Inside this issue

From the desk of Director GeneralIndependent Director - A pillar of Corporate Governance - Article Independent Director - Some snippets Crossword Summary of recent events in RTI, Courses conductedPhoto Gallery

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भारतीय लेखापरीक्षा और लेखा वि�भाग के्षत्रीय प्रशि�क्षण संस्थान, मुंबई

Indian Audit & Accounts Department

Regional Training Institute, Mumbai

सूचनापत्र /NewsletterIssue 8 September 2016 (e-Newsletter Edition 1)

From the desk of Director General……

Companies today need to be not only managed but also governed. The governance framework comprises of

Conformance or corporate governance and Performance or business governance, which together represent the entire

value creation, resource utilisation and accountability framework of an organisation. Successful organisations are

those which strike a right balance of the two dimensions, achieving good corporate governance that is linked

strategically with performance management.

Governance of Corporate or Corporate Governance is a function of governance failures in Corporate. It was the series

of business scandals and collapse of prominent companies, in the late 1980s, which brought corporate governance to

the forefront in the United Kingdom and led to the setting up of the Cadbury Committee headed by Sir Adrian

Cadbury by the London Stock Exchange, the Financial Reporting Council and the accountancy profession. Their

concern it is said, was not so much that the companies had failed as that their reports and accounts, just prior to their

failure, appeared to give no forewarning of the true state of their financial failures. The Sarbanes-Oxley Act in the

United States of America to increase accuracy of financial reporting and independence of audit also happened in the

aftermath of the Enron scandal and others.

Cut to India, early 2000s, the story repeats, the Satyam Computers Limited scandal, admitting massive fraud

perpetuated over a number of years and the board members according to the perpetrator, none the wiser. Fallout,

reforms in Corporate Governance- insertion of Clause 49 in the Listing Agreement with SEBI in 2001, DPE

Guidelines on Corporate Governance for Central Public Sector Enterprises 2010, the New Companies Act 2013 etc.

The failures in corporate governance are attributed in related literature to the ‘agency problem’ wherein there is

separation of management from ownership and the management, who is the agent of the shareholders, fails to act in

the interest of shareholders. In the absence of alignment of the interest of the manager and the company, the manager

is said to indulge in self-dealing because he has hundred percent control over the resources that the company holds

but less than hundred percent right on the cash flows that the company generates. Incentives to the manager to align

his interest to that of the company do not result in the desired outcome. Often, the manager indulges in accounting

fraud and takes decisions for short-term market performance to enhance the quantum of his incentive. Therefore,

effective monitoring of the manager is required to ensure that he takes decisions for the benefit of the company. The

board of directors and more specifically the independent directors on the boards become responsible for monitoring

the manager.

In this first edition of e-newsletter we remember the father of modern Corporate Governance, Sir. Adrian Cadbury

(15th April 1929 - 3rd September 2015) and dedicate this edition to the spirit and role of the Independent Director- a

pillar of Corporate Governance.

Kavitha Kestur

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Independent Director - A pillar of Corporate Governance

Ideal management and administration of a company is often compared to democracy. In a democracy, policy

decisions are taken by elected representatives of the people. In a company, policy decisions are taken by

directors who are elected by the shareholders of the company. Among the elected representatives, a majority

who form the executive government are in charge of day to day activities of administration and implementation

of policies. These can be compared to executive directors. There is another set of players in a democracy,

namely the opposition. An ideal opposition plays a constructive role in critically examining the decisions of the

executive and to act as a voice of conscience. They ensure that the executive does not take decisions which are

against the Constitution or against the will and welfare of the people. This role is played by an independent

director in a company. The independent director ensures that the decisions taken by the Board of Directors are

ethical and are equitably in the interests of all stakeholders - the shareholders, lenders, employees, customers,

government, revenue, citizens and so on.

The independent director is a director who does not have any direct or indirect vested interest in relation to the

company in which he is appointed as an independent director. This independence is secured by the definition of

the term 'independent director' as given in the Companies Act, 2013, the DPE guidelines for Central PSEs and

Clause 49 of SEBI's listing agreement/Listing Obligations and Disclosure Regulations, 2015 (LODR, 2015).

