Policies- Required by Corproates_icai Journal_nov-2015

7/24/2019 Policies- Required by Corproates_icai Journal_nov-2015

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www.icai.org 97THE CHARTERED ACCOUNTANT

NOVEMBER 2015

Corporate Policies Must Haves

Also, new concepts such as one-person company,small company, dormant company, class action suits,registered valuers and corporate social responsibilityhave been included.

Due to such changes, there are direct andresulting changes on the corporate policies thata company must have to ensure smooth flow of

business operations and regulatory compliance.

Select Key Changes in the Provisions ofthe Companies Act

I. Appointment of a Woman DirectorII. Performance Evaluation of Independent

DirectorsIII. Separate Meeting of Independent Directors

and raining of Independent DirectorsIV. Succession Plan For Board/Senior ManagementV. Compulsory Whistleblower MechanismVI. Constitution of Nomination and Remuneration

Committee

Corporate policies lay down the guiding principles and procedures according to which the

company operates. Te Companies Act, 2013 and the amendment of Clause 49 of Equity Listing

Agreement have introduced various provisions which have required significant changes in the

corporate policies. Some provisions have mandated specified policies, while various sections talk

about important matters on which it is advisable to have policy documents. Tis article identifies

and discusses corporate policies that are directly driven by the regulatory framework and alsolist down various other best practice policies which should also be documented in order to ensure

improved corporate governance. Read on...

CA. Kamal Keswani

(Te author is a member of theInstitute who may be reached at

[email protected].)

Background

Introduction of the Companies Act, 2013 followedby the amendment of Clause 49 of Equity ListingAgreement issued by the SEBI has resulted into aparadigm shift in the regulatory framework withemphasis on much needed corporate governance.Tese regulatory changes have far reachingimplications that are set to significantly change themanner in which companies operate in India.

Significant changes are introduced in theprovisions related to auditors, governance,e-management, compliance and enforcement,disclosure norms and mergers and acquisitions.

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www.icai.orgTHE CHARTERED ACCOUNTANT

NOVEMBER 201598

VII. Disclosure in Annual Report aboutRemuneration Policy and Evaluation Criteria

VIII. Related Party ransactions.A goal of an economic legislation like the

Companies Act, 2013 is to induce the economicgrowth with more desirable multifaceted robustgovernance and it will never aim to create abottleneck in the economic growth of any nation. Abare reading of the Companies Act, 2013 suggestsreader friendliness, whereas a detailed study leavesample room for interpretation and ambiguity. Inorder to bring stability and uniformity within thecompany, management needs to pen down thecorporate policies that act as guidelines for theiremployees and associates.

An UnderstandingAs per Oxford Dictionary, a policy is defined as acourse or principle of action adopted or proposed byan organisation or individual. Having the corporatepolicy documents in place is critical to the business,when properly managed, they induce an oversightfrom the enterprise level to business units anddepartments, and then to individuals.

Correct and succinct articulation of thesedocuments is of utmost importance as it translatesthe corporate vision, mission and goals in writing

and set parameters that govern the conduct ofbusiness. It can be used as a tool to introduce thebest practices followed globally. A policy shouldbe as precise as possible to reduce any room formisinterpretation, as one of the prime objectives ofa policy is to streamline and bring uniformity acrossthe organisation.

In this document, a total of 31 polices areidentified out of which there are 7 mandatorypolicies, 9 essential policies and 15 best practicepolicies. Mandatory and essential policies arediscussed in detail whereas best practice polices arelisted out.

I. Mandatory PoliciesOn a close perusal of the Companies Act, 2013

Having the corporate policy documents in place iscritical to the business, when properly managed,

they induce an oversight from the enterprise levelto business units and departments, and then to

individuals.

along with the Equity Listing Agreement, thereare various Sections that are specific enough tomandate having the policy on a matter; for example,according to Section 134(n) of the Act a statement

indicating development and implementation of arisk management policy for the company includingidentification therein of elements of risk, if any,which in the opinion of the Board may threaten theexistence of the company.

Following is the list of mandatory policies withreference of their relevant provisions:

Sr.No.

