998 and then from 2001 to 2008.

2.2 The International Auditing Practices Committee

3. To achieve its objectives, IFAC, over a period of time, constituted several boards/ committees to work in several areas of professional interest. The International Auditing Practices Committee (IAPC) was constituted in October 1977 with the prime objective of enhancing the quality and uniformity in practice throughout the world and strengthening public confidence in the global auditing and assurance profession. Towards this end, the IAPC, which was renamed as the International Auditing and Assurance Standards Board (IAASB) in 2002, is entrusted with the task of developing standards on auditing and review of historical financial information, as also standards on other types of assurance engagement carried out in the context of information other than historical financial information. The IAASB also develops related practice statements. English is the official language of the IAASB.

4. The Standards and Practice Statements issued by the IAASB are the benchmarks for high quality auditing and assurance practices. They are designed to help professional accountants meet the changing expectations of users. In addition, IAASB also develops the quintessential quality control standards for the auditors. From the first International Auditing Guideline1, Objective and Scope of the Audit of Financial Statements, issued by the IAPC in 1979, to the first International Standard on Auditing (ISA) issued in 1991, as on date, the tally of IAASB Standards has risen to 392, covering an array of important aspects of auditing and other assurance services. Based on the functional classification, the International Standards on Auditing have been classified in seven categories, viz., introductory matters, general principles and responsibilities, risk assessment and response to assessed risks, audit evidence, using the work of others, audit conclusions and reporting, and specialised areas.

2.3 International Auditing Standards and the Indian Contribution

5. ICAI represented India on the IAPC (later known as IAASB) during the latter’s early years, spanning the period 1980 to 1986.

6. In addition to helping draft the international    standards,  the  ICAI’s representation on the IAPC helped in rooting the international standards as the anchor in the formulation of the auditing standards in India.

7. Since 2002, the Chairman and Secretary of the Auditing and Assurance Standards Board (AASB) also participate as representatives of the Institute in the meetings of the National Auditing Standard-Setters3 [comprising ten countries including India], organised by the IAASB annually. The purpose of these meetings is to share knowledge on matters affecting international convergence and on international and national developments affecting the priority of topics on future standard-setting agendas, to optimise the process of bringing the strengths of IAASB and the national standard-setter (NSS) to bear on reaching consensus and convergence in standards at an early stage, to achieve closer co-operation and strengthened communication for identifying opportunities for closer collaboration on projects, leveraging of resources, further development of staff skills, minimisation of duplication, and to achieve wider involvement of NSS in IAASB task forces. For the purpose of these annual NSS meetings, only those standard-setters are invited by IAASB that:

• are significantly active in the development of national auditing standards, or by way of contributing to the development of International Standards on Auditing (ISAs);

1 The nomenclature was changed to International Standard on Auditing (ISA) in 1991.
2 The number of Standards issued by IAASB is 39 (excluding those which are the revised versions of the earlier Standards
issued under the Clarity Project) as on January 1, 2008.
3IAASB constituted a National Standard-setters (NSS) Group comprising of eight countries in 2001. India was invited
to become its member in 2002.

• have adopted or plan to adopt ISAs, or are demonstrably committed to the achievement of convergence of international and national standards;

• are sufficiently strong in terms of resources to participate actively in collaborative efforts identified through the activities of the liaison group; or

• represent the world’s largest economies.

2.4 International Auditing and Assurance Board – The Clarity Project

8. The IAASB embarked upon its Clarity Project in 2004 with the twin objectives of greater use of its International Standards and ease of their translation. Until then, the Standards issued by the IAASB were written in a format wherein the principles or the fundamental requirements of the Standards were given in the bold text, the mandate being indicated by the use of the word ‘should’, followed by its explanation in the normal type face, as a running text. Besides, the ISAs were quite concise and the explanation to the principles also did not contain any guidance aimed specifically at application of these Standards to audit of small entities. The Clarity Project, as the name suggests, was aimed at improving the clarity of the IAASB’s pronouncements, making the ISAs easy to understand and implement. The IAASB is, therefore, also in the process of revising and/or redrafting its entire suite of Standards and hopes to complete the project by the end of 2009.

9. Till December 2003, all the Standards issued by the IAASB were known as the International Standards on Auditing. However, pursuant to its Clarity Project, the IAASB, with effect from January 2008, has categorised its International Standards as under, on the basis of type of assurance provided by different types of engagements:

•   International Standards on Auditing (ISAs) – to be applied in the audit of historical financial information (100 – 999).

•   International Standards on Review Engagements (ISREs) – to be applied in the review of historical financial information (2000 – 2699).

•   International Standards on Assurance Engagements (ISAEs) – to be applied in assurance engagements dealing with subject matters other than historical financial information (3000 – 3699).

•   International Standards on Related Services (ISRSs) – to be applied to compilation engagements, engagements to apply agreed upon procedures to information and other related services engagements as specified by the IAASB (4000 – 4699).

The above four categories of International Standards are collectively known as the Engagement Standards.

10.  The Standards written under the Clarity Project have the following distinct features:

(i) The principles and the relevant application guidance in the Standard do not appear as running text. Instead, a Standard is now divided into two distinct sections. The first section contains the Requirements (i.e., the principles) apart from the Introduction, Scope and Objectives, whereas the second section contains the Application and Explanatory Material (i.e., the application guidance) in respect of the principles enunciated in the Requirements section. A Standard, therefore, now does not make a distinction between the principles and application guidance in the format of a bold type vis-à-vis normal text, rather the mandate is reflected in the Requirements paragraphs through the use of the word ‘shall’.

(ii) Recognising the fact of existence of large number of small and medium enterprises across the world, the Standards provide appropriate guidance to the auditors in respect of application of these Standards to such entities without diluting the principal requirements of the Standard. The Application and Explanatory Material Section of the Standard issued under the Clarity format, accordingly, contains separate guidance on application of the principles enunciated in the requirements section to the audit of small entities.

(iii) Prior to the Clarity Project, the IAASB had a separate Standard on audit in a computerised information systems environment. But now the different aspects of information technology environment have also been embedded in all the relevant Standards written under the Clarity Project. The said erstwhile Standard has been withdrawn pursuant to the issuance of its two Standards, ISA 315, Understanding the Entity and Its Environment and Assessing the Risk of Material Misstatements, and ISA 330, Auditor’s Procedures in Response to Assessed Risks, focusing on risk-based auditing.

(v) The Application and Explanatory Material section, at relevant places, also contains guidance on application of the principles laid down in the Standard to the audit of public sector entities. It is pertinent to note that the IAASB defines ‘public sector’ as ‘national governments, regional (for example, state, provincial, territorial) governments, local (for example, city, town)    governments and related governmental entities (for example, agencies, boards, commissions and enterprises)’.

11. In July 2006, IAASB issued a policy paper for national standard-setters (NSS) outlining the extent and manner of modification that a NSS could make to the corresponding International Standard (IS). A gist of these criteria is as follows:

(i) National Standard (NS) cannot be in conformity with the corresponding International Standard (IS) unless the standard-setter has in place a Standard conforming to the IAASB’s International Standards on Quality Control.

(ii) NS cannot be in conformity with the corresponding International Standard unless the NS includes all the requirements and guidance contained in the corresponding ISA, except as provided in (iii) and (iv) below.

(iii)  Limited additions permitted to an IS:
(a) National legal/regulatory requirements.
(b) Other requirements/guidance that are not inconsistent with the current requirements/guidance in IS.

(iv) Limited deletions from the ISs are:
(a) Elimination of options.
(b) Requirement/guidance which the law/regulation does not permit.
(c) Requirement/guidance where the IS recognises different practices may exist in different jurisdictions.

(v) All the ISs of a particular category have been included.

 

3. International Acceptance of International Standards on Auditing

 

12. ISAs are widely accepted now. The global acceptance of ISAs is confirmed by the 2006 survey by the IFAC Compliance Advisory Panel which indicates that more than 100 countries are using ISAs, either adopted as written or locally adapted, or as a basis for preparing their national standards. The 2006 Survey also revealed that 40 per cent of the countries adopt ISAs without any amendment; 35 per cent of the countries adopt ISAs and amend as necessary; and, 25 per cent of the countries compare National Standards with ISAs to eliminate differences. India falls in the category of those countries which adopt ISAs and make amendments subject to local laws, customs and usages. ISAs are also accepted as the basis for the audit of the financial statements of foreign listed entities by many of the world’s major capital markets for the public sector, the International Organisation of Supreme Audit Institutions (INTOSAI)4 uses ISAs as a basis for its Financial Audit Guidelines.

 
4. Auditing Standards in India
 
4.1  Legislative History

13.  The history of auditing in India can be traced back to the period of the Mauryan empire5, i.e, the period between 4th century BC and 150 AD. The mercantile legislations passed in 1857 contained a provision for annual audit of company’s accounts. The Indian Companies Act of 1866 not only required the directors of the company to keep true accounts of the stock in trade and sums of money received and expended as well as credits and liabilities of the company, it also contained detailed provisions in respect of audit of accounts of companies. The 1866 Act embedded the need for an auditor to be independent and, accordingly, contained a number of provisions in respect of ensuring the auditor’s independence, viz., those relating to remuneration, eligibility for re-election, filling of casual vacancy, right of access to books and accounts of the company, report to the members, etc. The other important legislations were the Joint Stock Companies Acts of 1850, 1857, 1860, 1882 and the Indian Companies Act, 1913. The Companies Act, 1956 has also had far-reaching implications for the auditing profession in India6.

14. Today, the audit of a company is carried out in terms of the provisions laid down in sections 224 to 227 of the Companies Act, 1956. Only a member of the ICAI who holds a certificate of practice can act as an auditor of a company. Whereas section 224 contains provisions relating to appointment and remuneration of the auditors, section 225 contains provisions relating to resolutions for appointment/removal of auditors. Section 226 of the said Act lays down requirements aimed at ensuring and protecting the independence of the auditors. To ensure fair and objective audit as also independence of auditors, it disqualifies the following persons from appointment as auditors of a company:

(i)  a body corporate,

(ii) an officer/employee of the company,

(iii) a person who is a partner, or who is in the employment, of an officer or an employee of the company,

(iv) a person who is indebted to the company for an amount exceeding one thousand rupees, or who has given any guarantee or provided any security in connection with the indebtedness of any third person to the company for an amount exceeding one thousand rupees, and

(v) a person holding any security of that company after a period of one year from

4 INTOSAI is the representative organisation of supreme it institutions, which are central government auditors.
5In Kautilyas Arthashastra.
6Source: The History of Accountancy Profession in India, Vol.I, The Institute of Chartered Accountants of India.

the date of commencement of the Companies (Amendment) Act, 2000.

4.2  The Emergence of the Institute of Chartered Accountants of India

15. The passing of the Chartered Accountants Act, 1949 led to the creation of the ICAI. It has been entrusted with the task of regulation of the accountancy profession in India. For this purpose, the Council of the Institute has established a number of Committees and Boards, each to address an aspect critical to such regulation, for example, students’ registration, education and training, auditing standards, accounting standards, ethical issues, continuing professional education, disciplinary aspects, etc. Some of these Committees and Boards are as follows:

 

Disciplinary Committee

1949

Examination Committee

1949

Board of Studies7

1954

Research Committee

1955

Continuing Professional Education

 

Committee8

1956

Committee on Ethical Standards

1975

Accounting Standards Board

1977

Auditing and Assurance

 

Standards Board9

1982

 
At present, there are more than 35 Committees/ Boards constituted by the Council of the Institute.

16. In 1955, the Council of the Institute set up the Research Committee ‘for providing necessary guidance with a view to ensuring the highest traditions and technical competence in the discharge of the duties by the Chartered Accountants’10. During 1952-1982, when the AASB was not in existence, the Research Committee brought out more than 20 publications dealing with some critical issues faced by the auditors. A list of these publications is given in Appendix A.

5. Formation of the Auditing Practices Committee

17. The research work undertaken by the Research Committee comprised both accounting and auditing, the auditing aspects being looked into primarily by the Auditing Practices Committee (APC), a sub-committee of the Research Committee, formed during the late 1970s. However, in September 1982, the Council of the Institute transformed that sub-Committee into a full-fledged non-standing Committee of the Council, independent of the Research Committee. The primary objective of the Committee was to review existing auditing practices in India and to develop Statements on Standard Auditing Practices (SAPs) so that these may be issued by the Council of the Institute. In 2002, the nomenclature of the APC was changed to Auditing and Assurance Standards Board (AASB) in conformity with the developments at the international level. In 2007, the nomenclature and categorisation of the Auditing and Assurance Standards was changed when the AASB issued the revised Preface in

7 Earlier known as the Coaching Board.
8Earlier known as the Post Graduate Courses Committee
9Prior to September 1982, Auditing and Assurance Standards Board was a part of the Research Committee.
10  Source: History of Accountancy Profession in India, Volume I, pp 361, The Institute of Chartered Accountants of India.

line with the IAASB’s revised Preface under the Clarity Project. This aspect has been discussed in subsequent paragraphs. A table showing the new categorisation and re-numbering of the auditing standards and reconciliation are given in Appendix B.

5.1 Composition of Auditing Practices Committee

18. Till 2002, the membership of APC comprised members of the Council of the Institute as well as co-opted members. As per the provisions of the Chartered Accountants Act, 1949 only chartered accountants, either from industry or practice can be co-opted on the Board. In July 2002, to bring in greater transparency and efficiency in the working of the APC, the Council of the Institute opened up the meetings of the APC to regulators, industry representatives as well as academicians as special invitees. Such representatives need not be chartered accountants. The regulators invited were the Reserve Bank and the SEBI. One special invitee was sought from the apex industry associations, viz., Federation of Indian Chambers of Commerce and Industry, Confederation of Indian Industry and the Associated Chambers of Commerce, on an annual rotation basis. Similarly, a representative was requested from leading management institutes of India, e.g., the Indian Institute(s) of Management – Ahmedabad, Lucknow, Indore, Kolkata, Kozikode, Bangalore, on an annual rotation basis.

5.2 Auditing Standard-setting – Considerations and Process

19.India is one of the founder members of the IFAC. Its responsibility in respect of the International Standards, therefore, emerges from one of the IFAC membership obligations whereby the Institute is required to promote the Standards promulgated by the IFAC. Accordingly, while formulating these Standards, the APC was also required to give due consideration to the corresponding standard(s) issued by the International Federation of Accountants as well as applicable laws, customs, usages and business environment in India. Though, periodically, IFAC undertakes assessment of the membership obligations by the member bodies, there is more to convergence with the international best practices than a mere need for compliance with a membership obligation, namely, conviction and commitment.

20. Auditing standards in India are formulated following a due process approved by the Council of the ICAI. This due process11 is set out in the Preface to the Statements on Standard Auditing Practices issued in June 1983. In terms of the 1983 Preface, a Standard passes through the following stages:

Stage I: At the first stage, the AASB determines the broad areas in which Standards need to be formulated and the priority in regard to the selection thereof.

Stage II: AASB constitutes study groups to write the Standards.

Stage III: The draft of the Standard prepared by the study group is discussed by the AASB and subject to necessary changes, if any, is issued as an Exposure Draft of the Standard for public comments.

Stage IV: AASB considers the comments received on the Exposure Draft on the basis of which the draft of the proposed Standard is finalised and submitted for the consideration of the Council of the Institute.

Stage V: The Council considers the draft of the proposed Standard and, if necessary, modifies it in

11The due process has been revised in 2007 and made more rigorous. The revised due process is discussed elsewhere in the Report.

consultation with the AASB. The final Standard is then issued under the authority of the Council.

21. As a matter of policy, as laid down in the Preface to Statements on Standards on Auditing Practices issued in 1980, the Standards issued by the AASB are anchored on the corresponding standards issued by the IAASB. Changes to the latter are made only as warranted by the local conditions.

5.3. Standards, Statements and Guidance Notes

22.The Auditing Practices Committee, in addition to the Standards, has also brought out Statements on a number of auditing issues. The Statements, normally, provided guidance to the members on issues of contemporary relevance and were issued primarily when auditing standards were either not yet in place or were in evolutionary stages. For example, the Statement on Auditing Practices, issued in 1964, a period when the concept of Standards had yet to take a concrete form, provided extensive guidance to the members on issues such as true and fair, materiality, comparative study, accounting policies, internal controls, auditor’s approach, etc. The Statement on Manufacturing and Other Companies (Auditor’s Report) Order, 1975 provided detailed guidance to the members for effective discharge of their reporting requirements under the said Order. The Statement on Qualifications in Auditor’s Reports was published as far back as in 1970 to provide guidance to members regarding the form, purpose and manner of qualifications and thereby improving the overall standards of reporting on the financial statements by chartered accountants.

23.Both the Standards as well as the Statements on auditing codify the best practices in the area of auditing and are regarded by the Council as being critical and are, therefore, mandatory in nature. If, for any reason, a member has not been able to perform an audit in accordance with the applicable Standard or Statement, he is required to draw attention to the material departures there from. It is, however, important to note that there can be situations in which certain matters are covered both by a ‘Statement’ and by a ‘Standard’. In such a situation, the ‘Statement’ prevails till the time the relevant ‘Standard’ becomes mandatory. Once a ‘Standard’ becomes mandatory, the concerned ‘Statement’ or the relevant part thereof automatically stands withdrawn.

24. The APC was also entrusted with bringing out Guidance Notes on auditing. Guidance Notes are designed primarily to provide guidance to members on matters which may arise in the course of their professional work and on which they may desire assistance in resolving issues which may pose difficulty. Guidance Notes are recommendatory in nature. A member is required to ordinarily follow recommendations in a Guidance Note relating to an auditing matter except where he is satisfied that in the circumstances of the case, it may not be necessary to do so. Till date, the AASB has issued a number of Guidance Notes on auditing, including four industry-specific Guidance Notes. A list of Statements and Guidance Notes is given in Appendix C.

5.4 Developments at the Auditing and Assurance Standards Board Pursuant to the International Auditing and Assurance Board’s Clarity Project

25. In May 2007, the Council of the Institute, as a part of its strategy to fall in line with the best practices followed at the AASB, approved a revised due process for the issuance of auditing standards. The revised due process is a necessary companion to the revised Preface and the new/revised Standards to be issued by the AASB is in line with the corresponding International Standards issued by the IAASB pursuant to its Clarity Project. The Revised Preface issued pursuant to the Clarity Project also paved the way for a new format of writing the Standards, i.e., dividing the Standards in two parts, viz., Requirement Section and Application and Explanatory Section. (The new Standards issued by the AASB corresponding to the ISs issued under the Clarity project have been discussed subsequently in this Report.) Though the principles of transparency and fairness lie at the heart of the revised due process, some critical modifications have been introduced to further strengthen the working of the AASB, especially, its standard-setting process. A brief summary of the significant changes made is given below:

5.4.1 Composition of Auditing and Assurance Standards Board

26. In respect of the composition of the AASB, the Revised Preface and the Due Process has introduced the following changes:

(i) IRDA (apart from the existing Reserve Bank and SEBI) has been added as another regulator from which a special invitee to AASB would be requested.

(ii) The academicians would now, in addition to the Indian Institute(s) of Management, be represented by any other prominent academic and/or research organisation.

(iii) Public interest would be represented on the AASB, for example, by a representative of a not-for-profit organisation.

(iv)  Term of the Chairman of the AASB would be at least three years to ensure continuity and consistency in policy decisions and approach.

5.4.2 Standard-setting Process

27. The standard-setting process has been modified for the following requirements by the Revised Preface and Due Process:

(i) The AASB meeting where a Standard/ Statement is to be considered, requires the presence – in person or through telecommunication link – of at least two-thirds of the membership of AASB.

(ii) Absence of a member for a consecutive period of three AASB meetings needs to be brought to the notice of the Council of the Institute.

(iii) The AASB has been authorised to undertake joint projects with regulators and others.

(iv) The draft of the Standard/Statement to be considered by the AASB is to be hosted on the website of the Institute at least twenty one days before the said AASB meeting.

(v) The period of exposure has been increased from 45 days to at least 60 days.

(vi) Comments of the respondents are to be hosted on the website of the AASB.

(vii) The manner of disposal of these comments by AASB is also required to be hosted on the website of the AASB .

(viii) Members of the public can attend the AASB meetings where a particular Standard is to be considered, subject to the specified conditions.

(ix) The final Standard for submission to the Council would be cleared by the AASB after a voting process.

28. Some of the other significant changes brought in by the revised Preface and the Due Process are:

(i) Guidance Notes, clarifications on Standards, technical guides, practice manuals, studies and other papers have been formally listed as documents that can be issued by the AASB.

(ii) The AASB has been given a formal authority to issue technical guides, practice manuals, studies and other papers, etc., under its own authority.

(iii) Procedure for issuance of the documents mentioned in (i) above has also been formalised.

 

6. Encouraging Implementation and Enforcing Compliance of Standards

 
29. The criticality of the Standards issued by the Institute is further underlined by clause 9 of Part I of the Second Schedule to the Chartered Accountants Act, 1949, which states that a chartered accountant in practice will be guilty of professional misconduct, if he ‘fails to invite attention to any material departure from the generally accepted procedures of audit applicable to the circumstances.’ As a regulator of the accountancy profession and the custodian of public trust in the financial reporting system in the country, the task of the Institute extends both to encouraging implementation as well as enforcing compliance with the Standards.

6.1    Encouraging Implementation

6.1.1 Continuing Professional Education

30. The History of Accountancy Profession in India states that ‘The Institute has always recognised the significance of continuing professional education (CPE) for its members and pursued it as one of the avowed objectives so as to ensure that its members attain and maintain the quality of knowledge and service expected of them. Continuing education is a joint responsibility of both the individual members as well as the professional body to which they belong. A professional Institute holds out a generalised promise of proficiency with regard to its members and it cannot absolve itself of the responsibility regarding their continued technical proficiency. It is with this end in view that the Institute has taken upon itself the task of providing continuing education to its members on a regular and systematic basis’12. Accordingly, the Council of the Institute constituted the Continuing Professional Education Committee in 1956.

31. As a part of the continuing professional education, the Committee, through its various programme organising units, conducts a number of seminars, workshops, conferences, etc., on various areas of professional interest, including auditing. During 2007-2008, the CPE Committee organised audit related programmes on topics such as service tax audit, bank audit, VAT audit, the Sarbanes-Oxley Act, 2002 the overall set of auditing standards, audits in public sector, forensic audit, audit of members of stock exchanges, audit of charitable institutions, audit of insurance companies, etc., allocating more

12 Source: The History of Accountancy Profession in India,Vol. II, The Institute of Chartered Accountants of India,

than 5000 CPE hours in total. In the year 2008-09, the CPE Committee has till October 31, 2008 held many learning programmes in the area of audit, generating more than 3,500 CPE hours. The Committee also brings out non-authoritative publications on various subjects. As on date, CPE is mandatory for the practicing members. However, from 2008, the CPE has become mandatory for the members in industry as well.

6.1.2 Peer Review Board

32. The Institute also has in place a system of peer review of audit firms (i.e., practice units), done under the aegis of the Peer Review Board of the ICAI, established in April 2002. The Board consists of ten members appointed by the Council of the ICAI of whom at least six are from amongst the members of the Council. The Board also has representatives from the Ministry of Corporate Affairs, the CAG, SEBI and the industry (as represented by FICCI/CII).

33. The review process involves an evaluation of the process followed by the Practice Units (PUs) in performing attestation engagements. Under a peer review, the reviewer examines the adequacy of the founding pillars of quality control system in an audit firm, viz., compliance with technical standards, audit procedures and documentation, quality of reporting, office systems and procedures and training of the staff and makes a report thereon. The report, rather than being a fault-finding weapon, is aimed at helping the reviewee to improve its performance. Importantly, the PUs found wanting/deficient by the peer reviewer are again subjected to a peer review process after a period of about six to twelve months to assess the improvements made by them.

34. Peer review was introduced in three stages to cover all types of PUs – sole proprietors, partnerships, etc. Stage I of the peer review process covered all such PUs which carry out audits of enterprises involving large amounts of funds – Government/public (paid-up capital above Rs. 5 crore and annual turnover of more than Rs. 50 crore), central statutory auditors of banks, insurance companies, central co­operative societies, asset management companies, mutual funds, etc. Stage II covered firms carrying out audits of branches of public sector banks/private sector and foreign branches, regional rural banks, co-operative banks, NBFCs listed on stock exchanges and not covered in Stage I. Stage III covered all the rest of the firms. As per the statistics available, 1,188 PUs fall under Stage I while Stage II covers 16,478 PUs and Stage III covers all residuary 38,356 firms including members that practice in individual name. The process of review is also cyclical since PUs covered under Stage I are reviewed mandatorily after every three years while in respect of Stage II and Stage III PUs, a four-year and a five-year cycle, respectively, has been decided by the Board. So far more than 11,000 PUs have been selected for review under different stages. As on date, 1,479 certificates have been issued to different PUs while follow-up reviews have been ordered in respect of about 248 PUs.

35. Peer review being an instrument of encouraging compliance with standards and improving the overall quality of work by audit firms, it is essential that the peer reviewers are themselves strong technically and are experienced enough to understand the intricacies of practice. The Institute has, therefore, till date empanelled more than 3,900 peer reviewers and has provided extensive training to 3,100 reviewers at 79 programmes organised so far throughout the country. The training, incidentally, also ensures consistency and uniformity in the peer review process. The Institute has also developed a strong trainer base for the training of the peer reviewers.

36. A move that can be seen as supporting the peer review process is the recommendation of the SEBI’s Committee on Disclosures and Accounting Standards (SCODA) that, in view of the public funds involved, audit of listed companies should be carried out by only those auditors who have themselves been subject to the peer review. The said recommendation of SCODA has, in principle, been accepted by the Council of the Institute.


6.1.3 Quality Review Board

37.        Section 28A of the Chartered Accountants Act, 1949 as amended by the Chartered Accountants (Amendment) Act, 2006 envisages establishment of a Quality Review Board (QRB) by the Central Government to perform the following functions:

(i) to make recommendations to the Council with regard to the quality of services provided by the members of the Institute;

(ii) to review the quality of services provided by the members of the Institute including audit services; and

(iii) to guide the members of the Institute to improve the quality of services and adherence to various statutory and regulatory requirements.

38.     The Central Government, through its notification issued in June 2007, has constituted the QRB. The Board has a total of ten members, excluding the Chairman, whereof five members are nominated by the Central Government and five by the Council of the Institute. The Chairman to the Board is also nominated by the Central Government.

6.2    Enforcing Compliance – Disciplinary Mechanism

39.     A member of ICAI is subject to its disciplinary jurisdiction. The Chartered Accountants Act, 1949 (hereinafter the Act unless specified otherwise) gives authority to the Central Council of ICAI to enquire into cases of professional or other misconduct on the part of members of ICAI and to take disciplinary action.

40.    The Act, as amended by the Amendment Act of 2006, provides for the constitution of the Board of Discipline consisting of a presiding officer who has knowledge of disciplinary matters and of the profession and of two members, one of whom shall be a member of the Central Council and the other a person to be nominated by the Central Government out of persons of experience having eminence in the field of law, economics, business, finance or accountancy. The Board looks into complaints which fall under the First Schedule to the Act.

41.   There is also a Disciplinary Committee which consists of the President or Vice-President of ICAI as the presiding officer and of two members who are members of the Central Council of ICAI and two members to be nominated by the Central Government from amongst persons of eminence having experience in the field of law, economics, business, finance or accounting. The Disciplinary Committee looks into complaints against members falling under both the First Schedule as well as the Second Schedule to the Chartered Accountants Act, 1949.

42.   To a large extent, the First Schedule covers professional and other misconduct related to non-observance of the internal regulations of the Institute. It has four parts, namely:

•   Part I – applicable to professional misconduct by members in practice;

•   Part II – applicable to professional misconduct by members in service;

•   Part III – applicable to professional misconduct by members generally (whether in practice or not); and

•   Part IV – applicable to other misconduct by members generally.

43.     The Second Schedule generally covers professional misconduct in areas where public interest is involved. It has three parts, namely:

Part I – applicable to professional misconduct by members in practice. This includes inter alia disclosure of confidential information, failure to disclose material facts or misstatements in financial statements, failure to exercise due diligence or grossly negligent conduct, failure to obtain sufficient information to warrant the expression of an opinion and failure to invite attention to material departures from generally accepted audit procedures;

Part II – applies to professional misconduct by members generally (whether in practice or not); and

Part III – applies to other misconduct by members generally.

44. The First and Second Schedules to the Chartered Accountants Act, 1949 are reproduced in Appendix D.

45. The Chartered Accountants Act, 1949 provides for the appointment by the Central Government of an Appellate Authority consisting of a person who is or has been a judge of a High Court as the Chairperson and two past members of the Central Council and two persons to be nominated by the Central Government from amongst persons having knowledge and practical experience in the field of law, economics, business, finance or accountancy.

46. Appeals to the Appellate Authority against an order of the Board of Discipline or the Disciplinary Committee can be made by an aggrieved member and/or the Director (Discipline).

6.3   Enforcing Compliance – Supervisory Mechanism

6.3.1 Financial Reporting Review Board

47. The Financial Reporting Review Board (FRRB) was constituted by the Council of the ICAI in July 2002, comprising of the members of the Council of the Institute (including a nominee of the Central Government on the Council) as well as representatives of IRDA and the CAG as special invitees. The primary function of the FRRB is to review the compliance inter alia with the reporting requirements of various applicable statutes, Accounting Standards and Auditing and Assurance Standards issued by the ICAI.

48. The Board reviews general purpose financial statements and the auditors’ reports thereon of certain randomly selected enterprises with a view to determine, to the extent possible:

•  Compliance with the generally acceptedaccounting principles in the preparationand presentation of financial statements;

•   Compliance with the disclosure requirements prescribed by regulatory bodies, statutes and rules and regulations relevant to the enterprise; and

•   Compliance with the reporting obligations of the auditor.

49. The FRRB can review the general purpose financial statements of the enterprise and the auditor’s report thereon either suo motu or on a reference made to it by any regulatory body like, the Reserve Bank, SEBI, IRDA, Ministry of Corporate Affairs, etc. The FRRB may also review general purpose financial statements of the enterprises and the auditor’s report thereon relating to which serious accounting irregularities in the general purpose financial statements have been highlighted by the media reports.

50. The enterprises within the purview of the FRRB include:

•   enterprises whose debt or equity securities are listed on a recognised stock exchange in India;

•   public financial institutions and banks;

•   non-listed and other commercial enterprises having a turnover of Rs. 50 crore or more; and

•   such other category of enterprises which in the opinion of the Board make the public interest vulnerable due to susceptibility to non-compliance of generally accepted accounting principles in the preparation and presentation of financial statements, non-compliance of the disclosure requirements prescribed by regulatory bodies, statutes and rules and regulations relevant to the enterprise and non-compliance of the reporting obligations of the enterprise and the auditor.

51. For suo motu reviews, the FRRB decides every year, the number of companies to be reviewed in each Council year. The companies are short-listed on the basis of the criteria decided by the Board, using the company database available from a nationally renowned source. After short-listing, the companies are sorted in the ascending order of turnover. From this list, the required number of companies are selected using scientific methods such as random sampling. In its reviews, the FRRB is assisted by its various Financial Reporting Review Groups (FRRGs). The members of the FRRGs are adequately trained by the FRRB and work under strict confidentiality requirements.

52. In case the FRRB finds any non-compliance with the factors stated above, it refers the case to the Secretary to the Council of the Institute of Chartered Accountants of India13 for initiating action against the auditor under the Chartered Accountants Act, 1949. Insofar as the management of the enterprise is concerned, pending the grant of relevant powers to the FRRB by the Central Government, the FRRB informs irregularity to the regulatory body relevant to the enterprise.

53. In cases where no material non-compliance and/or non-compliance affecting the true and fair view of financial statements are observed by the FRRB, and only immaterial non-compliance and/or non-compliance, which do not affect the true and fair view of financial statements are observed, the FRRB may not refer the case to the Secretary14 to the Council of the ICAI for initiating action against the auditor under the Chartered Accountants Act, 1949. In such cases, the FRRB would appropriately bring the non-compliance to the attention of the auditor and/or the enterprise concerned. Till 2007, the FRRB has taken up the review of 245 companies, out of which 74 cases have been referred to the Secretary to the Council of the Institute and 76 cases have been referred to the relevant regulators.15

13 Pursuant to the amendments introduced by the Chartered Accountants (Amendment) Act 2006, the cases now need
 to be referred to the Director (Board of Discipline).
14 See footnote 4.
15 The Institute has its own disciplinary mechanism, as prescribed under the Chartered Accountants Act, 1949 (amended
by the 2006 Amendment Act), to deal with the complaint cases filed against the members of the Institute. This disciplinary
mechanism has been discussed in this Report subsequently.

54. With a view to apprising the members of the Institute and others concerned about the major non-compliance observed during the review, the FRRB compiles information on instances of such non-compliance from time to time and publishes the same in the Journal of the Institute and also hosts them on the website of the Institute, without mentioning the names of the enterprises concerned and/or their auditors. The FRRB does not have any power to impose any kind of penalty on the concerned enterprise/auditor.

 

7. India and the World – Report on the Observance of Standards and Codes-2004

 
 

7.1 Report on the Observance of Standards and Codes’ Evaluation Process

55. The Financial Stability Forum (FSF) of the World Bank, established following the East Asian crisis,1997 enunciated twelve core principles of financial stability, with accounting and auditing being one of them. The Report on Standards and Codes (ROSC), a joint initiative of the World Bank and the IMF is aimed at assessing the level of compliance in the member countries of the twelve core principles enunciated by FSF, comprising assessment of actual practices as well as the effectiveness of the monitoring and enforcement mechanisms. For the purpose of collecting relevant information, diagnostic templates have been developed by the World Bank.

56. Insofar as auditing is concerned, the International Standards on Auditing (ISAs) issued by the IAASB of IFAC were taken as the benchmarks for the assessment and comparison. The diagnostic tool for the purpose evaluated the audit standard-setting framework as well as the position of each Auditing and Assurance Standard16 vis-a-is the corresponding International Standard on Auditing. The aspects evaluated include:

•   Existence of auditing standards;

•   Legal backing for these standards;

•   Existence of a national standard-setter;

•   Legal authority of the national standard-setter;

•   Composition of the standard-setting body;

•   Accountability of the standard-setting body;

•   Due process of standard-setting; and

•   Issuance of practical implementation guidance on auditing standards.

57. In respect of the individual standards, the following specific aspects were evaluated:

•   Standards gap and compliance assessment;

•   Whether standard has been adopted;

•   Whether the national standard-setters address certain specific aspects of each of the ISAs;

•   Standards as practiced;

•   the extent to which the practice differs from the written requirements of the national standards; and

•   difficulties faced by the professional accountants in public practice to fully comply with the standard.

7.2 Significant Findings of the Report on the Observance of Standards and Codes-2004

58. The ROSC-2004 was finalised by the representatives of the World Bank through a participatory process involving various
stakeholders such as the Ministry of Corporate Affairs, the Reserve Bank, the ICAI, IRDA, SEBI, the Bombay Stock Exchange, the National Stock Exchange, the CAG, the Central Board of Direct Taxes, the Federation of Indian Chambers of

16Now known as the Engagement Standards.

Commerce, the Confederation of Indian Industries, and the Associated Chambers of Commerce. Some of the significant findings of the ROSC-2004 are as follows:

•  ICAI follows a due process in formulating and issuing standards.

•  AASs generally replicate the ISAs, modifications being made to adapt to the local circumstances

•  Lesser audit alternatives as compared to ISAs.

59. The ROSC-2004 identified the following differences in the AASs issued by the ICAI vis-a -vis the ISAs.

I.  No AAS corresponding to the following ISAs:

(i)  ISA 100, Assurance Engagements

(ii) ISA 501, Audit Evidence – Additional Consideration for Specific Items

(iii) ISA 720, Other Information in Documents Containing Audited Financial Statements

(iv) ISA 910, Engagements to Review Financial Statements

II. Significant differences in Standards related to audit planning, management representations, audit sampling and quality control.

III. Inability of the incoming auditor to access the working papers of the outgoing auditor.

IV. No requirement for assessment of the professional competence of another auditor.

V. Quality of audit practices differs significantly among audit firms.

VI. Improper use of the expression ‘subject to/except for’ audit opinions in audit reports.

7.3 Institute of Chartered Accountants of India’s Response to Report on the Observance of Standards and Codes’ Findings

60. Pursuant to observations made by the ROSC, ICAI took several steps including expediting the issuance of updated Standards. Such response, along with the Panel’s response, are discussed below:

7.3.1 Auditing Standards Corresponding to ISAs

61. Subsequent to the issuance of the ROSC-2004, the ISA 100 was withdrawn by the IAASB and in its place a document titled Framework for Assurance Engagements was issued. In 2007, the ICAI issued a document titled Framework for Assurance Engagements corresponding to the IAASB document.

62. Though the ICAI did not have an auditing standard corresponding to ISA 501, it did have Guidance Notes on some of the topics covered in ISA 501 namely, guidance notes on ‘Audit of Inventories’ and on ‘Audit of Liabilities’. A full-fledged Standard on ‘Audit Evidence – Additional Consideration for Specific Items’ (AAS 3417) was issued in March 2005.

17Now known as the Standard on Auditing (SA) 501.

63. The AASB has already issued the Exposure Draft of the SA 720 corresponding to ISA 720.

64. Insofar as ISA 910 is concerned, ICAI had issued a Guidance Note on ‘Engagements to Review Financial Statements’ which was substantially on the lines of ISA 910. In March 2005, it has issued a standard (AAS 3318) on the subject.

8. On the Road to Convergence – Ironing Out the Standard-specific Differences

65. Subsequent to ROSC-2004, the IAASB, pursuant to its Clarity Project, has till date issued twenty Revised/Redrafted International Standards on Auditing and thirteen exposure drafts of revised/redrafted ISAs which are yet to be finally issued by IAASB. In addition, IAASB had also issued a ‘mother standard’ on quality control by the nomenclature of ISQC 1, Quality Control for Audit Firms that Perform Audits and Reviews of Historical Financial Information, and Other Assurance and Related Services Engagements. One of the major implications of ISQC for the IFAC member bodies is that having a Standard corresponding to ISQC 1 is an essential pre-requisite for the national standard- setters to claim compliance with the International Standards. The Institute has already issued a Standard (SQC 1) corresponding to ISQC 1. The IAASB has recently issued an Exposure Draft of the Redrafted ISQC 1 under the Clarity Project.

8.1 Access to Working Papers

66. The inability of the auditors to share working papers among themselves in the Indian context has given rise to differences vis-à-vis a number of ISAs, for example, in the Standard dealing with audit of group financial statements. This inability seems to have stemmed from the requirements of clause (1) of Part I of the Second Schedule to the Chartered Accountants Act, 1949 which states that, ‘a chartered accountant in practice will be guilty of professional misconduct if he discloses information acquired in the course of his professional engagement to any person other than his client so engaging him, without the consent of his client or otherwise than as required by any law for the time being in force’. Even in the case of an audit of a branch of a company, though section 228 of the Companies Act, 1956 empowers the principal auditor to visit the branch and inspect the documents maintained thereat but does not empower him to seek the working papers of the branch auditor. It shall, however, be well within the ambit of the legal provisions that an outgoing auditor may share his working papers subject to the permission of the client. Therefore, the principal auditor, both in the case of a branch or a subsidiary of the client company, may have access to the working papers of the latter if the parent company (client) so permits the branch/subsidiary auditor. The auditor may, however, at his discretion make copies of his working papers available to the client.

67. The Panel, however, reaffirms the recommendation of the SEBI Committee on Disclosures and Accounting Standards (SCODA) that, where a company has a material subsidiary whose audit has not been done by the principal auditor, the principal auditor should have the obligation to review the working papers of the other auditors who have audited the financial statements of such subsidiaries. To give effect to the ability of the principal auditor to fulfil this obligation, specific authority should be given to the auditor of the subsidiary in the engagement letter to allow such access.