While doing the audit of compliance of corporate governance norms, we would look at whether one-third of the

directors in a listed PSU are independent. We would look at compliance of the definition of independent

directors. For example, we would see if government nominee directors have not been wrongly counted as

independent directors.

If they are covered by DPE guidelines for CPSEs, at least half of the directors in a company with a Chairman as

an executive director should be independent. We would look at whether there are 2 independent directors in

public companies exceeding paid-up capital/ turnover/ borrowing thresholds prescribed in rules.

We would see if the criteria regarding relevant experience and expertise as stipulated by DPE Guidelines are

met. We would see if the norms on independent directors under Clause 49 of SEBI's Listing Agreement/LODR,

2015 are complied with in listed companies.

But more importantly, we can get leads in compliance audit by looking at the role played by an independent

director in a Company.

In a PSU, one may wonder what would be the role of an independent director. As in any other company, here

too, an independent director is a conscientious and not-so-silent sentinel. Even in a PSU, decisions may not be in

the best interests of all stakeholders. In such cases, an independent director's views will be a bulwark against

unchallenged decision making by a dominant group of directors. Let us look at some situations in which an

independent director may have something to say.

1. It is possible that the PSU of a Board may propose to pay out more dividend than is warranted by its

financial situation. This may be to meet targets set by administrative Ministries. Such artificial and mechanical

compliance with Ministry's directives may be detrimental to the Company. As a major controller of funds and

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decisions, the government and its nominees- the executive directors may be in a position to take such dividend

decisions. An independent director can raise objections to such proposals based on an unbiased study of the

financial position and prospects of the company. Whether his views are ultimately accepted or not may not be

material as any record of alternate views would be an input to auditors and CAG for framing their observations

and conclusions on the same.

2. On the accounting policies adopted by a company, an independent director can bring in his views based

on his experience and directorships in a variety of companies. The fact that he is not in direct charge of the

operations of any of the companies in which he is an independent director makes him unbiased. He can look at

the accounting policies accordingly purely based on their merit and suitability, rather than with a point of view

of window dressing.

3. At the outset, it may seem that PSUs may not be subject to the scourge of related party transactions as

most of the directors are civil employees of the government. In fact, related party transactions can be much more

deep rooted, sinister and can have much more pervasive effects in a PSU. An independent director can check

such transactions from causing damage, unbridled. Power vested in executive directors to award contracts can

lead to nepotism. Let us imagine that we have an infrastructure company in the public sector. It is in charge of

awarding contracts for urban development including construction of roads and footpaths. What would be the

situation if contracts are granted to parties based on political affiliations, proximity to people in power, bias or

because they are a front for transferring funds to vested interests? Naturally, there would be poor quality of

work, lack of responsibility and suffering to the citizens. Paver blocks and potholes on footpaths and roads

would lead to accidents and consequent loss of lives. It would also lead to repetitive expenditure on needless

repairs and high maintenance costs. Thus the idea of a related party in a PSU may not just be the traditionally

defined relative or person associated with one company, holding office in other companies as well. The meaning

of the term related party could also be extended in substance, and not only in legal form, to any person who is in

a position to influence decision making and can draw personal benefit therefrom. This extended interpretation of

the related party concept and assessment of its implications can be done by an independent director who has

fuller access to the records and knowledge of the situation in a company. He can object to such contracts.

4. Can an independent director prevent insider trading? Imagine a 'family-run' public company. The family

would be the first to access all price-sensitive information; i.e.: - information, the knowledge of which is likely

to impact stock prices. A hint of impending declaration of loss may erode the price of the company's securities in

the stock market. The family can sell its shares before the crash. If it is aware of a major acquisition which

would boost the shares, the family would buy more securities at lower prices and profit from the boom, when it

happens. Rather than trading on profits and maximising shareholders' wealth, the management would end up

misusing its access to confidential information for pure personal gain. When there is an independent director on

the Board, he acts almost like a CCTV which watches upon the acts of the executive director. Misuse of secrecy

is countered by transparency on a "need to know" basis. An executive director would be wary of setting off an

alarm from an independent director about suspicious share dealings correlated with price sensitive information

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which was not yet made public. This is because the independent director has access to the decisions and

workings of the Company. The strictest of penalties under the Companies Act, 2013 is on insider trading.

