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A Report on

Comparison Between Clause 49 of the Listing Agreement & Sarbanes Oxley Act !!
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$ntro-uction./
Corporate governance is about commitment to values and about ethical business conduct. It is about how an organization is managed. This includes its corporate and other structures, its culture, policies and the manner in which it deals with various stakeholders. Accordingly, timely and accurate disclosure of information regarding the financial situation, performance, ownership and governance of the company is an important part of corporate governance. The arbanes !"ley Act, which was signed by the # $resident %eorge &. 'ush into law in (uly )**), has brought about sweeping changes in financial reporting. This is perceived to be the most significant change to federal securities law since +,-*s. 'esides directors and auditors, the act has also led down new accountability standards for security analyst and legal counsels. In India, the CII took the lead in framing a desirable code of corporate governance in April +,,.. This was followed by the recommendations of the /umar 0angalam 'irla Committee on corporate governance. This committee was appointed by recommendations were accepted by Clause 3, of the listing agreement of every Indian tock 1"change. 1'I. The 1'I in 2ecember +,,, and now enshrined in

some of the differences are as follows45 A0 $nternal control./ Clause 3,6revised7 45 C1!8C9! accept responsibility for establishing and maintaining internal controls and that they have evaluated the effectiveness of the internal control systems of the company and they have disclosed to the auditors and the Audit committee, deficiencies in the
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design or operation of internal controls, if any, of which they are aware and the steps they have taken or propose to take to rectify these deficiencies. The role of audit committee is to review this internal control report. ec. -*) of arbanes5!"ley45 The principle e"ecutive officer or officers and the principle financial officer or officers or persons performing similar functions have the responsibility of designing, establishing and maintaining the internal controls. ;ere in the arbanes !"ley Act the public company accounting oversight board will review the same and not the audit committee. a. In Clause 3, the audit committee will review the internal control mechanism whereas as per the arbanes !"ley Act the public company accounting oversight board will review the same. b. In Clause 3, Internal Control is only specified but no elaborative details are given about it whereas in ec. 3*3 of the arbanes !"ley act the details regarding the same are specified.

B0 Au-it Committee composition./ ection -*+ of arbanes5!"ley45 The committee 6or e<uivalent body7 established by the board of directors of the issuer for the purpose of overseeing the accounting and financial reporting processes of the issuer. If there is no such committee then entire board of director is considered to be the

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member of the audit committee. 1ach member of the company=s audit committee must be a director and must otherwise be independent. Clause 3, 6revised7 45 +. The audit committee shall have minimum three directors as members. ). Two5thirds of the members of audit committee shall be independent directors. -. All members of audit committee shall be financially literate and at least one member shall have accounting or related financial management e"pertise. In arbanes !"ley act the number of directors constituting the audit committee is not specified. Also the fre<uency, the time gap between the meetings of audit committee is not specified. This points are clear in the Clause 3,.

C0 $n-epen-ent +irector./ As per arbanes5!"ley45 In order to be considered independent the one who does not +. Accept any consulting, advisory or other compensatory fee from the issuer. ). 'e an affiliated person of the issuer or any subsidiary there of. As per Clause 3, 6revised7 45 9or the purpose of the sub5clause 6ii7, the e"pression >independent director shall mean a non5e"ecutive director of the company who4 a. apart from receiving directors 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?

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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 e"ecutive of the company in the immediately preceding three financial years? d. is not a partner or an e"ecutive or was not partner or an e"ecutive during the preceding three years, of any of the following4 i7 the statutory audit firm or the internal audit firm that is associated with the company, and ii7 the legal firm6s7 and consulting firm6s7 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? and f. is not a substantial shareholder of the company i.e. owning two percent or more of the block of voting shares. As per the clause 3, the definition of the independent director is wider in scope than the one in arbanes !"ley Act.

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0 Sharehol-ers 1 $n2estors complaints./ ec. -*+ of arbanes5!"ley45 As per this section, each audit committee shall establish procedures for +. The receipt, retention and treatment of complaints received by the issuer regarding accounting, internal accounting controls or auditing matters and ). the confidential, anonymous submission by employee of the issuer of concerns regarding <uestionable accounting or auditing matters. Clause 3, 6revised7 45 hareholders section in the disclosures of clause 3, states that4 A board committee under the chairmanship of a non5e"ecutive director shall specifically look into the redressal of shareholder and investors complaints like transfer of shares, non5receipt of balance sheet, non5receipt of declared dividends etc. This Committee shall be designated as > hareholders8Investors %rievance Committee. arbanes !"ley act mainly considers the accounts related <ueries whereas Clause 3, covers the topic in the broad sense.