8.2     Assessment of Professional Competence

68. The International Standards on Auditing, envisaging situation where an auditor uses the work of another auditor, requires the former,

18Now known as the Standard on Review Engagements (SRE)2400.

in all cases, to assess the professional competence of the other auditor whose work he intends to use/rely upon. Such a requirement in ISAs, perhaps, has been incorporated to cover twin situations, viz., a multinational corporation may have several branches or subsidiaries operating in different parts of the world or probably on account of the fact that in some countries, for example, the United Kingdom, there may be more than one professional accounting body recognised under the law whose members can carry out the audit of the financial statements. In such jurisdictions, where there is only one professional accounting body recognised by law whose members can carry out the audits of financial statements, (for example, in India, this would comprise the members of ICAI), the need to assess the professional competence of the other chartered accountant on whose work the main auditor wishes to rely/relies, may still be necessary. The need arises on account of the fact that in today’s complex economic environment involving the highly specialised nature of industry and financial services sector, professional accountants are required to deal with several intricate issues pertaining to a particular industry. Therefore, one may come across a situation wherein an auditor having adequate experience and standing in the profession may not have relevant experience of the particular industry. Thus, it may be imperative for an auditor assuming the ultimate responsibility for the audit opinion to assess the professional competence of the other auditor in the context of the particular assignment before relying upon the latter’s work.

8.3  Quality of Audit Practices

69. A large number of audit firms in India – more than 80 per cent according to the statistics maintained by ICAI – are sole
proprietors, most of them having limited resources and small entities as their clients for audit and taxation work. This, however, cannot be a reason to compromise on the audit quality. The Institute has, therefore, undertaken rigorous steps such as the mandatory Continuing Professional Education for one and all practicing chartered accountants, peer reviews as well as training programmes throughout the nook and corner of the country. It is hoped that these initiatives of the ICAI, some of which have been elaborated in earlier paragraphs, coupled with the recent issuance of a comprehensive standard on quality control, corresponding to the ISQC 1 of the IAASB, would go a long way in ensuring a uniformly high quality among audit firms.

8.4 Manner of Making Qualified Reports

70. ICAI has always been conscious of the fact that quality of reporting is the ultimate test of true professional and, thus, has taken several steps from time to time to bring in better practices in reporting by the auditors. As a measure to bring in uniformity in the reporting practices among the statutory auditors of companies under the Companies Act, 1956 the Institute, issued the Statement on Section 227(1A) of the Companies Act, 1956 in 1965. This Statement was subsequently merged with the Statement on Qualifications in Auditor’s Report, issued by the ICAI in 1970-71. This publication of the ICAI was a benchmark of sorts in the sense that it contained fundamental principles on when and how to qualify the audit reports. To provide a greater and clearer understanding to the readers as to how the auditor’s qualifications have affected the financial statements of the entity, the Statement was revised in 2000 to incorporate a significant provision to the effect that the auditor must give the aggregate impact of his quantifiable qualifications on the net profit/loss of the auditee. In 2002, the ICAI also issued a prescribed format of an audit report. Thereafter, in 2003, ICAI issued the AAS 28, The Auditor’s Report on Financial Statement, corresponding to the then existing ISA 700. Through this AAS, for the first time, the ICAI laid down the basic elements of the auditor’s report. The Standard also introduced the concept of an ‘emphasis of matter paragraph’ and also laid down guiding principles as to situations warranting a qualified/adverse or a disclaimer of opinion.

71. The ICAI, through its CPE and other training programmes on auditing as well as the peer review process, has provided guidance to members on the appropriate use of the expression ‘subject to/except for’ in audit reports. In fact, the quality of reporting is one of the main focus areas in the process of peer review. In addition, the ICAI’s seriousness on the quality of audit reports is also reflected by the fact that the FRRB has referred to the Secretary, ICAI, more than 74 cases against auditors due to shortcomings in their audit reports on the financial statements of the companies reviewed by the FRRB.

 

9. 2008 – Four Years After Report on the Observance of Standards and Codes-2004

 
72.  The ICAI being a founder member of the IFAC, has followed a conscious policy of harmonisation with the international Standards, which, accordingly, form the basis for the national auditing standards (i.e, AASs) subject to any modifications arising out of the requirements of laws and regulations or customs and usage of trade. Since 2004, the AASB has also started the practice of giving a separate section on material departures from the corresponding ISA at the end of the Standard for better understanding of the users of financial statements. Beginning with the new/revised Standards, being issued corresponding to the ISAs issued under the Clarity Project, there is a conscious move on the part of the Institute to keep the departures from the ISAs at the bare minimum, having regard to the IAASB’s policy paper on compliance with the International Standards by the National Standard-Setters. Moreover, the information on the material departures from the corresponding ISAs is also being presented in a format which is more informative. The additions/deletions are now being given separately.

73. Another important difference between the IAASB Standards and the auditing Standards issued by the ICAI is that whereas the international standards contain separate guidance on application of the principles laid down in the Standard to public sector entities, the auditing standards issued by the ICAI do not contain any such separate guidance. The reason for this approach is the difference in the definition of ‘public sector entities’ as adopted by the IAASB and that adopted by the AASB of the ICAI. In India, public sector generally refers to public sector enterprises which are now working on commercial principles like any other business enterprise. The AASB, therefore, does not make any distinction in application of the auditing standards to public vis-à-vis non-public sector entities. Moreover, to the extent practicable, the guidance relating to public sector in ISAs has been retained in generic manner. Further, in India, government companies are subject to a supplementary audit by the C&AG in addition to the normal statutory audit conducted by a chartered accountant. In its Report of May 2005, the Expert Committee on Company Law noted that ‘since statutory audit is conducted by the statutory auditor appointed by the C&AG in the manner directed by him, the test/supplementary audit is superfluous since it would duplicate the work already done by statutory auditor.’

74. Significant changes have taken place the world over in the environment in which the audit is carried out today, the technology used by the clients for their business operations and, most importantly, the changing expectations of the various stakeholders, especially the regulators. Appropriate refinements in the auditing methodologies and technology were, therefore, imperative to match these changes and to help the profession maintain continued relevance in the society. The following paragraphs give a snapshot of the initiatives of the ICAI to match the pace of the economic developments taking India by storm.

9.1     Towards Risk-based Auditing

75.  In order to make the audit more efficient and effective as also a value-adding proposition for the client, there was a conscious move globally towards developing a risk-based approach in auditing. Though the IAASB began its Clarity Project in 2004, a major boost to the auditing process came in 2003 when the IAASB issued two new standards, ISA 315, Understanding the Entity and Its Environment and Assessing the Risks of Material Misstatement, and ISA 330, The Auditor’s Procedures in Response to Assessed Risks, and revised two of its existing Standards, viz., ISA 200, Objective and General Principles Governing an Audit of Financial Statements, and ISA 500, Audit Evidence. These four Standards were collectively known as the Audit Risk Standards. These Standards were effective in respect of audits of financial statements for periods beginning on or after December 15, 2004. Issuance of these four standards gave rise to conforming amendments/revision to almost the entire suite of the International Standards on Auditing. The accordingly revised International Standards on Auditing were issued by the IAASB during the period 2004 and were effective for all audits of financial statements for the periods beginning on or after December 15, 2004.

9.2 On the Road to Convergence with International Standards on Auditing – the Strategy

76. The Institute has again reiterated its commitment to bring out internationally benchmarked auditing standards. For this purpose, ICAI’s Auditing and Assurance Standards Board has not only initiated an ambitious project of revising all its existing Auditing and Assurance Standards in the light of the various ISAs being issued by IAASB under its Clarity Project to achieve total convergence with the same but is also looking forward to meeting the dateline set by IAASB for winding up the Clarity Project. AASB has also charted out a strategy for successfully finishing this project. According to this strategy, the standard-setting process would be accelerated without compromising on the consultations with the various stakeholders and deliberations required in formulation of a standard. For this, the AASB issues exposure drafts of the revised Standards on Auditing co-terminus with the exposure drafts of the revised/new ISAs issued under the Clarity Project. The AAS are being given shape only after the final ISA has been issued by the IAASB. The Board, in association with the Continuing Professional Education Committee of the Institute, is also holding a number of training programmes and workshops, etc. on auditing standards for members.

9.3 On the Road to Convergence with the International Standards on Auditing – the Progress

77.  As the first and the most fundamental step towards convergence, AASB in 2007 issued the Revised Preface in line with the Preface issued by the IAASB. The Revised Preface paves way for the introduction of Standards written in a format which is in harmony with that adopted by the IAASB for its ISA under the Clarity Project. The Preface, which is effective April 1, 2008 categories auditing standards into the following five categories, based on the types and levels of assurance that an engagement aims to provide:

(i) Standards on Auditing (SAs) – to be applied in the audit of historical financial information.

(ii) Standards on Review Engagements (SREs) – to be applied in the review of historical financial information.

(iii) Standards on Assurance Engagements (SAEs) – to be applied in assurance engagements, engagements dealing with subject matters other than historical financial information.

(iv) Standards on Related Services (SRSs) – to be applied to engagements to apply on agreed-upon procedures to information and other related services engagements such as compilation engagements.

78. Pursuant to the Revised Preface, therefore, the AASs, have been re-named as above and also re-numbered and re-categorised on the pattern followed by the IAASB for its Standards. The Revised Preface also provides for an SA to have two sections – the requirements section containing the basic principles and the application guidance section containing the implementation guidance.

79. In terms of a recent policy of IAASB, no National Standard-Setter (NSS), like the ICAI, can claim to have achieved convergence with the International Standards unless, among other things, it has a Standard equivalent to the International Standard on Quality Control (ISQC). The ISQC issued by the IAASB ranks highest in the hierarchy of the structure of IAASB pronouncements, preceding all the Standards issued by the IAASB. Therefore, as mentioned in earlier paragraphs, it is a mother Standard laying down extensive guidelines in respect of the quality control practices to be established and maintained by the accounting firms for the audits, reviews and other assurance engagements undertaken by them. The ICAI has also issued a mother standard on quality control corresponding to the ISQC.

80. In addition, the ICAI has also issued the revised Framework for Assurance Engagements corresponding to that issued by the IAASB. The Framework is a basic document, explaining the concept of assurance and the elements involved therein in the details.

81. A list of the final SAs issued by the ICAI under the Clarity Project is as follows:

240 The Auditor’s Responsibilities Relating to Fraud in an Audit of Financial Statements – Effective for audits of financial statements for periods beginning on or after April 1, 2009.

250 Consideration of Laws and Regulations in an Audit of Financial Statements – effective for audits of financial statements for periods beginning on or after April 1, 2009.

260 Communications of Audit Matters with Those Charged with Governance – effective for audits of financial statements for periods beginning on or after April 1, 2009.

300 Planning and Audit of Financial Statements – Effective for audits of financial statements for periods beginning on or after April 1, 2008.

315 Identifying and Assessing the Risks of Material Misstatement Through Understanding the Entity and its Environment – effective for audits of financial statements for periods beginning on or after April 1, 2008.

330 The Auditor’s Responses to Assessed Risks – Effective for audits of financial statements for periods beginning on or after April 1, 2008.

570 Going Concern – Effective for audits of financial statements for periods beginning on or after April 1, 2009.

580 Written Representations – Effective for audits of financial statements for periods beginning on or after April 1, 2009.

A gist of the major differences between the AASB’s Standards and ISAs is given in Appendix E.

 

10. The Way Forward

 
82. From the above, it is clear that the strength and future of auditing in India hinges delicately, among other things, on the
commitment of the various players in the auditing environment, essentially the government and the ICAI, to certain fundamental aspects. It is hoped that the following recommendations of the Advisory Panel would act as a catalyst in taking the auditing profession in the India to the next level of change.

10.1   Convergence    with    International Standards on Auditings

83. Notwithstanding the efforts being made by AASB to achieve full convergence with the international standards at the earliest, the road to convergence is difficult. Whereas the extensive requirements of the new Standards could have implications in terms of escalation in the costs of audit, some firms might find it difficult to persuade their clients for increasing the audit fees. Further, a big effort would also be required both at the level of the Institute as well at the level of these individual firms to not only equip the latter with the requirements of the new Standards but also give up their old methodologies and fall in line with the new audit techniques. This is also aggravated by the fact that at the international level also, the auditing standards are undergoing changes very frequently. The difficulties notwithstanding, convergence with the international standards has to be pushed forward and in future, EDs must be issued co-terminus with the EDs issued by IAASB.

84. The omission of a specific reference to ‘Public Sector’ in Standards on Auditing issued by AASB under the Clarity format needs reconsideration, particularly in view of the significant development that the INTOSAI is using ISAs as a basis for its Financial Audit Guidelines. Though generic guidance regarding specific aspects of public sector has been incorporated in the standard itself, but explicit reference to public sector would go a long way because ultimately these standards would also form the basis for auditing public sector by C&AG of India in the larger context.

10.2   Implementation of Auditing Standards

85.As discussed earlier, the Indian auditing scene is marked by the presence of a large number of small and medium practitioners. Given their limited resources and need to provide service in multiple aspects of the practice, these practitioners are bound to face difficulties in keeping pace with the fast-changing auditing literature and the resultant changes to the audit methodology. A seamless integration of these small and medium practitioners in the Institute’s efforts to make the auditing profession in India truly benchmarked with international practices is, therefore, quintessential for success of these efforts. For this purpose, the Institute needs to adopt a three-pronged strategy. The first part of the strategy being bringing out more technical guidance and other literature to help the practitioners not only understand the new auditing standards and aspects relating to their practical implementation but also appropriately appreciate the need for these changes. AASB has already initiated projects on bringing out implementation guides for its proposed Standards on risk-based audits and quality control in audit firms. The second part would be organising training programmes, conferences and such other programmes on the new auditing literature and methodology, which would help practitioners not only unlearn the old concepts and learn new ones, but also provide a platform for the Institute and the members to interact and understand the problems, apprehensions and expectations from each other and possible solutions thereto. However, with the Institute being the second largest accountancy body in the world with a membership of nearly 1,50,000 spread out over an extensive geographical area, reaching out to them and overcoming their professional, social, cultural and age prejudices and pre-conceptions, would require concerted, well-planned and, above all, patient efforts on the part of the Institute. The third and the final part would be to send a strong message among the practitioners that there is no option but to comply with the new requirements if they really want to contribute to as also share the fruits of the economic growth of the country. It should be clearly demonstrated that the delinquents and the errant would not be let off lightly. This can be ensured by strengthening the quality review and the disciplinary process.

10.3   Strengthening Peer Review

86. As mentioned in the preceding paragraphs, the peer review process is aimed at encouraging compliance with the auditing standards. A closer look at the data available with the Institute makes it clear that even for a significant proportion of Stage I and Stage II Practice Units, the actual peer review remains to be completed. ICAI needs to examine the causes of these delays to ensure the continuous efficacy of the process.

87.The Institute should also not lose sight of the Stage III Practice Units, which comprise auditors of small and medium enterprises. The importance of the Stage III auditors and their clientele in economic development of the country should not be underrated. The small and medium enterprises can also be said to involve public interest given the fact that they also use public funds and other resources in the form of loans from banks, etc., Further, gaps in their accounting concepts and systems, existence of a large number of related parties in the form of individuals, weaker internal control systems, and above all, a fairly free operating environment, without much legal and regulatory oversight, etc., make it all the more important that their audits are done carefully. Another reason for keeping a close watch on the quality of audits of small and medium enterprises is the fact that their audits are done mainly by small and medium audit firms (SMPs), a segment of auditors which is typically plagued by issues such as inability to keep up with the technical pronouncements of the Institute on a regular basis, inadequate staff and failure to provide them proper training and mentor them, over-familiarity with/financial over-dependence on a few clients leading to potential independence threats, etc. Moreover, attestation services performed by a chartered accountant holding certificate of practice ought to be a subject matter of review in the larger public interest. While these are valid considerations, until the resources of the ICAI are significantly enhanced, it may be desirable to give priority to Stage I and Stage II Practice Units where large public interest is involved.

88. There is a feeling that in some cases because of restrictions on cost, the time devoted to the peer review is inadequate. Some alternative method of financing the cost has to be examined so that the adequacy of the peer review is not compromised.

10.4   An Independent Oversight Mechanism

89. As stated earlier in the Report, the Chartered Accountants Act, 1949 has recently been amended to set up the QRB with the Central Government having a majority (six out of eleven members including the Chairman to the Board) representation thereon and the representation of the Council of the ICAI being lesser than that. Such a constitution of the QRB has definitely sent positive signals all across as to the Board’s commitment to a fair and transparent quality review process of audit firms. It is, therefore, essential that the government and the Institute ensure that the Board starts functioning at the earliest.

90. The main issue in the above context is clarifying the exact role of the QRB, whether it would be advisory or regulatory in nature. It is felt that to be really effective, it would be essential for the QRB to play a more proactive role as an independent oversight body for the auditing profession in India, as has become the norm in most of the developed countries. Such an independent oversight body would increase the credibility of the work done by the Indian audit firms, at the global level.

10.5  The Board of Discipline  and the Disciplinary Committee

91. With a two-layer disciplinary process, and with the Disciplinary Committee, (having Government nominees on board in terms of the provisions of the Chartered Accountants Act, 1949) being bestowed with more powers than the Board of Discipline, it is believed that the process of reining in errant members would be more rigorous and strict and would also cut down on the time factor. Since the nominations to the Board of Discipline and the Disciplinary Committee have already been made by the Institute and the Government, they should now accelerate the process of making the Board and the Committee functional. It is also suggested that until the current backlog of disciplinary cases is eliminated, complaints received from regulatory authorities and government entities like banks, where greater public interest is involved, be dealt with on a fast-track basis.

10.6   Enforcing Stricter Reporting Requirements for Listed Companies

92.The Listing Agreement of the SEBI, has been instrumental in improving and strengthening the reporting and disclosure practices among the listed entities. It requires the companies to furnish details regarding audit qualifications, viz., the reason for the audit qualification in their accounts, the reason for the company failing to publish accounts without audit qualifications, and the time within which the company will remove the qualification and publish accounts without qualification. Further,SEBI’s Committee on Disclosures and Accounting Standards (SCODA) in August 2002 also recommended three things. First, that the stock exchanges should be required to inform SEBI in cases where companies fail to remove audit qualifications; second, that SEBI may constitute an Advisory Committee to examine the cases reported by the stock exchanges where the companies have failed to remove audit qualifications, and, third, that SEBI may refer the matter to the Department of Company Affairs (now the Ministry of Corporate Affairs) to initiate necessary action under the Companies Act, 1956 and also to the ICAI in cases where actions are required against the auditors of the company. With this kind of a requirement in the Listing Agreement, SEBI has tried to build in a regulatory framework akin to the SEC in the US, wherein the SEC does not accept qualified audit reports of companies.

93. The path of ‘no qualified audit reports’ approach is, however, like a double-edged sword and, therefore, needs to be tread cautiously. Whereas, on the one hand, it would act as a strong deterrent to the companies indulging in what is called ‘earnings management’ and ‘creative accounting’, on the other hand, the inability of the auditor to issue qualified audit reports can lead to deadlocks with managements in case of genuine differences of opinion, which normally results in resignation of the auditors without the issuance of the audit report. In the extreme cases, such inability may also lead to impairment of auditor’s independence. It may also be noted despite SEC’s refusal to accept qualified reports, there has been a slew of re­statements in the last five years or so by the listed companies in the USA, indicating need for some checks and balances in the SEC’s policy.

94. Incidentally, SCODA, at its December 2006 meeting, recommended that the auditors of the listed companies may be required to submit to SEBI financial statements containing audit qualifications and that, to this effect, SEBI may write to the ICAI requesting them to advise its members suitably. This recommendation needs to be implemented in the right earnest.

95. Further, SCODA’s suggestion made at its meeting held in January 2007 ‘to amend Clause 41 of the listing agreement to make it mandatory for listed companies to ensure that their auditors submit the Annual Financial Statements to SEBI, along with the Auditor’s Report wherever the same are qualified by the auditors’ needs closer examination as to the actual follow-up of such a requirement. Guidelines may be prepared for determination of materiality of audit qualification having regard to following major areas:

(i) Where financial statements do not give a true and fair picture of the financial position of the company;

(ii) Non-observance of statutory provisions which may lead to imposition of penalties; and

(iii) Absence of information due to which auditors were unable to express an opinion or instances where auditors have been misled.

10.7 Access to Working Papers

96. Keeping in view the global environment and emergence of large corporate entities in India, the Panel endorses the recommendation of SEBI that, where a company has a material subsidiary whose audit has not been done by the principal auditor, the principal auditor should have the obligation to review the working papers of the other auditors who have audited the financial statements of such subsidiaries.

10.8  Functional Independence to the Auditing and Assurance Standards Board

97. To maintain the credibility and continuing relevance of the profession to the society, it is essential that a message is sent to the stakeholders that the Institute exists to serve the public interest. It is also, similarly, important to demonstrate that the auditing standards that are used by the auditors in carrying out audits of financial statements are to protect and serve the public interest and not to protect the auditors or help them shirk their responsibilities. As of date, though the Standards, are formulated by the AASB, the same are finally subject to the approval of the Council of the ICAI, which is the supreme body in the Institute, with a majority representation from practicing chartered accountants. It is, therefore, essential that, as is the world-wide phenomenon today, that functional independence is given to the Auditing and Assurance Standards Board vis-à-vis the Council of the Institute by making it the final authority for drafting and issuance of the Standards and the Council confining itself to the administrative, but not functional, control of the AASB.

10.9   Rationalising and Strengthening Auditor Independence

98. As mentioned earlier, the Companies Act, 1956 contains stringent provisions to protect the financial/personal independence of the auditors. In addition to the fundamental requirements in a number of clauses in the two Schedules to the Chartered Accountants Act, 1949 which again are explicitly or implicitly aimed at protecting the independence of the auditors, the Institute, too, has issued a number of self-regulatory measures for its members. One such measure is restricting the fees from one client to 40 per cent of the total revenues of the firm. Having regard to the growth of the auditing profession and changes in the economics of audit firms and operating environment of the clients, it is felt that the limit of 40 per cent is too large. The independence of the auditor may actually, or apparently, be jeopardised by the time the limit of 40 per cent is reached. It is, therefore, suggested that the limit be reduced to 25 per cent.

10.10 Free Flow of Information Among Different Players in the Regulatory Framework

99. Business enterprises today are functioning in an expanded regulatory regime, especially, those functioning in the corporate form and/or those which involve large public interest, for example, banking companies, insurance companies, or per se companies listed on stock exchanges. The Ministry of Corporate Affairs, through its Registrar of Companies, calls for a number of documents to be submitted by the companies, including their financial statements and the related audit report. Similarly, the Reserve Bank as well as the IRDA also require a number of returns, containing vast amount of information, to be filed by the entities falling under their regulatory regime. In the same way, SEBI, through means of the various requirements in the Listing Agreement, requires all listed companies, to submit financial and other information periodically.

100. In addition to the filing requirements, certain regulators, for example, the Reserve Bank undertakes inspections of banks. It would be beneficial if there is a free exchange of information between the different players in the legal and regulatory framework, especially, in relation to financial irregularities found by them.
 

References

 
1. The International Federation of Accountants’ website www.ifac.org (history of IFAC).

2. The International Auditing and Assurance Standards Board’s website www.ifac.org/IAASB.

3. The Institute of Chartered Accountants of India, (2000); History of the Accountancy Profession in India, Vol. I.

4. The Institute of Chartered Accountants of India, (2000); History of the Accountancy Profession    in India, Vol. II.

5. The Companies Act, 1956.

6. The Institute of Chartered Accountants of India, (2007); Preface to the Statements on Standard Auditing Practices, Handbook of Auditing Practices (Vol. I).

7. The Institute of Chartered Accountants of India, (2007); Announcements of the Council regarding Status of Various Documents Issued by the Institute of Chartered Accountants of India, Handbook of Auditing Practices (Vol. I).

8. The Institute of Chartered Accountants of India, (2007); Preface to Standards on Quality Control, Auditing, Review, Other Assurance and Related Services, Handbook of Auditing Practices.

9 The World Bank, (2004); Report on Observance of Standards and Codes (ROSC) – Accounting and Auditing, December.

10. The Chartered Accountants Act, 1949.

11. The UK Companies Act, 2006.

12. The International Federation of Accountants,(2007); Handbook of International Auditing, Assurance and Ethics Pronouncements.

13. The Institute of Chartered Accountants of India (2007); Handbook of Auditing Pronouncements.
 
Appendix A
 
List of Publications19
 

1952. Non-partner Chartered Accountant not to Sign Report on Behalf of the Firm

1955 Audit of Accounts of General Insurers

1957 Answers to Queries Regarding the Companies Act, 1956

1958 Council’s View on the Form of Certificate

1959 Disclosure in the Final Accounts of the Company

1961 Profit & Loss Account and Profit & Loss Appropriation Account

1962 Auditing of Accounts of Liquidators Mode of Valuation of Fixed Assets

1963 Recommendations regarding Non-Provision of Taxation Form of Balance Sheet Recommended by the Council Accounting & Auditing: Statement Issued by the Research Committee

1964 Maintenance of Unduly Heavy Cash Balances by Companies Treatment in Accounts of Taxation & Proposed Dividend Statement on Auditing Practices

1965 Statement on Section 227(1A) of the Companies Act, 1956

1966 Obligations under Certain Provisions of the Companies Act, 1956

1967 Guarantees and Counter-Guarantees given by Companies

1968 Independence of Auditors

1970-71 Statement on Qualifications in Auditor’s Report A Guide to Company Audit
Audit of Banking Companies

1975 Statement on Manufacturing and Other Companies (Auditor’s Report) Order, 1975

Statement on Payment to Auditors for Other Services

19 Publications brought out by the ICAI prior to formation of the Auditing Practices Committee in 1982.

 
Appendix B

New Categorisation and Re-numbering of Auditing Standards

 

SQC No.

Title of the SQC

Old AAS No.

1

Quality Control for Firms that Perform Audits and Reviews of Historical Financial Information, and Other Assurance and Related Services Engagements

 

SA No.

Title of the SA

AAS No.

200

Basic Principles Governing an Audit:

01

 

Objective and Scope of the Audit of Financial Statements

02

210

Terms of Audit Engagements

26

220

Quality Control for Audits of Historical Financial Information

17

230

Audit Documentation

03

240

The Auditor’s Responsibilities to Consider Fraud in an Audit of

 

 

Financial Statements

04

250

The Auditor’s Consideration of Laws and Regulations in an

 

 

Audit of Financial Statements

21

260

Communication with Those Charged with Governance

27

299

Responsibility of Joint Auditors

12

300

Planning an Audit of Financial Statements

08

310

Knowledge of the Business

 

 

(withdrawn pursuant to issuance of ISA 315 and 330)

20

315

Understanding the Entity and Its Environment and Assessing the Risks of Material Misstatement

6, 20 and 29

320

Audit Materiality

13

330

The Auditor’s Responses to Assessed Risks

6, 20 and 29

400

Risk Assessments and Internal Control

 

 

(withdrawn pursuant to issuance of ISA 315 and 330)

06

401

Auditing in a Computer Information Systems Environment

 

 

(withdrawn pursuant to issuance of ISA 315 and 330)

29

402

Audit Considerations Relating to Entities Using

 

 

Service Organisations

24

500

Audit Evidence

05

501

Audit Evidence – Additional Considerations for Specific Items

34

505

External Confirmations

30

510

Initial Engagements – Opening Balances

22

520

Analytical Procedures

14

 

SA No.

Title of the SA

AAS No.

530

Audit Sampling

15

540

Audit of Accounting Estimates

18

550

Related Parties

23

560

Subsequent Events

19

570

Going Concern

16

580

Representations by Management

11

600

Using the Work of Another Auditor

10

610

Relying Upon the Work of Internal Audit

07

620

Using the Work of an Expert

09

700

The Auditor’s Report on the Financial Statements

28

710

Comparatives

25

ISRE No.

Title of the ISRE

 

2400

Engagements to Review Financial Statements

33

ISAE No.

Title of the ISAE

 

3400

The Examination of Prospective Financial Information

35

ISRS No.

Title of the ISRS

 

4400

Engagements to Perform Agreed-upon Procedures Regarding
Financial Information

32

4410

Engagements to Compile Financial Information

31

 
 
Reconciliation of the International Standards on Quality Control, Auditing, Review, Other Assurance and Related Services, issued by the International Federation of Accountants with the Standards issued by ICAI (as on April 1, 2008)
 

(A)

 

International Standards issued by the International Auditing and
Assurance Standards Board (IAASB) of the International Federation of
Accountants (IFAC)

 

 

 

(I)  International Standards on Quality Control (ISQC 1)

 

1

 

(II)  International Standards on Auditing (ISAs)

 

32

 

(III) International Standards on Review Engagements (ISREs)

 

2

 

(IV) International Standards on Assurance Engagements (ISAEs)

 

2

 

(V) International Standards on Related Services Engagements (ISRSs)

 

2

 

Grand Total

 

39

(B)

Standards issued by the Auditing and Assurance Standards Board (AASB) of   
the Institute of Chartered Accountants of India (ICAI)

 

 

 

(I)  Standards on Quality Control (SQC 1)

1

 

 

(II) Standards on Auditing (SAs)

31

 

 

(i) Two AASs correspond to one ISA i.e., AAS 1 and AAS 2; hence one to
be reduced.

(1)

 

 

(ii) AAS corresponding to which no International Standard has been
issued – (AAS 12, Responsibility of Joint Auditors)

(1)

 

 

(iii) 3 AASs correspond to 2 ISAs that have now been withdrawn by
IAASB; hence one AAS to be reduced.

 

 

 

1.   AAS 06, Risk Assessment and Internal Control

 

 

 

2.   AAS 20, Knowledge of the Business

 

 

 

3.   AAS 29, Auditing in a Computer Information Systems

(1)

29

 

(III) Standards on Review Engagements (SREs)

1

 

 

(IV) Standards on Assurance Engagements (SAEs)

1

 

 

(V) Standards on Related Services Engagements (SRSs)

2

 

 

Total

 

33

(C)

International Standards Corresponding to which Standards are Under         
Preparation/Under Consideration of the AASB

 

 

 

1.   ISA 545,     Auditing Fair Value Measurements and Disclosures

 

 

 

2.   ISA 701,     Modifications to the Independent Auditor’s Report

 

 

 

3.   ISA 720,     Other Information in Documents Containing Audited
Financial Statements

 

 

 

4.   ISA 800,     The Independent Auditor’s Report on Special Purpose
Audit Engagements

 

 

 

5.   ISRE 2410, Review of Interim Financial Information Performed by
the Independent Auditor of the Entity

 

 

 

6.   ISAE 3000, Assurance Engagements Other than Audits or Reviews
of Historical Financial Information

 

 

 

Total

 

6

 

Grand Total

 

39

 

Appendix C

 

Statements on Auditing

 
    1. Statement on Auditing Practices (1964)

    2. Statement on Qualification in Auditor’s Report (1970)

    3. Statement on Section 227 (1A) of the Companies Act, 1956 (1975)20

    4. Statement on the Companies (Auditor’s Report) Order, 2003 [Issued under Section 227 (4A) of the Companies Act, 1956] (Replaced the Statement issued in 1975)20

    5. Statement on Payments to Auditors for Other Services (1975)

List of Guidance Notes

    1. Provision for Proposed Dividend

    2. Auditing of Accounts of Liquidators

    3. Guidance Note on Independence of Auditors (Revised)

    4. Preparation of Financial Statements on Letter-heads and Stationery of Auditors

    5 Guidance Note on Auditor’s Report on Revised Accounts of Companies Before Circulation to Shareholders

    6. Guidance Note on Certificate to be Issued by the Auditor of a Company Pursuant to Companies (Acceptance of Deposits) Rules, 1975

    7. Guidance Note on the Duty Cast on the Auditors under Section 45-MA of the RBI Act, 1934

    8. Guidance Note on Audit Reports and Certificates for Special Purposes

    9. Guidance Note on Accountants’ Report on Profit Forecasts and/or Financial Forecasts

    10. Guidance Note on Section 293 A of the Companies Act and the auditor

    11. Guidance Note on Audit of Fixed Assets

    12. Revision/Rectification of Financial Statements

    13. Guidance Note on Audit of Accounts of Non-corporate Entities (Bank Borrowers)

    14. Guidance Note on Reports in Company Prospectuses (Revised)

    15. Guidance Note on Audit of Abridged Financial Statements

    16. Guidance Note on Certification of Documents for Registration of Charges

    17. Guidance Note on Audit of Inventories

    18. Guidance Note on Audit of Investments

    19. Guidance Note on Audit of Debtors, Loans and Advances

    20 Currently in force
 
    20. Guidance Note on Audit of Cash and Bank Balances

    21. Guidance Note on Audit of Liabilities

    22. Guidance Note on Audit of Revenue

    23. Guidance Note on Certificate on Corporate Governance (Revised)

    24. Guidance Note on Section 227(3)(e) and (f) of the Companies Act, 1956 (Revised)

    25. Guidance Note on Audit of Expenses

    26. Guidance Note on Revision of the Audit Report

    27. Guidance Note on Special Consideration in the Audit of Small Entities

    28. Guidance Note on Audit of Miscellaneous Expenditure [Revised]

    29. Guidance Note on Audit of Consolidated Financial Statements

    30.Guidance Note on Computer-assisted Audit Techniques (CAATs)

    31. Guidance Note on Audit of Payment of Dividend

    32. Guidance Note on Audit of Capital and Reserves
 

Industry-specific Guidance Notes

1. Guidance Note on Audit of Banks

2. Guidance Note on Audit of Companies Carrying on Life Insurance Business

3. Guidance Note on Audit of Companies Carrying on General Insurance Business

4. Guidance Note on Audit of Accounts of Members of Stock Exchanges
 

Appendix D

 

Extracts from the Chartered Accountants Act, 1949

The First Schedule

[See sections 21(3), 21A(3) and 22]

PART I

 
Professional misconduct in relation to chartered accountants in practice

A chartered accountant in practice shall be deemed to be guilty of professional misconduct, if he
 

(1) allows any person to practice in his name as a chartered accountant unless such person is also a chartered accountant in practice and is in partnership with or employed by him;

(2) pays or allows or agrees to pay or allow, directly or indirectly, any share, commission or brokerage in the fees or profits of his professional business, to any person other than a member of the Institute or a partner or a retired partner or the legal representative of a deceased partner, or a member of any other professional body or with such other persons having such qualifications as may be prescribed, for the purpose of rendering such professional services from time to time in or outside India.

Explanation :- In this item, ‘partner’ includes a person residing outside India with whom a chartered accountant in practice has entered into partnership which is not in contravention of item (4) of this Part;

(3)    accepts or agrees to accept any part of the profits of the professional work of a person who is not a member of the Institute:

Provided that nothing herein contained shall be construed as prohibiting a member from entering into profit sharing or other similar arrangements, including receiving any share, commission or brokerage in the fees, with a member of such professional body or other person having qualifications, as is referred to in item (2) of this Part;

(4) enters into partnership, in or outside India, with any person other than a chartered accountant in practice or such other person who is a member of any other professional body having such qualifications as may be prescribed, including a resident who but for his residence abroad would be entitled to be registered as a member under clause (v) of sub-section (1) of section 4 or whose qualifications are recognised by the Central Government or the Council for the purpose of permitting such partnerships;

(5) secures, either through the services of a person who is not an employee of such chartered accountant or who is not his partner or by means which are not open to a chartered accountant, any professional business:

Provided that nothing herein contained shall be construed as prohibiting any arrangement permitted in terms of items (2), (3) and (4) of this Part;

(6) solicits clients or professional work either directly or indirectly by circular, advertisement, personal communication or interview or by any other means:

Provided that nothing herein contained shall be construed as preventing or prohibiting

(i) any chartered accountant from applying or requesting for or inviting or securing professional work from another chartered accountant in practice; or

(ii) a member from responding to tenders or enquiries issued by various users of professional services or organisations from time to time and securing professional work as a consequence;

(7) advertises his professional attainments or services, or uses any designation or expression’s other than chartered accountant on professional documents, visiting cards, letter-heads or sign boards, unless it be a degree of a University established by law in India or recognised by the Central Government or a title indicating membership of the Institute of Chartered Accountants of India or of any other institution that has been recognised by the Central Government or may be recognised by the Council:

Provided that a member in practice may advertise through a write-up setting out the services provided by him or his firm and particulars of his firm subject to such guidelines as may be issued by the Council;

(8) accepts a position as auditor previously held by another chartered accountant or a certified auditor who has been issued certificate under the Restricted Certificate Rules, 1932 without first communicating with him in writing;

(9) accepts an appointment as auditor of a company without first ascertaining from it whether the requirements of section 225 of the Companies Act, 195621 in respect of such appointment have been duly complied with;

(10) charges or offers to charge, accepts or offers to accept in respect of any professional employment, fees which are based on a percentage of profits or which are contingent upon the findings, or results of such employment, except as permitted under any regulation made under this Act;

(11) engages in any business or occupation other than the profession of chartered accountant unless permitted by the Council so to engage:

Provided that nothing contained herein shall disentitle a chartered accountant from being a director of a company (not being a managing director or a whole-time director) unless he or any of his partners is interested in such company as an auditor;

(12) allows a person not being a member of the Institute in practice, or a member not being his partner to sign on his behalf or on behalf of his firm, any balance-sheet, profit and loss account, report or financial statements.

 

PART II

 
Professional misconduct in relation to members of the Institute in service
 

A member of the Institute (other than a member in practice) shall be deemed to be guilty of professional misconduct, if he being an employee of any company, firm or person –

(1) pays or allows or agrees to pay directly or indirectly to any person any share in the emoluments of the employment undertaken by him;

21 No.1 of 1956

 

(2) accepts or agrees to accept any part of fees, profits or gains from a lawyer, a chartered accountant or broker engaged by such company, firm or person or agent or customer of such company, firm or person by way of commission or gratification.

 

PART III

 
Professional misconduct in relation to members of the Institute generally
 

A member of the Institute, whether in practice or not, shall be deemed to be guilty of professional misconduct, if he –

(1) not being a fellow of the Institute, acts as a fellow of the Institute;

(2) does not supply the information called for, or does not comply with the requirements asked for, by the Institute, Council or any of its Committees, Director (Discipline), Board of Discipline, Disciplinary Committee, Quality Review Board or the Appellate Authority;

(3) while inviting professional work from another chartered accountant or while responding to tenders or enquiries or while advertising through a write-up, or anything as provided for in items (6) and (7) of Part I of this Schedule, gives information knowing it to be false.


PART IV

Other misconduct in relation to members of the Institute generally

A member of the Institute, whether in practice or not, shall be deemed to be guilty of other misconduct, if he

1) is held guilty by any civil or criminal court for an offence which is punishable with imprisonment for a term not exceeding six months;

(2) in the opinion of the Council, brings disrepute to the profession or the Institute as a result of his action whether or not related to his professional work.

The Second Schedule

[See sections 21(3), 21B(3) and 22]

PART I

 
Professional misconduct in relation to chartered accountants in practice
 

A chartered accountant in practice shall be deemed to be guilty of professional misconduct, if he –

(1) discloses information acquired in the course of his professional engagement to any person other than his client so engaging him, without the consent of his client or otherwise than as required by any law for the time being in force;

(2) certifies or submits in his name, or in the name of his firm, a report of an examination of financial statements unless the examination of such statements and the related records has been made by him or by a partner or an employee in his firm or by another chartered accountant in practice;

(3) permits his name or the name of his firm to be used in connection with an estimate of earnings contingent upon future transactions in a manner which may lead to the belief that he vouches for the accuracy of the forecast;

(4) expresses his opinion on financial statements of any business or enterprise in which he, his firm, or a partner in his firm has a substantial interest;

(5) fails to disclose a material fact known to him which is not disclosed in a financial statement, but disclosure of which is necessary in making such financial statement where he is concerned with that financial statement in a professional capacity;

(6) fails to report a material misstatement known to him to appear in a financial statement with which he is concerned in a professional capacity;

(7) does not exercise due diligence, or is grossly negligent in the conduct of his professional duties;

(8) fails to obtain sufficient information which is necessary for expression of an opinion or its exceptions are sufficiently material to negate the expression of an opinion;

(9) fails to invite attention to any material departure from the generally accepted procedure of audit applicable to the circumstances;

(10) fails to keep moneys of his client other than fees or remuneration or money meant to be expended in a separate banking account or to use such moneys for purposes for which they are intended within a reasonable time.