Is insider trading an issue in PSUs? Again, there is more to it than appears on the surface. Insider trading in the

traditional sense of using price sensitive information to derive undue benefit from the stock market may be a

limited risk in PSUs. But, the prospects of profiting from inside information or even creating information to

derive personal benefits is very much within the realm of possibilities in a PSU.

Again, if we think of a PSU in charge of construction of infrastructure or development of real estate, it is very

much possible that its top management or persons wielding effective control thereof may buy cheap green-field

land, create news about an upcoming project thereon and profit from price increases due to expected

development. On exiting the real estate, the project can be kept in cold storage, till prices cool down and then the

cycle could re-start. To counter such transactions, which are, in essence, nothing but a version of insider trading

beyond the securities market; only an insider who knows these dealings, while being immune from these, can

question the transaction. Here too, an independent director can play a major role.

5. As a member of an audit committee of the Board of a PSU, an independent director can present an

independent view on financial statements and on whether related party transactions are really made at an arm's

length (i.e.: - transactions between two related parties conducted as if they were unrelated, so that there is no

conflict of interest). An independent director, as a chairperson of the Audit Committee, can be a credible focal

point for reporting concerns under the vigil/ whistle-blower mechanism. As he is not an executive director, fears

of victimisation of the person reporting the concerns would recede. This avenue would check wrong-doing. This,

in turn, would reduce overall risk for the auditor, as he can stay rest assured about robust internal controls.

6. An independent director is the chairperson of a nomination and remuneration committee of a company

or the remuneration committee of a CPSE. A direct audit point in CPSEs would arise if Performance Related Pay

is released to top management without an independent director on its Board. The independent director can give

vital inputs regarding expected quality of top managerial personnel. A balanced and reasonable pay structure can

be developed without yielding to excessive demands of executive directors and at the same time, retaining talent.

An independent director does not draw managerial remuneration and hence is not likely to be biased in favour of

an unreasonable decision for enhancement of pay. Minutes of meetings in this regard can yield audit points.

7. The performance of independent directors is reviewed by the Board and the performance of non-

independent directors can be reviewed by independent directors in their exclusive annual meeting. Minutes of

meetings in this regard can yield audit points. Different groups of individuals evaluate each other. Thus, there is

check on each other and an in-built mechanism to prevent growth of power centres.

8. The independent director is more likely to inject professionalism into the managerial decision process of

PSUs. As he does not come from a bureaucratic background, his decisions are more likely to be outcome-

oriented rather than purely rule or interpretation-driven.

9. Independent directors have a varied knowledge and experience of different fields of activity. They are

expected to have appropriate skills, experience and knowledge in one or more fields of finance, law,

management, sales, marketing, administration, research, corporate governance, technical operations or other

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disciplines related to the company’s business. Thus, they come from diverse backgrounds which will help in

developing newer insights and broader perspectives in company decision-making.

10. It is possible that industry leaders from the private sector are appointed as

independent directors in government companies. Thus, the best practices of private sector can be absorbed into

PSU management.

We can conclude by observing that while the role of an independent director is similar to that of a constructive

opposition in a democracy, there is an important difference. There is absolutely no chance of independent

directors replacing executive directors! Hence, their dissent is more likely to be reasonable and never motivated

by even a tinge of self-interest. If shareholders (government in case of PSUs) are not satisfied with their

executive directors, all they would do is to bring in a new team of executives – a new set of senior bureaucrats

and professional managers who can rectify the situation. Independent directors would continue as non-executive

and untrammelled directors.