Policy Relevant Provision

1 Risk ManagementPolicy

Section 134 of theCompanies Act, 2013and Clause 49of Equity ListingAgreement (BoardDisclosures)*

2 Corporate SocialResponsibility Policy

Section 135 ofCompanies Act, 2013

3 Nomination andRemuneration Policy

Section 178 of theCompanies Act, 2013and Clause 49(IV)(A) of Equity ListingAgreement *

4 Code for IndependentDirector

Schedule IV to theCompanies Act, 2013

5 Material SubsidiaryPolicy

Clause 49 of EquityListing Agreement *

6 Board Diversity Policy Section 149 of theCompanies Act,2013 and Clause 49of Equity ListingAgreement *

7 Code of Conduct forBoard Members andSenior ManagementPersonnel

Clause 49 (II) (E)of Equity ListingAgreement *

* Te policies having relevant provision as Clause

49 indicated by * are applicable only to listedcompanies.1. Risk Management Policy: Effective

management of business risks is extremelycritical to achieve positive results and enhancecorporate reputation. It has been seen thatalthough significant risks are often knownto the personnel of company, it may not getenough attention of top management, and thusmay result in significant losses to the company.Risk management oversees and ensures the

integrity of the process with which risks aretaken.

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Te purpose of this policy is to:i. Embed risk management across all

the business units and critical supportfunctions.

ii. Make risk management everyonesresponsibility.

iii. Link risk management to businessperformance of the company.

2. Corporate Social Responsibility Policy:Needless to point out the inevitable factthat a company operates in a society and it isdependent on society for its continuity andthriving. Considering this rationale, variouscorporate social responsibility (CSR) initiativeswere taken in the past decade and introducingmandatory CSR activities for companies basedon certain specified monetary threshold is oneof the major steps to make companies sociallyresponsible.

Te purpose of corporate socialresponsibility policy is to indicate the activitiesto be undertaken by the company as specifiedin Schedule VII to the Act and to lay down themonitoring mechanism for the same.

3. Nomination and Remuneration Policy:Te need to develop the nomination andremuneration policy is to ensure that

remuneration arrangements support thestrategic aims of the business and enablesthe recruitment, motivation and retention ofsenior executives, satisfying the expectations ofshareholders and remaining consistent with theexpectations of the wider employee population.

Te purpose of this policy is:i. o lay down criteria for appointment,

removal of directors and key managerialpersonnel and evaluation of theirperformance.

ii. o determine remuneration based on thecompanys financial position, trends andpractices on remuneration prevailing inpeer companies in the industry.

4. Code for Independent Director: ScheduleIV to the Companies Act, 2013 is a code thatcontains guidelines for professional conductof independent directors aiming to foster theconfidence of investment community andvarious other stakeholders. Section 149 (8) ofthe Companies Act, 2013 makes it mandatoryfor the company and the independent directors

to follow the stated provisions in this code.

5. Material Subsidiary Policy: With a view ofhaving improved governance and transparency,Clause 49 of the Equity Listing Agreement(Listing Agreement) with the stockexchanges makes it mandatory to determine thematerial subsidiaries. Te purpose of this policyis to lay down the criteria towards ascertainingmaterial subsidiaries of the company and toprovide the governance framework for suchsubsidiaries.

It is applicable to all listed companies havingshare capital of more than R10 crore and networth exceeding R25 crore.

6. Board Diversity: Diversity of background,skills and perspectives are considered essentialingredients of an effective Board. Multiple

perspectives are necessary to bring in creativityto challenge stereotype thought process andestablish wider range of considerations into thebusiness decision making process. Diversityleads to more innovation, more out of the boxthinking, better governance and decisionsthat are holistic, comprehensive and inclusivethereby leading to board effectiveness. Recentamendment introduced through Section 149and Clause 49 of Listing Agreement based oncertain threshold limit makes it mandatory tohave at least one woman director on the Board.

Tis policy aims to set out the approachto achieve diversity on the Board. Building aBoard of diverse and inclusive culture is integralto the success of the company.

7. Code of Conduct for Board Members andSenior Management Personnel: Since theBoard of a company hold a fiduciary position,it becomes necessary for them to have atransparent conduct in order to upkeep theconfidence of various stakeholders. o achievethis, Clause 49 of Equity Listing Agreement

makes it mandatory for a Board to lay down

With a view of having improved governance andtransparency, Clause 49 of the Equity Listing

Agreement (Listing Agreement) with the stock

exchanges makes it mandatory to determine thematerial subsidiaries. The purpose of this policy is tolay down the criteria towards ascertaining material

subsidiaries of the company and to provide thegovernance framework for such subsidiaries.

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The purpose of the related party transaction policyis to ensure due and timely identication, approval,disclosure, reporting and transparency of specied

transactions between company and any of its relatedparty in compliance with the applicable laws and

regulations.

a code of conduct for all Board members andsenior management of the company.