 
PART II
 
Professional misconduct in relation to members of the Institute generally
 

A member of the Institute, whether in practice or not, shall be deemed to be guilty of professional misconduct, if he –

(1) contravenes any of the provisions of this Act or the regulations made there under or any guidelines issued by the Council;

(2) being an employee of any company, firm or person, discloses confidential information acquired in the course of his employment except as and when required by any law for the time being in force or except as permitted by the employer;

(3) includes in any information, statement, return or form to be submitted to the Institute, Council or any of its Committees, Director (Discipline), Board of Discipline, Disciplinary Committee, Quality Review Board or the Appellate Authority any particulars knowing them to be false;

(4) defalcates or embezzles moneys received in his professional capacity.

 

PART III

 
Other misconduct in relation to members of the Institute generally
 

A member of the Institute, whether in practice or not, shall be deemed to be guilty of other misconduct, if he is held guilty by any civil or criminal court for an offence which is punishable with imprisonment for a term exceeding six months.

 

Appendix E

 

A Comparative Study Between Standards on Auditing of ICAI and International
Standards on Auditing of IAASB
As on October 23, 2008

 

 

 

ISA No.

ISA

SA no. (AAS No.)

SA

Remarks

General Principles and Responsibilities

200

Objective and General Principles Governing an Audit of Financial Statements

200

Basic Principles

ISA 200 deals with the important aspects of an audit of financial statements, viz., objective of an audit of financial statements, scope of an audit of financial statements, professional skepticism, reasonable assurance, audit risk and materiality, responsibility for the financial statements, determining the acceptability of the financial reporting framework, expressing an opinion on the financial statements.

(1)

Governing an Audit

 

 

 

 

(2)

Objective and Scope of an Audit of Financial Statements

Though AAS 1 and 2 also deal with the significant principles like the objective and scope of an audit of financial statements, responsibility for financial statements, the concept of ‘professional skepticism’ has been dealt by the AAS 4, The auditor’s responsibility to consider fraud and error in an audit of financial statements. The concept of ‘audit risk’ has been dealt in AAS 6, Risk Assessment and Internal Control. Further, the concept of ‘reasonable assurance’ has been dealt in the Framework for Statements on Standard Auditing Practices and Guidance Notes on Related Services.

 

 

 

 

The IAASB has recently issued the Revised ISA 200, Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with International Standards on Auditing, under the Clarity Project. The AASB has also constituted a study group to prepare the draft of the Revised SA 200.

210

Terms of Audit Engagement

210
(26)

Terms of Audit Engagements

ISA 210 lays down standards in respect of how the auditor and the client should agree on the terms of the engagement and the auditor’s response to a client’s request to change the terms/scope of the engagement to that which provides lower level of assurance. It contains guidance on the principle contents of an audit engagement letter, considerations in case of a recurring audit, and considerations for the auditor before accepting a change in the terms of the engagement.

AAS 26 is generally consistent with the principles laid down in ISA 210, except that it does not contain a provision for reference in the engagement letter to the ‘form of any reports or other communication of results of the engagement.’ Further, AAS 26 is also more explicit on the management’s responsibility concerning financial statements. Unlike ISA 210, AAS 26, due to the client                confidentiality requirements prescribed for an auditor under the Chartered Accountant Act, 1949 also contains a provision for an explicit reference to the fact in the audit engagement letter that the audit may be subject to a peer review.

 

 

 

 

(IAASB has issued an Exposure Draft of the Redrafted ISA 210, Agreeing to the Terms of the Engagement. The AASB has also issued the Exposure Draft of the revised SA 210 (Revised) based in ISA Exposure Draft.)

220

Quality Control for Audits of Historical Financial Information

220
(17)

Quality Control for Audit Work

ISA 220 lists down standards for maintaining quality control in respect of audits of historical financial information. The principles enunciated include those in respect of leadership responsibilities for quality in audits, ethical requirements, client acceptance and continuance considerations, assignment of engagement teams, engagement performance, consultation, differences of opinion, engagement quality control review and monitoring.

AAS 17 is not as detailed as the ISA 220 and focuses on general aspects relating to the engagement performance, viz., direction, supervision and review only. Unlike ISA 220, it does not also per se contain practical guidance on implementation of the quality control policies.

 

 

 

 

The IAASB has issued an exposure draft of the redrafted ISA 220 under the Clarity Project. AASB has also constituted a study group to revise SA 220.

230

Audit Documentation

230
(3)

Audit Documentation
(Revised)

Both ISA 230 and AAS 3 lay down
the basic principles relating to documentation of audit working papers by the auditor. The ISA 230, however, contains guidance in respect of certain additional significant principles relating to audit documentation such as nature of audit documentation, concept of experienced auditor, documentation of the identifying characteristics of specific items being tested, documentation of significant matters, documentation of departures from basic principles or essential procedures, identification of preparer and reviewer, assembly of the final audit file and changes to documentation after the date of the auditor’s report.

The revised SA 230 has been placed for the consideration of the Council at its November 2008 meeting. The revised SA 230 is based on the redrafted ISA 230 issued under the Clarity Project.

240

The Auditor’s Responsibility to Consider Fraud in an Audit of Financial Statements

240
(4)

 

 

The Auditor’s Responsibility to Consider Fraud and Error in an Audit of Financial Statements

Both ISA 240 and AAS 4 essentially take the same view on the responsibilities of the auditor for detecting frauds. However, ISA 240 provides significantly detailed guidance on nature of frauds, and the auditor’s procedures to address risks of material misstatement due to frauds. Another major difference is the fact that the ISA 240 does not dwell on the issue of errors like AAS 4.

 

 

 

 

The AASB in 2007 issued the revised SA 240 based on the Revised ISA 240 issued by IAASB in December 2006 under its Clarity Project. The revised SA 240 is effective from April 1, 2009. The revised SA 240 does not contain any material modifications vis-à-vis Redrafted ISA 240 except that the specific reference to application of certain requirements of the Standard to public sector entities (as given in ISA 240) have been generalised since in terms of the revised Preface issued by the AASB, auditing standards apply equally to all entities irrespective of their nature, size, etc., and also given the fact that the term ‘public sector’ as understood in India is different from its definition as given in the IFAC Glossary of Terms.

250

Consideration of Laws and Regulations in an Audit of Financial Statements

250
(21)

 

Consideration of Laws and Regulations in an Audit of Financial Statements

Both the Standards ISA 250 and AAS 21 lay down principles in relation to auditor’s responsibility to consider laws and regulations in an audit of financial statements and cover significant aspects such as responsibility of management for compliance with laws and regulations, auditor’s consideration of compliance with laws and regulations, reporting of non-compliance and withdrawal from the engagement.

 

 

 

 

An important difference between the two is that whereas ISA 250 requires communication without delay if the non-compliance is believed to be intentional and material whereas AAS 21 requires such communication if the non -compliance is believed to be intentional and/or material.

The Council of the Institute at its meeting held in October 2008 has approved the revised SA 250 (Effective from April 1, 2008) which is based on the redrafted ISA 250 issued by IAASB under the Clarity Project. The revised SA 250 does not contain any material modifications vis-à-vis the ISA 250 issued under the Clarity Project

260

Communication of Audit Matters with Those Charged with Governance

260
(27)

 

Communication of Audit Matters with Those Charged with Governance

Both the Standards lay down principles in respect of communication of audit matters between the auditor and those charged with governance of the entity and contain guidance on important related aspects such as who constitute those charged with governance, timing of communications, forms of communications, other matters, confidentiality, laws and regulations, etc. AAS 27 is generally consistent with the requirements of ISA 260 except that the AAS 27, unlike ISA 260, specially identifies the ‘importance and sensitivity of the audit matters of governance interest’ as one of the factors to be considered in determining the persons with whom audit matters of governance interest need to be communicated.

 

 

 

 

The Council of the Institute at its meeting held in October 2008 has approved the revised SA 260 (effective from April 1, 2008) which is based on the redrafted ISA 260 issued by IAASB under the Clarity Project. The revised SA 260 does not contain any material modifications vis-à-vis the ISA 260 issued under the Clarity Project

 

-

299
(12)

Responsibility of the
Joint Auditors

The practice of appointing more
than one auditor to conduct the audit of large entities, especially, in case of public sector undertakings and banks is quite common in India. Such auditors are known as joint auditors and they conduct the audit jointly and report on the financial statements of the entity. In November 1996, the Institute issued a Standard, Responsibility of Joint Auditors. This SA deals with the professional responsibilities which the auditors undertake in accepting such appointments as joint auditors. The important aspect of joint audit assignments as covered by this SA include possible basis of division of work among joint auditors, co­ordination among joint auditors, joint and several liability of joint auditors, responsibility for obtaining and evaluating information and explanation from management, responsibility for scrutiny of branch accounts and returns, need for review of work performed by one joint auditor by other joint auditor(s), reporting responsibilities, etc.

 

 

 

 

The IAASB has not yet issued any Standard on joint audits.

Risk Assessment and Response to Assessed Risks

300

Planning an Audit of
Financial Statements

300
(8)

Planning an Audit of
Financial Statements

The AASB in 2007 issued the
revised SA 300 based on the Revised ISA 300 issued by IAASB in December 2006 under its Clarity Project. The SA 240 is effective from April 1, 2008. The revised SA 300 does not contain any material modifications vis-a -vis the ISA 300 issued under the Clarity Project.

315

Understanding the
Entity and Its Environment and Assessing the Risk of Material Misstatements

315
(6)

 

Understanding the Entity and Its Environment and Assessing the Risk of Material Misstatements

The AASB in 2007 issued the SA 300 and SA 315 based on the ISA 300 and ISA 315 issued by IAASB in December 2006 under its Clarity Project. These two SAs combine the subject matter of AAS 6, Risk Assessments and Internal Control, AAS 20, Knowledge of the Business and AAS 29, Auditing in a Computer Information Systems Environment. The SA 300 & SA 315 is effective from April 1, 2008. The revised SA 315 does not contain any material modifications vis-à-vis the ISA 315 issued under the Clarity Project.

330

The Auditor’s Response
to Assessed Risks

330
(20)

The Auditor’s
Response to Assessed Risks

-

320

Audit Materiality

320
(13)

Audit Materiality

AAS 13 and the corresponding international standard, viz., ISA 320, Audit Materiality, are quite similar. Both require the auditor to give due consideration to materiality when (a) determining the nature, timing and extent of audit   procedures,   and   (b) evaluating     the     effect     of misstatements. Also, both the standards     recognise     that materiality and audit risk have an inverse relationship.

Despite these similarities in the overall approach, there are some semantic differences between the two standards. There is also a significant conceptual difference between them. According to AAS 13, materiality depends on the size and nature of an item, judged in the particular circumstances of its misstatement. ISA 320, on the other hand, quotes the definition of materiality from International Accounting Standards Board’s ‘Framework for the Preparation and Presentation of Financial Statements’ according to which materiality depends on the size of an item or error judged in the particular circumstances of its omission or misstatement. Thus, AAS 13 seems to take a broader view of materiality than ISA 320. An item could be material under AAS 13 independently of its size, but not so under ISA 320.

 

 

 

 

The IAASB has recently issued the revised ISA 320 under the Clarity Project. The AASB has also prepared the draft of the revised SA 320 based on the said ISA and will soon issue an Exposure Draft of the same.

402

Audit Considerations relating to Entities Using Service Organisations

402
(24)

 

Audit Considerations relating to Entities Using Service Organisations

ISA 402, Audit Considerations Relating to Entities Using Service Organisations has recently been revised by IAASB to conform to its new risk standards which leads to differences between Indian and international standards on auditor’s assessment of and response to risks. Under AAS 24, Audit Considerations Relating to Entities Using Service Organisations, if the information is insufficient, the auditor of the client would first consider the need to request the service organisation to have its auditor perform such procedures and to supply the necessary information in the form of reports. It is only if such reports are not made available within a reasonable time that the auditor of the client would consider the need to visit the service organisation to obtain the relevant information. Under ISA 402, on the other hand, the auditor can straightway consider visiting the service organisation as an alternative to requesting the service organisation to provide the reports of its auditor. Under AAS 24, if the service organisation’s auditor is a chartered accountant, there is no need for the client’s auditor to consider     his     professionalcompetence but ISA 402 requires such an assessment in all cases.

 

 

 

 

The IAASB has issued an Exposure Draft of the revised ISA 402 under the Clarity Project. The AASB has also issued an Exposure Draft of the revised SA 402 based on the Exposure Draft of the ISA.

 

Audit Evidence

 

 

 

500

Audit Evidence

500
(5)

Audit Evidence

While both the Standards ISA 500 and AAS 5 enunciate the basic principles underlying the collection and evaluation of audit evidence, ISA 500 is more detailed. Further, unlike ISA 500, the relationship of audit evidence with audit risk has not been covered in AAS 5. Nor does the present AAS 5 elaborate on situations where tests of control are necessary and situations where substantive procedures can be totally dispensed with for material  items.

The IAASB has issued an Exposure Draft of the revised ISA 500 under the Clarity Project. The AASB has also issued an Exposure Draft of the revised SA 500 based on the Exposure Draft of the ISA.

501

Audit Evidence – Additional Considerations for Specific Items

501
(34)

Audit Evidence – Additional Considerations for Specific Items

Both the Standards ISA 501 and AAS 34 contain guidance relating to collection of audit evidence relating to certain specific items/disclosures      in      financial statements, viz., attendance at physical inventory counting, inquiry regarding litigation and claims, valuation and disclosure
of long-term investments and segment information.

 

 

 

 

The two Standards are same except    for    the    following differences:

(a) Due to practical reasons, paragraph 23 of the AAS requires that when litigation or claims have been identified by the management or when the auditor believes they may exist, and are likely to be material, the auditor may seek direct communication with the entity’s lawyers. The auditor need not necessarily communicate    with    the entity’s lawyers and such other professionals whom the entity engages for litigation and claims in case the auditor is able to obtain sufficient appropriate audit evidence regarding the identification of litigation and claims involving the entity which may have a material    effect    on    the financial statements. The ISA on the other hand requires that   the   auditor   should communicate    with    the entity’s lawyers to obtain sufficient appropriate audit evidence   as   to   whether potentially material litigation and claims are known and management’s estimates of the financial implications, including costs, are reliable.

 

 

 

 

(b) Each part of the AAS contains the requirements related to obtaining the management representation. There is, however,         no         such requirement in the ISA.

The   IAASB   has   issued   an Exposure Draft of the revised ISA 501 under the Clarity Project. The AASB has also constituted a study group to revise SA 501 based on the Exposure Draft.

505

External Confirmations

505
(30)

External Confirmations

Both ISA 505 and AAS 30 lay down the basic principles in respect of external confirmation as audit evidence and deal with related     aspects     such     as relationship      of      external confirmation   procedure   to inherent  and  control  risks, assertions addressed by external confirmations, timing of external confirmations, design of external confirmation requests, nature of information being confirmed, prior   experience,   form   of confirmation               request, characteristics of respondents, external confirmation process, evaluating the results of the confirmation               process, management representations, etc.

AAS 30 is, however, different from ISA 505 on the following counts:

 

 

 

 

(a)   The AAS requires the auditor
to obtain an understanding of
the substance of transactions
and agreement with the third
parties to decide about the
information to be included in
the request for confirmation.
ISA 505 does not contain any
requirements in this regard.

(b)   The AAS requires the auditor
to consider the information
from audits of earlier years.
This   requirement  is   not
present in ISA 505.

(c)   The AAS requires the auditor
to request the management to
verify  and  reconcile  the
discrepancies revealed by the
external       confirmations
received or by the additional
procedures carried out by the
auditor. The AAS further
requires   the   auditor   to
consider what further tests
can be carried out to satisfy
himself as to the correctness
of related assertions. This
requirement is not present in
ISA 505.

The   IAASB   has   issued   an Exposure Draft of the revised ISA 501 under the Clarity Project. The AASB has also constituted a study group to revise SA 501 based on the Exposure Draft.

510

Initial Engagements – Opening Balances

510
(22)

Initial Engagements – Opening Balances

Both ISA 510 and AAS 22 contain principles relating to audit of opening balances in case of initial engagements, i.e., when the financial statements are audited for the first time or when the financial statements  of  the preceding period were audited by another auditor. The basic point of difference between the ISA 510 and AAS 22 is that unlike the ISA, the AAS 22 does not permit modifications   to   the   prior period’s balances in the current period.

 

 

 

 

The   IAASB   has   issued   the redrafted ISA 510 under the Clarity Project. The AASB has also issued an Exposure Draft of the revised SA 510 based on the said ISA, for public comments.

520

Analytical Procedures

520
(14)

Analytical Procedures

AAS 14, Analytical Procedures, and       the       corresponding international standard, viz., ISA 520, establish standards on the application     of     analytical procedures during an audit. Both the standards take the same view of the nature and purpose of analytical procedures, the stages of an audit at which analytical procedures should, or may, be used, and the extent to which reliance can be placed on these procedures.
The   IAASB   has   issued   the Exposure Draft of the redrafted ISA 520 under the Clarity Project. The AASB has constituted a study group to prepare the draft of the revised SA 520 based on the said Exposure Draft.

530

Audit Sampling and
Other Means of Testing

530
(15)

Audit Sampling

The   AASB   had   issued   the
Exposure Draft of the revised SA 530 for public comments. The Exposure Draft is being finalised in the light of the final redrafted ISA 530 issued by IAASB under the Clarity Project.

540

Audit of Accounting Estimates

540
(18)

Audit of Accounting Estimates

Both the Standards ISA 540 and AAS 18 enunciate principles relating to audit of accounting estimates and related aspects such as nature of accounting estimates, audit procedures responsive to risk of material misstatements in estimates and reviewing and testing the process used by the management, use of independent estimates and evaluation of results of audit procedures. AAS 18 is principally in line with the requirements contained in ISA 540.

 

 

 

 

AASB has issued the Exposure Draft of the revised SA 540 based on the revised ISA 540 issued by IAASB under the Clarity Project.

545

Auditing Fair Value Measurements and Disclosures

 

 

 

550

Related Parties

550
(23)

Related Parties

AAS 23, Related Parties very closely follows ISA 550, Related Parties. Like ISA 550, AAS 23 requires the auditor to perform audit procedures designed to obtain sufficient appropriate audit evidence regarding the identification and disclosure by management of related parties and the related party transactions that are material to the financial statements though it recognises (like ISA 550) that an audit cannot be expected to detect all related party transactions.

 

 

 

 

AASB has issued the Exposure Draft of the revised SA 550 based on the revised ISA 550 issued by IAASB under the Clarity Project.

560

Subsequent Events

560
(19)

Subsequent Events

While both the Standards deal with the auditor’s responsibility in connection with the subsequent events, the definition of subsequent events in ISA 560, Subsequent Events is considerably broader than the definition in AAS 19, ‘Subsequent Events’ as it also includes the facts discovered after the date of the auditor’s report. Unlike AAS 19, ISA 560 does not deal with the effect of management’s refusal or failure to account for material subsequent events properly. AASB has issued the Exposure Draft of the revised SA 560 based on the revised ISA 560 issued by IAASB under the Clarity Project.

570

Going Concern

570 (16)

Going Concern

Both the Standards deal with the auditor’s responsibility in relation to reporting on the going concern aspect. The ISA 570 is, however, more detailed. Further, Under AAS 16, Going Concern, the period for which the continuance of the entity is to be judged is ‘generally a period not to exceed one year after the balance sheet date’. While ISA 570, Going Concern indicates that the aforesaid period should be at least, but not limited to, one year from the balance sheet date. ISA 570 also deals with the auditor’s duties in situations where (a) the management is unwilling to make or extend its assessment relating to going concern assumption when requested by the auditor or (b) there is significant delay in signature or approval of the financial statements by the management.

 

 

 

 

The Council of the Institute has recently approved the revised SA 570 based on the redrafted ISA 570 issued by IAASB under the Clarity Project.

580

Management Representations

580
(11)

Representations by Management

Both ISA 580 and AAS 11 deal with the auditor’s responsibility relating to representations received from management during the course of the audit. ISA 580, Management Representations states that written representations may be limited to material matters when other sufficient appropriate audit evidence cannot reasonably be expected to exist. AAS 11, Representations by Management does not specifically state so.

AASB has issued the revised SA 580 based on the redrafted ISA 570 issued by IAASB under the Clarity Project. The revised SA 570 does not contain any material modifications vis-à-vis the ISA 570 issued under the Clarity Project.

Using Work of Others

600

Using the Work of Another Auditor

600
(10)

Using the Work of Another Auditor

According to AAS 10, Using the Work of Another Auditor, barring exceptional cases, the principal auditor is entitled to rely on the other auditor’s work in situations where the appointment of the other auditor is pursuant to a statute. ISA 600, Using the Work of Another Auditor, on the other hand, does not entitle the principal auditor to rely so. ISA 600 lists review of the working papers of the other auditor as one of the audit procedure that the principal auditor may employ to obtain audit evidence concerning the adequacy of the other auditor’s work. AAS 10 requires the principal auditor to consider the professional competence of the other auditor only where the other auditor is not a member of the ICAI. ISA 600 requires assessment of the other auditor’s professional competence, in the context of the specific assignment, in all cases.

AASB has issued the Exposure Draft of the revised SA 600 based on the revised ISA 600 issued by IAASB under the Clarity Project.

610

Considering the Work
of Internal Auditing

610
(7)

Relying Upon the
Work of an Internal Auditor

Both ISA 610 and AAS 7 lay down
standards in respect of use of the work of an internal auditor by the independent auditor.

 

 

 

 

ISA 610, Considering the Work of Internal Auditing does not list physical examination and verification of assets whereas AAS 7, Relying upon the Work of an Internal Auditor does not list the ‘review of compliance with laws, regulations and other external requirements and with management policies and directives and other internal requirements’ among the principal activities of internal audit function.

AASB has constituted a study group to prepare the draft of the revised SA 610 based on ISA 610 issued under the Clarity Project.

620

Using the Work of an Expert

620
(9)

Using the Work of an Expert

Both the Standards deal with the factors to be considered by the auditor when using the work of an expert. AAS 9 and ISA 620 are quite similar in approach.
The IAASB has issued an Exposure Draft of the revised ISA 620 under the Clarity Project, The AASB has also constituted a study group to revise SA 620 based on the said Exposure Draft.

Audit Conclusion and Reporting

700

The Independent Auditor’s Report on a Complete Set of General Purpose Financial Statements

28

The Auditor’s Report on Financial Statements

Both the Standards deal with the fundamental principles involved in reporting the auditor’s opinion. However, AAS 28 differs from ISA 700 inasmuch as that according to AAS 28, The Auditor’s Report on Financial Statements, the date of the auditor’s report is the date on which the auditor signs the report. ISA 700, The Independent Auditor’s Report on a Complete Set of General Purpose Financial

705

Modifications to the Opinion in the Independent Auditor’s Report

 

 

Statements, on the other hand, requires that the auditor should date the report on the financial statements no earlier than the date on which the auditor has obtained sufficient appropriate audit evidence on which to base the opinion on the financial statements. AAS 28 requires that the audit report should name a specific   location   which   is ‘ordinarily the city where the audit report is signed’. ISA 700, on the other hand, construes that the report should name the location  in  the  country  or jurisdiction where the auditor practices. As per AAS 28, where a firm is appointed as auditor, the audit report should be signed in ‘the personal name of the auditor and in the name of the firm’,      along      with      the membership number of the partner/proprietor signing the audit report. ISA 700 requires that the audit report should be signed ‘in the name of the audit firm, the personal name of the auditor or both, as appropriate for the particular jurisdiction’. AAS 28 considers it preferable that  an  emphasis-of-matter paragraph precede the opinion paragraph. ISA 700, on the other hand, prefers such a paragraph to be included after the opinion paragraph.

706

Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent Auditor’s Report

 

 

 

 

 

 

 

The IAASB has issued ISA 705 and 706 under the Clarity Project. The AASB has also constituted a study group to prepare the draft of the SAs 705 and 706 based on the said ISAs.

710

Comparatives

25

Comparatives

AAS 25, Comparatives deals with auditor’s responsibilities relating to comparatives only under the ‘corresponding figures’ framework. AAS 25 does not deal with the auditor’s responsibilities when the ‘comparative financial statements’ framework is used. There is a significant difference between them in relation to the auditor’s responsibilities where, in performing the audit of the current period financial statements, the auditor becomes aware of a material misstatement that affects the prior period financial statements on which an unmodified report has been previously issued. Another major difference between AAS 25 and ISA 710, Comparatives relates to the procedures prescribed in a situation where the prior period financial statements are not audited.

The IAASB has issued an Exposure Draft of the revised ISA 710 under the Clarity Project. The AASB has also constituted a study group to revise SA 710 based on the said Exposure Draft.

720

Other Information in Documents Containing Audited Financial Statements

720

 

AASB has issued Exposure Draft of the SA 720 based on ISA 720 issued under the Clarity Project.

Specialised Areas

800

The Independent Auditor’s Report on Special Purpose Audit

 

 

Though as such there is no AAS or SA on this topic as yet, the ICAI has already issued a Guidance Note on Special Purpose Audit Reports and Certificates.

The IAASB has issued an Exposure Draft of the revised ISA 800 under the Clarity Project. The AASB has also constituted a study group to prepare the drafts of the SA 800 based on the said Exposure Draft.

International Standards on Review Engagements

2400

Engagements to Review Financial Statements

2400
(33)

Engagement to Review Financial Statement

ISRE 2400 and SA 2400 lay down the basic principles to be observed by the auditor in carrying out review engagements, viz., general principles, scope of a review, moderate assurance, terms of engagement, planning, work performed by others, documentation, procedures and evidence, conclusion and reporting.

 

 

 

 

SRE 2400, ‘Engagements to Review Financial Statements’ does not require the engagement letter to include form of report to be issued pursuant to the engagement since the format of report, in some cases, is prescribed by the law or regulations pursuant to which the financial statements are required to be reviewed. AAS 33 requiresthat the auditor should not agree to a change of engagement where there is no reasonable justification for doing so. If the auditor is unable to agree to a change of the engagement and is not permitted to continue the original engagement, the auditor should withdraw and consider whether there is any obligation, either contractual or otherwise, to report the circumstances necessitating the withdrawal to other parties, such as the board of directors or shareholders. There is no corresponding requirement in ISRE 2400.

2410

Review of Interim Financial Information Performed by the Independent Auditor of the Entity

 

 

AASB has constituted a study group to prepare the draft of this Standard.

Assurance Engagements Other Than Audits or Reviews of Historical Financial Information

3000

Assurance Engagements Other Than Audits or Reviews of Historical Financial Information

 

 

No Standard on this topic as yet.

3400

The Examination of Prospective Financial

3400
(35)

 

Both the standards ISA 3400 and AAS 35 lay down principles and procedures to be Information adopted by the auditor while examining prospective financial information prepared by the client. Though these fundamental principles are same in both the Standards, the major point of difference between the SAE 3400 and ISAE 3400 arises on account of the requirements of the Chartered Accountants Act, 1949 pursuant to which SAE 340 precludes the auditor from expressing positive assurance regarding the assumptions as it may tantamount to vouching forthe accuracy of the forecast/ projection/hypothetical assumptions.

Related Services

4400

Engagements to Perform Agreed upon Procedures regarding Financial Information

SRS
4400
(32)

 

Engagements to Perform Agreed upon Procedures regarding Financial Information U n l i k e ISRS 4400, Engagements to Perform Agreed-upon Procedures Regarding Financial Information, SAR 4400, Engagements to Perform Agreed-upon Procedures Regarding Financial Information recognises the possibility that in certain circumstances, the report of an agreed-upon procedures engagement may not be restricted only to those parties that have agreed to the procedures to be performed, and may be made available to a wider range of entities or individuals, e.g., in the case of government organisations. ISRS 4400 specifically states that the auditor may consider attaching to the engagement letter a draft of the type of report of factual findings that will be issued. SRS 4400 does not specifically mention the above. SRS 4400 requires ‘place of signature’ to be mentioned in the report whereas the requirement in ISRS 4400 is of mentioning the ‘auditor’s address’.

4410

Engagements to Compile Financial Information

4410
(31)

 

There is much greater emphasis in SRS 4410, ‘Engagements to Compile Financial Information’ on a clear enunciation of the management’s responsibilities in both the engagement letter and the report to be issued pursuant to the engagement as compared to ISRS 4410, ‘Engagements to Compile Financial Information’. SRS 4410 also requires that the financial statements should be approved by the client before compilation report is signed by the accountant. SRS 4410, unlike ISRS 4410, also prohibits the accountant from preparing the financial statements on his letter head or other stationery bearing his (or firm’s) name or address. SRS 4410 separately deals with situations where the client has an identified financial reporting framework and those where the client does not have an identified financial reporting framework. Similarly, it deals specifically with a situation where the client happens to be a company and there is a non-compliance with accounting standards. ISRS 4410 does not contain such  a discussion.

 
 

Appendix F

 

Auditing Standards
A Peer Review of the Advisory Panel Report

By N. P. Sarda

Dear Shri Rakesh Mohan,

I refer to your letter bearing ref.DO.MPD/CFSA.No.4019/06.55.00/2007-08 dated April 9,2008.

As I am on a visit to Canada and USA and I shall return to India after 2-3 weeks, I am giving here below my brief comments through this e-mail message.

Overall Opinion:

The Coverage, Completeness, Conciseness and Quality of the draft Report are excellent.

Brief Observations:

(1)  An Independent Oversight Mechanism:

Page 89 of the draft report refers to the constitution of the Quality Review Board (QRB). QRB has been constituted, but has not yet started effective functioning. The exact role of QRB has not yet been decided. Whether the role of QRB would be regulatory in nature or would it be advisory in nature? The determination of the role of QRB is of utmost importance for the functioning of the independent oversight mechanism. Whether the role of QRB would be on the same lines as the role of PCAOB in USA or the equivalent quality oversight boards in Europe or Japan or not ? If the role of QRB in India is not on the same lines as the quality oversight boards in USA, Europe or Japan, the audit firms in India issuing audit reports for the companies listed in USA, Europe or Japan or major subsidiaries of companies listed in those countries would have to undergo the inspection and other regulatory requirements of the quality oversight boards of the respective countries.

Stance of the Panel: Accepted. This has been incorporated in the Report.

(2)  Implementation of Auditing Standards:

Para 85 covers the need for effective implementation of auditing standards and suggests adoption of a three pronged strategy. The heading of the para may be changed to ‘Implementation of auditing standards’ instead of ‘training and guidance by ICAI’. Further, though ICAI has introduced a scheme of networking of audit firms to ensure adequate resources and infrastructure for effective service capabilities of audit firms, the response to the scheme of networking has not been encouraging. Further steps for improving the resources and skills of the audit firms in the context of new and updated standards on auditing and growing sizes of entities of auditees should be thought of, encouraged and implemented.

Stance of the Panel: Accepted. This has been incorporated in the Report.

 
 

Appendix G

 

Auditing Standards
A Peer Review of the Advisory Panel Report

By Mr. Ian Mackintosh

 

I have reviewed both documents. In both cases I cannot comment on the accuracy of the reporting of the history and the present situation. I have no personal knowledge of these matters. My comments are therefore contained to the situation going forward.

Auditing

This is not my area of expertise, but I will make a few general comments:

• I agree generally with the thrust of the recommendations in the Way Forward part of the document.

• I would reinforce the warning given in paragraphs 93 to 95 on the non-acceptance of qualified audit reports. In some cases there is a place for qualified audit reports.

• I think it is very important that the AASB is given functional independence.

• The big question, not in my opinion adequately addressed, is whether a regime of self-regulation can be sustained in the future. There may well be a case for more independent regulation, not directly involving the Institute.

Stance of the Panel: Accepted. This has been incorporated in the Report.

 
 

Chapter IV

 

Contents

 

 

Assessment of Corporate Governance Standards

 
Assessment of Corporate Governance Standards

Section No.

Subject

Page No.

1.

Background

141

2.

What is Corporate Governance?

141

3.

History of Corporate Governance in India

142

4.

Corporate Governance Framework

143

5.

Approach and Methodology

145

6.

Corporate Governance: Why OECD Benchmarks?

147

7.

India and the OECD Principles

147

8.

Summary Assessment of OECD Principles

148

9.

Corporate Governance Assessment – Unlisted Companies

171

10.

Corporate Governance Assessment – Banks

172

11.

Corporate Governance Assessment – Insurance Companies

176

12.

Recommendations: The Way Forward

179

List of Appendices

 

Appendix I

Recommendations of Various Committees

184

Appendix II

Detailed Assessment of Corporate Governance

190

List of Annexes

 

Annex A

Clause 49 of the Listing Agreement

231

Annex B

Corporate Governance – A Peer Review of the Advisory Panel Report

248

 

1. Background

1.1 This assessment of adherence to corporate governance standards has been conducted by a Sub-group1 set up by the Advisory Panel on Institution and Market Structure (IMS). The Sub­group met several times before finalising the assessment and Report. The comments of the Panel have been incorporated in the assessment. The Report was also peer reviewed by Sir Andrew Large whose comments are furnished in Annex B along with the stance of Advisory Panel. The comments of the peer reviewer have also been appropriately incorporated in the Report.

1.2 The Report begins with an introduction to the concept of corporate governance and traces the history of corporate governance in India. A detailed assessment, with reference to OECD Principles of corporate governance, constitutes the most significant portion of this Report. The detailed assessment has been furnished in Appendix II and a summary of the same appears in the body of the Report. The Report also spells out the approach and methodology followed in carrying out the assessment and evaluates the relevance of OECD benchmarks for India. The Report concludes with a section on recommendations.

2. What is Corporate Governance?

2.1 What constitutes corporate governance, has been a subject of intense debate throughout the world with no concise, universally agreed upon, defined parameters. However, the concept has evolved in different ways over the last two decades depending upon the prevailing economic system.

2.2 As per some of the well-accepted definitions2, corporate governance refers to the following:

• system by which business corporations are directed and controlled.

• the structure through which the company objectives are set, and the means of attaining those objectives and monitoring performance.

• relationship among various participants in determining the direction and performance of corporations.

• balance between economic and social goals and between individual and communal goals.

• efficient use of resources and accountability for the stewardship of those resources.
 

1 Comprising representatives from SEBI,the Reserve Bank, Ministry of Corporate Affairs and IRDA.

2 OECD, Calpers, Sir Adrian Cadbury, Kumar Manglam Birla Committee Report.
 

• enhancement of the long-term shareholder value while at the same time protecting the interests of other stakeholders.

2.3 Corporate governance clearly impinges upon the direction, goals and performance of a corporation. The belief that maximisation of shareholder value is the main purpose of the modern business has been associated with the ‘Anglo-Saxon’ agency model of the corporation. A clear separation between management control and shareholder ownership is the primary feature of this model.

2.4 This contrasts with the ‘German’ conception of the company as a social institution, wherein, the majority shareholder is a part of the supervisory board along with other stakeholders like workers/employees. This is popularly known as ‘Insider System’. In another model which has evolved in East Asian economies, the family controls the substantial shareholding and also actively participates in the management of the company. This is close to the corporate ownership structures in India where the family-run business groups still play a crucial role. Shareholdings in Indian companies are segregated mainly as promoter and non-promoter shareholding. The promoters usually have substantial shareholding. The absence of clear lines of distinction between the role of the family as shareholder(s), as board member(s) and in management needs special consideration in evolving corporate governance framework in India.

2.5  The central corporate governance issue, irrespective of the economic model, is aligning the objectives of management with the objective of shareholder wealth maximisation. Companies are encouraged in most systems to take into consideration the interests of all the stakeholders while making their decisions. The idea is to emphasise that the board is responsible not only to shareholders but also to individuals or groups who have a stake in the actions and decisions of such an organisation.

2.6 In this debate about corporate governance, the concepts of accountability, transparency and equality of treatment to all the shareholders occupy the centre-stage irrespective of the economic system. Companies around the world are realising that better corporate governance adds considerable value to their operational performance.

3. History of Corporate Governance in India

3.1 Corporate governance initiatives in India, unlike some other parts of the world, were not triggered by any serious nationwide financial, banking and economic collapse. At the time of independence in 1947, the country inherited a functional stock market with a well-developed banking system. In the decades after Independence, a conscious tilt towards socialism led to the creation of a regime of licensing, protection and controlled growth of capital market and the corporate sector. The development financial institutions played a dominant part by providing long-term finance to companies in the absence of a vibrant capital market.

3.2 In the 1980s, however, this situation changed. There have been wide-ranging changes in both the laws and the regulations in the field of corporate law and the capital market. Since reforms began in 1991, India has emerged far better endowed than many other countries.

3.3 The single most important event in the field of investor protection in India has been establishment of Securities and Exchange Board of India (SEBI) in 1992. The introduction of Clause 493 in Listing Agreements (Annex A) in the year 2000 by SEBI was a major turning point in the history of corporate governance in India. The Companies Act, 1956 has also been amended substantially in the years 1997, 1999, 2000, 2001, 2002 and 2006 to provide a solid foundation of corporate governance in India. There have, however, been some financial scams.4 These revealed certain structural loopholes in the financial system and the corporate governance framework which, in turn, have led to a series of reforms.

3.4 To briefly trace the important developments in the area of corporate governance in India, the Confederation of Indian Industry (CII), purely as a voluntary effort, released a Desirable Corporate Governance Code for listed companies in 1998. In 1997, the Kumar Mangalam Birla Committee constituted by SEBI designed a mandatory-cum-recommendatory code for listed companies on a roll-out plan. SEBI implemented the recommendations of the Birla Committee through the enactment of Clause 49 in the Listing Agreement in the year 2000. As stated earlier, this Clause has served as a milestone in the evolution of corporate governance practices in India. In 2002, the Naresh Chandra Committee on corporate audit and governance submitted its Report. Subsequently, in order to review the existing corporate governance code, SEBI constituted the Narayana Murthy Committee based on whose recommendations made in 2003, far-reaching changes were made in the Listing Agreement in 2004. The Ministry of Corporate Affairs also constituted an Expert Committee on Company Law under the chairmanship of Dr. J J Irani which released its Report in May 2005. The Consultative Group of Directors of Banks and FIs set up by the Reserve Bank under the Chairmanship of Dr. Ashok Ganguly to review the supervisory role of boards submitted its Report in April 2002. The recommendations given by these Committees are furnished in Appendix I.

3.5 The aforesaid Committees appointed by SEBI and the Reserve Bank for making recommendations for evolving corporate governance framework have had the benefit of building upon similar codes developed in other countries including OECD jurisdictions. Thus, international practices and developments have been factored into these studies. For instance, the Narayana Murthy Committee was set up to review the corporate governance norms in the aftermath of major corporate developments in US in the early years of this decade. While bodies like National Foundation of Corporate Governance set up by the Ministry of Corporate Affairs are engaged in a dialogue with both national and international agencies on an ongoing basis, it is essential that learning from the experience of other countries should be a dynamic process and not a static one. The corporate governance code should be constantly reviewed in light of the ever-changing global scenario.

4. Corporate Governance Framework

4.1 The corporate structure in India can be broadly categorised under two heads, namely,
 

3 Clause 49 of the Listing Agreement of SEBI requires the companies who are listed to comply with certain provisions
relating to board of Directors, Audit Committee, subsidiary companies, disclosures, report on corporate governance and
compliance.