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In no case can there be any appeasement at the cost of honour. Real appeasement is to shed all fear and do what is right at any cost.

Mahatma GandhiCorporate governance is concerned with holding the balance between economic and social goals and between individual and communal goals. The governance framework is there to encourage the efficient use of resources and equally to

require accountability for the stewardship of those resources. The aim is to align as nearly as possible the interests of individuals, corporations and society.

Sir Adrian CadburyJustice consists not in being neutral between right and wrong, but in finding out

the right and upholding it, wherever found, against the wrong. Theodore Roosevelt

Snippets on Corporate Governance: Independent DirectorCompanies Act, 2013 - Provisions on Independent Directors

S.149(4) Every listed public company shall have at least one-third of the total number of directors as independent

directors and the Central Government may prescribe the minimum number of independent directors in case of any

class or classes of public companies.

Explanation.—For the purposes of this sub-section, any fraction contained in such one-third number shall be rounded off as one.S.149(6) An independent director in relation to a company, means a director other than a managing director or a

whole-time director or a nominee director,—

(a) who, in the opinion of the Board, is a person of integrity and possesses relevant expertise and experience;

(b) (i) who is or was not a promoter of the company or its holding, subsidiary or associate company;

(ii) who is not related to promoters or directors in the company, its holding, subsidiary or associate company;

(c) who has or had no pecuniary relationship with the company, its holding, subsidiary or associate company, or their

promoters, or directors, during the two immediately preceding financial years or during the current financial year;

(d) none of whose relatives has or had pecuniary relationship or transaction with the company, its holding, subsidiary

or associate company, or their promoters, or directors, amounting to two per cent. or more of its gross turnover or total

income or fifty lakh rupees or such higher amount as may be prescribed, whichever is lower, during the two

immediately preceding financial years or during the current financial year;

(e) who, neither himself nor any of his relatives—

(i) holds or has held the position of a key managerial personnel or is or has been employee of the company or its

holding, subsidiary or associate company in any of the three financial years immediately preceding the financial year

in which he is proposed to be appointed;

(ii) is or has been an employee or proprietor or a partner, in any of the three financial years immediately preceding the

financial year in which he is proposed to be appointed, of—

(A) a firm of auditors or company secretaries in practice or cost auditors of the company or its holding, subsidiary or

associate company; or

(B) any legal or a consulting firm that has or had any transaction with the company, its holding, subsidiary or associate

company amounting to ten per cent. or more of the gross turnover of such firm;

(iii) holds together with his relatives two per cent. or more of the total voting power of the company; or

(iv) is a Chief Executive or director, by whatever name called, of any non-profit organisation that receives twenty-five

per cent. or more of its receipts from the company, any of its promoters, directors or its holding, subsidiary or

associate company or that holds two per cent. or more of the total voting power of the company; or

(f) who possesses such other qualifications as may be prescribed.

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Listing Obligations and Disclosure Regulations, 2015 (LODR)- Provisions on Independent DirectorsR.17 (1) (b) where the chairperson of the board of directors is a non-executive director, at least one-third of

the board of directors shall comprise of independent directors and where the listed entity does not have a

regular non-executive chairperson, at least half of the board of directors shall comprise of independent

directors.

(6) (a) The board of directors shall recommend all fees or compensation, if any, paid to non-executive

directors, including independent directors and shall require approval of shareholders in general meeting.

(d) Independent directors shall not be entitled to any stock option.

(10) The performance evaluation of independent directors shall be done by the entire board of directors

R.18 (1)(b) Two-thirds of the members of audit committee shall be independent directors.

R.25. (1) A person shall not serve as an independent director in more than seven listed entities:

Provided that any person who is serving as a whole time director in any listed entity shall serve as an

independent director in not more than three listed entities.

(2) The maximum tenure of independent directors shall be in accordance with the Companies Act, 2013 and

rules made thereunder, in this regard, from time to time.

(3) The independent directors of the listed entity shall hold at least one meeting in a year, without the

presence of non-independent directors and members of the management and all the independent directors

shall strive to be present at such meeting.