Further, this code of conduct needs tosuitably incorporate the duties of independent

directors as laid down in the Companies Act2013 and it shall be posted on website of thecompany as per the requirements of Clause 49.

II. Essential Policies

Various sections talk about important mattersthat call for the concern of management withoutmandatorily having a policy on the same, but atthe same time it is advisable to have a documentaddressing various issues related to that matter. Eachof the essential policy deals with a topic that has amention in the relevant framework and lays downcertain conditions that need to be fulfilled in thatregard.

Following is the list of identified essential policieswith reference to their relevant provisions:

Sr.No.

Policy Relevant Provision

1 Investment Policy Section 68 of theCompanies Act, 2013

2 Loan Policy Section 67 andSection 185 of theCompanies Act, 2013

3 Related Partyransaction Policy

Section 188 of theCompanies Act,2013 and Clause 49of Equity ListingAgreement

4 Non DisclosureAgreement policy

Section 457 of theCompanies Act, 2013

5 Policy onRecruitment andSelection

Section 139 of theCompanies Act, 2013

6 Code for Prohibition

of Insider rading

Section 195 of the

Companies Act, 20137 Policy on

Compensation andBenefits

Section 325 of theCompanies Act,2013 and Clause 49of Equity ListingAgreement *

8 Succession PlanningPolicy


9 Whistle BlowerPolicy


* Te policies having relevant provision as Clause

49 indicated by * are applicable only to listedcompanies.

1. Investment Policy: Companies conductingbusiness are bound to deal with cash andcash equivalents. Te endeavour to ensureprotection and optimisation of the value of

these cash funds that may be both short termand (or) long term in nature and to comply withthe various regulations governing the company,a policy formalising the process of additionalcash management, investment assets alongwith the various options of parking the idlefunds needs to be articulated in a document.

Te purpose of this policy is:i. o identify investment objectives.ii. Establish a basis for evaluating investment

results.iii. Establish a clear understanding for all

involved parties of the investment goalsand objectives including various assetclasses, investment management styles,asset allocations, acceptable risk and totallong term investment return.

iv. o outline responsibilities associated withinvestment management.

v. o establish guidelines for investmentactivities.

vi. o set out a clear process on hedgingforeign risk exposure.

2. Loan Policy: Based on the risk appetite,risk tolerance and risk profile, companiesnot involved in the business of lending in theordinary course of business set out the guidingprinciples, general approach and fundamentalconsiderations for lending activities througha loan policy. Tis policy document aims tohelp the credit dispensing functions, therebycreating a desired loan portfolio.

Following are the objectives of this policy:i. Establishes authority, rules and framework

to operate and administer the loan portfolioeffectively,

ii. Controls lending risk,iii. Helps to define the extent of funding,

eligibility criteria, loan tenure,

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disbursement procedure, etc. in compliancewith the applicable regulations,

iv. Ensures the institutions stability andsoundness,

v. o ensure adequate underwriting practicesand loan documentation/records.

3. Related Party Transaction Policy: Certainrelationships can present potential or actualconflicts of interest which may raise questionslike: Whether transactions associatedwith such relationships are consistent withcompanys and its stakeholders best interests?Te company must ensure that certain specifiedrelated party transactions are managed anddisclosed in accordance with the strict legaland accounting requirements to which thecompany is subject to.

Te purpose of the related partytransaction policy is to ensure due and timelyidentification, approval, disclosure, reportingand transparency of specified transactionsbetween company and any of its related partyin compliance with the applicable laws andregulations.

4. Non-Disclosure Agreement Policy: Duringconduct of the business, many a times differentclasses of data varying from confidential to

sensitive are disclosed to other parties and toprevent misuse of such data, having a non-disclosure agreement with them is necessary.A non-disclosure agreement (NDA) is asigned formal agreement in which one partyagrees to give other party confidentialinformation and data about its business orproducts and the other party agrees not toshare this information with anyone else basedon the terms and conditions as stated in theagreement.

Te purpose of non-disclosure agreementpolicy is:i. o set out the classes of data and level of

security to be assigned to each class of data.ii. o state the clear terms and conditions

as to what information is private andconfidential.

iii. List out possible parties those need toexecute non-disclosure agreement.

iv. Format of non-disclosure agreement.5. Policy on Recruitment and Selection:

Te talent pool of a company is one of the

most crucial resources steering the company

towards its goal. Te talent acquisition teamneeds to understand the mission, vision andgoals of the company to find the best suitedmatch for recruitment and selection.