4 Harshad Mehta scam in 1992 and Ketan Parekh scam in 2001.

 

listed companies5 and unlisted companies. In the case of listed companies, the public interest involved is generally much higher than those in unlisted companies. Both listed and unlisted companies can either be from the public sector or the private sector. Some banks and insurance bodies are also constituted as companies. Some of the banks are also listed. Presently, none of the companies from the insurance sector are listed.

4.2 The corporate governance framework in India primarily consists of the following legislations and regulations:

The Companies Act, 1956: All companies in India, whether listed or unlisted, are governed by the Companies Act which provides inter alia for incorporation of different types of companies – private limited, public limited, limited by guarantee, not-for-profit companies, etc. The Companies Act is administered by the Ministry of Corporate Affairs (MCA). The Act is comprehensive and deals with the rules and procedures regarding incorporation of a company; prospectus and allotment of ordinary and preference shares and debentures; management and administration of a company; annual returns; frequency and conduct of shareholders’ meetings and proceedings; maintenance of accounts; board of directors, prevention of mismanagement and oppression of minority shareholder rights; the power of investigation by the government, including powers of the CLB, etc. The Companies Act does not stipulate distinction on compliance as regards the preparation of accounts, based on the nature of companies.

Securities and Exchange Board of India (SEBI) Act, 1992: SEBI Act mandates SEBI to protect interest of investors and develop and regulate the securities markets. The powers of the board comprise registering and regulating the working of various intermediaries in the securities markets, promoting and regulating self-regulatory organisations, prohibiting undesirable activities like insider trading, fraudulent and unfair trading practices, regulating acquisition activity of listed companies, overseeing IPOs and further offerings by listed companies. SEBI has the power to impose penalties for violation of the Act and Regulations made under the Act. The Act empowers SEBI to investigate, adjudicate, hold enquiry and prosecute. There are also general powers to pass directions against listed companies or responsible persons in the interest of investors or the orderly development of securities market.

The Securities Contracts (Regulation) Act, 1956:
SCRA and Securities Contracts (Regulations) Rules regulate transactions in securities. The Act deals with recognition of stock exchanges by Central Government (whose powers in this case are delegated to SEBI), powers to suspend the business of stock exchange or supersede its governing board. It provides for regulation of contracts and options in securities. There are also provisions relating to listing of securities and right to appeal to
 
5 Listed companies: Companies which raise funds from public by issuing prospectus and are listed on SEBI-recognised Stock Exchanges. 4,687 companies are listed on BSE and 1,185 companies on NSE.
 

Securities Appellate Tribunal in case of refusal by exchange to list securities of listed companies. Under the Act, there are provisions for adjudication proceedings to be conducted by adjudicating officer apointed by SEBI and imposition of monetary penalties for various violations. SEBI also has powers to issue directions against entities such as stock exchanges, listed companies etc. There are also provisions for initiation of prosecution proceedings under the Act. The Central Government has also issued Securities Contracts (Regulation) Rules, 1957 which inter alia contain qualification for persons to be members of stock exchange, books of accounts to be maintained by members, listing conditions etc.

The Depositories Act, 1996: This Act provides for regulation of depositories in securities markets. The Act inter alia deals with rights and obligations of depositories, depository participants, issuers and beneficial owners. A depository needs certificate from SEBI for commencement of business. Under the Act, SEBI has got powers to call for information and enquiry, give directions, levy penalties and adjudicate. Presently there are two depositories, viz., National Securities Depository Ltd. and Central Depository Securities Ltd.

The Banking Regulation Act, 1949: This Act covers all aspects relating to licensing of banks, the activities which banking companies can engage in, power of the Reserve Bank to give directions, suspension of business and winding up of banking companies.

The Insurance Regulatory and Development Authority Act, 1999: Insurance Act 1938 and various regulations framed under the Insurance Regulatory and Development Authority Act, 1999 cover all aspects relating to registration of insurance companies and licensing of insurance intermediaries, investments of insurance companies, assets, liabilities and solvency margin of insurers, reinsurance, preparation of financial statements, protection of policy-holders’ interest, fit and proper criteria, transfer of shares, winding up of an insurance company, etc.

Listing Agreement with Stock Exchanges: Listing Agreement is an agreement entered between a stock exchange and the company seeking listing of securities on the exchange. It contains various requirements and disclosure obligations that companies must follow to remain as listed entities. The corporate governance requirements that listed companies must follow are specified in Clause 49. The model Listing Agreement has been stipulated by SEBI and is reviewed and amended by SEBI from time to time. Stock exchanges are primarily responsible for ensuring compliance of various requirements under Listing Agreement. SCRA stipulates penalties upto Rs 25 crore for non-compliance of listing conditions pursuant to adjudication by an adjudicating officer appointed by SEBI.

4.3 As can be seen from above, the legislative framework is wide enough to cover corporate governance issues for a diversified corporate sector.

5. Approach and Methodology

5.1 For the purposes of this study, the OECD principles on corporate governance, revised in 2004, have been used as benchmark for assessment. The OECD principles of corporate governance, cover six main areas. They call on governments to put in place an effective institutional and legal framework to support good corporate governance practices (Principle I). They aims at a corporate governance framework that protects and facilitates the exercise of shareholders’ rights (Principle II). They also strongly support the equal treatment of all shareholders, including minority and foreign shareholders (Principle III). They recognise the importance of the role of stakeholders in corporate governance, while they also look at the importance of timely, accurate and transparent disclosure mechanisms (Principle IV and V, respectively). They deal with board structures, responsibilities and procedures (Principle VI). These principles are further broken down into sub-principles.

5.2 The assessment with respect to each principle has been done on the scale of ‘Not Implemented’ to ‘Fully Implemented’. The current position against each principle has been set out before determining the assessment. Inputs from policy-makers, various institutions like stock exchanges, depositories, and professionals have been obtained for the purpose. The assessment ratings broadly reflect the robustness of the system to deal with the issue. Further, while doing the assessment on the basis of OECD principles on corporate governance, guidance provided under the commentary of ‘Evaluation Methodology’ published by the OECD has been followed.

5.3 It may be recalled that in April 2004, a Corporate Governance Country Assessment for India was carried out as part of the joint World Bank/IMF program of Reports on the Observance of Standards and Codes (ROSC). To provide a comparative perspective, principle-wise assessment as per this Report, wherever applicable, has been placed alongside the current assessment. In the said World Bank Report, the observance of principles was assessed on the scale which ranged from ‘Observed’ to ‘Not Observed’. However, as per the latest OECD evaluation methodology (2004), the assessment of revised principles has been done on the scale ranging from ‘Fully Implemented’ to ‘Not Implemented’.
 

Sr. No.

Previous Assessment Scale

Current Assessment Scale

1

2

3

1.

Observed

Fully Implemented

2.

Largely Observed

Broadly Implemented

3.

Partially Observed

Partially Implemented

4.

Materially

 

 

Not Observed

5.

Not Observed

Not Implemented

6.

Not Applicable

 

5.4 The present assessment is based on the study of the working of various constituents of the corporate sector – listed and unlisted companies, banking, insurance and public sector enterprises. Corporate governance issues are particularly significant for listed companies due to the high level of public interest involved. So far, listed companies have attracted greater attention even in terms of prescriptive corporate governance measures for them. Besides the Companies Act, which is applicable to both listed and unlisted companies, Clause 49 of the Listing Agreement stipulates comprehensive requirements with respect to corporate governance only for listed companies. As such, special focus has been attached to listed companies in this Report.

5.5 As many corporate governance requirements (e.g., Clause 49 of Listing Agreement) do not apply at present to unlisted companies, a separate section has been included in the Report. This section deals with the issues and the existing corporate governance framework pertaining to them.

5.6 Further, banking and insurance companies are important constituents of the financial system and involve substantial public interest (depositors and policy-holders). There are additional legislations, namely, the Banking Regulations Act, the Insurance Regulatory Development Act and the Insurance Act which impinge upon the corporate governance requirements for these sectors. The Report, therefore, deals with these sectors separately.

5.7 As regards the public sector, the requirements of corporate governance have been enunciated in the code of corporate governance which has been brought out by the Department of Public Enterprises. The level of actual compliance by these enterprises varies depending on their listing status. The requirement of corporate governance in this code has been almost modelled on the lines of Clause 49 of the Listing Agreement which is applicable only to the listed companies.

6. Corporate Governance: Why OECD Benchmarks?

6.1 Given the increasing interdependence and integration of financial markets across the world, it was considered important that some degree of uniformity and coherence is established in the regulatory framework. With this in mind the OECD council, meeting at ministerial level on April 27-28, 1998 called upon the OECD to develop, in conjunction with national governments, other international organisations and the private sector, a set of corporate governance standards and guidelines. In order to fulfill this objective, the OECD established the ad hoc Task Force on corporate governance to develop a set of non-binding principles that embody the views of OECD countries on this issue. The original OECD Principles were issued in 1999. Subsequent corporate scandals in a number of countries led to the revision of these principles in 2004.

6.2 The principles are non-binding and their implementation must be adapted to different legal, economic and cultural circumstances. This is a key strength of the principles, which has made them a useful tool worldwide, in developed as well as emerging markets.

6.3 There are a number of other reasons for adopting these principles as the basis for evaluation. First, no other alternative parameters of evaluation are available to bench­mark the level of corporate governance in different jurisdictions. Second, OECD principles have been adopted by the World Bank to evaluate the level of corporate governance for ROSC assessment. in various jurisdictions across the world. Third, in the case of India, similar Report on Observance of Standards and Codes (ROSC) assessments have been done by the World Bank in 2001, followed by another assessment in 2004. Lastly, international organisations such as International Organisation of Securities Commission (IOSCO) and Financial Stability Forum (FSF) also recognise OECD principles as standards in the area of corporate governance.

7. India and the OECD Principles

7.1 Experience has shown that India has a well-established corporate governance framework. It remained unaffected by the Asian financial crisis of the late 1990s. Indeed, the movement towards adopting good corporate governance practices, better financial and non-financial disclosures and the promotion of transparent and efficient markets in India had built up well before the East Asian debacle. This is evident from the assessment done by the World Bank in its last study conducted in 2003, which has been brought out in their Report on Observence of Standards and Codes (ROSC).

7.2 The World Bank in its ROSC-2004 identified several areas for reform out of which major ones like sanctions and enforcement should be credible deterrent, especially in the area of insider trading and related party transactions. Fragmented structure of regulatory oversight over the listed companies by SEBI, stock exchanges, and MCA leads to weaker enforcement and regulatory arbitrage. Board practices need to be strengthened, and role of institutional investors could play an important role in the corporate governance of their portfolio companies.

7.3 In the last three years, decisive steps have been taken to enhance the level of corporate governance requirements and also to improve the quality of disclosures on a real-time basis. The experience shows that in recent years, the capital market has amply rewarded those companies which have a proven record of good governance practices. The legal and regulatory framework has enabled and facilitated the growth of such companies.

7.4 Further, a number of steps have also been taken by the government and the securities market regulator by prescribing stiff penalties for those found guilty of insider trading, which also includes disgorgement of ill-gotten gains. Moreover, a state-of-the-art integrated surveillance system has been put in place to monitor the stock market transactions on a real­time basis to check manipulation. The disclosure norms for the related party transactions have also been strengthened. There are forums to facilitate co-ordination amongst various regulatory authorities. As far as board practices are concerned, the provisions of Clause 49 of the Listing Agreement have been strengthened and the Institute of Company Secretaries of India has recently brought out the ‘Secretarial Standard on Board Room Practices’ with a view to bring about uniformity in these matters. Developments vis-à-vis these aspects have been detailed in the assessment.

8. Summary Assessment of OECD Principles6

(For detailed assessment, please see Appendix II)
 

Principle

FI7

BI

PI

NI

NA

 

I. Ensuring the Basis for an Effective Corporate Governance Framework

IA.
Enhancement of market integrity and promotion of transparent and efficient markets

 

×

 

 

 

• Comprehensive statutory framework in place for listed companies. Companies Act applicable to all companies.

• SEBI mandated to regulate and develop securities market and protect investors under SEBI Act.

• SCRA and SCRR regulate transactions in securities.

• Listing Agreement applicable to all listed companies.

 

6 Unless there are specific provisions under the Insurance Act and the Regulations, the provisions of the Companies Act
are equally applicable to insurance companies.

7 FI - Fully implemented, BI - Broadly implemented, PI - Partially implemented, NI - Not implemented, NA - Not Applicable.

 

Principle

FI

BI

PI

NI

NA

 

 

 

 

 

 

 

• Depositories Act governs electronic trading.

Banking

• Banking Regulations Act, 1949.

Insurance

• Insurance Act, 1938, Insurance Regulatory and Development Authority Act, 1999.

Overall Comments

• Corporate Governance for listed companies. has received a lot of focus and is increasingly being adopted by listed companies.

• Need to enhance focus on unlisted companies.

IB.
Transparent
and
enforceable
legal and
regulatory
requirements

×

 

 

 

 

 

• Companies Act stipulates directors’ responsibility Statement, Audit Committees, postal ballot. Registrar of Companies (RoCs) can initiate prosecution for non-filing of compliance.

• Clause 49 of the Listing Agreement provides for composition of Board of Directors (BoD), Independent Directors, Constitution of Audit Committee, Disclosures in Annual Reports, Subsidiary Companies, Code of Conduct, CEO/CFO certifications, Quarterly Report on corporate governance.

• For the quarter ended Sptember 30, 2007, 1210/1295 companies at NSE and 2848/4162 at BSE submitted Corporate Governance Report.

• Provision for financial penalties/prosecution for non-compliance.

Banking

• Banks are required to put up a Report to BoD, in compliance with the Reserve Bank’s Circular dated June 20, 2002 based on recommendation of Ganguly Committee. For private sector banks, additional fit and proper directives and guidelines on ‘ownership and governance’ were issued on June 25, 2004.

Insurance

• The Management Report is required to confirm compliance with the provisions of

 

Principle

FI

BI

PI

NI

NA

 

 

 

 

 

 

 

 

 

 

 

the IRDA Act and the regulations framed thereunder. However, all the stipulations on corporate governance are not placed under one set of regulations. This is being addressed through issue of separate comprehensive guidelines on corporate governance.

Overall Comments

• Legal and regulatory requirements are consistent with rule of law and are in public domain. Requirements are of two types – mansdatory and non-mandatory.

IC.
Division of
responsibilities
amongst
authorities

 

×

 

 

 

 

• All companies to file fundamental documents with RoCs.

• Listed companies to comply additionally with Listing Agreement.

•  The provisions of Companies Act related to
management and administration and minority shareholder protection administered by Ministry of Corporate Affairs
(MCA) (Sections 401, 408, 388B).
• SEBI has general powers to pass directions
under Section 11B against listed companies
under SEBI Act and also certain delegated
powers under SCRA (Section 12A).
• Securities market intermediaries and
depositories regulated by SEBI under
provisions of SEBI Act and Depositories Act.
• In respect of stock exchanges, SCRA assigns
regulatory role between Central Government
and SEBI.

• SEBI has elaborate responsibilities in matters
relating to issue of shares by listed
companies, market misconduct, substantial
acquisitions and takeovers of listed
companies, etc.

 

Principle

FI

BI

PI

NI

NA

 

 

 

 

 

 

 

• Certain provisions of Companies Act are administered by SEBI.

• Trading on stock exchanges governed by bye-laws of the stock exchanges under overall policy laid down by SEBI.

• Trading in government securities and money market instruments under the purview of the Reserve Bank.

• IRDA and the Reserve Bank are regulator for insurance and banking sector, respectively.

• Various mechanisms in place for co­ordination and exchange of information amongst regulators.

Overall Comments

• Jurisdictions and roles are clearly defined and there is co-ordination among regulators.

ID.
Efficient
supervisory,
regulatory and
enforcement
framework

×

 

 

 

 

• Company Law Board (CLB) independent quasi-judicial body for matters pertaining to Companies Act.

• Electronic compliance managment system under MCA for electronic filing of documents by the companies in a 24×7 time-frame and effective monitoring by RoCs.

• SEBI is an autonomous, statutory body established under SEBI Act, 1992.

• SEBI Board has representation from various Ministries concerned.

• Rules are made by the Central Government under SEBI Act and Securities Contracts (Regulation) Act in a consultative manner.

• Public comments obtained for regulations and major proposals, before finalisation.

• Expenses of SEBI are met through fees and charges received from intermediaries.

• SEBI has comprehensive investigative and enforcement powers to issue directions under SEBI Act. SEBI also has enforcement powers under SCRA.

• Appellate authority for appealing against SEBI orders.

• Principles of natural justice followed by competent authorities.

 

Principle

FI

BI

PI

NI

NA

 

 

 

 

 

 

 

• Provision for SROs under SEBI Act.

Overall Comments

• Position as outlined above reflects basis for present assessment.

II. The Rights of Shareholders

IIA. Basic
shareholder rights

×

 

 

 

 

• Companies Act, SEBI Act, Depositories Act, SCRA and regulations made thereunder provide enabling framework.

• For shares in physical form, record-keeping by issuer or Share Transfer Agent. For shares in dematerialised forms, depositories record allotment and transfer of ownership. Under Clause 49 of Listing Agreement, listed companies to delegate share transfer to an officer or a committee which meet at least once in a fortnight.

• Complaint redressal mechanism laid down by SEBI and MCA.

• Shares of public/listed companies freely transferable under Companies Act. On stock exchanges rolling settlement on T+2 basis and counter-party risk guaranteed.

• Under Companies Act, Memorandum of Understanding (MoU)/Articles of Association (AoA) and financials to be filed with RoC.

• Detailed disclosures under SEBI (Disclosure and Investor Protection) Guidelines and Listing Agreement at the time of raising funds.

• In terms of Listing Agreement, all material and price-sensitive information to be in public domain. Clause 30, 31, 32, 33, 35, 36, 37, 41 and 49 stipulate periodic disclosure on shareholding, directorship, auditors and financials in Audited Results/stock exchange who, in turn, display on their website.

 

Principle

FI

BI

PI

NI

NA

 

 

 

 

 

 

 

• Provisions under Listing Agreement related to disclosure of quarterly-year-to-date financials to be submitted to stock exchange within 15 minutes of board meeting and in newspapers within 48 hours. 7 days prior intimation for board meetings.

• Every issuer company to inform material deviations in the utilisation of issue proceeds to stock exchange and Audit Committee through advertisement in newspapers.

• Under MCA-21 information regarding companies available on-line.

• As per SEBI’s initiative electronic disseminating/filings under www.corpfiling.co.in.

• Shareholders have right to participate, vote in general meetings.

• Shareholders appoint directors by passing resolutions and can propose candidates.

• In terms of Listing Agreement, companies must provide relevant information regarding candidates.

• Shareholders to share the profits by way of dividends.

• Dividend must be paid within 30 days of AGM. Redressal mechanism and penal provisions for non-compliance.

Insurance

• Companies Act applicable.

• In addition, provisions of Insurance Act permits issuance of only equity shares with single face value. Paid-up amount is same at Rs.10/-.

• Voting rights are strictly proportionate to paid up amount.

• Shares are not freely transferable at the threshold limit of 1 per cent and above.

• Process of introduction of a shareholder after due diligence by supervisor.

Overall Comments

• Recent initiatives have further improved position.

 

Principle

FI

BI

PI

NI

NA

 

IIB.
Rights to participate in fundamental decisions

×

 

 

 

 

• Shareholders have powers for appointment/ removal of directors and auditors, authorising, issuing share capital, amendments to MoU/AoA, remuneration of Board Members, major corporate transactions, change in business, objects, delisting, etc.

• U/s 81 pre-emptive rights for capital increase.

• Disposal of substantial business assets requires special majority.

• Special Resolution (SR) required for extraordinary transactions.

• Accounts minutes filed with RoC available for inspection.

• As per SEBI Disclosure and Investor Protection Guidelines, at the time of raising of funds from public, all material information regarding company, promoters, management, project, financials and risk factors to be disclosed.

• Under Listing Agreement, continuous disclosures requirement of material events. SEBI Takeover Regulations have provisions for minority shareholder protection and participation in change in management. Delisting guidelines enable shareholder participation and protection.

Insurance

• Quarterly reporting of financial results and the solvency position.

Overall Comments

• Adequate provisions enshrined in the law.

IIC.
Shareholders’ AGM rights

×

 

 

 

 

• Companies Act stipulate AGM, prior notice with agenda and explanatory statement (in case of special resolution). shareholders can

 

Principle

FI

BI

PI

NI

NA

 

 

 

 

 

 

 

 

 

 

 

raise questions and propose new resolution. Provisions for proxy voting and postal ballot.

• Sections 225, 257 of Companies Act govern appointment of directors.

• Sections 198, 309 and Schedule XIII of Companies Act prescribe provisions for remuneration.

• Shareholders approve maximum remuneration to BoD.

• Under Listing Agreement, shareholders approval required for fees/compensation to independent directors.

• ESOPs require shareholders approval under Companies Act and SEBI Regulations.

• Position under IIA and VI D may be seen.

Overall Comments

• Companies Act and Listing Agreement enable shareholders’ participation.

• Need to explore alternative methods for voting to ensure greater shareholders participation and spread awareness.

IID.
Disproporti­onate control disclosure

 

 

 

 

 

×

 

 

 

 

• Provision in Companies Act for issuance of shares with disproportionate voting rights.

• Companies disclose capital structures/ shareholding patterns that allow certain shareholders to exercise control disproportionate to their cashflow rights in Audited Results.

• Restrictions under Section 108A to 108E of Companies Act to prevent creation of monopolistic groups.

• Disclosure requirements under Section 187C of Companies Act.

• Joint venture arrangement and private equity investments may provide clauses as per which shareholders may obtain a degree of control which is disproportionate.

• The equity holding details are to be disclosed on quarterly basis.

• Any change in shareholding pattern of 1 per cent and above to be disclosed.

 

Principle

FI

BI

PI

NI

NA

 

 

 

 

 

 

 

 

 

 

 

Insurance

• Provisions of Companies Act applicable.

• Every person who has any interest in shares of a company which stands in the name of other person, make a declaration regarding acquisition of interest.

Overall Comments

• Ownership through cross-holdings and use of trusts and private companies for owning shares in group companies give rise to opaque and non-transparent structures.

• Disclosure norms need to be continuously strengthened.

• Stringent penal action to be enforced.

IIE.
Markets for corporate control should be allowed to function

 

 

 

 

 

×

 

 

 

• Provisions in Listing Agreement and SEBI (SAST) Regulations, 1997 to facilitate corporate restructuring and acquisitions.

• Issue of beneficial interest dealt with under Section 187C and 187D of Companies Act.

• Continuous disclosure on ownership by investor category as well as at various thresholds of ownership.

• stock exchanges disseminate the information through trading terminals and websites.

• In case of change in control, acquirer is required to make a public offer at every stage. Entire process to be completed in prescribed time. Provisions for competitive bids.

• Section 391-394 and 293 (1) of Companies Act govern mergers and sale of corporate assets.

Insurance

• Insurance Act, 1938 contains prescriptions on regulatory approvals on transfer of stakes beyond specified thresholds.

 

Principle

FI

BI

PI

NI

NA

 

 

 

 

 

 

 

Overall Comments

• Comprehensive regulatory framework has facilitated acquisitions over the last few years.

• In case of mergers and amalgamations role of MCA vis-à-vis courts needs to be reviewed.

• Competition Act stipulates time period before which proposed combinations cannot take place.

• Changes proposed under Competition Act and their impact have not been studied.

IIF.
Cost/benefit to voting

 

 

×

 

 

• No regulatory requirement for Institutional Investors to disclose their voting policies, procedure and conflicts of interest.

• As per latest World Bank Report Institutional Investors do not exercise their voting rights actively.

Overall Comments

• Need to initiate dialogue with the industry on the issue.

• Possibility of stipulating requirements as good practice or mandatory requirements to be explored.

IIG.
Consultation
amongst
shareholders
including
institutional
investors

×

 

 

 

 

• SEBI and MCA recognise Investor Associations to take up investors rights and grievances.

• Provisions under SEBI Takeover and Insider Regulations to check potential misuse of shareholder co-operation.

Overall Comments

• Forum available to facilitate interaction among shareholders. Checks and balances also in place.

III. Equitable Treatment of Shareholders

IIIA.
All
shareholders
should be
treated
equally

 

×

 

 

 

• Within each class of shares, all shares carry the same rights. Any change subject to the approval of shareholders. Proxy voting permitted.

• MCA has a portal for investor complaints. Provisions under Companies Act for action in cases of oppression and mismanagement, false statements, defaults in provisions of Companies Act.(388, 391, 397, 398, 401, 408)

 

Principle

FI

BI

PI

NI

NA

 

 

 

 

 

 

 

• Liability for directors under Companies Act. Class action permitted under Criminal Procedure Code (CrPC).

• SEBI deals with investor grievances pertaining to areas delegated to it under SEBI Act, against listed companies for non-compliance of takeover regulations, market manipulation, insider trading, etc. Under Listing Agreement requirement of shareholders/Investor Grievances Committee under the chairmanship of a non-executive director.

• Proxy voting permitted. Custodians to provide information to Institutional Investors.

• Voting rights in respect of foreign depository receipt holders determined by the agreement between the issuer and the depository.

• DIP guidelines provide for lock-in of shares and disclosure requirements.

• Position under IIE, IIA and IIC may be seen.

• Under section 621 of Companies Act, any shareholder can complain, file prosecution against company/officers in default.

• Provisions in delisting guidelines.

Insurance

• Position under IIA may be seen.

• At present the equity is closely held. In case of State-owned companies, the equity is held by the Government of India.

Overall Comments

• Structure is in place. Scope for expediting the process on implementation side and sensitising shareholders about their rights and responsibilities.

IIIB.
Insider trading
and abusive

×

 

 

 

 

• Insider trading, an offence under SEBI Act, attracts penalty of Rs 25 crore/3 times profits or 10 year imprisonment.

 

Principle

FI

BI

PI

NI

NA

 

self-dealing is prohibited.

 

 

 

 

 

• Disclosure requirements under Insider Trading Regulations, Takeover Regulations and Listing Agreement and other requirements such as Trading Window, pre-clearance, holding period, code of conduct for transactions by Listed Companies/Board Members/senior management.

• Market surveillance by stock exchanges. SEBI has Integrated Market Surveillance System to monitor and detect instances of insider trading and front-running. Requirement of Unique Client and Know Your Client norms and Permanent Account Number.

• During the last two years, SEBI has initiated actions against few entities for indulging in front-running, abusive self-dealing, violation of disclosure requirements.

• Insider Trading Regulations reviewed from time to time to strengthen framework.

Overall Comments

• SEBI has comprehensive powers for investigation.

• Regulatory framework and oversight strengthened to deter insider trading which is complex and difficult to prove even in advanced countries.

• In 2005-06 and 2006-07, respectively, 13 and 26 regulatory/enforcement action initiated for violation of insider trading regulations.

• During 2005-06 and 2006-07, 239 cases taken up for investigation pertaining to market manipulation and price rigging under SEBI (PFUTP) Regulations. Investigation completed in 139 cases.

IIIC.
Board/
Managers
disclose
interests

×

 

 

 

 

• Disclosure of material conflict of interest, related party transactions, directorships in other companies, shareholding required under Companies Act and Listing Agreement.

• Central Government approval required for certain related party transaction and loans to directors.

• Restrictions on participation by interested parties in such matters.

 

Principle

FI

BI

PI

NI

NA

 

 

 

 

 

 

 

• Shareholders, parties related to directors not allowed to take loans from companies.

Banks

In terms of Banking Regulation Act, there are prohibition on:

• director in BoD of banking company to be director in any other banking company.

• partners/members on behalf of any firm in which any of its directors is interested as partner, manager, employee or guarantor or any company.

Insurance

• Related party transaction to be disclosed under Accounting Standard 18.

• Insurers to furnish a schedule on payments to individuals, firms, companies in which its directors are interested and make disclosures in management report.

Overall Comments

• With amendments in Listing Agreement, the disclosure framework for observance of the principle is in place.

IV. Role of Stakeholders in Corporate Governance

IVA.
Stakeholder rights respected

×

 

 

 

 

• Shareholders have enforceable rights to participate.

• Debt-holders/creditors have rights in respect of matters which affect their rights, e.g., reduction in capital.

• Depositors can approach CLB for default in repayment.

• General laws applicable for customers/ suppliers, etc.

• As per Section 217 of Companies Act, Board reports annually on company activities,

 

Principle

FI

BI

PI

NI

NA

 

 

 

 

 

 

 

 

 

 

 

 

including company performance on environment issues, labour issues, tax compliance and provisions of Companies Act.

• National Foundation for Corporate Governance, Trust in Partnership with CII, ICAI and ICSI has been set up to strengthen the role of stakeholders.

Insurance

• Provisions of Companies Act applicable.

• Provisions for protection and servicing of policyholders.

Overall Comments

• Various laws recognise rights of stakeholders.

• Need for greater disclosure and publicity of Corporate Social Responsibility initiatives.

IVB.
Redressal for violation of rights

 

 

 

 

 

 

 

×

 

 

 

 

• Shareholders, creditors have enforceable rights under Companies Act.

• Framework by SEBI, MCA, stock exchanges to attend to investor grievances.

• Other Acts like SARFAESI Act to safeguard interests of creditors.

• For other stakeholders, remedies available under other general laws.

• Refer Principle IIIA and IVA.

Insurance

• IRDA (Protection of Policy-holders’ interest) Regulations, 2002 address rights of policy-holders.

• Insurance Ombudsman and consumer courts.

Overall Comments

• SARFAESI Act has strengthened creditors’ rights.

• The liquidation process is time consuming.

• Need for speedy disposal by courts.

• Setting up of dedicated courts may expedite disposal.

IVC.
Performance
enhancement

 

×

 

 

 

 

• Profit-sharing by employees provided under Companies Act.

• Section 79A of Companies Act and SEBI (ESOP and ESPS) Guidelines, 1999 govern issuance of stock options to employees of the listed companies.

 

Principle

FI

BI

PI

NI

NA

 

 

 

 

 

 

 

• Reservation for employees in public issues permitted under SEBI Disclosure and Investor Protection Guidelines.

• Factories Act and Industrial Disputes Act also facilitate employee participation in decision-making.

Overall Comments

• Enabling provisions in place

IVD.
Access to information

×

 

 

 

 

• Information about company disclosed periodically under Listing Agreement (immediately, in case material in nature) in the newspapers/to the stock exchange, who display on their website.

• MCA-218 provides access to information filed with Registrar of Companies (RoC).

• For IPOs and issues by listed companies disclosures to be made in prospectus under SEBI (DIP) Guidelines.

• Any listed company making issue of debt securities on a private placement basis and listed on a stock exchange is required to make full disclosures as per Companies Act, 1956, SEBI (DIP) Guidelines, 2000.

• Position under IIA and VE may be referred.

Insurance

• Access to information through website and MCA-21.

Overall Comments

• Emphasis on transparency and accurate and timely information.

IVE. Free communication

 

 

×

 

 

• Listing Agreement stipulates Whistle-Blower Mechanism as non-mandatory condition with adequate safeguards for employees.

 
8 A project initiated by Ministry of Corporate Affairs (MCA) to automate all processes related to proactive enforcement and compliance of the legal requirements under the Companies Act, 1956.
 

Principle

FI

BI

PI

NI

NA

 

of unethical practices to the board

 

 

 

 

 

• Legislations namely Factories Act, PF Act, and Industrial Disputes Act.

Overall Comments

• Protection available under other legal enactments.

• Non-mandatory conditions.

• Need to review experience gained in this area.

IVF.
Enforcement of creditor rights

 

×

 

 

 

• Section 100-104, 391-394 of Companies Act recognise creditors’ rights and provide for winding up.

Overall Comments

• Position under Principle IVB may be referred.

V. Disclosure and Transparency

VA.
Disclosure
standards

×

 

 

 

 

• Provisions for adoption and statutory filing of financial statement under Companies Act.

• Under Listing Agreement, quarterly financial statements to be published. Quarterly results are to be approved by the board or a committee thereof.

• Audited Results to be published and circulated (full or abridged version). Management Discussion and Analysis stipulates (under Companies Act, Listing Agreement), inter alia, consolidated financial statements required to be filed including discussion on the company’s competitive position, incorporating opportunities and threats, outlook, risks and concerns, etc.

• Under Companies Act and Listing Agreement (quarterly), share ownership to be disclosed in Annual Report/stock exchange by investor category and tranches of ownership information disseminated on website of the stock exchange.

• Under Companies Act/Listing Agreement, board member and key executives remuneration available in the Audited Results and balance sheet. Under Clause 49, senior management to disclose to the board all matters/transactions involving conflict of interest.

• Sec 217 of Companies Act and Clause 49 stipulate reporting on employees and other

 

Principle

FI

BI

PI

NI

NA

 

 

 

 

 

 

 

stakeholder issues, developments in HR, information on companies governance policies, discussions on opportunities and threats, etc.

Banks

• Additional disclosures in the ‘Notes to Accounts’ on asset quality, business ratio, maturity pattern of certain items of assets and liabilities, exposures to sensitive sectors.

Insurance

• IRDA (Preparation of Financial Statements and Auditors’ Report of Insurance Companies) Regulations, 2002 prescribes formats for various financial statements to be submitted by life insurers and non-life insurers separately. Quarterly reporting mandatory. Financial statements such as actuarial returns, business underwriting details, etc., to be submitted as per stipulated prescriptions.

Overall Comments

• With amendments in Listing Agreement, disclosures mandated under legal framework.

• Adjudication against 20 companies initiated by SEBI for non-compliance with Clause 49 of Listing Agreement.

VB.
Standards of accounting and audit

×

 

 

 

 

• ICAI is responsible to the Accounting Standards Board which issues Accounting Standards primarily based on IFRS.

• Information is prepared, audited and disclosed in accordance with the Accounting Standards.

• IFRS to be adopted from April 2011.

• Listing Agreement requires quarterly financial results to be approved by BoD, certified by CEO and CFO.

 

Principle

FI

BI

PI

NI

NA

 

 

 

 

 

 

 

 

 

 

 

• Major variation between the un-audited quarterly or yearly financial results, amendment on limited review to be explained, duly approved by the board.

Insurance

• Joint audit by two audit firms annually.

• Norms for appointment of statutory auditors issued by Supervisor.

• Tenure of audit firm restricted to five consecutive years.

• Statutory auditors to file Report as specified in IRDA Regulations.

Overall Comments

• Recent initiatives have enhanced the credibility and quality of disclosures.

VC.
Independent audit annually

 

 

 

 

 

×

 

 

 

• Under Companies Act annual accounts to be audited by an independent, competent and qualified auditor appointed by shareholders.

• Act governing ICAI, ICSI and ICWAI recently amended to enhance transparency and professionalism (disciplinary mechanism), limit extent of non-audit services to the client company and stipulate adequate related disclosures.

• The concept of peer audit review introduced for listed companies.

Banks

• Banking Regulation Act,1949 also applicable.

Insurance

• Annual Joint Audit by two auditors.

Overall Comments

• Recent initiatives have enhanced the credibility and quality of disclosures.

VD.
Accountability of auditors

 

 

 

×

 

 

 

• Principle V C may be referred.

• Companies Act and Listing Agreement stipulate setting up of Audit Committee.

• Peer review of auditors of listed companies recommended by SCODA.

Overall Comments

• Auditors accountability would be further enhanced with introduction of peer review.

 

Principle

FI

BI

PI

NI

NA

 

VE.
Fair and timely dissemination

×

 

 

 

 

• Principle II A, IVD may be referred.

• Section 219(iv) of Companies Act and Clause 32 of Listing Agreement permit listed companies to send abridged balance sheet, profit and loss account to shareholders.

• Online information available under MCA-21, and also, in www.watchoutinvestors.com and www.corpfiling.co.in.

Insurance

• Annual accounts of companies are also consolidated and published in Supervisor’s Annual Report at www.irdaindia.org.

• Consolidated monthly performance of insurers on website.

Overall Comments

• Adequate provisions available under Companies Act, Disclosure and Investor Protection guidelines and Listing Agreement.

VF.
Provision of professional advice

 

×

 

 

 

• Brokers, MFs, portfolio managers, credit rating agencies registered and regulated by SEBI.

• Mandatory IPO grading.

• Regulations for Investment Advisors under preparation by SEBI.

• Disclosure requirement under Listing Agreement and SEBI Insider Trading Regulations.

• Restrictions and Disclosure requirement in terms of code of conduct under SEBI Stock Broker Regulations.

Overall Comments

• Various initiatives taken for disclosure and transparency.

VI. Responsibilities of the Board

VIA.
Board Acts with
due diligence, care

×

 

 

 

 

• Provisions in the Companies Act for effective management and accountability of BoD to the company and shareholders.

 

Principle

FI

BI

PI

NI

NA

 

 

 

 

 

 

 

• Under Listing Agreement, board and independent directors to protect the interest of the stakeholders (Clause 41 and 49).

• Listing Agreement lays composition of board (combination of executive and independent directors).

• Board to be assisted by committees (Audit Committee, Investors’ Grievances Committee and Remuneration Committee).

• Board can seek information on all significant issues.

• Quarterly financials to be approved by the BoD.

• Minimum number frequency of board meeting and limit on number of companies where director can be on board.

• CEO and CFO certification on authenticity of financial results.

Banks: Private Sector Banks

• ‘Fit and proper’ criteria, deed of covenant for directors.

• Nomination Committee to exercise due diligence.

Public sector banks

• ‘Fit and proper’ criteria applicable other than directors nominated by Govt. of India under Section 9(3)(h) of the Banking Companies

Insurance

• Additional appointment of whole-time director requires the approval of IRDA.

• Authority can also remove a Director or CEO.

• ¼ of directors (not less than 2) to be elected by policyholders of life insurance company.

• No insurance agent eligible to be a director.

• Life insurer cannot have a common director with another such insurer.

• In the de-tariffed scenario, the boards of general insurance companies have been assigned additional responsibilities.

Overall Comments

• With amendments in Listing Agreement, necessary requirements in place for coporates. Board responsibility of banks and insurance companies also specified.

 

Principle

FI

BI

PI

NI

NA

 

VIB.
Treat all shareholders fairly

 

×

 

 

 

• BoD obligated to take decisions in a fair manner and interests of the company.

• Shareholders have remedy under CLB for oppression by board.

• Listing Agreement provides for an optimum combination of executive and non-executive directors and setting up Shareholder committee to look into investor grievances.

Overall Comments

• Rights of shareholders legally protected, scope on implementation side.

VIC.
Apply high ethical standards

×

 

 

 

 

• Directors responsibility statement under Section 217(2AA).

• Company Secretary ensures that the board complies with its statutory duties.

• Reporting requirements on board under Section 217.

• Powers and duties of directors contained in Sections 291 and 293 of Companies Act.

• Listing Agreement- CEO and CFO certification and code for BoD.

• Auditors/Company Secretaries to certify compliance of conditions of corporate governance under Listing Agreement.

Insurance

• Statutory Auditors confirm compliance with Insurance Act and registration requirment.

Overall Comments

• Companies Act and Listing Agreement stipulate obligations on BoD.

VID.
The board should fulfill certain key functions

 

×

 

 

 

• Companies Act governs remuneration to BoD/ managerial personnel.

• Shareholders appoint regular directors. BoD can appoint casual directors, additional directors and alternate director.

 

Principle

FI

BI

PI

NI

NA

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

• Provisions in Companies Act for monitoring, managing potential conflicts of interest/ misuse of corporate assets/abuses in related party transactions.

• In terms of Listing Agreement, separate section on corporate governance in Audited Results and non-compliance of mandatory requirements with reasons and extent to which non-mandatory requirements adopted to be highlighted.

• Committees under Listing Agreement monitor effectiveness of the company’s governance practices.

• Audit Committee oversee and review the financials of the company, its subsidiaries, related party transactions, functioning of auditors, whistle-blower mechanism and utilisation of issue proceeds.

• Process of selecting, compensating and monitoring key executives by the company managements.