(4) The independent directors in the meeting referred in sub-regulation (3) shall, interalia-

(a) review the performance of non-independent directors and the board of directors as a whole;

(b) review the performance of the chairperson of the listed entity, taking into account the views of executive

directors and non-executive directors;

(c) assess the quality, quantity and timeliness of flow of information between the management of the listed

entity and the board of directors that is necessary for the board of directors to effectively and reasonably

perform their duties.

(6) An independent director who resigns or is removed from the board of directors of the listed entity shall

be replaced by a new independent director by listed entity at the earliest but not later than the immediate

next meeting of the board of directors or three months from the date of such vacancy, whichever is later:

Provided that where the listed entity fulfils the requirement of independent directors in its board of directors

without filling the vacancy created by such resignation or removal, the requirement of replacement by a

new independent director shall not apply.

______________________________________________________________________________________

SOLUTIONS TO CROSSWORD:ACROSS: 4. GOVERNANCE 8. THREEPHASE 9. IFRS 10. STATUTORYAUDITOR 13. SIX

14. INDAS 15. SUPPLEMENTARYDOWN: 1. COSTACCOUNTANTS 2. TEN 3. COMPANYSECRETARY 5. NFRA 6. IPSAS

7. ONECRORE 11. TEST 12. IRDA

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Duties of Independent Directors

The independent directors shall—(1) undertake appropriate induction and regularly update and refresh their skills, knowledge and

familiarity with the company;

(2) seek appropriate clarification or amplification of information and, where necessary, take and

follow appropriate professional advice and opinion of outside experts at the expense of the

company;

(3) strive to attend all meetings of the Board of Directors and of the Board committees of which

he is a member;

(4) participate constructively and actively in the committees of the Board in which they are

chairpersons or members;

(5) strive to attend the general meetings of the company;

(6) where they have concerns about the running of the company or a proposed action, ensure that

these are addressed by the Board and, to the extent that they are not resolved, insist that their

concerns are recorded in the minutes of the Board meeting;

(7) keep themselves well informed about the company and the external environment in which it

operates;

(8) not to unfairly obstruct the functioning of an otherwise proper Board or committee of the

Board;

(9) pay sufficient attention and ensure that adequate deliberations are held before approving

related party transactions and assure themselves that the same are in the interest of the company;

(10) ascertain and ensure that the company has an adequate and functional vigil mechanism and

to ensure that the interests of a person who uses such mechanism are not prejudicially affected on

account of such use;

(11) report concerns about unethical behaviour, actual or suspected fraud or violation of the

company’s code of conduct or ethics policy;

(12) acting within his authority, assist in protecting the legitimate interests of the company,

shareholders and its employees;

(13) not disclose confidential information, including commercial secrets, technologies,

advertising and sales promotion plans, unpublished price sensitive information, unless such

disclosure is expressly approved by the Board or required by law.

Penalties on Independent DirectorsAn independent director shall be held liable, only

in respect of such acts of omission or commission

by the company which had occurred with his

knowledge, attributable through processes of board

of directors, and with his consent or connivance or

where he had not acted diligently.

Why is it that a number of independent directors are quitting the boards of real estate developers?The fear is that under The Real Estate (Regulation and

Development) Act, 2016-RERA, independent directors can

be held accountable in case a company fails to comply with

the new stringent regulations.

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Newsletter Crossword (September-October 2016)RTI, Mumbai

EclipseCrossword.comAcross4. Provisions on Independent Directors are part of

Corporate ................8. ....................... audit (2 words) reduces audit comments on accounts.

9. IPSAS draws from .................10. Adequacy of Internal financial controls are to be reported upon by .............. (2

words)13. AS ........ has been deleted for companies14. IFRS-based standards adapted for India are known as ............15. Financial Audit of Companies is a .............. Audit

Down1. Cost auditing standards are formulated by The

Institute of ......... (2 words) of India.2. AS ..... has been revamped for companies3. ............. (2 words) is responsible for organising meetings of a company5. ............. is the authority being established, with powers to levy penalties on

erring CAs6. ............... are accounting standards adopted by the UN.7. Threshold limit for auditors to report corporate frauds to MCA is Rs. ....... (2

words)11. Compliance and Performance Audits of Companies are ...... audits12. IndAS can be adopted by Insurance Companies if and as directed by .........