A recruitment and selection policy isdesigned to ensure that company selects thebest possible candidate for the job, on thebasis of their relevant merits and abilities asmeasured against the requirements of the job.

Te purpose of recruitment and selectionpolicy is to ensure:i. a professional and consistent approach to

recruitment and selection;ii. that talent is recruited on the basis of merit,

capability and potential;iii. that appropriate skills, both technical

and personal are taken care of in orderto meet operational and strategicrequirements.

6. Code for Prohibition of Insider Trading:Unlike other outsider parties, internalmembers of company possess more criticalinformation about the company. With anintention to curb malpractices by the insidersi.e. the employees/directors with directcontact to the companys critical and sensitiveinformation and to protect the interest of

the investors against such practices, it isadvised for a company to have the code forprohibition of insider trading.

Te need for this policy is to:i. o ensure confidentiality of price sensitive

information and prevention of misuse ofsuch information.

ii. Fairness and transparency in dealings withstakeholders.

iii. Compliance with laws and regulations.iv. Protection of interest of the investors.

7. Policy on Compensation and Benefits:Te policy on compensation and benefits isan essential part of the policies register ofa company. It strengthens the relationshipbetween the stakeholders and the company.Tis policy includes the policies relating tosalary administration, compensation, perks andbenefits. Compensation includes all the directand indirect benefits the employees (includingdirectors) are awarded with. A well set policywill support a company to remain competitivein today's world and ensure sustainability in the

future.

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Tis policy aims to achieve the followingobjectives:i. o ensure that all the workers and

employees dues are paid on timely basis

and promptly since often the prompt andconsistent payment helps in loweringemployee turnover.

ii. o facilitate smooth functioning of theprocesses of the company by establishingpositive environment and contentedworkforce.

iii. o ensure no over payment or excesspayment is made to the employees and viceversa.

iv. o ensure that the benefits (long term,short term, terminal) are in line withthe statutory requirements includingaccounting standards.

8. Succession Planning Policy: Te changingdynamics may impact progress, developmentand continuity of a company therebycreating a need to develop and nurtureits human capital to ensure that the keyposts will be filled with people able tocarry on and excel when the current keypeople retire or move on, thereby enablingsmooth, transparent and bona fide transition

of role and related hand-over as a part ofsuccession.

o achieve this, the company should have aformal succession planning policy that includesa systematic succession planning activitywith well defined roles, responsibilities andtimelines.

Succession planning is a company-wide,continuous and pro-active programmewhich is developed and implemented incoherence with the companys vision, designedto establish the practice of identifying,evaluating and developing candidates, forkey positions giving an assurance to variousstakeholders on companys continuity andgrowth prospects.

III. Best Practice Policies

Apart from the mandatory policies and essentialpolices that are directly driven by the regulatoryframework, there are also other matters thatdemand for having a document in place consideringthe best practices in the global market. Following

polices listed out in this section are neithermandatory nor essential but as a matter of bestpractice and to have an improved governance,it is advisable to have these documents penned

down.List of Best Practice Policies:

Sr. No. Policy

1 Board Evaluation2 Policy on Anti-Corruption and Bribery

3 Intellectual Property Rights Policy

4 Prevention of Sexual Harassment atWork Place

5 Media and External CommunicationsPolicy

6 Health and Safety Policy

7 Protection of Companys Asset Policy 8 Blogging and Usage of Social Media

Policy9 Te Computer and Internet Usage

Policy

10 Information Security Policy

11 Delegation of Authority Policy 12 Policy on raining and Development

13 Policy on Performance Appraisal14 Policy on Exit and ermination

15 Code of Corporate Disclosure Practices

for Prevention of Insider radingNote: Te policies classified to be mandatory andessential are based on the Companies Act, 2013,various notifications issued by MCA and Clause 49of Equity Listing Agreement.

Considering industry specific laws, a companymay have other mandatory policies to be drafted andfollowed.

ConclusionCompanies need to take additional measures

considering the new requirements relatedto compliance of having corporate policiesintroduced by the applicable relevant regulatoryframework. Many companies would need to poolin additional resources across certain functionsto upkeep with these changes. Tus, earlychange management is the key to adaption in thecurrent scenario. A perfect bespoke articulationof the policy document will clearly show upon the key performance indicators of a company,thereby, steering it towards the achievement of itsstrategic goals and providing it a competitive edge.

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Policies- Required by Corproates_icai Journal_nov-2015

Documents

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