• Disclosure requirements for compensation to employees beyond the prescribed threshold.

• ESOPs to be approved by the board and shareholders.

• Listing Agreement states that fees/ compensation to non-executive directors to be fixed by the board with prior approval of shareholders.

• Under Listing Agreement, all material transactions along with management’s justification to be placed before the Audit Committee.

• At least one independent director on the board of the holding company to be director on the board of a material non-listed Indian subsidiary company. Audit Committee reviews financial statements, investments and related party transactions of material unlisted subsidiary company.

• Minutes of board meetings and statement of all significant transactions and arrangements

 

Principle

FI

BI

PI

NI

NA

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

entered into by the material unlisted subsidiary company are to be placed before the board of listed holding company.

• Manager/secretary and the two directors of the company (managing director must sign, if there is one) are required to sign financial statements.

• Certification by the CEO/CFO of financials.

• Compliance Certificate from auditors/CSs.

• Board oversee the process of disclosure and communications.

• Position under IIA, VIB may be seen.

• Management Discussion and Analysis to include discussion on risks and concerns.

• Requirement to keep board informed about the risks assessment and minimisation procedures.

• Disclosure requirement with respect to risks due to foreign exchange exposure.

Insurance

• Investment committees in accordance with regulations.

• Additional responsibility on board of non-life insurance companies in de-tariffed scenario.

• Management Report to be submitted confirming payment of statutory dues, shareholding pattern, maintenance of solvency margins, overall risk exposure, etc.

Overall Comments

• Board’s responsibilities enhanced under amended Listing Agreement. Need to evaluate extent of implementation. Action needs to be taken for non-compliance, need to promote credible institute for directors. Need for deterrent provisions and strict penalties for violation of provisions relating to related party transactions.

 

Principle

FI

BI

PI

NI

NA

 

 

 

 

 

 

 

• Need to strengthen risk management framework, setting up of Risk Management Committee under Listing Agreement to be explored.

VIE.
The board
should be able
to exercise
objective
judgment

 

×

 

 

 

• Listing Agreement stipulates the composition of BoD, committees, representation of independent director, frequency of meetings, attendance, maximum number of companies in which a person could be a director.

• Position under VIA may be seen.

Overall Comments

• Listing Agreement amended to bring clarity in these areas. Variance on extent of compliance. Maximum term of independent directors to be statutorily restricted. Eventually, definition of independent directors to be brought in Companies Act.

VIF.
Access to information

×

 

 

 

 

• Listing Agreement stipulates the minimum information that must be made available to the board and empowers the board at any point of time any information and access to expert advice.

Overall Comments

• Requisite provisions in law.

• Institute of Company Secretaries has brought out a secretarial guide on boardroom practices to serve as a repository.

 

9. Corporate Governance Assessment – Unlisted Companies

9.1 The corporate governance assessment of the financial sector would be incomplete without having an examination of the unlisted companies, which constitute a dominant part, at least in number, of the corporate structure. This is very much evident from the following table:

 

Table 2: Number of Companies Registered as on March 31, 2007

Total No. of Companies

8,20,862

No. of Public Limited Companies

98,865

No. of Private Limited Companies

7,21,720

 
9.2 Recently, there has been a trend amongst some of the bigger names in the corporate sector to get their companies delisted so as to escape the increasing requirements of disclosure, mounting pressure of public scrutiny and rigorous compliance requirements and increased cost of compliance. This is substantiated by the fact that none of the following requirements are applicable to the unlisted companies: (i) no requirement to constitute a board with more than 33 per cent/ 50 per cent of independent directors; (ii) no requirement to constitute an Audit Committee for public companies with less than Rs. 5 crore paid-up capital; (iii) no code of conduct is required for the directors; (iv) no requirement to constitute remuneration committee and shareholder grievance redressal committee; (v) no disclosure requirement for material subsidiary company transactions; and (vi) no requirement for CEO/CFO certification.

9.3 Nonetheless, the fact remains that a substantial portion of unlisted companies, which are in the form of private limited companies, consist of small and medium companies, which need concession in terms of compliance, disclosure and certification
requirements.

Further, private equity has emerged as an alternate source of finance for the unlisted companies in a big way. This development is also going to impact the corporate governance structure and practices in such companies.

9.4 It is important to note that insofar as corporate governance is concerned, the difference between a listed and an unlisted company is substantially confined to one class of stakeholders, namely, shareholders. The concerns of other stakeholders, viz., employees, creditors, Government, consumers, etc., particularly in large companies are no different between listed and unlisted companies. The unlisted companies do not necessarily mean lack of public interest and involvement in their affairs since a majority of them access the institutional finance, including from banks. Consequently, the need for evolving a corporate governance code for unlisted companies cannot be overlooked. This can take two forms, viz., (i) unlisted companies can voluntarily evolve and adopt a code of corporate governance. This would involve a huge cultural shift. Trade associations like CII, FICCI/ASSOCHAM can play an important role in this. (ii) Ministry of Corporate Affairs can consider mandating, in respect of unlisted companies above a particular size, compliance of applicable provisions of Clause 49 of the Listing Agreement9. Companies Act would need to be amended in this regard.

10. Corporate Governance Assessment – Banks

10.1 Banks are ‘special’ as they not only accept and deploy large amounts of uncollateralised public funds in fiduciary capacity, but also leverage such funds through credit creation. Banks are also important for the smooth functioning of the payments system. In view of the above, legal prescriptions for ownership and governance of banks laid down in the Banking Regulation Act, 1949 have been supplemented by regulatory prescriptions issued by the Reserve Bank from time to time for improving the standard of corporate governance in banks in India.

10.2 In particular, the following measures have been taken to improve the standard of corporate governance in banks in India:

(i) The Consultative Group of Directors of Banks/Financial Institutions (Chairman: Dr. Ashok Ganguly) set up in April 2002, looked into all the issues relating to the supervisory role of the boards of banks and made several recommendations for making
 

9 Cross-referencing to other laws is not uncommon in the Indian context. For example, Income Tax Act refers and mandates compliance with several provisions of the Companies Act.

 

the role of BoD more effective with a view at minimising risk. The Report of the Dr. Ganguly Group was forwarded to all the banks in June 2002 by the Reserve Bank and they were advised to adopt and implement, based on the decision taken by their respective boards, the recommendations relating to: (i) responsibilities of the BoD, (ii) role and responsibilities of the independent/non­executive directors, (iii) training facilities for directors, (iv) submission of information to the board, (v) agenda and minutes of the board meetings, (vi) constitution of various committees of the board like Shareholders Grievance Redressal Committee, Risk Management Committee and Supervisory Committee, and (vii) disclosure and transparency.

(ii) Based on the recommendations of the Advisory Group on Banking Supervision, (Chairman: Shri M.S.Verma), banks were advised in June 2003 by the Reserve Bank to strengthen their risk management framework, review connected lending, prepare strategic business plans and ensure its percolation to the grass-root level as also to strengthen the internal control system.

(iii) Guidelines for acknowledgement of transfer/allotment of shares in private sector banks were issued by the Reserve Bank in February 2004, which envisaged that acknowledgement from the Reserve Bank for acquisition/transfer of shares would be required for all cases of acquisition of shares which would take the aggregate holding of an individual or group to the equivalent of 5 per cent or more of the paid-up capital of the bank. Further, it was indicated that in deciding whether or not to grant acknowledgement, the Reserve Bank would take into account, among other things, the aspect relating to ‘fit and proper’ status of the shareholders whose aggregate holdings are above the specified thresholds. It was also advised that for deciding the ‘fit and proper’ status of the applicant for an acknowledgement of transfer/allotment of shares, criteria such as integrity, reputation, track record in financial matters, compliance with tax laws, source of funds for the acquisition and where the applicant is a corporate body, its track record of reputation for operating in a manner that is consistent with the standards of good corporate governance, financial strength and integrity, in addition to assessment of individuals and other entities associated with the corporate body, would also be taken into account. Higher levels of scrutiny were also envisaged for acquisition or investment, which would take the shareholding of the applicant to higher levels (10 per cent or more).

(iv) All the banks in the private sector were advised by the Reserve Bank in June 2004 that they should undertake a process of ‘due diligence’ to determine the suitability of the persons for appointment/continuing to hold appointment as directors on the board, based upon qualifications, expertise, track record, integrity and other ‘fit and proper’ criteria. For this purpose, banks were advised to obtain a ‘declaration and undertaking’ in a prescribed format from the proposed/existing directors. Banks were also advised that the Nomination Committees of the Board should undertake this process of due diligence. All the banks in the private sector appear to have carried out the ‘due diligence’ exercise in respect of directors on their boards through the Nomination Committees, taking into account the information furnished by the directors in the ‘declaration and undertaking’ in the prescribed format. Banks have also confirmed that they have undertaken an annual exercise to ascertain whether there is any change in the information already provided by the directors on their ‘fit and proper’ status and wherever there is any change, the requisite details have been furnished by the directors. Further, banks in the private sector were advised by the Reserve Bank in the above-mentioned circular, that the nominated/elected directors should execute a deed of covenant to discharge the responsibilities as directors to their best of abilities.

(v) The Government issued guidelines in September 2004 (which were modified in October 2006 and subsequently in November 2007) for appointment of non-official directors on the boards of nationalised banks, the SBI, the NABARD, NHB, etc., which recommended that the suitability of nominees for the above appointment should be assessed in terms of formal qualifications and expertise, track record, integrity, etc. For assessing integrity and suitability, information on criminal records, financial position, civil actions undertaken to pursue personal debts, refusal of admission to or expulsion from professional bodies, sanctions applied by regulators and similar bodies and previous questionable business practices, etc., would be relied upon. It also envisaged that persons with special academic training or practical experience in the fields of agriculture, rural economy, banking, co­operation, economics, business management, human resources, finance, law, marketing, industry and information technology may be considered.

(vi) SEBI circulated the revised Clause 49 of the Listing Agreement in October 2004 which was applicable to all the listed entities including listed banks. The revised Clause covers several aspects, which touch upon corporate governance issues such as: (i) composition of the board, (ii) directors’ compensation and disclosures, (iii) role of independent directors, (iv) role and powers of the Audit Committee, (v) enhanced disclosure, and (vi) compliance. It was observed that the provisions of the revised Clause 49 were largely in tune with the various instructions issued by the Reserve Bank on corporate governance and as such the banks would not find it difficult to comply with the provisions of Clause 49.

(vii) The Reserve Bank issued guidelines on ‘Ownership and Governance’ in private sector banks in February 2005, which envisaged that ultimate ownership and control of private sector banks should be well-diversified, thereby minimising the risk of misuse or imprudent use of leveraged funds. Further, banks were advised that the important shareholders (shareholding of 5 per cent and above) should be ‘fit and proper’ as laid down in the Reserve Bank guidelines on acknowledgement for allotment and transfer of shares issued in February 2004. It was also reiterated to banks that the Directors and CEO who manage the affairs of the bank should be ‘fit and proper’ and they should observe sound corporate governance principles. Further, banks were advised that, as a matter of desirable practice, not more than one member of a family or a close relative (as defined under Section 6 of the Companies Act, 1956) or an associate(partner, employee, director, etc.) should be on the board. The banks were also expected to ensure that they had minimum capital/net worth for optimal operations and systemic stability. In addition, it was expected that the policies and processes of banks are transparent and fair.

(viii) The Banking Companies (Acquisition and Transfer of Undertaking) Act, 1970/1980 were amended in October 2006 providing for introduction of ‘fit and proper’ criteria for directors elected in terms of Section 9 (3) (i) of the Act. Based on the above amendment, the Reserve Bank has issued suitable guidelines to nationalised banks and associate banks of the SBI in November 2007.

(ix) Keeping in view the recommendations of Ganguly Group, as also the best corporate governance practices, all private sector banks were advised by the Reserve Bank in May 2007 to have a part-time chairman of the BoD and a separate Chief Executive Officer/Managing Director who would be responsible for day-to-day management of the bank.

(x) In addition to the above, the Banking Regulation Act, 1949 contains certain provisions covering corporate governance aspects:

a. Not less than 50 per cent of BoD shall include persons with professional experience in areas like accountancy, agriculture and rural economy, banking, co-operation, economics, finance, law, small-scale industry or any other matter as specified by the Reserve Bank as useful [Section 10– A(2)(a)–Independent Directors];

b. No banking company incorporated in India shall have as a director in its BoD any person who is a director of any other banking company (Section 16 – Conflicts of Interests);

c. No banking company shall enter into any commitment for granting any loan or advance or advance to or on behalf of (i) any of its directors, (ii) any firm in which any of its directors has interest as partner, manager, employee or guarantor or (iii) any company of which any of the directors of the banking company is a director, managing agent, manager, employee or guarantor or in which he holds substantial interest, or (iv) any individual in respect of whom any of its directors is a partner or guarantor (Section 20 – Self-Dealing/Conflicts of Interests);

d. Power of the Reserve Bank to remove managerial and other persons from office (Section 36 AA) if it is felt that the affairs of the banking company are conducted in a manner detrimental to the interests of the depositor; and

e. Power of the Reserve Bank to appoint additional directors (Section 36 AB).

 
(xi) Incidentally, Basle Committee on Banking Supervision has published a document in February 2006 enumerating the following principles of corporate governance:

a. The board members should be qualified for their positions, have a clear understanding of their role in corporate governance and be able to exercise sound judgment about the affairs of the bank;

b. The BoD should approve and oversee the bank’s strategic objectives and corporate values that are communicated throughout the banking organisation;

c. The BoD should set and enforce clear lines of responsibility and accountability throughout the organisation;

d. The BoD should ensure that there is appropriate oversight by senior management consistent with the board policy;

e. The board and senior management should effectively utilise the work conducted by internal audit function, external auditors and internal control functions;

f. The BoD should ensure that compensation policies and practices are consistent with the bank’s corporate culture, long-term objectives and strategy and control environment;

g. The bank should be governed in a transparent manner;

h. The BoD and senior management should understand the bank’s operational structure, including where the bank operates in jurisdictions or through structures that impede transparency (i.e., ‘know-your-structure’).

 
(xii) It is observed that the principles of corporate governance adopted by banks in India are largely in tune with the principles published by Basle Committee on Banking Supervision in February 2006.

11. Corporate Governance Assessment – Insurance Companies

11.1 All insurers are required to ensure compliance with corporate governance as per the provisions of the Companies Act, 1956. In addition, the insurers have to comply with the requirements of the Insurance Act, 1938 and the regulations framed thereunder. The various requirements stipulated by the Authority to ensure good governance in the management of affairs of the insurers and transparency in their operations inter alia cover such aspects as internal controls and processes; constitution of an investment committee, its duties and responsibilities; appointment of managerial personnel to meet the ‘fit and proper’ criteria subject to prior approval of the Authority; disclosure on payments made to individuals, firm, companies and organisations in which directors are interested; stipulation on appointment of joint auditors, their qualifications and rotation of auditors and format of the audit report; defined role of the appointed actuary; representation of the policyholders on the board; and provisions against commonality of interest through presence of similar directors in two insurance companies. The various accounting standards framed by the Institute of Chartered Accountants of India facilitate conformity with the accounting principles and disclosure of specified information has been stipulated to ensure transparency in operations.

11.2 In particular, the following measures have been taken to improve the standard of corporate governance in insurance companies in India:

(i) Capital Structure and Rights of Shareholders: At present, insurance companies are closely held. As such, the provisions applicable to listed companies are not applicable to them. However, the Insurance Act envisages that the domestic promoters of companies would be required to disinvest after ten years of the commencement of operations. It is expected that this obligation would act as a pre-determinant of governance requirements as applicable to listing companies at present. Section 6A(5) requires the beneficial shareholder to declare his interest to the company in the prescribed form (to be countersigned by the person in whose name the share is registered) where any shares of a company stand in the name of another person in the register of members of the company. This declaration is required to be made within 30 days from the date of acquisition of such an interest. All shareholders have access to the said register. Thus, the beneficial ownership is required to be disclosed. In addition, all the provisions of the Companies Act, 1956 apply as regards the maintenance of details of the beneficial shareholders.

(ii) Transferability of Shares: It is a pre­requisite for an insurance company to be a public limited company. Shares of the insurance companies are, however, not freely transferable in view of certain specific provisions in the Act, viz., any transfer of 1 per cent and above of the paid-up equity requires the approval of the Authority. Where the transferee is likely to acquire 5 per cent or more (the threshold limit is lower at 2.5 per cent or more in case of a banking company), prior approval of the supervisor is required.

(iii) Shareholders/Promoters and Board:

(a) Fit and Proper stipulations: The insurance sector is capital intensive in nature with the minimum paid-up capital requirement of Rs.100 crore in case of life and non-life insurance companies; and Rs.200 crore in case of reinsurance companies. In addition, all insurance companies are required to maintain a solvency margin ratio of 1.5 at all times. The requirement for injection of additional capital is particularly significant in the case of the life insurance companies during the initial seven to ten years. Being unlisted public limited companies, the shareholders are expected to inject additional capital into the venture till such time as the operations of the company stabilise (which could be a period of 7 to 10 years). The promoter shareholders are very careful in the choice of the shareholders/promoters (both in the initial registration process and during the course of operations of the company) to ensure that they comply with the ‘fit and proper’ requirements.

(b) Board of Directors: The election and removal of members of the board is governed by the provisions of the Companies Act. In addition, the appointment of whole-time directors requires the approval of the supervisor. The Insurance Act also provides for removal of a director or CEO under specific conditions.

(c) Policyholders’ representation on the board: There are specific provisions in the Act, which provide for the constitution of the board: (i) No insurance agent who solicits or procures life insurance business and no chief agent or special agent is eligible to be or remain a director of any insurance company carrying on life insurance business; and (ii) A life insurer shall not have a common director with another such insurer.

(iv) Share in the Profits of the Company: The provisions relating to distribution of the surplus of insurance companies are contained in two different legislations. In the case of a non-life insurance company, the applicable provisions are those under the Companies Act, 1956. In case of a life insurance company, provisions of Section 49 of the Insurance Act read with the IRDA (Distribution of Surplus) Regulations, 2002 is applicable.

(v) Loans to Senior Management: No insurance company can grant loans or temporary advances, either on hypothecation of property or on personal security or otherwise, except loans on life policies issued by him within their surrender value, to any director, manager, managing agent, actuary, auditor or officer of the insurer of the company.

(vi) Borrowings: The legislation provides for raising of funds by insurance companies only through the equity share capital mode. These restrictions have been put in place because the sector was opened up only in 1999 and the supervisor has adopted a cautious approach on various prudential and regulatory issues. Options for providing other avenues for raising funds can be considered in due course.

(vii) Redressal Mechanisms for Stakeholders: IRDA (Protection of Policy-holders’ Interest) Regulations, 2002 addresses various issues relating to protection of rights of policyholders. These regulations cover aspects from the point of sale up to settlement of claims. The other fora for redressal of grievances include the insurance ombudsman and consumer courts. With respect to other stakeholders, such as minority shareholders, the provisions of various corporate laws apply. An Appellate Authority has been set up under the Ministry of Finance to provide for the appeal by the insurance companies against the orders passed by the supervisor. There are special provisos which take care of the interest of the various stakeholders in case of restructuring/winding up of insurance companies. In cases where the Act is silent, the provisions of the corporate legislation are applicable.

(viii) Penal Provisions Applicable to Senior Management: The provisions of Sections 21 (1), 102, and 104 of the Insurance Act are applicable for calling for additional information from the senior management and for initiating penal action in case of default in complying with or acting in contravention with the provisions of the legislation. In addition, provisions of corporate laws are applicable in case of contravention of any provisions of the applicable legislations.

(ix) Furnishing Reports: Section 11(1) of the Insurance Act requires every insurer to prepare the balance sheet, revenue account, receipts and payments account and profit and loss account for each financial year. Insurance companies are required to consolidate their operations within and outside India to present the same in the Annual Report. The accounts and statements have to be signed by the Chairman, if any, two Directors and the Principal Officer10 of the company. The Annual Report includes the directors’ report; balance sheet; profit and loss account; cash flow statement; notes to the financial statements; auditors’ Report; management report; management discussion and analysis; financial ratios and summary of financial statements for the last five years. Accounting Standards issued by ICAI are
 
10 ‘Principal Officer’ means any person connected with the management of the company or any other person to whom the Authority has served notice of its intention of treating him as the principal officer thereof.
 

applicable to insurance companies to the extent indicated in the standards and also as indicated in IRDA regulations on preparation of financial statements. IRDA (Preparation of Financial Statements and Auditors’ Report of Insurance Companies) Regulations, 2002 prescribe the formats for various financial statements to be submitted by life insurers and non-life insurers (including the re-insurer) separately. The various periodic reports required to be submitted by the insurance companies include: (i) Business underwritten details on monthly basis, (ii) Equity holding pattern on quarterly basis, (iii) Actuarial returns and solvency statements, (iv) Investment returns (also on a quarterly basis), and (v) Reinsurance returns.

The supervisor has recently stipulated quarterly submission of un-audited financial statements and solvency position effective December 2007.

(x) Audit: The accounts of insurance companies are required to be audited jointly by two audit firms annually. The norms for appointment of statutory auditors have been issued by the IRDA, which are required to be complied with by the insurance companies while appointing the statutory auditors. The norms prescribe the minimum number of partners in the audit firm and the educational/ professional qualifications and experience of the partners. As part of the corporate governance stipulations, an audit firm cannot be appointed/ continued for more than five consecutive years. No two audit firms can simultaneously carry on audit work for more than four years. An audit firm on completion of its tenure of five/four years as the case may be, is subject to a cooling-off period of two years during which period it cannot accept statutory audit assignment of the said insurance company for the next two years. The statutory auditors are required to file their audit report as per the format specified at Schedule C of IRDA Regulations on preparation of financial statements and auditors’ report.

Duties and audit procedures of statutory auditors of insurance companies are required to be compliant with the prescriptions laid down by the ICAI. The operating expenses schedule of the financial statements filed by the insurance companies requires specific disclosure of the requirement of the expenses incurred on the auditors including the auditors’ fees, expenses, etc. as auditor; as adviser or in any other capacity, in respect of taxation matters, insurance matter, management services and in any other capacity.

Overall Assessment

11.3 While the various prescriptions on corporate governance are laid down in the various provisions of the insurance legislation and the regulations framed thereunder and the provisions of the corporate law are also applicable, there is a felt need for issuing comprehensive guidelines on corporate governance applicable to the insurance companies.

11.4 The supervisor is in the process of finalising the existing statutory and regulatory requirements on corporate governance under various provisions of the Insurance Act and the regulations framed thereunder into one comprehensive document. Care is being taken to align the existing principles and guidelines listed in the OECD guidelines and the IAIS documents and blending them with domestic practices and other statutory regulations for corporate entities.

12. Recommendations: The Way Forward

12.1 The last decade has seen extensive activity on the corporate governance front. Its importance is increasingly being recognised, Corporate governance norms are becoming an integral part of the corporate framework. While, to a certain extent, better compliance will be driven by the more stringent enforcement of regulations, the momentum will come from the forces of competition and demand for low-cost capital.

12.2 Indian corporate sector is becoming increasingly significant in the global context. In the service sector, Indian companies have been able to establish themselves as key players especially in sectors such as information technology, BPO and finance. India has emerged as a manufacturing base for international corporations. Also, Indian companies have made significant acquisitions of entities abroad. With these developments, the Indian corporate sector would be under increasing scrutiny from various potential stakeholders at the global level. Therefore, quality of corporate governance in these companies would be a key determinant affecting their ability to attract capital, business, global partners and quality manpower. Good corporate governance in such companies is likely to be emulated by other corporates, thereby enhancing overall levels of corporate governance in India.

12.3 Some evidence of this emerging phenomenon is already visible in corporate India with new companies aggressively being
managed by a new generation of professionals who place a great deal of value on corporate governance and transparency – if not for self- interest but as an instrument for obtaining access to cheaper capital. Therefore, such companies are more than willing to have members who are true professionals on their boards and voluntarily follow disclosure standards that measure up to the best in the world. The capital market also substantiates this by putting premium on the valuations of such companies. The concept of  sustainable development has been taken in the right earnest by some of these companies and has been integrated in their business plans.

12.4 As regards the enabling framework, it is evident that the initiatives taken by the Government/regulators have raised corporate governance standards in India at par with the best in the world. The policy framework is mostly in place and the compliance has also been increasing. At the same time, there are certain areas, as identified in the assessment where more needs to be done. In our view, steps on the following lines would strengthen the corporate governance framework:

(i) Investor education can play a key role in spreading awareness about exercise of their rights and impact on board governance. Work in this direction is already being done by the various concerned authorities, which needs to be taken up on a larger scale and reach. A co­ordinated approach amongst authorities can further enhance effectiveness of efforts in this direction (refer Principle IIC and IIIA).

(ii) It has been observed that presently the participation by shareholders in decision-making is somewhat constrained due to their inability to be present for the AGM/ EGMs, lack of understanding about issues, absence of co-ordination amongst themselves due to their dispersed geographical spread (refer Principle IIC). Certain steps like introduction of postal ballot for voting for some decisions, provision for proxy voting, etc. have already been taken to obviate the need for physical presence of the shareholders. Following measures can also be considered to ensure greater shareholder participation:

a. holding of AGM at a place where majority of shareholders are resident;

b. explore alternate methods for voting which are convenient to shareholders (refer Principle IIC);

c. investor associations can play an active role in providing a platform for co-ordination amongst investors. There is a need to have a larger number of credible investor associations and encourage interaction amongst them. At the same time, there should be checks in place to avoid misuse of such forums.

 

(iii) Institutional investors need to be encouraged to declare their voting policy and to effectively participate in the corporate decision-making. Institutional investors are expected to have better knowledge and understanding of affairs of the company. There is a need to initiate dialogue with the industry to develop the awareness about the contribution that institutional investors can make in the corporate governance of a portfolio company. Possibility of stipulating specific requirements either as good practice or mandatory requirements may be explored (refer Principle IIF, IIG).

(iv) The present corporate governance framework for the listed companies attaches a lot of importance to the role of independent directors. However, there are no mandatory requirement pertaining to the tenure of their directorship. It is felt that to ensure that the independence of independent directors is maintained in spirit, an upper limit on the tenure of independent directors should be provided for in the law. Further, the definition of independent directors could be included in corporate law in due course (refer Principle VIE).

(v) Credible institutional mechanism for the training of directors including the independent directors needs to be created on a priority basis. It is noted that steps have already been initiated in this regard by Ministry of Corporate Affairs as well as SEBI. ICAI and ICSI which are playing a crucial role in addressing this requirement (refer Principle VID).

(vi) To address concerns regarding ownership through cross holding and opaque, non-transparent structures (refer Principle IID), there is a need for strengthening disclosure norms to bring about greater transparency in ownership structures. Further, stringent penal action needs to be enforced whenever such undesirable practices are unearthed.

(vii) There is a need for strengthening the enforcement mechanism by focusing on the efforts of tracking of defaulters or non-compliance by the corporate. These would act as deterrent for future non-compliance and also boost the confidence of the investors in the system.

(viii) Various provisions have been incorporated both under the Companies Act and the Listing Agreement to address conflict of interest issue in related party transactions. Information pertaining to material related party transactions is required to be in public domain. As a further step, appropriate penalties may be provided for in the law for non-compliance pertaining to related party transactions (refer Principle VID).

(ix) Penal provisions for fraudsters may be strengthened  in  corporate  law  by providing for the disgorgement of gains and confiscation of assets.

(x) India today boasts of a robust regulatory framework. There are, however, bottlenecks due to delays in the judicial process. The liquidation process is time-consuming and lengthy, thereby, hardly leaving any effective remedy for the stakeholders other than secured creditors. It has been observed that setting up of dedicated courts for certain areas has led to expeditious disposal of cases. Therefore, an effective institutional mechanism for time-bound resolution of cases needs to be created urgently (refer Principle IVB).

(xi) There is a need for evolving a corporate governance code for unlisted companies. This can take two forms:

• Unlisted companies can voluntarily evolve and adopt a code of corporate governance. Trade associations like CII, FICCI and ASSOCHAM can play an important role in this regard.

• A separate Corporate Governance Code for unlisted companies may be brought out under the Companies Act, by the Ministry of Corporate Affairs which takes into account the interest of stakeholders in such companies. The Ministry can also consider mandating, in respect of unlisted companies of above a particular size, compliance with applicable provisions of Clause 49 of Listing Agreement. Companies Act would need amendment in this regard (refer Principle IA).

 

(xii) In the case of mergers and amalgamations, role and responsibility of Ministry of Corporate Affairs vis-à-vis courts may be reviewed, particularly with reference to valuation and interest of minority shareholders.

(xiii) In terms of the recommendations made by Narayana Murthy Committee, certain requirements of Clause 49 of the Listing Agreement were non-mandatory. It was probably hoped that many companies would move, over time, towards complying with the non-mandatory requirements. Four years have lapsed since the recommendations of the Committee were implemented. At present, the listed companies are required to disclose the extent to which the non-mandatory requirements have been adopted. It is recommended that the listed companies may be required to also disclose the reasons for non-compliance with non-mandatory requirements (refer Principle VID).

(xiv) Presently, in terms of Clause 49 of the Listing Agreement, the requirement to establish whistle-blower mechanism is not mandatory and depends on discretion of the companies. Four years have passed since this non-mandatory requirement was introduced. It may, therefore, be worthwhile to gather information on the experience of the companies which chose to implement this mechanism so far and consider further course of policy change, if any, in this area (refer Principle IVE).

(xv) Recent developments in the derivatives market have brought to the forefront the importance of risk management. There is a need for strengthening the existing framework with regard to risk management in the listed companies. Introducing the requirement of having Risk Committees in the Listing Agreement can be specifically explored in this regard (refer Principle VID).

(xvi) There is a need for greater disclosure and publicity of CSR (corporate social responsibility) initiatives by the corporate sector. This would put peer pressure on companies inactive in this area. Industry groups and chambers of commerce like FICCI and CII can play an important role in this regard (refer Principle IVA).

(xvii) Impact of the new Competition Act on the markets for corporate control needs to be studied and suitable action taken to ensure that such markets function in an efficient and transparent manner (refer Principle IIE).

(xviii) While international practices and developments have apparently been factored into the evolution of corporate governance framework in India, it is essential that learning from the experience of other countries should be a dynamic process and not a static one. The corporate governance code should be constantly reviewed in light of the ever-changing global scenario.
 
 

Appendix I

Recommendations of Various Committees

 

CII Code on Corporate Governance

(i) Any listed company with a turnover of Rs.100 crore and above should have professionally competent, independent, non-executive directors, who should constitute at least 30 per cent of the board if the chairman of the company is a non­executive director or at least 50 per cent of the board if the chairman and managing director is the same person.

(ii) No single person should hold directorships in more than 10 listed companies.

(iii) Audit committees consisting of at least three members, all drawn from a company’s non-executive directors, who should have adequate knowledge of finance, accounts and basic elements of company law, should be constituted.

(iv) Non-financial disclosures were recommended by the Working Group on the Companies Act. A comprehensive Report on the relatives of directors–either as employees or board members–would be an integral part of the directors’ Report of all listed companies. Details of loans to directors should be disclosed as an annex to the directors’ Report in addition to being a part of the schedules of the financial statements. A compliance certificate, indicating that the requirements under the Companies Act have been adhered to, should be part of Annual Report.

(v) Financial disclosures recommended by the Working Group were a tabular form containing details of each director’s remuneration and commission as a part of the directors’ report.

(vi) Costs incurred, if any, in using the services of a group resource company must be clearly and separately disclosed in the financial statement of the user company.

(vii) A listed company must give information on its divisions or business segments as a part of the directors’ report in the Annual Report.

(viii) Where a company had raised funds from the public by issuing shares, debentures or other securities, it would have to give a separate statement showing the end-use of such funds. This disclosure would be in the balance sheet as a separate note forming a part of accounts.

(ix) Major Indian stock exchanges should gradually insist upon a compliance certificate, signed by the CEO and the CFO, with regard to the fairness of the financial statements.

The Code was adopted by over 25 leading companies between 1998 and 2000.

Kumar Mangalam Birla Committee Report

In 1997, the Kumar Mangalam Birla Committee constituted by SEBI designed a mandatory-cum-recommendatory code for listed companies on a rollout plan. SEBI implemented the recommendations of the Birla Committee through the enactment of Clause 49 in the Listing Agreement in the year 2000. This clause has served as a milestone in the evolution of corporate governance practices in India. The important mandatory recommendations were:

(i) Board of a company to have an optimum combination of executive and non­executive Directors with not less than 50 per cent of the board comprising the non­executive directors.

(ii) Setting up of an audit committee-The constitution, powers and functions of the audit committee were laid out in detail to facilitate effective control and functioning.

(iii) The BoD should decide the remuneration of the non-executive directors. Full disclosure should be made to the shareholders regarding the remuneration package of all the directors.

(iv) Board meetings to be held at least four times a year. A director should not be a member in more than ten committees or act as the chairman of more than five committees across all companies in which he is a director.

(v) Management discussion and analysis reports should form part of the Annual Report to the shareholders, as part of the directors’ report or as an addition thereto.

(vi) In the case of the appointment of a new director or re-appointment of a director, shareholders must be provided with a brief resume of the director, his expertise and the names of companies in which the person also holds directorship and the membership of committees of the board.

(vii) A board committee to be formed to look into the redressal of shareholders’ complaints like transfer of shares, non-receipt of balance sheet, dividend, etc.

(viii) Information like quarterly results, presentation made by companies to analysts to be put on company’s website or sent in such a form so as to enable the stock exchange on which the company is listed to put it on its own website.

(ix) Enforcement of accounting standards, strengthening the obligation to make more disclosures in annual financial reports.

(x) The management to make disclosures to the board relating to all material, financial and commercial transactions, where they have personal interest that may have a potential conflict with the interest of the company at large.

(xi) There would be a separate section on corporate governance in the Annual Reports of the companies with a detailed compliance report.

Some of the non-mandatory recommendations were:

(i) Board to set up a remuneration committee to determine the company’s policy on specific remuneration packages for executive directors.

(ii) Half-yearly declaration of financial performance including summary of the significant events to be sent to each shareholder.

(iii) Non-executive chairman would be entitled to maintain a chairman’s office at the company’s expense and also allowed reimbursement of expenses incurred in performance of his duties. This would enable the discharge of responsibilities effectively.

Naresh Chandra Committee Report

In 2002, the Naresh Chandra Committee on Corporate Audit and Governance submitted its Report with the following recommendations:

(i) Ensure the independence of auditors by laying down certain restrictions on rendering of non-audit services and over exposure or dependency on one client.

(ii) Rotation of audit firms: The Committee recommended compulsory audit partner rotation. There is no need to legislate in favour of compulsory rotation of audit firms. However, the partners and at least 50 per cent of the engagement team (excluding article clerks and trainees) should be rotated every five years. Also, persons who are compulsorily rotated could, if need be, allowed to return after a break of three years.

(iii) Setting up of independent quality review board through legislative action and also provide for a peer review system within the ICAI. Further, it recommended expeditious disciplinary action against errant auditors.

(iv) Management certification regarding auditor’s replacement.

(v) Appointment, remuneration of auditors (not applicable to scheduled banks and government companies) to be recommended by the audit committee.

(vi) Certification of annual audited accounts by CEO and CFO.

(vii) Setting up of a corporate Serious Fraud Office.

(viii) Strengthening of disciplinary mechanism for professional misconduct against auditors.

(ix) Setting up of an independent regulator similar to the Public Company Accounting Oversight Board as per the Sarbanes Oxley Act.

(x) The role of independent directors, and how their independence and effectiveness be ensured.

Narayana Murthy Committee Report

Subsequently, in order to review the existing corporate governance code, SEBI constituted the Narayana Murthy Committee based on whose recommendations made in 2003, the following far-reaching changes were made in the Listing Agreement in 2004:

(i) Definition of independent director expanded to exclude persons related to promoters, occupying management positions at the board level and one level below executives, in the preceding three financial years.

(ii) Associate, senior management, relative, nominee directors defined.

(iii) Requirement of previous approval of shareholders for remuneration (including limit for maximum number of stock-options) to non-executive directors stipulated.

(iv) Meaning of directorship, for the purpose of considering the limit of committees on which a director can serve, explained.

(v) Requirement of code of conduct (to be laid down by board) for board members, senior management and affirmation regarding compliance by the said persons and declaration to this effect by CEO in Annual Report stipulated.

(vi) At least 2/3rd of members of the audit committee to be independent directors (earlier majority were to be independent directors). The term ‘financially literate’ should be defined. Audit committee to meet at least four times a year in place of earlier requirement of thrice in a year.

(vii) Role of audit committee be expanded to include reviewing, with the management, the annual financial statements before submission to the board for approval.

(viii) At least one independent director on the BoD of the holding company to be a director on the BoD of a material non-listed Indian subsidiary company.

(ix) Requirement now to disclose any treatment different from that prescribed in accounting standards in preparation of financial statements together with the management’s explanation.

(x) Uses/application of funds raised through an issue, by major category, on quarterly basis to be disclosed to the Audit committee which, in turn, is to make appropriate recommendation.

(xi) All pecuniary relationship of non­executive directors vis-à-vis the company, to be disclosed in the Annual Report. Non­executive Directors to disclose, in the general meeting, their shareholding in the listed company in which they are proposed to be appointed as directors, prior to their appointment.

(xii) CEO/CFO certification confirming the review of financial statements, no fraudulent, illegal transaction violative of company’s code of conduct entered into and the responsibility for establishing and maintaining internal control for financial reporting.

(xiii) Companies to submit a quarterly compliance report to stock exchanges, signed by CEO/Compliance Officer. Compliance with mandatory requirements, adoption (andcompliances)/non-adoption of the non-mandatory requirements to be disclosed in the annual report.

The following were the non-mandatory requirements:

(i) Audit qualification: Move towards a regime of unqualified financial statements.

(ii) Training of board members.

(iii) Mechanism for evaluation of non­executive members: Performance evaluation by peer group comprising the entire BoD excluding the director being evaluated.

(iv) Whistle-blower Policy: Mechanism for employees to report to the management unethical behavior. Safeguards against victimisation.

Irani Committee Report

The Ministry of Corporate Affairs also constituted an Expert Committee on Company Law under the chairmanship of Dr. J. J. Irani which released its Report in May 2005 with the following recommendations:

(i) Company law should enable self-regulation and impose greater accountability through disclosures and speedy administration of sanctions.

(ii) The law should consider the requirements of different kinds of companies while prescribing the corporate governance structure for them.

(iii) The law should recognise one-person companies by giving them a simpler legal regime.

(iv) No restriction on the number of subsidiary companies.

(v) Limited liability partnerships should be facilitated through a separate enactment.

(vi) Strict action to be taken against companies, which vanish with the investors funds, by taking suitable measures in the registration process itself, and thereafter a regular regime of filing of documents. The power to disgorge the ill-gotten gains and lifting of corporate veil to be given to the registering authorities.

(vii) Law should recognise the principle of independent directors and spell out their attributes, role, qualifications, liability and manner of appointment along with the criterion for independence. The number and proportion of such directors in the board may vary depending upon the size and type of company.

(viii) Decision on remuneration of directors not to be based on a Government approval system.

(ix) Basic duties of directors to be specified in the Act in an inclusive manner.

(x) Conditions for disqualifications of directors should also be specified in the Act itself.

(xi) The use of postal ballot during meetings of members should be allowed to be used widely. AGMs may be held at a place where at least 105 members reside.

(xii) Strict disclosure norms and approval of board/shareholders in case of related party transactions.

(xiii) Minority and minority interest should be defined in the substantive law itself.

(xiv) Law should recognise shareholders interest by providing for class action and derivative actions.

(xv) Certification by CEOs and CFOs of financial statements. All directors to sign the financial statements. Dissemination of accounts through the website for the investors.

(xvi) Small companies should be given exemption or at least some relaxation in respect of disclosure requirements.