Solutions on Page 8

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Events in RTI, Mumbai since publication of previous newsletter

1. Smt. Kavitha Kestur took over as Director General, RTI, Mumbai w.e.f. 6 October 2016.

2. Shri Sundar Ramakrishnan, Sr. Audit Officer (CF/KC & C) took repatriation w.e.f. 30.04.2016 after 4

years of all-round and dedicated service in RTI, which was well appreciated by one and all.

Smt. Maheswari V., Sr.Audit Officer from O/o PAG (Audit)-I, Mumbai joined RTI, Mumbai in his

place.

3. Shri D.K. Salunke, Sr. Audit Officer (CF/EDP) retired on superannuation on 31.05.2016 after 24 years of

tireless service in RTI. Smt. Shalini Vijayan, Sr.Audit Officer from O/o PAG (Audit)-I, Mumbai joined

RTI, Mumbai in his place.

4. Shri Chetan Jobanputra, AAO (CF/EDP) took repatriation w.e.f. 31.07.2016 after 2 years of service in

RTI. His lectures were always highly appreciated by participants.

5. Shri Ashok.R.Gade, AAO (Admn.) proceeded on repatriation to his parent office w.e.f. 3 June 2016.

Smt. Seeta Magi, Asst.Audit Officer from O/o PAG (Audit)-I, Mumbai joined RTI, Mumbai in his place.

___________________________________________________________________________________

Courses we conducted from 1-4-2016 to 30-9-2016

Non-EDP Courses:-

1. Regulations on Audit & Accounts 2007

2. Certification Audit of Accounts including Financial Audit of Autonomous Bodies

3. Transfer Pricing4. All India Seminar on General Purpose-Financial

Reporting (IPSAS)

5. Right to Information Act

6. CERA and Audit of ACES

7. Induction course for Auditors and Accountants including Office Procedure & CCS (Conduct) Rules, Gender Awareness & Ethics

8. Financial Attest Audit Guidelines (FAAG)

9. Awareness of ISSAIsAudit of Direct Taxes10. Audit Evidence12. Preparation and conduct of DPC meeting and

maintenance and implementation of rosters13. Development of Management Skills14. Communication & Motivation & APARs15. Audit Reporting16. Statistical Sampling in Audit

Additional Training:-Non-EDPTraining on IndAS jointly organized by CAG of India

and IndAS implementation committee of CA institute in collaboration with O/o PAG (Audit)-III, Mumbai

EDP Courses:-

1. Audit in IT Environment (Six programmes)

2. Qlikview Software

3. IT Audit

4. IDEA (Two programmes)

5. Oracle Backend - SQL

Additional Training:-EDP1. Seminar on Big Data2. Training on Data Analytics (All India level) (three

programmes)Infrastructure support was provided to the following conferences/ International Training programmes: -1. Conference of the O/o Director of Audit, Navy,

Mumbai

2. Trainees from SAI, Bangladesh

3. Workshop on Statistical Sampling for O/o PAG (Audit)-III, Mumbai

4. Mid-term appraisal meeting on Thematic Audit on "Parcel business in Indian Railways" of the O/o Principal Director of Audit, Central Railway

5. Annual CRA Workshop for Group A & B officials

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Mid-term Meeting of the RAC was held on 23 September 2016.

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All India Training on Data Analytics06.09.2016 to 10.09.2016

All India Training on Data Analytics14.09.2016 to 17.09.2016

All India Seminar on IPSAS

23.05.2016 to 24.05.2016

Training on IndAS09.05.2016 to 11.05.2016

Customs Training for SAI, Bangladesh29.05.2016 to 01.06.2016

All India Training on Data Analytics19.09.2016 to 23.09.2016