(xvii) Restriction on auditors for providing non-audit services.

(xviii) Valuation of shares of companies involved in mergers and acquisition by independent registered valuers to be made mandatory.

Ashok Ganguly Committee Report

The Consultative Group of Directors of banks and FIs set up under Chairmanship of Dr. Ashok Ganguly by the Reserve Bank to review the supervisory role of boards submitted its Report in April 2002 with the following recommendations:

Recommendations applicable to all banks

(i) Responsibilities of the Board of Directors: A strong corporate board should fulfil the following four major roles, viz., overseeing the risk profile of the bank, monitoring the integrity of its business and control mechanisms, ensuring the expert management, and maximising the interests of its stakeholders.

(ii) Role and responsibility of independent and non-executive directors: The independent/non-executive directors have a prominent role in inducting and sustaining a pro-active governance framework in banks. It would be desirable for the banks to take an undertaking from each independent and non-executive director to the effect that he/she has gone through the guidelines defining the role and responsibilities and enter into covenant to discharge his/her responsibilities to the best of their abilities, individually and collectively. A model form of ‘deed of covenants with a director’ is provided in the Consultative Group’s Report.

(iii) Training facilities for directors: Need-based training programmes/seminars/ workshops may be designed by banks to acquaint their directors with emerging developments/challenges facing the banking sector and participation in such programmes could make the directors more sensitive to their role.

(iv) The board should ensure that the directors are exposed to the latest managerial techniques, technological developments in banks and financial markets, risk management systems, etc. so as to discharge their duties to the best of their abilities.

Committees of the Board

(i) Banks should set up the following Committees: (a) Shareholders’ Grievance Redressal Committee. (b) Risk Management Committee. ( c) Supervisory Committee.

Disclosure and Transparency

The following disclosures should be made by banks to the Board of Directors at regular intervals as may be prescribed by the board in this regard:

(i) progress made in putting in place a progressive risk management system, and risk management policy and strategy followed by the bank.

(ii) exposures to related entities of the bank, viz., details of lending to/investment in subsidiaries, the asset classification of such lending/investment, etc.

(iii) conformity with corporate governance standards, viz., in composition of various committees, their role and functions, periodicity of the meetings and compliance with coverage and review functions, etc.

Recommendations applicable only to private sector banks

Eligibility criteria and ‘fit and proper’ norms for nomination of directors: The board of directors of the banks while nominating/co-opting directors should be guided by certain broad ‘fit and proper’ norms for directors, viz., formal qualification, experience, track record, integrity etc. For assessing integrity and suitability features like criminal records, financial position, civil actions initiated to pursue personal debts, refusal of admission to or expulsion from professional bodies, sanctions applied by regulators or similar bodies, previous questionable business practices, etc., should be considered. The board of directors may, therefore, evolve appropriate systems for ensuring ‘fit and proper’ norms for directors, which may include calling for information by way of self-declaration, verification reports from market, etc.
 
 

 

Appendix II

Detailed Assessment of Corporate Governance

 

I: Ensuring the Basis for an Effective Corporate Governance Framework The corporate governance framework should promote transparent and efficient markets, be consistent with the rule of law and clearly articulate the division of responsibilities among different supervisory, regulatory and enforcement authorities.

Principle IA: The corporate governance framework should be developed with a view to its impact on overall economic performance, market integrity and the incentives it creates for market participants and the promotion of transparent and efficient markets.

Earlier Assessment : Not Available


Current Position:

i. There is a comprehensive corporate governance framework in India for listed companies. All companies are governed by the Companies Act, which deals with various aspects like types of companies, incorporation of companies, management and administration of the companies, board of directors, issuance of capital, corporate restructuring, minority shareholder protection, revival and rehabilitation of sick companies, winding up and dissolution of companies, etc.

ii. The SEBI is the apex securities market regulator with a mandate to protect the interest of investors and develop and regulate the securities market under SEBI Act 1992. SEBI has, since its inception, led the securities market reforms in the country. Various initiatives of SEBI like dematerialisation, rolling settlement, comprehensive risk management framework, elaborate disclosure standards, introduction of derivatives, corporate governance norms, etc., have contributed a great deal in enhancing the market integrity apart from making the markets efficient and transparent.

iii. SCRA and SCRR regulate transactions in securities. Listing agreement has also emerged as an important component of the corporate governance framework. Depositories Act, 1996 facilitated dematerialisation and paperless trading.

iv. For banking and insurance sectors, there are specific statutes, i.e., Banking Regulations Act, 1949 and Insurance Act, 1938, Insurance Regulatory Development Authority Act, 1999, LIC Act, GIC Act and Insurance Act, respectively.

Banks

i. The Reserve Bank is an autonomous statutory body established under an Act of Parliament, i.e., RBI Act, 1934. The objectives for establishing the Reserve Bank as given in the Preamble to the RBI Act are regulation of the issue of bank notes and the keeping of reserves with a view to securing monetary stability in India and generally to operate the currency and credit system of the country to its advantage.

ii. The general superintendence and direction of the affairs and business of the Reserve Bank is entrusted to an independent Central Board of Directors headed by the Governor.

iii. The Central Board would consist of a Governor, not more than four Deputy Governors, four directors to be nominated by the Central Government, one from each of the Local Boards, ten directors to be nominated by the Central Government and one Government official to be nominated by the Central Government.

iv. In terms of the powers conferred on it under the provisions of the Banking Regulation Act, 1949 the Reserve Bank has the powers for regulating and supervising banks.

v. The regulatory and supervisory powers relate to:

(a) the forms of business in which the banking companies may engage in (Section 6);

(b) licensing of banking companies (Section 22);

(c) restriction on opening of new banks and transfer of existing places of business by banks (Section 23);

(d) powers to inspect banks (Section 35);

(e) powers to give directions to banks in public interest and in the interest of banking policy (Section 35A);

(f) control over management of banking companies, including the power of the Reserve Bank to approve the appointment/terms of appointment Chairman/Chief Executive Officer of the banking company (Section 35B);

(g) prescription of minimum paid-up capital and reserves for banks (Section 11);

(h) prescription of Cash Reserve Ratio (Section 18);

(i) prescription of maintenance of percentage of assets as Statutory Liquidity Ratio (Section 24);

(j) regulations relating to publication of accounts and balance sheet (Section 29 and Section 31);

(k) appointment of auditors (Section 30); and

(l) punitive measures (Section 47A)

While regulating banks, the Reserve Bank ensures that there is a consultative process with the regulated entities (banks/NBFCs, etc.) before issuing various policy guidelines/circulars.
 

Present Assessment: Broadly Implemented

Overall Comments: Corporate governance has received a lot of focus from the concerned authorities in the last decade. As a result, a comprehensive corporate governance framework has been put in place for listed companies. The significance of good corporate governance and its linkages with capacity to attract investment is being increasingly recognised by the Indian corporate sector. While a strong corporate governance framework for listed companies has been provided for, there is apparently need for enhancing the focus on other sectors (e.g. unlisted companies) to strengthen the overall system.

Principle IB: The legal and regulatory requirements that affect corporate governance practices in a jurisdiction should be consistent with the rule of law, transparent and enforceable.

Earlier Assessment: Not Available

Current Position:

i. Companies Act has various provisions pertaining to corporate governance such as, mandatory Directors Responsibility Statement in the directors’ report, requirement of audit committees in companies exceeding a certain size, providing facility of postal ballot in voting by shareholders on certain matters, etc. RoCs can initiate prosecution for non-filing of compliances.

ii. Clause 49 of the listing agreement, which is applicable to all listed companies, stipulates elaborate provisions pertaining to composition of BoD, appointment of independent directors, constitution of audit committee, disclosures in annual reports, subsidiary companies, code of conduct, CEO/CFO certifications, quarterly report on corporate governance, etc. to ensure high standards of corporate governance. Incidentally, for the quarter ended September 30, 2007 out of 1,295 companies listed at NSE, 1,210 companies had submitted their corporate governance report with the NSE. At BSE, 2,848 companies out of 4,16211 companies had submitted similar reports with the BSE for the quarter ended September 30, 2007. Violation of listing agreement can attract severe financial penalties and also makes the company liable for prosecution.

iii. Clause 49 is applicable to all listed banks to the extent that it is not in violation of the provisions of Banking Regulation Act, 1949 as also the various guidelines issued by the Reserve Bank, the regulator for banks. Further, with respect to banks, based on the recommendations of the Consultative Group of Directors of Banks/FIs (Dr.Ganguly Group) which looked into the entire gamut of issues relating to corporate governance in banks and FIs, the Reserve Bank has issued a detailed circular No.DBOD.BC116/08.139.001/2001-2002 dated June 20, 2002 to all scheduled commercial banks (except foreign banks, RRBs and Local Area Banks). In terms of this circular, banks have been advised that they may place the Report of the Group as well as the list of recommendations enclosed to the circular before the BoD of the bank and based on the decision taken by the board, the recommendations can be adopted and implemented by the bank.

iv. Also in the case of private sector banks, separate circular/directive have been issued on June 25, 2004 on ‘fit and proper’ status of the directors of such banks. Also, guidelines on ‘ownership and governance’ have been issued to private sector banks in February 2005 in terms of which important shareholders (i.e., shareholding of 5 per cent and above) are ‘fit and proper’ as laid down in the guidelines dated February 3, 2004 on acknowledgement for allotment and transfer of shares.

 
11 Out of 1,314 companies which have not submitted their Report, 1,116 are suspended for trading. (Source: BSE)
 

Present Assessment: Fully Implemented

Overall Comments: Various legal and regulatory requirements pertaining to corporate governance are consistent with the rule of law and are in public domain. The requirements are of two kinds: mandatory and non-mandatory. The mandatory requirements are enforceable.

Principle IC: The division of responsibilities among different authorities in a jurisdiction should be clearly articulated and ensure that the public interest is served.

Earlier Assessment: Not Available

Current Position:


i. All companies, incorporated in India have to file their fundamental documents (such as bye-laws, initial directors, shareholder registry) with Registrar of Companies (RoCs), which come under the Ministry of Corporate Affairs (MCA). Listed companies are additionally required to file the documents as provided by the listing agreement/Insider Regulations/ Takeover Regulation/other regulations as may be applicable with the stock exchanges where they are listed. RoCs are empowered to prosecute a company in case of non-compliance. Similarly, stock exchanges can suspend trading, delist and also initiate prosecution proceedings for non-compliance by listed companies.

ii. The provisions of the Companies Act, 1956 which relate to management and administration of companies and minority shareholder protection are administered by the Central Government. Therefore, the powers relating to protection of shareholders in that regard is vested with the MCA. The MCA has power to file a petition on behalf of minority shareholders before the Company Law Board in cases of alleged oppression and mismanagement (s.401), appoint additional directors for prevention of oppression or mismanagement subject to approval of the Company Law Board (s. 408), power to remove managerial personnel in certain exceptional cases (s. 388B), etc. SEBI, however, has general powers to pass directions against listed companies or responsible persons in the interest of investors or the orderly development of securities market under Section 11B of the SEBI Act, 1992 and Section 12A of the Securities Contracts (Regulation) Act, 1956.

iii. The securities market intermediaries and depositories are totally under the oversight of SEBI under provisions of the SEBI Act, 1992 and Depositories Act, 1996. As far as stock exchanges are concerned, under provisions of the Securities Contracts (Regulation) Act, 1956 some regulatory roles are assigned to SEBI, while others are with the Central Government. Out of the functions of Central Government mentioned in that Act, most have been delegated by the Central Government to SEBI. Thus, effectively SEBI exercises almost total oversight over the stock exchanges. SEBI also has elaborate responsibility in matters of IPOs, further offerings by listed companies, policy-making in respect of secondary market, market misconduct, insider trading, substantial acquisition of shares and takeovers of listed companies, etc. SEBI also has statutory obligations to develop the securities market and protect the interest of investors. Secondary market trades on stock exchanges are governed by bye-laws of the stock exchanges under overall policy laid down by SEBI. Secondary market trades in government securities, money market instruments, ready forward contracts in debt securities, gold-related securities, etc., which are not done through stock exchanges are regulated by the Reserve Bank in exercise of delegated powers under the Securities Contracts (Regulation) Act, 1956.

iv. SEBI administers certain enumerated provisions of the Companies Act, 1956 relating to issue of capital, transfer of securities and non-payment of dividend in respect of listed companies and companies which intend to get their securities listed.

v. The Reserve Bank is the regulator in respect of banking sector and IRDA is the regulator for insurance companies.

vi. There is co-ordination among various regulatory bodies like Registrars of Companies, Ministry of Corporate Affairs, SEBI, Reserve Bank, etc. The High Level Co-ordination Committee for Financial Markets (HLCCFM) provides a forum for co-ordination between SEBI, Reserve Bank and IRDA. Further, there is exchange of information between SEBI, Reserve Bank and IRDA through RBI-SEBI Technical Committee (convened by DBOD, Reserve Bank) as also Committee for RBI/SEBI/IRDA regulated entities (convened by DBS, Reserve Bank). Whenever any Reserve Bank regulated entity approaches SEBI for undertaking any activity which comes under the ambit of SEBI’s regulation, SEBI seeks information from the Reserve Bank about the track record of the entity, in terms of regulatory and supervisory comfort. Similarly, whenever any RBI-regulated entity approaches IRDA for undertaking insurance business, IRDA seeks feedback from Reserve Bank on such entity.

vii. Section 11(2)(ia) of the SEBI Act enables SEBI to seek and share information with other regulators.

viii. Owing to the close co-ordination and constant exchange of information between the various agencies, there is a consultative approach in ensuring enforcement.

Present Assessment: Fully Implemented

Overall Comments: By and large, jurisdictions and roles of various regulators are clearly defined. Further, regulators interact through co-ordinating mechanisms like HLCCFM to take stock of developments in the financial system. These interactions also enable steps towards plugging of regulatory gaps in the system.

Principle ID: Supervisory, regulatory and enforcement authorities should have the authority, integrity and resources to fulfill their duties in a professional and objective manner. Moreover, their rulings should be timely, transparent and fully explained.

Earlier Assessment: Not Available

Current Position:

1. SEBI is an autonomous statutory body established under SEBI Act, 1992. There are requirements stipulated under the act to ensure that the members of the board are persons of ability, integrity with special knowledge and experience in the relevant areas. The board also has representation from Ministry of Corporate Affairs, the Ministry of Finance and the Reserve Bank. Rules are made by the Central Government under SEBI Act and Securities Contracts (Regulation) Act. The Central Government invariably consults SEBI before moving suo moto legislation/amendments in the field of securities laws. Regulations made by SEBI contain most of the substantive matters concerning securities market intermediaries, market misconduct, etc. All expenses of the board are met through the fees and charges received from intermediaries. As a matter of practice, all the regulations and major proposals are generally posted for public comments before finalisation.

2. SEBI has comprehensive investigation and enforcement powers under SEBI Act. The powers are wide enough to include registered entities and persons associated with securities market. Enforcement actions are carried out in a transparent manner after giving due opportunity to the party concerned to represent. SEBI also has enforcement powers under SCRA.

3. For taking actions, such as those under Sections 11, 11B or 11D of SEBI Act, the Chairman or whole-time member is the competent authority to take action after following principles of natural justice.

4. There is a provision for appeal against orders of the board and of the Adjudicating Officers to the Securities Appellate Tribunal under Section 15T of the SEBI Act. Second appeal lies on question of law to the Supreme Court of India.

5. The SEBI (self-regulatory organisations) Regulations, 2004 contemplate formation of SROs representing particular segments of the securities market and their recognition by SEBI, to facilitate better oversight and enforcement.

6. The Ministry of Corporate Affairs has launched an elaborate electronic compliance management system which enables electronic filing of documents by the companies in a 24x7 time-frame. It enables not only registration and incorporation of companies but also filing of documents and annual returns online. The electronic system enables the Registrar of Companies to monitor compliance by the corporates and also provides online access to the users of the information.

7. The Company Law Board (CLB) is an independent quasi-judicial body which is available as an effective and viable forum to redress any grievance of operations and mismanagement of the minority shareholders.

Insurance

• The Supervisory Authority: Insurance Regulatory and Development Authority (IRDA) is an autonomous body formed under an Act of Parliament, viz., Insurance Regulatory and Development Authority Act, 1999. The Insurance Act, 1938 and the Regulations framed thereunder lay down the regulatory framework for supervision of the entities operating in the sector.

• The objective of supervision as stated in the preamble to the IRDA Act is to protect the interests of holders of insurance policies, to regulate, promote and ensure orderly growth of the insurance industry.

• The structure of IRDA is defined in the IRDA Act, 1999 which provides that the Authority shall consist of the Chairperson; not more than five whole-time members and not more than four part-time members. The members of the Authority are appointed by the Central Government, and must have expertise and knowledge in the specified fields, viz., life insurance, general insurance, actuarial science, finance, economics, law, accountancy and administration.

• Powers and Functions: The powers and functions of the Authority are laid down in the legislation governing the insurance sector. In addition, the powers vesting with the Central Government and the Controller of Insurance (at the time of opening up of the sector) have been transferred to the Authority through amendments made in the Insurance Act, 1938.

• The Chairperson has the powers of general superintendence and direction in respect of all administrative matters of the IRDA. The policy-level decisions are taken by the Authority by a majority of votes. The Chairperson of IRDA is appointed by the Cabinet Committee on Appointments. The Committee is headed by the Prime Minister. The Central Government reserves the right to remove any member from office under specified conditions. However, no member shall be removed for reasons of abuse of office or for being in the position which is likely to prejudice his functioning, without being given a reasonable opportunity to be heard.

• Section 14(2) of the IRDA Act, and Sections 34 and 114A of the Insurance Act deal with the powers vested in the Authority. The legislative framework provides the powers to the supervisor to lay down the prescriptions on operational matters through notification of Regulations/Circulars/Guidelines. The legislation also vests the supervisor with the powers to enforce observance of the law and the regulations framed thereunder.

• The supervisor is equipped with adequate powers under the Act to order an investigation into the affairs of any insurance company. Based on the report filed with it, the Authority can, after giving due opportunity to the insurer to be heard, issue any directions as it may deem fit, including cancellation of registration or even to apply for winding up of the insurer.

• The regulatory framework provides for registration of insurance companies, maintenance of solvency margin, investments and reporting requirements on financial and actuarial matters. The Authority has also issued regulations on licensing of agents, corporate agents, brokers, and third-party administrators. Keeping in view its developmental role, regulatory framework has been established for protection of the interests of policyholders and laying down the obligations towards the rural and social sectors.

• Financial Independence: The funds requirements of IRDA are met from the various ‘Fees’ received from the insurance companies and intermediaries. The supervisor has the requisite financial independence while carrying out its supervisory functions; and it does not rely upon Government/other grants to finance its activities. The IRDA’s budgetary allocations are approved by its board and it has complete discretion in the manner of utilisation of its resources to meet its expenses or for capital expenditure as may be required to meet its objectives or to protect against any risks as may be perceived by it.

• Consultative process and transparency: IRDA follows the process of consultation with the industry stakeholders in framing various policies/regulations. The manner of framing the regulations is transparent. In most instances, IRDA sets up a consultative committee/group comprising experts from various fields/representing the industry to examine the various aspects related to an issue. The recommendations of the Group are submitted to IRDA, where these are exposed to the stakeholders and then vetted by the Insurance Advisory Committee. The draft of each regulation is finally approved by the board of IRDA. All regulations and circulars issued by IRDA are placed on its website. In addition, IRDA falls under the purview of the Right to Information Act, where under its activities come under public scrutiny.

• Decision making: The office procedures of the Authority require that every decision is well-supported by written office notes setting out the reasoning for the decisions. Decisions taken in other similar cases are also taken into account to ensure consistency in decisions-making. Official action taken on deviations/violation of insurers from legislation/regulations are placed on the official website of the supervisor and are also published in the IRDA Journal.

• Right of appeal: Each legal provision vesting the power of supervisory action also contains provisions for review of the decisions. The right of appeal may lie with (i) the Chairman of the Authority; (ii) the Central Government or (iii) the judiciary. This ensures that the supervisory authority is exercised judiciously and in a defensible manner. Section 110H of the Insurance Act provides for appeal against the orders of the supervisor under the specified sections of the Act to the Appellate Authority set up by the Central Government.

Present Assessment: Fully Implemented

Overall Comments: Position as outlined above reflects the basis for present assessment.

 
II: The Rights of Shareholder
 
The corporate governance framework should protect and facilitate the exercise of shareholders’ rights.

Principle IIA: The corporate governance framework should protect and facilitate the exercise of shareholders’ rights. Basic shareholder rights should include the right to: 1) secure methods of ownership registration; 2) convey or transfer shares; 3) obtain relevant and material information on the corporation on a timely and regular basis; 4) participate and vote in general shareholder meetings; 5) elect and remove members of the board; and 6) share in the profits of the corporation.

Earlier Assessment: Observed

Current Position:

• Listed companies

i. Companies Act, 1956 (CA), SEBI Act, 1992, Depositories Act, 1996 and Securities Contracts (Regulations) Act, 1956 ensure secure methods of ownership registration. In case of shares held in physical form, record-keeping is done by issuer or share transfer agent who maintains the register of members. In case of shares in dematerialised form, SEBI-registered depositories record the allotment of securities and transfer of ownership. There are adequate safeguards to ensure security and propriety of record. There are specific regulations stipulated by SEBI for regulating the functioning of registrars and share transfer agents, custodians, depositories and depository participants. To expedite the process of share transfers, in terms of Clause 49 of the listing agreement (entered into by companies with the stock exchanges), listed companies are required to delegate the power of share transfer to an officer or a committee or to a registrar and share transfer agents. Further, the delegated authority is to attend to share transfer formalities at least once in a fortnight. Complaints pertaining to allotment/ transfer can be filed with Ministry of Company Affairs (MCA) and also with SEBI for listed companies. There are penal provisions under the Companies Act12 and SEBI Act for delay/ non-redressal of queries.

ii. Shares of public/listed companies are freely transferable under the Companies Act, 1956. For transactions on the stock exchanges, rolling settlement takes place on T +2 basis and counter-party risk is guaranteed by central counter-party.

iii. The shareholders have the right to obtain relevant information about the company on a timely and regular basis under various provisions of the Companies Act, 1956.

a. All companies are required to file memorandum, articles of association and financials with RoC, which are in public domain.

b. As per SEBI (Disclosure and Investor Protection) guidelines, at the time of raising of funds from public, all material information regarding company, promoters, management, project, financials, risk factors are to be disclosed.

c. For listed companies, the listing agreement mandates that all material and price- sensitive information is available in the public domain on a real-time basis. Clauses 3013, 3114, 3215, 3316, 3517, 3618, 3719, 4120, 4321 and 4922 of the listing agreement contain provisions relating to periodic disclosure of information by companies pertaining to

 

12 Section 113 of the Companies Act provides the penal provisions regarding delay as well as non-redressal of complaints regarding allotment/transfer of share certificates.

13 Company will promptly notify the Exchange of any change in Company’s directorate, MD, managing agents, secretaries, treasurers and auditors.

14 Company will forward to exchange promptly without application annual reports, balance sheets, all periodical reports, special reports, all notices, resolutions, circulars relating to new issue of capital prior to dispatch to shareholders, proceedings of AGMs, EGMs, all notices and circulars pertaining to proposed mergers, etc.

15 Company to send a statement containing the salient features of the balance sheet, profit and loss account and Auditor’s Report to each shareholder and, upon application, to any member of Exchange.

16 Company to forward to Exchange copies of all notices sent to shareholders with respect to amendments to Memorandum of Association and Articles of Association.

17 Companies to file quarterly shareholding pattern.

18 Company to immediately inform stock exchange about all material events and price-sensitive information.

19 Company agrees to permit stock exchange to make available immediately to its members and to the press any information supplied by the company in compliance with listing agreement.

20 Filing of unaudited financial information on quarterly basis.

21 Company to file statement on quarterly basis indicating variations between projected utilisation of funds made in prospectus/notice to EGM and actual utilisation of funds along with explanation thereof in case of material variations.

22 Provisions related to corporate governance.
 

shareholding, directorship, auditors and financials of a company in the newspapers/ to the exchanges who in turn display them on their website.

d. The listed companies are also required to disclose information in their annual report. There are provisions related to disclosure of quarterly as well as year to date financial results of the subsidiaries. Under Clause 41, all the financial results are required to be submitted to the stock exchanges within 15 minutes of conclusion of the meeting of the board in which they are approved. Financial results are further required to be published in at least one English daily and one daily newspaper published in the language of the region where the registered office of the company is situated within 48 hours of approval. Under the listing agreement, companies are also required to give 7 days prior intimation through public notice of the date and purpose of meeting of the board in which financial results will be considered.

e. In terms of Clause 49, where monitoring agency has been appointed to monitor the utilisation of issue proceeds, the report submitted by such agency is to be placed before the audit committee of the issuer company which in turn is to make appropriate recommendations to the board. Further, issuer company is to inform the material deviations in the utilisation of issue proceeds to the stock exchange and simultaneously make the material deviations/adverse comments of the audit committee/monitoring agency public through advertisement in the newspapers.

f. With the launch of MCA-21, an e-governance project by MCA, information regarding companies is available on-line on a real-time basis to all stakeholders. Further, as per SEBI’s initiative, Bombay Stock Exchange Ltd. (BSE) and National Stock Exchange of India Ltd. (NSE) have jointly launched, on January 1, 2007 a common platform at www.corpfiling.co.in for disseminating filings made by companies listed on these exchanges. In the second phase, the platform will enable electronic filing by companies listed in BSE and NSE. Under the same, SEBI has recently made electronic filing compulsory for 100 companies to be shortlisted on the basis of market capitalisation.

 
iv. The shareholders have the general right to participate and vote in general shareholders meetings. Shareholders’ participation is, however, not very high.

v. The shareholders appoint directors by passing resolutions in the general meetings. Company must inform all shareholders about candidature23. Although usually board proposes the directors, the law permits shareholders also to propose candidates. In terms of Clause 49 of the listing agreement, in case of appointment of a new director or reappointment of a director, the shareholders must be provided with the following information:

a. A brief resume of the director,

b. Nature of his expertise in specific functional areas,

c. Names of the companies in which the person also holds directorship and the membership of committees of the board, and

d. Shareholding of the non-executive directors.

 

vi. The shareholders have the right to share the profits of the corporation by way of payment of dividends. The board of directors recommends the rate of dividend and shareholders approve

 
23 Shareholders can propose candidates up to 14 days before AGM and company must inform all shareholders about the candidates at least 7 days before the meeting.
 

the same. Shareholders, however, cannot increase the rate of dividend. Dividend declared must be paid within 30 days of declaration24. Complaints in this regard can be filed with MCA and with SEBI for listed companies. There are penal provisions in Companies Act25 and SEBI Act for delay/non-redressal in this regard.

Insurance

i. All insurers are required to ensure compliance on corporate governance as per the provisions of the Companies Act, 1956. In addition, the insurers have to comply with the requirements of the Insurance Act, 1938 and the regulations framed thereunder. At present, insurance companies are closely held, and as such the provisions applicable to listed companies are not applicable to them. The rights of the shareholders are thus drawn from the Companies Act, 1956.

 

a. The provisions of the Insurance Act, 1938, (‘The Act’) only permit issuance of ordinary shares (equity shares) which has a single face value (Section 6A (1)).

b.The paid-up amount is the same for all shares (a period of upto one year can be allowed by the company for payment of calls on shares).

c. Voting right of every shareholder shall be strictly proportionate to the paid-up amount of the shares held by him (Section 6A(2)).

d. It is a pre-requisite for an insurance company to be a public limited company.

e. Shares of these companies are, however, not freely transferable in view of certain specific provisions in the Act, viz., any transfer of 1 per cent and above of the paid-up equity requires the approval of the Authority. Similarly, where the transferee is likely to acquire a stake of 5 per cent or more (the threshold limit is lower at 2.5 per cent or more in case of a banking company), prior approval of the supervisor, viz., Insurance Regulatory and Development Authority (IRDA) is required.

f. The process of introduction of a shareholder is preceded by a thorough due diligence process by the supervisor.

g. Share in the profits of the corporation.

h. In case of the non-life insurance companies, the provisions of the Companies Act, 1956 are applicable.

i. In respect of life insurance companies, the provisions of the IRDA (Distribution of Surplus) Regulations, 2002 are applicable.

 

24 Failure in compliance would attract monetary penalty/imprisonment in term of the Companies Act, 1956.

25 Section 207 of the Companies Act provides for penalty for failure to distribute dividend within the prescribed time
of 30 days.

 

Present Assessment: Fully Implemented

Overall Comments: As a result of initiatives stated above, position with regard to basic shareholders rights has further improved since the last assessment.

Principle IIB: Shareholders should have the right to participate in, and to be sufficiently informed on, decisions concerning fundamental corporate changes such as: (i) amendments to the statutes, or articles of incorporation, or similar governing documents of the company; (ii) the authorisation of additional shares; and (iii) extraordinary transactions, including the transfer of all or substantially all assets, that in effect result in the sale of the company.

Earlier Assessment: Observed

Current Position:

Listed Companies

i. The shareholders have powers for appointment/removal of directors, appointment and removal of auditors, authorising and issuing of share capital, amendments to the company’s memorandum and articles of association, remuneration of board members, major corporate transactions such as disposal/mergers, transactions with related parties, changes in company’s business or objects, delisting, etc.

ii. The shareholders have the pre-emptive rights in the event of capital increase. In case of extraordinary transactions, special resolution (3/4th majority) is required. In certain cases, such as under Section 395 of the Companies Act 1956, the resolution requires approval by 9/10th majority of shareholders. Disposal of business assets, as a whole or substantial part thereof, requires approval of shareholders by special majority.

iii. After adoption, accounts are filed with RoC, and other decisions are recorded in minutes and are available for inspection by members.

iv. For listed companies, under the listing agreement, there are continuous disclosure requirements of material events including quarterly results. SEBI (Substantial Acquisition of Shares and Takeovers) Regulations contain various provisions to ensure that rights of minority shareholders are protected, and that they get to participate in the event of change in management, in an informed manner.

v. Further, delisting guidelines stipulate reverse book building mechanism which enables shareholders to effectively participate in case a company wants to get delisted and also safeguards their interest.

Insurance

i. The insurance sector is capital-intensive in nature with the minimum paid-up capital requirement of Rs.100 crore in case of life and non-life insurance companies; and Rs.200 crore in case of reinsurance companies. In addition, all insurance companies are required to maintain a solvency margin26 of 1.5 times at all times. The requirement for injection of additional capital is particularly significant in case of the life insurance companies during the initial seven to ten years.

ii. Election and removal of members of the board is as provided in the Companies Act, 1956. Further, appointment of whole-time directors requires the approval of IRDA. The Act also provides for removal of a director or CEO as per stipulations.

 

26 Solvency margin is extra capital that an insurance company is required to hold.

 

iii. The process of sale of an insurance company needs to comply with various provisions of the Insurance Act, 1938 and requires the approval of the Authority. Only thereafter can the board consider grant of approval for sale of the company. In addition, any such sale requires approval of the shareholders.

iv. The supervisor has stipulated quarterly reporting of financial results and the solvency position to ensure continuous disclosures.

Present Assessment: Fully Implemented

Overall Comments: The observance is ensured as most of the provisions are enshrined in the law.

Principle IIC: Shareholders should have the opportunity to participate effectively and vote in general shareholder meetings and should be informed of the rules, including voting procedures, which govern general shareholder meetings. (i) Shareholders should be furnished with sufficient and timely information concerning the date, location and agenda of general meetings as well as full and timely information regarding the issues to be decided at the meeting; (ii) Shareholders should have the opportunity to ask questions to the board, including questions relating to the annual external audit, to place items on the agenda of general meetings, and to propose resolutions, subject to reasonable limitations; (iii) Effective shareholder participation in key corporate governance decisions, such as the nomination and election of board members, should be facilitated. Shareholders should be able to make their views known on the remuneration policy for board members and key executives. The equity component of compensation schemes for board members and employees should be subject to shareholder approval; (iv) Shareholders should be able to vote in person or in absentia, and equal effect should be given to votes whether cast in person or in absentia.

Earlier Assessment
: Observed

Current Position:


i. Under the Companies Act, 1956 a company must hold an Annual General Meeting every year27 at or near company’s registered office. Notice of the general meeting indicating time, place and location along with the agenda are sent to the shareholders at least 21 days before the meeting. In case of special business, an explanatory statement is also sent along with the notice.

ii. The shareholders have the right to ask questions at the meeting28 and they can propose new resolution to the board or management subject to certain limitations.
 

27 Any shareholder can apply to the Company Law Board to call an AGM in case the company fails to comply.

28 Shareholders participation in general shareholder meetings are governed by Section 176, 177, 179, 183, 189 of the
Companies Act, 1956.
 

iii. The shareholders appoint directors by passing resolutions in the general meetings. The law permits shareholders to propose candidates. Nomination and election of board members is carried out under following circumstances: a) Re-appointment of retiring directors - ordinary resolution to be passed in the general meeting (Section 225); b) Section 257 provides for rights of persons other than retiring directors to stand for directorship. For this purpose, notice for nomination/candidature is to be given within 14 days before the meeting. For remuneration, the prescribed provisions are contained in Section 198, 309 and schedule XIII. The maximum amount of remuneration to the BoD are to be approved by shareholders. In terms of Clause 49, all fees/compensations other than the sitting fees as permitted by the Companies Act,1956 if any paid to non-executive directors, including independent directors, requires previous approval of shareholders in general meeting. Listing agreement also provides for setting up of a remuneration committee though as a non mandatory condition, to ensue transparency, accountability and shareholders participation in deciding matters pertaining to remuneration of directors. ESOPs granted are to be approved at the AGM in terms of Section 79 A of the Companies Act, 1956 and SEBI (ESOP and ESPS) Guidelines, 1999. Position under Principle IIA and VI D (iii) may also be referred.

iv. The shareholders have the right to vote in person or in absentia through proxy. Postal ballot concept has already been introduced pursuant to which any shareholder can send his vote for certain fundamental decisions, through post.

Present Assessment: Fully Implemented

Overall Comments: The Companies Act enables shareholder participation in general shareholder meetings. The provisions of listing agreement have also strengthened the position. However, alternate methods for voting can be explored to further enhance shareholder participation. Investor education is also key to spread awareness amongst shareholders regarding their rights.

Principle II D: Capital structures and arrangements that enable certain shareholders to obtain a degree of control disproportionate to their equity ownership should be disclosed.

Earlier Assessment: Largely Observed

Current Position
:

i. The provision (section 86) has been made in the Companies Act, 1956 for enabling companies to issue equity shares with disproportionate voting rights. The companies are required to disclose special voting rights, caps on voting rights, significant cross-shareholdings, etc. in their Memorandum and Articles of Association29.

ii. The provisions of Section 108A to 108E of the Companies Act, 1956 places restrictions on acquisition of certain shares with a view to prevent the creation of monopolistic groups.

iii. The provision of Section 187C of the Companies Act, 1956 casts an obligation on the person whose name is entered in the register of members to make a declaration before the company that the member does not hold beneficial interest in the company.

iv. In terms of listing agreement, detailed shareholding pattern is required to be submitted to the stock exchanges on a quarterly basis and the same is disseminated on the website of the

 

29 The form of Memorandum and Articles of Association have been prescribed under Section 14, 28 and 29 of the Companies Act, 1956 (Schedule I).

 

stock exchange. Any change in shareholding pattern of 1 per cent and above to be disclosed. Capital structures/shareholding patterns that allow certain shareholders to exercise control disproportionate to their cash flow rights are to be disclosed in the annual report required to be filed under the Companies Act, 1956 by every company.

v. Joint venture arrangement and private equity investments may provide for certain clauses where certain shareholder(s) may obtain a degree of comfort which is disproportionate.

Insurance:

i. All the provisions of the Companies Act, 1956 on maintenance of details of the beneficial shareholders apply to insurance companies.

ii. In addition, there are specific stipulations under the Act which provide that every person who has any interest in any shares of a company which stands in the name of another person in the register of members of the company, shall within thirty days from the date of acquisition of such interest, make a declaration in the prescribed form (which shall be countersigned by the person in whose name the share is registered) to the company declaring his interest in such share. All the shareholders have access to the register of members. In effect, the beneficial ownership is required to be disclosed upfront.

Present Assessment: Broadly Implemented

Overall Comments: Ownership through cross-holdings and use of trusts and private companies for owning shares in group companies give rise to opaque and non-transparent structures. These issues require to be addressed by the concerned authorities. The disclosure norms need to be continually strengthened to bring about greater transparency in ownership structures. Stringent penal action needs to be enforced wherever such undesirable practices are unearthed.

Principle IIE: Markets for corporate control should be allowed to function in an efficient and transparent manner. (i) The rules and procedures governing the acquisition of corporate control in the capital markets, and extraordinary transactions such as mergers, and sales of substantial portions of corporate assets, should be clearly articulated and disclosed so that investors understand their rights and recourse. Transactions should occur at transparent prices and under fair conditions that protect the rights of all shareholders according to their class. (ii) Anti-take-over devices should not be used to shield management and the board from accountability.

Earlier Assessment: Observed

Current Position:

i. There are elaborate provisions in the listing agreement as well as SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 to facilitate corporate restructuring and acquisitions.

ii. The provisions of Section 187C of the Companies Act, 1956 provides for an obligation on the member to make a declaration of the actual holder of the beneficial interest in the company.

iii. The provision of Section 187D of the Companies Act, 1956 empowers the Government, where there exist good reasons, to investigate about the beneficial ownership of the shares.

iv. The Regulations have been framed keeping in mind the principles like equality of treatment and opportunity to all shareholders and fair and truthful disclosure of all material information by the acquirer. There are timelines to be adhered to, so as to make it an efficient process.

v. In terms of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, it is required to report to the stock exchanges on a continuous basis share ownership by investor category as well as at various thresholds of ownership in terms of percentage of shares held30. Stock exchanges, in turn, are required to disseminate the information through trading terminals and website.

vi. In case of change in control over the target company, the acquirer has to make a public offer for acquisition of shares in the said company31.

vii. Disclosures are required at every stage through public announcement, requirement to circulate letter of offer/notice to the general meeting. Minimum offer price is to be determined in terms of Regulations32. The entire process is to be completed within a prescribed time-frame.

viii. There are restrictions on issuance of securities pursuant to public announcement by the target company. Regulations provide for competitive bids.

ix. The shareholders can approach SEBI for redressal of any complaint regarding alleged change in control. SEBI can take action for non-compliance of Substantial Acquisition of Shares and Takeovers (SAST) regulations under SEBI Act which provides for monetary penalty as well as imprisonment.

x. There are specific provisions under Section 391-394 of the Companies Act which provide for furnishing a report by the Registrar of Companies before the court so as to ensure that interest of members, employees and the public are protected. This is necessary to ensure the adherence to the accounting principles while preparing the statement of affairs and fair valuation of assets. The provision of Section 293(1)(a) of the Companies Act requires the approval of the shareholders for any decision regarding lease or sale of corporate assets.

Insurance

i. The legislation governing the insurance industry enables the supervisor to call for the required information as the situation warrants. A number of reports have also been stipulated under the legislation which are required to be submitted by the insurers on a periodic basis.

 

30 In case of any acquisition of shares which entitles the acquirer to more than 5 per cent, 10 per cent, 14 per cent, 54 per cent and 74 per cent voting rights in any Indian listed company, disclosure has to be made at every stage to the respective company and to the concerned stock exchange(s). In case of acquirers holding more than 15 per cent in a Indian listed company, every acquisition/sale of 2 per cent has to be reported to the company and to the concerned stock exchange(s). As per the Listing Agreement, the companies are required to report the shareholding category-wise, i.e., Promoter/Non-promoter holding, Institutional/NRI/Banks/Mutual Funds, etc. Further the shareholding of the promoters and persons holding 1 per cent and more of shares are also required to be reported.

31 An acquirer who crosses the 15 per cent threshold must make an offer for at least additional 20 per cent shares from existing shareholders.

32 The minimum price for this public offer cannot be lower than the negotiated price, price paid by the acquirer in 26 weeks period prior to public announcement and 26 weeks average weekly data and 2 weeks daily data.

 

The consolidation of the financial highlights of statements of insurance companies is published by the supervisor its Annual Report, thereby ensuring transparency and disclosure to various stakeholders.

ii. In addition, the Annual Reports are also available on MCA-21, the website maintained by Ministry of Corporate Affairs.

Present Assessment: Broadly Implemented

Overall Comments: SEBI Takeover code has gone a long way in facilitating takeovers in a transparent manner and protecting the interest of minority shareholders. The code has been revised from time to time on the basis of experience and feedback received. In case of mergers and amalgamations role and responsibilities of MCA needs to be reviewed particularly with reference to valuation and interest of minority shareholders. Under the Competition Act, a firm proposing to enter into a combination33, is required to notify the Competition Commission. The proposed combination cannot take effect for a period of 210 days from the date it notifies the Commission or till the Commission passes an order, whichever is earlier. While changes proposed under the new Competition Act and their impact have not been studied for the purpose of this study, the aforesaid provision is likely to have material effect on the processes involved in completing transactions.

Principle IIF: The exercise of ownership rights by all shareholders, including institutional investors, should be facilitated. (i) Institutional investors acting in a fiduciary capacity should disclose their overall corporate governance and voting policies with respect to their investments, including the procedures that they have in place for deciding on the use of their voting rights; (ii) Institutional investors acting in a fiduciary capacity should disclose how they manage material conflicts of interest that may affect the exercise of key ownership rights regarding their investments.

Earlier Assessment: Materially Not Observed

Current Position:

i. Presently there is no regulatory requirement on institutional investors to disclose their voting policies, procedures and conflicts of interest. At the same time, there are no restrictions on exercise of voting rights by all shareholders.

ii. The information pertaining to shareholders (including institutional investors) using their voting rights actively is not available. However, as per the study done by the World Bank in its Report ‘India – Role of Institutional Investors in the Corporate Governance of their Portfolio Companies, in the year 2005, it was noted that institutional investors do not exercise their share voting rights actively.

 
33 Broadly, combination includes acquisition of control, shares, voting rights or assets, acquisition of control by a person over an enterprise where such person has control over another enterprise engaged in competing businesses, and amalgamations between or amongst enterprises where these exceed the thresholds specified in the Act in terms of assets or turnover.
 

Present Assessment: Partially Implemented

Overall Comments: The present regulatory framework does not stipulate any mandatory requirement with regard to this aspect. At the same time, there are no restrictions in this area. There is a need to initiate dialogue with the industry to develop the awareness about the contribution that institutional investors can make in the corporate governance of a portfolio company. Possibility of stipulating specific requirements either as good practice or mandatory requirements may be explored.

Principle II G: Shareholders, including institutional shareholders, should be allowed to consult with each other on issues concerning their basic shareholder rights as defined in the Principles, subject to exceptions to prevent abuse.

Earlier Assessment:Not Available

Current Position:


i. There is no legal bar as such under the law about consultation amongst shareholders. Companies Act provides for general meetings where shareholders can interact.

ii. SEBI and MCA recognise Investor Associations34. These recognised Associations provide a platform for investors to interact with each other on matters affecting their rights and take up their grievances and issues concerning them with corporates and other agencies include regulators.

iii. Shareholders’ co-operation and co-ordination can also be misused to manipulate markets and take control over a company. However, there are regulations in place (like SEBI Takeover Regulations and Insider Trading Regulations) to prevent and deal with such eventualities.

Present Assessment: Fully Implemented

Overall Comments: As stated above, there are fora available to facilitate interaction amongs shareholders. Checks and balances in this regard are also in place.

 

III: Equitable Treatment of Shareholders

 

 

The corporate governance framework should ensure the equitable treatment of all shareholders, including minority and foreign shareholders. All shareholders should have the opportunity to obtain effective redress for violation of their rights.

Principle IIIA: All shareholders of the same series of a class should be treated equally. (i) Within any series of a class, all shares should carry the same rights. All investors should be able to obtain information about the rights attached to all series and classes of shares before they purchase. Any changes in voting rights should be subject to approval by those classes of shares which are negatively affected; (ii) Minority shareholders should be protected from abusive actions by, or in the interest of, controlling shareholders acting either directly or indirectly, and should have effective means of redress; (iii) Votes should be cast by custodians or nominees in a manner agreed upon with the beneficial owner of the shares; (iv) Impediments to cross-border voting should be eliminated; (v) Processes and procedures

 
34 Under Companies Act, the recognition of investor associations is provided.
 

for general shareholder meetings should allow for equitable treatment of all shareholders. Company procedures should not make it unduly difficult or expensive to cast votes.

Earlier Assessment: Partially Observed

Current Position:

i. Within each class of shares, all the shares carry the same rights. Any change in rights in any class of shares is subject to the approval by that class of shareholders. As per the Companies Act, 1956 a person authorised to vote can do so by appointing a proxy who can vote on poll. Information pertaining to voting rights attached with all classes of shares is provided under Article of Association.

ii. Both MCA and SEBI are mandated to protect the interests of investors. Section 391, 397, 398 and 401 of the Companies Act provide for relief as well as procedure for redressal of grievances in cases of oppression and mismanagement. MCA has power to file a petition on behalf of minority shareholders before Company Law Board in cases of alleged oppression and mismanagement (Section 401), appoint additional directors for prevention of oppression or mismanagement subject to approval of Company Law Board (Section 408), powers to remove managerial personnel in certain exceptional cases (Section 388B). Position stated under Principle IIE may also be referred. In cases regarding mergers, action can be taken under Section 391-394 of the Companies Act, 1956. For matters relating to false statements in the prospectus, periodic filings, or other public statements, there is civil and criminal liability for directors under Sections 62 and 63 of the Companies Act, 1956. As per section 621, any shareholder can complain/file prosecution, if company/officers of the company make default of any provisions of the Companies Act, 1956. Class action suit against corporations/directors is possible under provisions of Order I, Rule 8 of the Code of Civil Procedure, 1908, in suitable cases, with permission of the court. For matters relating to non-delivery of shares after transfer, non-payment of dividend, non-refund, SEBI has been delegated powers under the Companies Act. Further, there are various provisions under SCRA, SEBI Act, 1992, SEBI (Prohibition of Insider Trading) Regulations, 1992, SEBI (Substantial Acquisitions of Shares and Takeovers) Regulations, 1997, SEBI (Prevention of Fraudulent and Unfair Trading Practices), 2003, etc., to safeguard the interest of investors. MCA has set up a portal for investor complaints. There is an office of Investor Assistance and Education in SEBI which deals with investor grievances pertaining to areas delegated to SEBI under Companies Act, against listed companies. In terms of Clause 49 of the listing agreement, for listed companies, a board committee designated as Shareholders/Investor Grievance Committee, under the chairmanship of a non-executive director is required to be set up to specifically look into redressal of shareholders and investor grievances like transfer of share, non-receipt of balance sheet, non-receipt of declared dividends, etc.

iii. & In India, shares are held in physical and demat form and the shareholders can appoint
iv. proxy35 to delegate their voting rights. Custodians who hold shares on behalf of the Institutional Investors are expected to provide information to the shareholders about the proposed general meetings of the companies so as to enable them to appoint proxies/attend meetings and exercise voting rights. The custodian agreement entered into between the custodian and institution spells out the manner of providing information to shareholders. Voting rights in respect of foreign depository receipt holders such as GDRs/ADRs are determined by the agreement between the issuer and the depository. Quite often, the said agreements provides for exercise of voting rights by depository at the instruction of boards of issuer company. Sometimes such agreements provide for exercise of voting rights by depository at the instance of holders of depository receipt. In order to ensure interest of minority shareholders, in respect of shares issued on a preferential basis by listed companies, SEBI (DIP) Guidelines have provisions related to pricing and lock-in of shares. Further, relevant information such as object, shareholding pattern, identity of proposed allottees is required to be furnished in the Explanatory statements to the notice for the EGM. In case of an IPO, the entire pre-issue capital is required to be locked in for a period of one year.

v. Position under Principle IIA and II C may be referred.

Insurance:

i. Insurance companies are governed by the provisions in the Companies Act, 1956 to provide for shareholders’ rights.

ii. In addition, the insurance legislation prescribes issuance of ordinary shares (equity shares) which has a single face value. The paid-up amount is the same for all shares at Rs.10/-. The voting rights of every shareholder shall be strictly proportionate to the paid-up amount of the shares held by him.

Present Assessment: Broadly Implemented

Overall Comments:. Protection of interest of minority shareholders has attracted a lot of attention of the regulators. SEBI has brought about amendments in SEBI Act , Takeover Regulations, Insider Trading Regulations and Delisting Guidelines with a view to protect minority shareholders from possible abusive actions of controlling shareholders. From time to time, SEBI issues directions and initiates regulatory actions in the interest of minority shareholders and for non-compliance with provisions of regulations. Though the structure for equitable treatment of all shareholders is mostly in place, there is scope for expediting the processes involved and improving effectiveness of the system, particularly on implementation side. There is also the need for sensitising shareholders about their rights and responsibilities.

Principle IIIB: Insider trading and abusive self-dealing should be prohibited.

Earlier Assessment: Partially Observed

Current Position:

i. Insider trading is an offence under SEBI Act and SEBI (Prohibition of Insider Trading) Regulations, 1992 which has comprehensive provisions relating to insider trading. Instances of insider trading can attract a penalty of twenty five crore rupees or three times the amount of profits made out of such failure, whichever is higher.
 
35 Section 176 of Companies Act provides for proxy rights of shareholders.
 

ii. For listed companies, there are disclosure requirements pertaining to transactions in the company’s shares by board members, senior managers or controlling shareholders, under the SEBI (Prohibition of Insider Trading) Regulations, 1992 and SEBI (Substantial Acquisition of Shares and Takeovers) Regulations and the listing agreement. All submissions made by the companies to the exchange, in this regard, are disseminated to the market and also displayed on the website of the exchange.

iii. As preventive measures, SEBI (Prohibition of Insider Trading) Regulations, 1992 lays down the Code of Conduct for listed companies and for other entities. There are pre-clearance requirements on trades executed by directors/officers/designated employees. There is also a holding period requirement of 30 days for all directors/officers/designated employees.

iv. In terms of SEBI (Prohibition of Insider Trading) Regulations, 1992 companies are required to specify a trading period, to be called ‘Trading Window’ during which directors and executives are not entitled to deal in company shares. There are also other restrictions on trading by directors, officers and designated employees.

v. Market surveillance is primarily the responsibility of the stock exchanges who are the first-level regulators. However, SEBI has also put in place Integrated Market Surveillance System to monitor and detect any instances of insider trading and front-running. Implementation of Unique Client code and Know Your Client norms while trading on stock exchanges has also facilitated tracing identity of persons transacting in shares of a company. PAN has been made mandatory for opening demat accounts, investments in IPOs and public issues and trading on the stock exchanges.

vi. Based on the alerts, during the last two years SEBI has initiated actions against few entities for indulging in front-running and abusive self-dealing. Besides, several cases of violation of disclosure requirements under the SEBI (Prohibition of Insider Trading) Regulations, 1992 and SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 have been identified and have been referred for further investigation or adjudication. In addition, on a regular basis, information/explanation is sought from the entities observed to be dealing in the shares of the listed companies prior to the major announcements.

vii. With a view towards incorporating an additional corporate governance measure which aligns the interests of a company’s shareholders to that of the company’s insiders, additional regulations are proposed to be introduced in the SEBI (Prohibition of Insider Trading) Regulations, 1992. The proposed regulation seeks to compel an ‘insider’ to surrender such profits to the company in any of his/her transaction concerning equity-based securities of the company (including its parents or subsidiary’s shares) in the event both the buy and sell side of the transaction are entered into within six months of the other.

Present Assessment: Fully Implemented

Overall Comments: SEBI has comprehensive powers for undertaking investigation and enforcement under SEBI Act, 1992. The regulatory framework and oversight has been strengthened over years to deter insider trading. Various regulatory and enforcement actions have also been initiated for violation of Insider Trading Regulations in the last two years (2005-06: 13, 2006-07: 26). However, the fact remains that insider trading is usually very complex and difficult to prove and this is the position even in advanced countries. To deal with market manipulation and fraudulent activities, SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003 are also in place. During the last two financial years (2005-06 and 2006-07), 239 cases were taken up for investigation pertaining to market manipulation and price rigging and investigation was completed in 139 such cases.

Principle IIIC: Members of the board and key executives should be required to disclose to the board whether they, directly, indirectly or on behalf of third parties, have a material interest in any transaction or matter directly affecting the corporation.

Earlier Assessment: Partially Observed

Current Position:

i. The provisions36 under the Companies Act, 1956 require the members of the board and key executives to disclose to the board whether they, directly or indirectly or on behalf of the third parties, have a material interest in any transaction or matter directly affecting the corporation. In some cases of related party transactions, even the approval of the Central Government is required (Section 297) under the Companies Act, 1956.

ii. In terms of Companies Act, directors are required to disclose their interest, if any, in the proposals which are considered by the board. They should not participate in such matters (Section 299). Directors are also required to disclose their directorships in other companies (Section 303).

iii. Listing agreement stipulates strict disclosure requirements in this respect. Under listing agreement, it is obligatory on part of senior management to make disclosures to the board relating to all material, financial and commercial transactions, where they have personal interest that may have a potential conflict with the interest of the company at large. All related party transactions are to be disclosed to the audit committee in a manner to be decided on the basis of materiality. Further, a company is required to disclose in its Annual Report:

a. ‘Related Party Disclosures’ in compliance with Accounting Standard (Clause 32).

b. all materially significant related party transactions that may have potential conflict with the interests of company at large (Clause 49).

 

iv. Further, in terms of Clause 49.IV.E.iv and v of the listing agreement:

a. the company shall disclose the number of shares and convertible instruments held by non-executive directors in the Annual Report.

b. Non-executive directors shall be required to disclose their shareholding (both own or held by/for other persons on a beneficial basis) in the listed company in which they are proposed to be appointed as directors, prior to their appointment. These details should be disclosed in the notice to the general meeting called for appointment of such director.

 

36 Section 295, 297, 299, 300, 301 and 302 of Companies Act provide for disclosure requirements in this regard.

 

v. Shareholders are not allowed to get loan from companies. For loans to directors, Central Government’s approval is required. Parties related to directors are prohibited to obtain loan from company.

Banks

i. In terms of Section 16 of the Banking Regulation Act, no banking company incorporated in India shall have as a director in its Board of Directors any person who is a director of any other banking company and this, to some extent, takes care of the conflicts of interests aspect.

ii. Further, in terms of Section 20 of the Banking Regulation Act, no banking company can grant any loans or advances to or on behalf of any of its directors, any firm in which any of its directors is interested as partner, manager, employee or guarantor or any company of which the subsidiary or the holding company of which any of the directors of the banking company is a director, managing agent, manager, employee or guarantor or in which he holds substantial interest or any individual in respect of whom any of its directors is a partner or guarantor.

Insurance:

i. Insurance companies are required to comply with the Accounting Standards (AS) issued by ICAI, as provided under the Companies Act. Accordingly, related party transactions are required to be disclosed under AS 18.

ii. In addition, insurers are also required to furnish a schedule giving details of payments made to individuals, firms, companies and organisations in which directors of the insurers are interested. These disclosures are required to be made in the Management Report which forms part of the annual financial statements.

Present Assessment: Fully Implemented

Overall Comments: With the amendments in the listing agreement, various disclosure requirements have been stipulated. The framework for observance of the principle is in place.

 

IV: Role of Stakeholders in Corporate Governance

 

The corporate governance framework should recognise the rights of stakeholders established by law or through mutual agreements and encourage active co-operation between corporations and stakeholders in creating wealth, jobs, and the sustainability of financially sound enterprises.

Principle IVA: The rights of stakeholders that are established by law or through mutual agreements are to be respected.

Earlier Assessment: Observed

Current Position:

i. The shareholders have enforceable rights to participate. Debenture holders/Creditors have rights in respect of matters which affect their rights, e.g., reduction in capital, amalgamation, etc. Depositors have some rights to approach Company Law Board for repayment in case of default by company.

ii. There are no legal rights in respect of customers/suppliers, etc. under the Companies Act, 1956 but under the general laws of the land, viz., Contract Act, Sale of Goods Act, etc., they are well-protected. Big companies do have policies (voluntary) to take care of interests of all stakeholders.

iii. In terms of Section 217 of the Companies Act, the Board Reports annually on company activities, including company performance on environment issues, labour issues, tax compliance and provisions of Companies Act. The companies are encouraged to adopt socially responsible behaviour and many have already started resorting to the triple bottom-line reporting.

iv. In terms of Section 217 of the Companies Act, board reports annually on company activities, including company performance on environment issues, labour issues, tax compliance and provisions of Companies Act.

v. The creation and setting up of National Foundation for Corporate Governance by the Government as a Trust in partnership with the stakeholders, viz., CII, ICAI and ICSI is a step towards propagating good corporate governance practices and strengthening the role of the stakeholders.

Insurance:

i. The provisions of the Companies Act are applicable for protection of the interests of the shareholders.

ii. In addition, there are provisions for protection of the interests of the policyholders. It may be mentioned that protection of the interests of the policyholders is part of the mission statement of the supervisor. Regulations have been framed for ensuring compliance by the insurance companies in this regard. These regulations are aimed at servicing of the policyholders.

iii. The overall regulatory, supervisory and reporting requirements have been framed to protect the interests of the policyholders.

Present Assessment: Fully Implemented

Overall Comments: There are various laws that recognise the rights of stakeholders. There is a general appreciation in the corporate sector relating to the concerns of all the stakeholders and these have been protected adequately under the relevant laws. There is, however, need for greater disclosure and publicity of CSR (corporate social responsibility) initiatives by corporate sector.

Principle IVB: Where stakeholder interests are protected by law, stakeholders should have the opportunity to obtain effective redress for violation of their rights.

Earlier Assessment: Partially Observed

Current Position:

i. Shareholders and creditors have enforceable legal rights under the Companies Act, 1956. Sections 397 to 407 of the Companies Act, 1956 contain provisions which have mechanisms to prevent violation of shareholders’ rights through oppression and mismanagement. Reference may be made to position under Principle IIIA.

ii. Other stakeholders can take action under general law to seek redressal. For e.g., there are certain remedial measures available under Factories Act and Industrial Disputes Act for affected parties. Refer Principle IVA.

iii. SARFAESI Act addresses the rights of creditors.

iv. Further, SEBI is also mandated to protect the interests of investors. There is an Office of Investor Assistance and Education in SEBI which deals with investor grievances against listed companies. Under listing agreement, companies are required to have shareholders’ committee to look into shareholders’ grievances.

Insurance:

i. IRDA (Protection of Policy-holders’ Interest) Regulations, 2002 addresses various issues of protection of rights of policy-holders.

ii. For other stakeholders, provisions of various other applicable laws would prevail. The other forums for redressal include insurance ombudsman and consumer courts.

Present Assessment: Broadly Implemented

Overall Comments: With the passing of SARFAESI Act, rights of creditors have been substantially safeguarded. The liquidation process is, however, time-consuming and lengthy, thereby, hardly leaving any effective remedy for the stakeholders other than secured creditors. There is also a need for speedy disposal of cases by courts. It has been observed that setting up of dedicated courts leads to expeditious disposal. Comments in response to Principle IIIA may also be referred.

Principle IVC: Performance-enhancing mechanisms for employee participation should be permitted to develop.37

Earlier Assessment: Observed

Current Position:

i. There are provisions under Companies Act, 1956 which allows the employees to participate in company’s profits such as share ownership, share options or profit-sharing schemes.

ii. Section 79 A of the Companies Act, 1956 and SEBI (ESOP and ESPS) Guidelines, 1999 stipulate the mechanism for issuance of stock options to employees of the listed companies. SEBI (DIP) Guidelines, 2000 also provide for reservation on competitive basis, in public issues, for employees of the company. Share option schemes are approved at the AGM.

 
37 Corporate governance framework should recognise the rights of stakeholders established by law or through mutual agreements and encourage active co-operation between corporations and stakeholders in creating wealth, jobs and sustainability of financially sound enterprise.
 

iii. There are provisions under other statutes such as Factories Act, Industrial Disputes Act etc., for participation of employees in the decision-making.

Present Assessment: Fully Implemented

Overall Comments: As stated above, appropriate enabling provisions are in place . The setting up of the National Foundation for Corporate Governance with the active participation of industry, professional institutes and the Government has given the requisite fillip to provide a platform for propagating good corporate governance practices.

Principle IVD: Where stakeholders participate in the corporate governance process, they should have access to relevant, sufficient and reliable information on a timely and regular basis.

Earlier Assessment: Observed

Current Position:


i. The shareholders have special access to the corporate information through various provisions under the Companies Act and listing agreement.

ii. Other stakeholders have right to such information only when their rights are affected. Information about company is also disclosed periodically in terms of the listing agreement (immediately, in case, material in nature) in the newspapers/to the exchanges, which in turn display them on their website.

iii. With the introduction of MCA-21, the stakeholders have access to the information filed by companies with RoC.

iv. For IPOs and issues by listed companies, disclosures to be made under SEBI (DIP) Guidelines.

v. Further, any listed company making issue of debt securities (maturity not less than 365 days) on a private placement basis and listed on a stock exchange is required to make full disclosures (initial and continuing) in the manner prescribed in Schedule II of the Companies Act, 1956, SEBI (DIP) Guidelines, 2000 and listing agreement with the Exchange38. A separate listing agreement is required to be entered with the exchange for such securities. Reference may also be made to position under Principle IIA (3) and VE.

Insurance:

i. Policyholders in general have access to the various financial statements of the insurance companies which are available in the public domain through the websites of the regulator and MCA.

Present Assessment: Fully Implemented

Comments: There is a lot of emphasis on transparency in the system. Rules and guidelines are in place to ensure accurate and timely availability of material information to those concerned. India has now one of the best electronic corporate registries in the world which is capable of providing access to the corporate information on a 24×7 basis. The stakeholders can inspect the documents filed by the company with the office of RoCs. SEBI has also launched a Corporate Filing and Dissemination System to enable corporates to disseminate information electronically, on real­time basis amongst the investors.

 
38 SEBI circular No. SEBI/MRD/SE/AT/36/2003/30/09 dated September 30, 2003.
 

Principle IVE: Stakeholders, including individual employees and their representative bodies, should be able to freely communicate their concerns about illegal or unethical practices to the board and their rights should not be compromised for doing this.

Earlier Assessment: Not Available

Current Position:

i. There are different legislations to protect the interest of employees namely Factories Act, Provident Fund Act, Employee State Insurance Act, Industrial Disputes Act, Workman Compensation Act, etc.

ii. In terms of non-mandatory conditions stipulated under the listing agreement, all listed companies are required to establish a whistle-blower mechanism for employees to report to the management concerns about unethical behavior, actual or suspected fraud or violation of the company’s code of conduct or ethics policy.

iii. The mechanism is also required to provide for adequate safeguards against victimisation of employees who avail of the mechanism and also provide for direct access to the chairman of the audit committee in exceptional cases and existence of mechanism to be appropriately communicated within the organisation.

Present Assessment: Partially Implemented

Overall Comments: The rights of the employees though are not covered directly under the Companies Act but ample protection is available under the specific legal enactments. Even under the listing agreement presently, the requirement to establish whistle-blower mechanism is not mandatory and depends on discretion of the companies. It would be worthwhile to gather information on the experience of the companies which choose to implement this mechanism.

Principle IVF: The corporate governance framework should be complemented by an effective, efficient insolvency framework and by effective enforcement of creditor rights.

Earlier Assessment: Not Available

Current Position:

Position under Principle IVB may be referred. The company law (Section 100 to 104 and Section 391 to 394 of the Companies Act, 1956) recognises provisions for creditors’ rights during normal course of business. Winding-up orders can be made, if a company is not able to pay debts.

Present Assessment: Broadly Implemented

Overall Comments: Comments under Principle IVB may be referred.
 

V: Disclosure and Transparency

 

The corporate governance framework should ensure that timely and accurate disclosure is made on all material matters regarding the corporation, including the financial situation, performance, ownership and the governance of the company.

Principle VA: Disclosure should include, but not be limited to material information on (i) The financial and operating results of the company (ii) Company objectives (iii) Major share ownership and voting rights (iv) Remuneration policy for members of the board and key executives, and information about board members, including their qualifications, the selection process, other company directorships and whether they are regarded as independent by the board (v) Related party transactions. (vi) Foreseeable risk factors (vii) Issues regarding employees and other stakeholders (viii) Governance structure and policies, in particular, the content of any corporate governance code or policy and the process by which it is implemented.

Earlier Assessment: Largely Observed

Current Position:

i. There are various provisions under the Companies Act, 1956 for preparation, adoption and statutory filing of financial statements (annually) with the RoC. The listing agreement gives a broad framework for listed companies in this regard. Under Clause 41 of the listing agreement, listed companies are to publish the quarterly financial statements. The quarterly results are to be approved by the board or a committee thereof. Companies are also required to publish an Annual Report, circulate its full or abridged version to all shareholders and, after adoption, file the same with RoC. This includes chairman’s statement, balance sheet, profit and loss account/income statement, cash flow statement, statement of changes in equity, notes on financial statements, an audit report, etc. The companies are also required to file consolidated financial statements.

ii. The Companies Act mandates disclosure of company’s objectives in the Annual Report (under the ‘Management Discussion and Analysis’(MDA) section). In terms of listing agreement also, ‘Management Discussion and Analysis’ should include discussion on the company’s competitive position, inter alia, incorporating opportunities and threats, outlook, risks and concerns, etc.

iii. Under the various provisions of the Companies Act, 1956 and the listing agreement, share ownership is required to be disclosed in the annual report by investor category (promoters, financial institutions, foreign investors, etc.,) and by tranches of ownership. The companies are required to disclose special voting rights, caps on voting rights, significant cross-shareholdings etc., in their Memorandum and Articles of Association. In terms of listing agreement, detailed shareholding pattern is required to be submitted to the stock exchanges on a quarterly basis and the same is disseminated on the website of the stock exchange.

iv. The information39 about the board members and key executives is available to investors in the annual report of the company. Besides this, the balance sheet40 of the company discloses
 

39 Appointment, remuneration to the managerial personnel are governed by Section 289, 198, 309, 309 and schedule XII
of the Companies Act. Section 295, 297, 299, 300, 301 and 302 of Companies Act provide for disclosure requirement
in this regard.

40 The balance sheet and annual returns are required to be filed as per the provisions contained in Sections 220 and 159
of Companies Act.

 

the information about the remuneration paid to the managing directors/directors, etc. For the boards’ remuneration, aggregate amount is disclosed and in respect of key employees, the amount is disclosed individually. Listing agreement also mandates disclosures pertaining to remuneration of directors in Annual Report as well as in the notice to the general meeting called for appointment of such directors. In terms of Clause 49 all fees/compensation other than the sitting fees as permitted by the Companies Act, 1956, if any, paid to non-executive directors, including independent directors, shall be fixed by the Board of Directors and requires previous approval of shareholders in general meeting. Position contained under Priciple IIA (5) and IIC (3) may alse be seen.

v. In terms of Clause 49, senior management41 is required to make disclosures to the board relating to all material financial and commercial transactions, where they have personal interest, that may have a potential conflict with the interest of the company at large. Position contained under Principle IIC may also be referred.

vi. The companies are required to disclose in their Annual Report, their policies on risk management and material foreseeable risk factors. Under the listing agreement, as part of the director’s report or as an addition thereto, MDA which is required to be part of Annual Report should include discussions on risk and concerns and the internal control systems and their adequacy. Further, company is required to lay down procedures to inform board members about the risk assessment and minimisation procedures and the same are reviewed periodically.

vii. The board is required under Section 217 of the Companies Act to report annually on employee and other stakeholder issues. In terms of listing agreement, MDA should include material developments in human resources/industrial relations front, including number of people employed.

viii. Section 217 of the Companies Act, 1956 and Clause 49 of the listing agreement requires the companies to disclose information relating to company’s governance structures and policies.

Apart from the above, the listing agreement stipulates MDA to include discussions on opportunities and threats, segment wise or product-wise performance, etc.

Banks

i. In the case of banks, the Reserve Bank guidelines as contained in the circular No.DBOD.BP.BC.No.14/21.04.018/2007-2008 dated July 2, 2007 require certain additional disclosures in the ‘Notes to Accounts’ on asset quality, business ratio, maturity pattern of certain items of assets and liabilities, exposures to sensitive sectors in addition to the disclosures as per Accounting Standards.

 
41 Personnel of the company who are members of its core management team excluding the Board of Directors.
 

Insurance

i. Section 11(1) of the Insurance Act requires every insurer to prepare balance sheet, revenue account, receipts and payments account and profit and loss account on an annual basis for each financial year. Further, the IRDA (Preparation of Financial Statements and Auditors Report of Insurance Companies) Regulations, 2002 prescribes the formats for various financial statements to be submitted by life insurers and non-life insurers separately. Quarterly reporting has also been mandated by the Authority.

ii. The annual reports of insurance companies include directors Report; balance sheet; profit and loss account; cash flow statement; notes to the financial statements; auditors report; management report; management discussion and analysis; and financial ratios and summary of financial statements for five years.

iii. Apart from the financial statements that are to be submitted on an annual basis, insurance companies are required to file the following:

a. Business underwritten details on a monthly basis.

b. Equity holding pattern on a quarterly basis.

c. Actuarial returns and solvency statements.

d. Investment returns (also on a quarterly basis).

e. Reinsurance Returns.

 
Present Assessment: Fully Implemented

Overall Comments: Disclosures in terms of principle VA are stipulated by the prevailing legal framework. Listing agreement, which has been amended from time to time, has served as an effective tool for ensuring availability of information in public domain on an ongoing basis. SEBI has recently initiated adjudication proceedings against 20 companies for non-compliance of Clause 49 of the listing agreement, which contains, among other things, provisions relating to disclosure and transparency.
Principle VB: Information should be prepared, and disclosed in accordance with high quality standards of accounting, financial and non-financial disclosure.

Earlier Assessment: Largely Observed

Current Position:

i. The information is prepared42, audited and disclosed in accordance with the Accounting Standards. ICAI has called for adoption of IFRS by public interest entities (such as listed companies, banks and insurance entities) and large-sized entities for accounting periods beginning on or after April 1, 2011. The ICAI is responsible to the Accounting Standards Board which currently issues accounting standards that are based on IFRS but contain certain modifications to reflect the legal and economic environment in India.

ii. Recent notification of Accounting Standards by the Ministry with the active participation and involvement of all the stakeholders is a step in this direction.
 
42 Clause 50 of Listing Agreement mandates that all listed companies will comply with Accounting Standards issued by ICAI.
 

iii. Listing agreement also provides for focused disclosures in a timely manner of all material information. To ensure credibility and authenticity of the financial statements, provisions of Clause 41 have been amended by SEBI vide circular dated July 10, 2007 to provide for approval of the quarterly financial results by BoD and certification by CEO and CFO.43 Where there are major variations between the unaudited quarterly or year-to-date financial results and the results amended pursuant to limited review for the same period, the company is required in terms of the Listing agreement to submit to the exchange an explanation for the reasons for variations, duly approved by the board.

Insurance:

i. The accounts of insurance companies are required to be audited jointly by two audit firms annually.

ii. The norms for appointment of statutory auditors have been issued by the supervisor which are required to be complied with by the insurance companies. The norms prescribe the minimum number of partners in the audit firm and the educational/professional qualifications and experience of the partners. As part of the corporate governance stipulations, an audit firm cannot be appointed/continued for more than five consecutive years. In addition, no two audit firms can simultaneously carry on audit work for more than four years. An audit firm on completion of its tenure of five/four years as the case may be, is subject to a cooling-off period of two years during which period it cannot accept statutory audit assignment of the said insurance company for the next two years.

iii. Further, the statutory auditors are required to file their audit report as per the format specified at Schedule C of IRDA Regulations on preparation of financial statements and auditors’ report.

Present Assessment: Fully Implemented

Overall Comments: Recent initiatives as indicated above have enhanced the credibility and quality of the financial and non-financial disclosures.

Principle VC: An annual audit should be conducted by an independent, competent and qualified auditor in order to provide an external and objective assurance to the board and shareholders that the financial statements fairly represent the financial position and performance of the company in all material respects.

Earlier Assessment: Partially Observed

 

43 The quarterly financial results are to be approved by the BoD or by a committee thereof, other than the Audit Committee. While placing the financial results before the board, the Chief Executive Officer and Chief Financial Officer shall certify that the financial results do not contain any false or misleading statement or figures or do not omit any material fact which may make the statements or figures contained therein misleading.

 

Current Position:

i. The provisions of the Companies Act, 1956 provides that the annual accounts of the company shall be externally audited by an independent, competent and qualified auditor in order to provide an external and objective assurance to the board and shareholders that the financial statements fairly represent the financial position and performance of the company in all material respects. External auditors44 are appointed by the shareholders in the AGM and are also accountable to the shareholders. They owe a duty to the company to exercise due professional care in conduct of the audit.

ii. The recent amendments passed by the Government to the Acts governing the three professional institutes, viz., ICAI, ICSI and ICWAI were aimed at bringing transparency and professionalism in their working and also to strengthen the disciplinary mechanism. The amendments have put a limit on the extent of non-audit services to be rendered to the client company by the statutory auditor and adequate disclosures to this effect have also been stipulated.

iii. The concept of peer audit review has also been introduced in the case of listed companies.

Banks

i. In terms of the provisions of the Banking Regulation Act, 1949 all banking companies are required to publish their annual accounts, duly audited by external auditors, in the prescribed manner and also forward copies thereof to the Reserve Bank.

Insurance

i. The insurance companies are subject to joint audit as stipulated by IRDA. There are further stipulations on the areas to be covered in the audit report.

Present Assessment: Broadly Implemented

Overall Comments: Recent amendments have strengthened the framework and enhanced accountability in the system. The real impact of the recent initiatives could be measured only after a reasonable period of time has elapsed.

Principle VD: External auditors should be accountable to the shareholders and owe a duty to the company to exercise due professional care in the conduct of the audit.

Earlier Assessment: Not Available

Current Position:

i. Position given under principle V C above may be referred. As per Section 292A of the Companies Act, 1956 every public company having paid-up capital of not less than Rs 5 crore is required to constitute an audit committee.

ii. As per a recent recommendation of the SEBI’s Committee on Disclosures and Accounting Standards (SCODA), in view of the public funds involved, audit of listed companies should be carried out by only those auditors who have themselves been subject to the peer review. The said recommendation of SCODA has, in principle, been accepted by the Council of ICAI.

 

44 The enabling provisions regarding appointment and remuneration of auditors are covered under Section 224 to 233B of Companies Act.

 

Present Assessment: Broadly Implemented

Overall Comments: Auditors accountability would be further enhanced with the introduction of peer review.

Principle VE: Channels for disseminating information should provide for equal, timely and cost-efficient access to relevant information by users.

Earlier Assessment: Observed

Current Position:

i. The information as provided by the companies to the exchange is being disseminated to the market through the trading terminals of the exchange and the same is also being updated on the website of the exchange. Apart from this, information is also disseminated through newspapers, by post, etc. Information is required to be disseminated on periodic basis as well as on real-time basis depending on materiality. Section 219(iv) of Companies Act and Clause 3245 of listing agreement permit listed companies to send to each shareholder a statement containing the salient features of the balance sheet, profit and loss account and auditor’s report instead of sending full balance sheet and annual report. Position as explained in response to Principle IIA (iii) and IVD may also be referred.

ii. The Government with the launch of MCA-21 has given access to all the corporate information to all the stakeholders in a 24×7 timeframe. Investors Education and Protection Fund (IEPF) under the Ministry has sponsored a website, viz., www.watchoutinvestors.com which is a unique initiative in the world as it seeks to provide information about 84,000 entities and individuals who have been convicted of economic offences. As per SEBI’s initiative, Bombay Stock Exchange Ltd. (BSE) and National Stock Exchange of India Ltd. (NSE) have jointly launched on January 1, 2007 the common platform at www.corpfiling.co.in for disseminating filings made by companies listed on these exchanges.

Insurance:

iii. Annual accounts of the insurance companies are consolidated and published in the supervisor’s annual report which is hosted on the website of IRDA, viz., www.irdaindia.org.

iv. Apart from the annual financial statements, monthly performance of the insurers are also consolidated and published in the website and journal of the supervisor. These are, thus, available in the public domain.

v. In addition, some of the companies are also voluntarily publishing their financial statements on their respective websites. All the insurance companies’ annual accounts are also hosted on MCA’s website.

 

45 Amended vide SEBI circular dated April 26, 2007.

 

Present Assessment: Fully Implemented

Overall Comments: Companies Act, DIP guidelines and listing agreement have adequate provisions to ensure availability of information. Reference is invited to the comments provided at Principle IV D.

Principle VF: The corporate governance framework should be complemented by an effective approach that addresses and promotes the provision of analysis or advice by analysts, brokers, rating agencies and others, that is relevant to decisions by investors, free from material conflicts of interest that might compromise the integrity of their analysis or advice.

Earlier Assessment: Not Available

Current Position:

i. Brokers, mutual funds, portfolio managers, credit rating agencies are registered and regulated by SEBI. SEBI has mandated rating of IPOs by SEBI-registered credit rating agencies.

ii. SEBI is also in the process of formulating regulations for investment advisors to provide credible framework for analyses and investment advice.

iii. There are disclosure requirements under SEBI Insider Trading Regulations and listing agreement to take care of conflict of interest.

iv. There are restrictions and disclosure requirements on brokers and sub-brokers, on giving advice and recommendations, in terms of Clause 7 of Code of Conduct stipulated under SEBI (Stock Brokers and Sub- Brokers) Regulations.

Insurance

At present, none of the insurance companies is listed and their shares are not widely held. Potential investors carry out due analysis of the respective companies prior to taking an investment decision.

Present Assessment: Broadly Implemented

Overall Comments: Various initiatives as indicated above have been taken in the direction of the Principle above.

 
VI: Responsibilities of the Board
 

The corporate governance framework should ensure the strategic guidance of the company, the effective monitoring of management by the board, and the board’s accountability to the company and the shareholders.
Principle VIA: The corporate governance framework should ensure the strategic guidance of the company, the effective monitoring of management by the board, and the board’s accountability to the company and the shareholders. Board members should act on a fully informed basis, in good faith, with due diligence and care and in the best interests of the company and its shareholders.

Earlier Assessment: Largely Observed

Current Position:


i. There are provisions in the Companies Act, 1956 which provide for effective management by the board and make the board accountable to the company and shareholders.

ii. The provisions of Clause 41 and 49 of the listing agreement also seek to place a greater responsibility on the board and on the independent directors to protect the interest of the stakeholders. As per Clause 49 I(A) the BoD of the listed companies has to be an optimum combination of executive and independent directors with not less than fifty per cent of the board of directors comprising of non-executive directors, to facilitate unbiased monitoring of affairs of the company. Where the chairman of the board is non-executive director, at least one third of the board should comprise of independent directors and in case he is an executive director, at least half of the board should comprise of independent directors.

iii. The board is assisted by various committees which oversee and review the functioning of all critical areas on an ongoing basis and report directly to the board.

iv. The board is empowered to seek information on all significant issues. Clause 49 (1) (C) stipulates that the board shall meet at least four times a year, with a maximum time gap of four months between any two meetings. Minimum information to be made available to the board to facilitate informed decision has also been provided under the said clause. A director cannot be a member in more than 10 committees or act as a Chairman of more than five committees across all companies in which he is a director.

v. Recent amendments in Clause 41 are also steps towards ensuring greater accountability of the board. As per Clause 41 (II) (a) all quarterly financial results are to be approved by the BoD. There are requirements vis-à-vis the CEO and CFO, i.e., whole-time finance director or any other person handling finance functions to certify that the financial results do not contain any false or misleading statement or figures and do not omit any material fact which may make the statements or figures contained therein misleading.

Banks: Private Sector Banks

i. In terms of the directive issued by the Reserve Bank in June 2004, all banks in the private sector have to ensure that the directors on their boards satisfy the ‘fit and proper’ criteria such as educational qualifications, integrity, track record, etc. For this purpose, all the directors are required to furnish a declaration and undertaking to the bank and the Nomination Committee of the Board is expected to carry out an exercise of due diligence in respect of the directors based on the information furnished by the directors as also based on information obtained from other sources.

ii. Further, all the directors on the boards are expected to execute a deed of covenant to discharge the responsibilities as directors to the best of their abilities.

iii. Even in the case of public sector banks, the ‘fit and proper’ criteria have been made applicable to elected directors by way of suitable amendments to the relevant statutes. However, in the case of directors nominated by Government of India under Section 9(3) (h) of the Banking Companies (Acquisition and Transfer of Undertaking) Act, 1970/1980 amendments to the Act making applicable ‘fit and proper’ criteria for nominated directors are yet to be carried out.

Insurance

i. While the provisions of the Companies Act, 1956 are applicable to all insurance companies, in addition, the following proviso is also applicable under the Insurance Act, 1938.

ii. Section 48B: A life insurer shall not have a common director with another such insurer.

Present Assessment: Fully Implemented

Overall Comments: With the recent amendments brought about in the listing agreement, the necessary requirements for compliance with the Principle are in place.

Principle VIB: Where board decisions may affect different shareholder groups differently, the board should treat all shareholders fairly.

Earlier Assessment: Largely Observed

Current Position:

i. The BoD is under an obligation to take decisions in a fair manner in the best interests of the company and its shareholders.

ii. In any case, if any shareholder group feels oppressed by board’s other group, provisions in respect of taking up the matter with quasi-judicial forum (CLB) are available.

iii. To safeguard the interest of the minority shareholders, it has been stipulated under the listing agreement that the board should have an optimum combination of executive and non-executive directors.

iv. Further, there is a requirement to set up Shareholders’ Committee headed by a non-executive director to look into investor grievances.

Present Assessment: Broadly Implemented

Overall Comments: While necessary provisions have been enshrined in the related laws, there is scope for improvement on the implementation side. The rights of the shareholders are adequately protected under the present legal structure.

Principle VIC: The board should apply high ethical standards. It should take into account the interests of stakeholders.

Earlier Assessment: Observed

Current Position:

i. Directors’ Responsibility Statement under Section 217(2AA) has been provided for to hold the BoD accountable in respect of financial disclosure. The Company Secretary ensures that the board complies with its statutory duties and obligations. In terms of Section 217, the board reports annually on company activities, including company performance on environment issues, labour issues, tax compliance and provisions of Competition Act. Apart from Section 217(2AA) of the Companies Act, the powers and duties of directors are contained in Section 291 and 293 of Companies Act.

ii. The board normally relies on the committees/management for ensuring compliance with the applicable laws. However, the directors themselves also need to be reasonably aware of all applicable laws.

iii. To ensure compliance, certifications from CEO and CFO have been made mandatory. Clause 49 of the listing agreement provide for code of conduct for BoD and senior management which is required to be posted on the website of the company. All board members and senior management personnel are required to confirm compliance with the code on an annual basis.

iv. Listed companies are also required to obtain certificate from the auditors or practicing company secretaries regarding compliance of conditions of corporate governance as stipulated under listing agreement.

Insurance

i. Compliance with the stipulations of the Insurance Act and registration requirements are to be confirmed by the statutory auditors.

Present Assessment: Fully Implemented

Overall Comments: Both Companies Act and listing agreement stipulate clear-cut obligations on the BoD in this regard. The comments under Principle VI B may be referred.

Principle VID: The board should fulfill certain key functions including (i) Reviewing and guiding corporate strategy, major plans of action, risk policy, annual budgets and business plans; setting performance objectives; monitoring implementation and corporate performance; and overseeing major capital expenditures, acquisitions and divestitures; (ii) Monitoring the effectiveness of the company’s governance practices and making changes as needed; (iii) Selecting, compensating, monitoring and, when necessary, replacing key executives and overseeing succession planning; (iv) Aligning key executive and board remuneration with the longer-term interests of the company and its shareholders; (v) Ensuring a formal and transparent board nomination and election process; (vi) Monitoring and managing potential conflicts of interest of management, board members and shareholders, including misuse of corporate assets and abuse in related party transactions; (vii) Ensuring the integrity of the corporation’s accounting and financial reporting systems, including the independent audit, and that appropriate systems of control are in place, in particular, systems for risk management, financial and operational control, and compliance with the law and relevant standard; (viii) Overseeing the process of disclosure and communications.

Earlier Assessment: Largely Observed

Current Position:

i. These functions are the responsibility of the board. To facilitate effective functioning there are various dedicated Committees, which are mandatory in the case of listed companies to monitor the effectiveness of the company’s governance practices and making changes as needed. Listing agreement mandates setting up of audit committee46 which is expected to mainly oversee and review the financials of the company, its subsidiaries, related party transactions, functioning of auditors, etc., The audit committee is also required to review the functioning of whistl-blower mechanism. As per recent amendments in the listing agreement the monitoring report47 filed by the monitoring agency with the issuer company regarding utilisation of issue proceeds is to be placed before the audit committee which, in turn, will make appropriate recommendations to the board. In term of para IV(F) of Clause 49, MDA is to include discussion on ‘Risks and Concerns.’

ii. In terms of listing agreement, there has to be a separate section on corporate governance in the Annual Reports of the company, with a detailed compliance report on corporate governance. Non-compliance of any mandatory requirement along with reasons thereof and the extent to which the non-mandatory requirements have been adopted are to be specifically highlighted.

iii. The process of selecting, compensating, monitoring and when necessary, replacing key executives is carried out by the company managements under the overall HR policy of the company. There are disclosure requirements for compensation to employees beyond the prescribed threshold. ESOPs are also to be approved by the board as well as shareholders.

iv. The remuneration paid to the BoD/managerial personnel is governed by the various provisions of the Companies Act, 1956, which is primarily based on the profits of the company. The terms and conditions for the appointment and payment of remuneration to them is also subject to the approval of shareholders. There is a formal and transparent board election process. The shareholders of the company appoint regular directors. The Board of Directors can appoint casual directors (Section 260), Additional Directors (Section 262) and Alternate Director (Section 313). Even the Central Government can nominate special directors on the board of the company (Section 408). Under the listing agreement all fees/ compensation to be paid to non-executive directors, including independent directors is to be fixed by board and requires prior approval of shareholders in general meeting. Under the non-mandatory requirements stipulated under the listing agreement, the Board is empowered to set up Remuneration Committee to look into various aspects pertaining to remuneration to be paid to executive directors.

v. Position under Principle VI (D) (iv) and II A (5) above may be referred.

vi. There are provisions in the Companies Act, 1956 that provides for monitoring and managing potential conflicts of interest of management, board members and shareholders including misuse of corporate assets and abuse in related party transactions. All the directors are required to disclose their interest to the company. Under listing agreement, all material transactions along with management’s justification are to be placed before the audit

 

46 As per Clause 49 II A of the listing agreement Audit Committee shall have

• minimum three directors

• two-third of the members as independent directors

• all financially literate members with at least one member having accounting or related financial management expertise. Chairman of the Audit Committee shall be present at the AGM to answer shareholder queries.

Powers of Audit Committee:

• To investigate any activity within its terms of reference

• To seek information from any employee

• To obtain outside legal or other professional advice

• To secure attendance of outsiders with relevant expertise, if considered necessary.

47 In terms of SEBI DIP Guidelines any company making a public or rights issue of more than Rs 500 crore has to appoint
a monitoring agency to monitor the utilisation of issue proceeds that in turn files its report with the issuer company.

 

committee. Regarding subsidiary companies, there are provisions to ensure that at least one independent director on the board of the holding company is a director on the BoD of a material non- listed Indian subsidiary company48. The audit committee of the listed holding company reviews the financial statements, in particular, the investments made by the unlisted subsidiary company. The minutes of the board meetings of the unlisted subsidiary company are to be placed at the board meeting of the listed holding company. The management is required to periodically bring to the attention of the BoD of the listed holding company, a statement of all significant transactions and arrangements entered into by the unlisted subsidiary company. Further, as stated above, the audit committee reviews statement of significant related party transactions49 (as defined by the audit committee), submitted by management. In terms of para IV(F) Clause 49 of listing agreement, companies are required to lay down procedures to inform board members about risk assessment and minimisation procedures. These procedures are to be periodically reviewed to ensure that executive management controls risks through means of properly defined framework. Information to be made available to the Board, as per para I(C) of Clause 49 of Listing agreement includes quarterly details of foreign exchange exposures and steps taken by the management to limit the risks of adverse exchange rate movement, if material.

vii. It is the duty of the board/management to ensure integrity of accounts/financial statements. The board is required by the law to disclose in their Annual Report about the financial position of the company. The Manager/Secretary and the two directors of the company (Managing Director must sign, if there is one) are required to sign the financial statements. It is optional if all the board members want to sign financial statements. Further there are certification requirements by the CEO/CFO pertaining to financials and operations of the company, in terms of Listing agreement. The company is also required to obtain certificate from the auditors or practicing company secretaries regarding compliance of conditions of corporate governance as stipulated under listing agreement. When money is raised through an issue (public issue, rights issue, preferential issue, etc.,) in terms of Clause 49 (D) there are requirements to disclose to the audit committee, the uses/applications of funds by major category (capital expenditure, sales marketing, working capital, etc.) on a quarterly basis as part of their quarterly declaration of financial results. On an annual basis, till the full money raised through the public issue is utilised, companies are required to prepare a statement, duly certified by statutory auditors, of funds utilised for purposes other than those stated in the offer document. Audit committee is required to make appropriate recommendation to the board to take up steps in this matter.

 

48 An unlisted company incorporated in India, whose turnover or net worth exceeds 20 per cent of consolidated turnover or net worth respectively of listed holding company and its subsidiary in the immediately preceding accounting year.

49 Any individual transaction or arrangement that exceeds or is likely to exceed 10 per cent of the total revenues or total expenses or total assets or total liabilities, as the case may be, of the materially unlisted subsidiary for the immediately
preceding accounting year.

 
 

viii. Clause 49 of the listing agreement stipulates that the board oversee the process of disclosure and communication.

Banks

As per Ganguly committee recommendation, banks and Fls have been advised to have Risk Management Committee.

Insurance

i. Insurance companies are required to set up investment committees. The constitution of the committee and its functions have also been stipulated under the regulations.

ii. Additional responsibilities have been entrusted upon the boards of the non-life insurance companies in the de-tariffed scenario with specific reference to the underwriting policy of their respective companies.

iii. As part of annual financial statements, insurance companies are required to submit ‘Management Report’ on various issues confirming payment of statutory dues, shareholding pattern and transfer of shares are in accordance with the statutory or regulatory requirements, policyholders funds being invested in India, solvency margins have been maintained, review of values of various assets in the balance sheet, overall risk exposure and strategy adopted to mitigate the same, performance of investments etc.

Present Assessment: Broadly Implemented

Overall Comments: With the amendment in listing agreement brought about by SEBI pursuant to Narayana Murthy Report on corporate governance, boards’ responsibilities have been substantially enhanced and further crystallised. It, however, needs to be evaluated whether the same are being implemented by companies across the board. Non-compliant companies should be identified and appropriate regulatory action initiated. Further, recent developments in the derivatives market have brought to the forefront the importance of risk management. There is a need for strengthening the existing framework with regard to risk management in listed companies. Introducing the requirement of having Risk Committees in the listing agreement can be specifically explored in this regard. Further, there is a need to promote a credible institute for the training of directors, including independent directors. Deterrent provisions and stiffer penalties may be provided for in the corporate law for violation of provisions pertaining to related party transactions.

Principle VIE: The board should be able to exercise objective independent judgement on corporate affairs (i) Boards should consider assigning a sufficient number of non-executive board members capable of exercising independent judgement to tasks where there is a potential for conflict of interest. Examples of such key responsibilities are ensuring the integrity of financial and non-financial reporting, the review of related party transactions, nomination of board members and key executives, and board remuneration; (ii) When committees of the board are established, their mandate, composition and working procedures should be well-defined and disclosed by the board; (iii) Board members should be able to commit themselves effectively to their responsibilities.

Earlier Assessment: Partially Observed

Current Position:

i. Clause 49 of the listing agreement provides for composition of the board, i.e., balance between executive and non-executive directors. It also specifies the number of independent directors required on the board. As a non-mandatory condition stipulated under listing agreement the tenure of independent directors is not to exceed, in the aggregate, nine years, on the board of a company. Position given under Principle VIA may also be seen in this regard. There are also requirements pertaining to composition of the various committees, to be set up under the listing agreement, to ensure representation by independent directors. For instance, audit committee has to be chaired by an independent director (who is required to be present at annual general meeting to answer shareholder queries) and two-thirds of its members should be independent directors. The audit committee is also mandated to meet at least four times a year and not more than four months should lapse between two meetings. Similarly, grievance committee is to be headed by independent director. The listing agreement also provides for setting up of remuneration committee, as a non-mandatory condition.

ii. The listing agreement lays down in detail the mandate, composition and working procedure with respect to various committees required to be set up.

iii. There are sufficient provisions in the Companies Act, 1956, and the listing agreement which ensures the maximum number of companies in which one person could be a director, regular attendance of directors in the board meetings and also the frequency of board meetings.

Present Assessment: Broadly Implemented

Overall Comments: Listing agreement has been amended by SEBI, pursuant to recommendations in Narayana Murthy Report on Corporate Governance to bring about greater clarity in these areas. There is, however, variance on the extent of compliance by the companies. Maximum term of independent director on the board of a company may be statutorily restricted. Eventually definition of Independent director is required to be brought in the corporate law.

Principle VIF: In order to fulfill their responsibilities, board members should have access to accurate, relevant and timely information.

Earlier Assessment: Observed

Current Position:

i. The access to the quality information in a timely manner depends on the culture of the organisation.

ii. Clause 49 of the listing agreement stipulates that the minimum information that must be made available to the board. The list includes all material information that would be required by the board for effective functioning. Further, the board is empowered to seek at any point of time any information that it may deem to be material. They also have access to expert advice.

Present Assessment: Fully Implemented

Overall Comments: Requisite provisions have been laid down in the law. The Institute of Company Secretaries of India has brought out a Secretarial Guide on boardroom practices which would serve as a repository of good practices for making board functioning effective.

 

 

Annex A

Clause 49 of the Listing Agreement

 

I.  Board of Directors

(A) Composition of Board

i. The BoD of the company shall have an optimum combination of executive and non-executive directors with not less than fifty per cent of the board of directors comprising of non-executive directors.

ii. Where the Chairman of the board is a non-executive director, at least one-third of the board should comprise of independent directors and in case he is an executive director, at least half of the board should comprise of independent directors.

Provided that where the non-executive Chairman is a promoter of the company or is related to any promoter or person occupying management positions at the board level or at one level below the board, at least one-half of the board of the company shall consist of independent directors.

Explanation-For the purpose of the expression ‘related to any promoter’ referred to in sub-clause (ii):

a. If the promoter is a listed entity, its directors other than the independent directors, its employees or its nominees shall be deemed to be related to it;

b. If the promoter is an unlisted entity, its directors, its employees or its nominees shall be deemed to be related to it.

 

iii. For the purpose of the sub-clause (ii), the expression ‘independent director’ shall mean a non-executive director of the company who:

a. apart from receiving director’s remuneration, does not have any material pecuniary relationships or transactions with the company, its promoters, its directors, its senior management or its holding company, its subsidiaries and associates which may affect independence of the director;

b. is not related to promoters or persons occupying management positions at the board level or at one level below the board;

c. has not been an executive of the company in the immediately preceding three financial years;

d. is not a partner or an executive or was not partner or an executive during the preceding three years, of any of the following:

i. the statutory audit firm or the internal audit firm that is associated with the company, and

ii. the legal firm(s) and consulting firm(s) that have a material association with the company.

e. is not a material supplier, service provider or customer or a lessor or lessee of the company, which may affect independence of the director;

f. is not a substantial shareholder of the company, i.e., owning two per cent or more of the block of voting shares;

g. is not less than 21 years of age.

 

Explanation

For the purposes of the sub-clause (iii):

a. Associate shall mean a company which is an ‘associate’ as defined in Accounting Standard (AS) 23, Accounting for Investments in Associates in Consolidated Financial Statements, issued by the Institute of Chartered Accountants of India.

b. ‘Senior management’ shall mean personnel of the company who are members of its core management team excluding BoD. Normally, this would comprise all members of management one level below the executive directors, including all functional heads.

c. ‘Relative’ shall mean ‘relative’ as defined in Section 2(41) and section 6 read with Schedule IA of the Companies Act, 1956.

d. Nominee directors appointed by an institution which has invested in or lent to the company shall be deemed to be independent directors.

Explanation:

‘Institution’ for this purpose means a public financial institution as defined in Section 4A of the Companies Act 1956 or a ‘corresponding new bank’ as defined in Section 2(d) of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 or the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980 [both Acts].

(B) Non executive directors’ compensation and disclosures

All fees/compensation, if any, paid, to non-executive directors, including independent directors, shall be fixed by the Board of Directors and shall require previous approval of shareholders in general meeting. The shareholders’ resolution shall specify the limits for the maximum number of stock options that can be granted to non-executive directors, including independent directors, in any financial year and in aggregate.

Provided that the requirement of obtaining prior approval of shareholders in general meeting shall not apply to payment of sitting fees to non-executive directors, if made within the limits prescribed under the Companies Act, 1956 for payment of sitting fees without approval of the Central Government.

 

(C) Other provisions as to Board and Committees

i. The board shall meet at least four times a year, with a maximum time gap of four months between any two meetings. The minimum information to be made available to the board is given in Annex I A.

ii. A director shall not be a member in more than 10 committees or act as Chairman of more than five committees across all companies in which he is a director. Furthermore it should be a mandatory annual requirement for every director to inform the company about the committee positions he occupies in other companies and notify changes as and when they take place.

 

Explanation:

i. For the purpose of considering the limit of the committees on which a director can serve, all public limited companies, whether listed or not, shall be included and all other companies including private limited companies, foreign companies and companies under Section 25 of the Companies Act shall be excluded.

ii. For the purpose of reckoning the limit under this sub-clause, Chairmanship/ membership of the audit committee and the shareholders’ grievance committee alone shall be considered.

iii. The board shall periodically review compliance reports of all laws applicable to the company, prepared by the company as well as steps taken by the company to rectify instances of non-compliances.

iv. An independent director who resigns or is removed from the board of the company shall be replaced by a new independent director within a period of not more than 180 days from the day of such resignation or removal, as the case may be:

Provided that where the company fulfils the requirement of independent directors in its board even without filling the vacancy created by such resignation or removal, as the case may be, the requirement of replacement by a new independent director within the period of 180 days shall not apply.

(D) Code of Conduct

i. The board shall lay down a code of conduct for all board members and senior management of the company. The code of conduct shall be posted on the website of the company.

ii. All board members and senior management personnel shall affirm compliance with the code on an annual basis. The annual report of the company shall contain a declaration to this effect signed by the CEO.

 

Explanation:

For this purpose, the term ‘senior management’ shall mean personnel of the company who are members of its core management team excluding Board of Directors. Normally, this would comprise all members of management one level below the executive directors, including all functional heads.

 

II. Audit Committee

(A) Qualified and Independent Audit Committee

A qualified and independent Audit Committee shall be set up, giving the terms of reference subject to the following:

i. The Audit Committee shall have minimum three directors as members. Two-thirds of the members of Audit Committee shall be independent directors;

ii. All members of Audit Committee shall be financially literate and at least one member shall have accounting or related financial management expertise;

 

Explanation

i. The term ‘financially literate’ means the ability to read and understand basic financial statements, i.e., balance sheet, profit and loss account, and statement of cash flows.

ii. A member will be considered to have accounting or related financial management expertise if he or she possesses experience in finance or accounting or requisite professional certification in accounting or any other comparable experience or background which results in the individual’s financial sophistication, including being or having been a Chief Executive Officer, Chief Financial Officer or other senior officer with financial oversight responsibilities.

iii. The Chairman of the Audit Committee shall be an independent director;

iv. The Chairman of the Audit Committee shall be present at Annual General Meeting to answer shareholder queries;

v. The Audit Committee may invite such of the executives, as it considers appropriate (and particularly the head of the finance function) to be present at the meetings of the Committee, but on occasions it may also meet without the presence of any executives of the company. The finance director, head of internal audit and a representative of the statutory auditor may be present as invitees for the meetings of the Audit Committee;

vi. The Company Secretary shall act as the secretary to the Committee.

(B) Meeting of Audit Committee

The Audit Committee should meet at least four times in a year and not more than four months shall elapse between two meetings. The quorum shall be either two members or one third of the members of the Audit Committee, whichever is greater, but there should be a minimum of two independent members present.

 

(C) Powers of Audit Committee

The Audit Committee shall have powers, which should include the following:

1. To investigate any activity within its terms of reference.

2. To seek information from any employee.

3. To obtain outside legal or other professional advice.

4. To secure attendance of outsiders with relevant expertise, if it considers necessary.

 

(D) Role of Audit Committee

The role of the Audit Committee shall include the following:

1. Oversight of the company’s financial reporting process and the disclosure of its financial information to ensure that the financial statement is correct, sufficient and credible.

2. Recommending to the board, the appointment, re-appointment and, if required, the replacement or removal of the statutory auditor and the fixation of audit fees.

3. Approval of payment to statutory auditors for any other services rendered by the statutory auditors.

4. Reviewing, with the management, the annual financial statements before submission to the board for approval, with particular reference to:

a. Matters required to be included in the Director’s Responsibility Statement to be included in the Board’s Report in terms of clause (2AA) of Section 217 of the Companies Act, 1956;

b. Changes, if any, in accounting policies and practices and reasons for the same;

c. Major accounting entries involving estimates based on the exercise of judgment by management;

d. Significant adjustments made in the financial statements arising out of audit findings;

e. Compliance with listing and other legal requirements relating to financial statements;

f. Disclosure of any related party transactions; and

g. Qualifications in the draft audit report.

 

5. Reviewing, with the management, the quarterly financial statements before submission to the board for approval.

5A. Reviewing, with the management, the statement of uses/application of funds raised through an issue (public issue, rights issue, preferential issue, etc.), the statement of funds utilised for purposes other than those stated in the offer document/prospectus/notice and the report submitted by the monitoring agency monitoring the utilisation of proceeds of a public or rights issue, and making appropriate recommendations to the board to take up steps in this matter.

6. Reviewing, with the management, performance of statutory and internal auditors, adequacy of the internal control systems.

7. Reviewing the adequacy of internal audit function, if any, including the structure of the internal audit department, staffing and seniority of the official heading the department, reporting structure, coverage and frequency of internal audit.

8. Discussion with internal auditors any significant findings and follow-up thereon.

9. Reviewing the findings of any internal investigations by the internal auditors into matters where there is suspected fraud or irregularity or a failure of internal control systems of a material nature and reporting the matter to the board.

10. Discussion with statutory auditors before the audit commences, about the nature and scope of audit as well as post-audit discussion to ascertain any area of concern.

11. To look into the reasons for substantial defaults in the payment to the depositors, debenture-holders, shareholders (in case of non-payment of declared dividends) and creditors.

12. To review the functioning of the whistle-blower meschanism, in case the same is existing.

13. Carrying out any other function as is mentioned in the terms of reference of the Audit Committee.

Explanation

i. The term ‘related party transactions’ shall have the same meaning as contained in the Accounting Standard 18, Related Party Transactions, issued by the Institute of Chartered Accountants of India.

ii. If the company has set up an Audit Committee pursuant to provision of the Companies Act, the said Audit Committee shall have such additional functions/features as is contained in this clause.

(E) Review of Information by Audit Committee

The Audit Committee shall mandatorily review the following information:

1. Management discussion and analysis of financial condition and results of operations;

2. Statement of significant related party transactions (as defined by the Audit Committee), submitted by management;

3. Management letters/letters of internal control weaknesses issued by the statutory auditors;

4. Internal audit reports relating to internal control weaknesses; and

5. The appointment, removal and terms of remuneration of the Chief Internal Auditor shall be subject to review by the Audit Committee.

III. Subsidiary Companies

i. At least one independent director on the BoD of the holding company shall be a director on the BoD of a material non-listed Indian subsidiary company.

ii. The Audit Committee of the listed holding company shall also review the financial statements, in particular, the investments made by the unlisted subsidiary company.

iii. The minutes of the board meetings of the unlisted subsidiary company shall be placed at the board meeting of the listed holding company. The management should periodically bring to the attention of the Board of Directors of the listed holding company, a statement of all significant transactions and arrangements entered into by the unlisted subsidiary company.

Explanation

i. The term ‘material non-listed Indian subsidiary’ shall mean an unlisted subsidiary, incorporated in India, whose turnover or net worth (i.e. paid-up capital and free reserves) exceeds 20 per cent of the consolidated turnover or net worth respectively, of the listed holding company and its subsidiaries in the immediately preceding accounting year.

ii. The term ‘significant transaction or arrangement’ shall mean any individual transaction or arrangement that exceeds or is likely to exceed 10 per cent of the total revenues or total expenses or total assets or total liabilities, as the case may be, of the material unlisted subsidiary for the immediately preceding accounting year.

iii. Where a listed holding company has a listed subsidiary which is itself a holding company, the above provisions shall apply to the listed subsidiary insofar as its subsidiaries are concerned.

 

IV. Disclosures

(A) Basis of related party transactions

i. A statement in summary form of transactions with related parties in the ordinary course of business shall be placed periodically before the Audit Committee.

ii. Details of material individual transactions with related parties which are not in the normal course of business shall be placed before the Audit Committee.

iii. Details of material individual transactions with related parties or others, which are not on an arm’s length basis should be placed before the Audit Committee, together with Management’s justification for the same.

 

(B) Disclosure of Accounting Treatment

Where in the preparation of financial statements, a treatment different from that prescribed in an Accounting Standard has been followed, the fact shall be disclosed in the financial statements, together with the management’s explanation as to why it believes such alternative treatment is more representative of the true and fair view of the underlying business transaction in the Corporate Governance Report.

(C) Board Disclosures – Risk management

The company shall lay down procedures to inform board members about the risk assessment and minimisation procedures. These procedures shall be periodically reviewed to ensure that executive management controls risk through means of a properly defined framework.

(D) Proceeds from public issues, rights issues, preferential issues, etc.

When money is raised through an issue (public issues, rights issues, preferential issues etc.), it shall disclose to the Audit Committee, the uses/applications of funds by major category (capital expenditure, sales and marketing, working capital, etc.,), on a quarterly basis as a part of their quarterly declaration of financial results. Further, on an annual basis, the company shall prepare a statement of funds utilised for purposes other than those stated in the offer document/prospectus/notice and place it before the Audit Committee. Such disclosure shall be made only till such time that the full money raised through the issue has been fully spent. This statement shall be certified by the statutory auditors of the company. Furthermore, where the company has appointed a monitoring agency to monitor the utilisation of proceeds of a public or rights issue, it shall place before the Audit Committee the monitoring report of such agency, upon receipt, without any delay. The Audit Committee shall make appropriate recommendations to the board to take up steps in this matter.

(E) Remuneration of Directors

i. All pecuniary relationship or transactions of the non-executive directors vis-à-vis the company shall be disclosed in the Annual Report.

ii. Further the following disclosures on the remuneration of directors shall be made in the section on the corporate governance of the Annual Report.

a. All elements of remuneration package of individual directors summarised under major groups, such as salary, benefits, bonuses, stock options, pension, etc.

b. Details of fixed component and performance linked incentives, along with the performance criteria.

c. Service contracts, notice period, severance fees.

d. Stock option details, if any – and whether issued at a discount as well as the period over which accrued and over which exercisable.

 

iii. The company shall publish its criteria of making payments to non-executive directors in its Annual Report. Alternatively, this may be put up on the company’s website and reference drawn thereto in the Annual Report.

iv. The company shall disclose the number of shares and convertible instruments held by non-executive directors in the Annual Report.

v. Non-executive directors shall be required to disclose their shareholding (both own or held by/for other persons on a beneficial basis) in the listed company in which they are proposed to be appointed as directors, prior to their appointment. These details should be disclosed in the notice to the general meeting called for appointment of such director.

(F) Management

i. As part of the directors’ report or as an addition thereto, a Management Discussion and Analysis Report should form part of the Annual Report to the shareholders. This Management Discussion and Analysis should include discussion on the following matters within the limits set by the company’s competitive position:

1. Industry structure and developments.

2. Opportunities and Threats.

3. Segment–wise or product-wise performance.

4. Outlook

5. Risks and concerns.

6. Internal control systems and their adequacy.

7. Discussion on financial performance with respect to operational performance.

8. Material developments in Human Resources/Industrial Relations front, including number of people employed.

 

ii. Senior management shall make disclosures to the board relating to all material financial and commercial transactions, where they have personal interest, that may have a potential conflict with the interest of the company at large (for e.g. dealing in company shares, commercial dealings with bodies, which have shareholding of management and their relatives, etc.,)

Explanation:


For this purpose, the term ‘senior management’ shall mean personnel of the company who are members of its core management team excluding the Board of Directors). This would also include all members of management one level below the executive directors including all functional heads.

(G) Shareholders

i. In case of the appointment of a new director or re-appointment of a director, the shareholders must be provided with the following information:

a. A brief resume of the director;

b. Nature of his expertise in specific functional areas;

c. Names of companies in which the person also holds the directorship and the membership of Committees of the Board; and

d. Shareholding of non-executive directors as stated in Clause 49 (IV) (E) (v) above

 

ia. Disclosure of relationships between directors inter-se shall be made in the Annual Report, notice of appointment of a director, prospectus and letter of offer for issuances and any related filings made to the stock exchanges where the company is listed.

ii. Quarterly results and presentations made by the company to analysts shall be put on company’s web-site, or shall be sent in such a form so as to enable the stock exchange on which the company is listed to put it on its own web-site.

iii. A board committee under the chairmanship of a non-executive director shall be formed to specifically look into the redressal of shareholder and investors complaints like transfer of shares, non-receipt of balance sheet, non-receipt of declared dividends etc. This Committee shall be designated as ‘Shareholders/ Investors Grievance Committee’.

iv. To expedite the process of share transfers, the board of the company shall delegate the power of share transfer to an officer or a committee or to the registrar and share transfer agents. The delegated authority shall attend to share transfer formalities at least once in a fortnight.

V. CEO/CFO certification

The CEO, i.e. the Managing Director or Manager appointed in terms of the Companies Act, 1956 and the CFO i.e. the whole-time Finance Director or any other person heading the finance function discharging that function shall certify to the board that:

a. They have reviewed financial statements and the cash flow statement for the year and that to the best of their knowledge and belief:

i. these statements do not contain any materially untrue statement or omit any material fact or contain statements that might be misleading;

ii. these statements together present a true and fair view of the company’s affairs and are in compliance with existing accounting standards, applicable laws and regulations.

 

b. There are, to the best of their knowledge and belief, no transactions entered into by the company during the year which are fraudulent, illegal or violative of the company’s code of conduct.

c. They accept responsibility for establishing and maintaining internal controls for financial reporting and that they have evaluated the effectiveness of internal control systems of the company pertaining to financial reporting and they have disclosed to the auditors and the Audit Committee, deficiencies in the design or operation of such internal controls, if any, of which they are aware and the steps they have taken or propose to take to rectify these deficiencies.

d. They have indicated to the auditors and the Audit Committee,

i. significant changes in internal control over financial reporting during the year;

ii. significant changes in accounting policies during the year and that the same have been disclosed in the notes to the financial statements; and

iii. instances of significant fraud of which they have become aware and the involvement therein, if any, of the management or an employee having a significant role in the company’s internal control system over financial reporting.

 

VI. Report on Corporate Governance

i. There shall be a separate section on corporate governance in the Annual Reports of company, with a detailed compliance report on corporate governance. Non-compliance of any mandatory requirement of this clause with reasons thereof and the extent to which the non-mandatory requirements have been adopted should be specifically highlighted. The suggested list of items to be included in this report is given in Annex I C and list of non-mandatory requirements is given in Annex I D.

ii. The companies shall submit a quarterly compliance report to the stock exchanges within 15 days from the close of quarter as per the format given in Annex I B. The report shall be signed either by the compliance officer or the Chief Executive Officer of the company.

VII. Compliance

1. The company shall obtain a certificate from either the auditors or practicing company secretaries regarding compliance of conditions of corporate governance as stipulated in this clause and annex the certificate with the directors’ report, which is sent annually to all the shareholders of the company. The same certificate shall also be sent to the Stock Exchanges along with the Annual Report filed by the company.

2. The non-mandatory requirements given in Annex I D may be implemented as per the discretion of the company. However, the disclosures of the compliance with mandatory requirements and adoption (and compliance)/non-adoption of the non-mandatory requirements shall be made in the section on corporate governance of the Annual Report.
 
 

Annex I A

Information to be Placed Before Board of Directors

 
1. Annual operating plans and budgets and any updates.

2. Capital budgets and any updates.

3. Quarterly results for the company and its operating divisions or business segments.

4. Minutes of meetings of Audit Committee and other committees of the board.

5. The information on recruitment and remuneration of senior officers just below the board level, including appointment or removal of Chief Financial Officer and the Company Secretary.

6. Show cause, demand, prosecution notices and penalty notices which are materially important.

7. Fatal or serious accidents, dangerous occurrences, any material effluent or pollution problems.

8. Any material default in financial obligations to and by the company, or substantial non­payment for goods sold by the company.

9. Any issue, which involves possible public or product liability claims of substantial nature, including any judgement or order which, may have passed strictures on the conduct of the company or taken an adverse view regarding another enterprise that can have negative implications on the company.

10. Details of any joint venture or collaboration agreement.

11. Transactions that involve substantial payment towards goodwill, brand equity, or intellectual property.

12. Significant labour problems and their proposed solutions. Any significant development in Human Resources/Industrial Relations front like signing of wage agreement, implementation of Voluntary Retirement Scheme, etc.

13. Sale of material nature, of investments, subsidiaries, assets, which is not in normal course of business.

14. Quarterly details of foreign exchange exposures and the steps taken by management to limit the risks of adverse exchange rate movement, if material.

15. Non-compliance of any regulatory, statutory or listing requirements and shareholders service such as non-payment of dividend, delay in share transfer, etc.

Annex I B

Format of Quarterly Compliance Report on Corporate Governance

Name of the Company:

Quarter ending on:
 

Particulars

Clause of
Listing
Agreement

Compliance
Status
Yes/No

Remarks

1

2

3

4

I. Board of Directors

491

 

 

(A) Composition of Board

49 (IA)

 

 

(B) Non-executive Directors’ compensation and disclosures

49 (IB)

 

 

(C) Other provisions as to Board and Committees

49 (IC)

 

 

(D) Code of Conduct

49 (ID)

 

 

II. Audit Committee

49 (II)

 

 

(A) Qualified and Independent Audit Committee

49 (IIA)

 

 

(B) Meeting of Audit Committee

49 (IIB)

 

 

(C) Powers of Audit Committee

49 (IIC)

 

 

(D) Role of Audit Committee

49 II(D)

 

 

(E) Review of Information by Audit Committee

49 (IIE)

 

 

III. Subsidiary Companies

49 (III)

 

 

IV. Disclosures

49 (IV)

 

 

(A) Basis of related party transactions

49 (IV A)

 

 

(B) Disclosure of Accounting Treatment

49 (IV B)

 

 

(C) Board Disclosures

49 (IV C)

 

 

(D) Proceeds from public issues, rights issues, preferential issues etc.

49 (IV D)

 

 

(E) Remuneration of Directors

49 (IV E)

 

 

(F) Management

49 (IV F)

 

 

(G) Shareholders

49 (IV G)

 

 

V.  CEO/CFO Certification

49 (V)

 

 

VI. Report on Corporate Governance

49 (VI)

 

 

VII. Compliance

49 (VII)

 

 

Note: 1.  The details under each head shall be provided to incorporate all the information required as per the provisions of the Clause 49 of the Listing Agreement.

 2. In the column No.3, compliance or non-compliance may be indicated by Yes/No/N.A. For example, if the board has  been composed in accordance with the Clause 49 I of the Listing Agreement, ‘Yes’ may be indicated. Similarly, in case the company has no related party transactions, the words ‘N.A.’ may be indicated against 49 (IV A).

3. In the remarks column, reasons for non-compliance may be indicated, for example, in case of requirement related to circulation of information to the shareholders, which would be done only in the AGM/EGM, it might be indicated in  the ‘Remarks’ column as – ‘will be complied with at the AGM’. Similarly, in respect of matters which can be complied  with only where the situation arises, for example, ‘Report on Corporate Governance’ is to be a part of Annual Report only, the words ‘will be complied in the next Annual Report’ may be indicated.

 
 

Annex I C

Suggested List of Items to be Included in the Report on Corporate Governance in the Annual Report of Companies

 
1. A brief statement on company’s philosophy on code of governance.

2. Board of Directors:

i. Composition and category of directors, for example, promoter, executive, non­executive, independent non-executive, nominee director, which institution represented as lender or as equity investor.

ii. Attendance of each director at the board meetings and the last AGM.

iii. Number of other Boards or Board Committees in which he/she is a member or Chairperson.

iv. Number of board meetings held, dates on which held.

3. Audit Committee:

i. Brief description of terms of reference.

ii. Composition, name of members and Chairperson.

iii. Meetings and attendance during the year.

4. Remuneration Committee:

i. Brief description of terms of reference.

ii. Composition, name of members and Chairperson.

iii. Attendance during the year.

iv. Remuneration policy.

v. Details of remuneration to all the directors, as per format in main report.

5. Shareholders’ Committee:

i. Name of non-executive director heading the committee.

ii. Name and designation of compliance officer.

iii. Number of shareholders’ complaints received so far.

iv. Number not solved to the satisfaction of shareholders.

v. Number of pending complaints.

6. General Body meetings:

i. Location and time, where last three AGMs held.

ii. Whether any special resolutions passed in the previous three AGMs.

iii. Whether any special resolution passed last year through postal ballot – details of voting pattern.

iv. Person who conducted the postal ballot exercise.

v. Whether any special resolution is proposed to be conducted through postal ballot

vi. Procedure for postal ballot.

7. Disclosures:

i. Disclosures on materially significant related party transactions that may have potential conflict with the interests of company at large.

ii. Details of non-compliance by the company, penalties, strictures imposed on the company by stock exchange or SEBI or any statutory authority, on any matter related to capital markets, during the last three years.

iii. Whistle-Blower policy and affirmation that no personnel has been denied access to the Audit Committee.

iv. Details of compliance with mandatory requirements and adoption of the non-mandatory requirements of this clause.

8. Means of communication:

i. Quarterly results.

ii. Newspapers wherein results normally published.

iii. Any website, where displayed.

iv. Whether it also displays official news releases.

v. The presentations made to institutional investors or to the analysts.

9. General Shareholder information:

i. AGM: Date, time and venue.

ii. Financial year.

iii. Date of Book closure.

iv. Dividend Payment Date.

v. Listing on Stock Exchanges.

vi. Stock Code.

vii. Market Price Data: High, Low during each month in last financial year.

viii. Performance in comparison to broad-based indices such as BSE Sensex, CRISIL index, etc.

ix. Registrar and Transfer Agents.

x. Share Transfer System.

xi. Distribution of shareholding.

xii. Dematerialisation of shares and liquidity.

xiii. Outstanding GDRs/ADRs/Warrants or any Convertible instruments, conversion date and likely impact on equity.