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&0 3enal 3ro2isions./ Clause 3, 6revised7 45 9or violation of the listing agreement, ection )-1 of ecurities Contract Begulation Act, +,@A provides for a pecuniary penalty of upto Bs.)@ crores5on the company. ec. -*) of arbanes5!"ley45 9or violation of arbanes5!"ley Act, efflion ,*A provides for fines and imprisonment of up to C + million and +* years for knowing violations of ection ,*A, and up to C@ million and )* years for willful violations

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*0 Co-e of Con-uct1&thics./ ection 3*A of arbanes5!"ley45 The act directs the companies to disclose if they have adopted code of conduct, if not, reasons thereof. Code of ethics for senior financial officers4 Issuers shall adopt a code of ethics for senior financial officers, applicable to its principal financial officer and comptroller or principal accounting officer, or persons performing similar functions. Clause 3,6Bevised745 +.The 'oard shall lay down a code of conduct for all 'oard members and senior management of the company. The code of conduct shall be posted on the website of the company. ). All 'oard members and senior management personnel shall affirm compliance with the code on an annual basis. The Annual Beport of the company shall contain a declaration to this effect signed by the C1!. -. 9or this purpose, the term Esenior managementE shall mean personnel of the company who are members of its core management team e"cluding 'oard of 2irectors. Formally, this would comprise all members of management one level below the e"ecutive directors, including all functional heads. As per the above paragraph, in the Indian conte"t, it will be obligatory for the board of the company to lay down a code of conduct for the board members and the senior management of the company. As per arbanes5!"ley restricts the code of conduct to be applicable to only =principal financial officer and comptroller or principal accounting officer, or persons performing similar functions.

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)0 3ublic Company Accounting O2ersight Boar-./ As per the arbanes !"ley act, a $ublic Company Accounting !versight 'oard has been set up to oversee the audit of listed companies in order to protect investors and public interest in matters relating to the preparation of audited financial statements. There is no such provision in the Clause 3,. In India the ICAI is legally empowered to carry out most of the regulatory, oversight and disciplinary functions outlined in the !G Act 6barring prosecution and levying of penalties7. 'ut the public perception is that the ICAI mechanisms are slow and the institute is not interested in ade<uately disciplining the members. In India the functions of $CA!' are carried out by various regulatory agencies viz. 1'I, B'I, ICAI, IC I, IC&AI etc. If there were to be an Indian version of the $CA!', then such powers would need to be withdrawn from the e"isting regulatory agencies and concentrated in the proposed public oversight board.

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$nstances of o2erstepping of 4uris-iction by S&B$ ./


In enacting the new clause, 1'I has overstepped its Hurisdiction and had encroached on the powers of the Central %overnment in regard to the substantive provisions under the purview of the Companies Act, +,@A.The limited power, available to 1'I under the companies act is clarified in the statement of obHects and reasons of the Companies 6amendment7 'ill )***.The limited Hurisdiction of 1'I has been Hudicially approved. &hen 1'I cannot enforce other provisions, obviously, it cannot enact new or parallel provisions in the garb of listing clause, as has been done vide revised clause 3,. ome of the instances are4 a5 $n-epen-ent -irector./ The definition in Clause 3, is much more comprehensive than in the Companies Act or 2raft 'ill where certain aspects concerning >Independent 2irector are yet to be prescribed. Apparently, 1'I has included certain matters related to independence on which the government has yet to decide in the conte"t of the Companies Act. The 1'I has widened the definition of the term >Independent 2irector in its scope and applications so as to make it more stringent. b5 Remuneration./ Clause 3, which has been made in the e"ercise of delegated power, visualizes prior approval of shareholders in regard to remuneration, as also sitting fees payable to directors which is not being done at present and shows e"ercise of power in e"cess of what has been delegated to 1'I.

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c5 "he number of companies where a person can be -irector./ ection )D@ of the companies act provides a person cannot be a director in more than +@ companies. The same is the position in the draft bill with the rider that where any such person also holds office as a managing director or whole time director in the company, the limit for directorship for him shall be +* companies. The Clause 3, limits this number to +* without any other stipulation. To this e"tent the clause 3, overrides the provisions in the Companies act. -5 Boar- of -irector meetings./ As per the Companies Act and Clause 3,, the board should meet at least 3 times in a year. 'ut the additional re<uirement in the Clause 3, is that there should be a minimum gap of - months. This additional re<uirement of months overrides the provisions of the Companies Act. e5 Co-e of con-uct./ As per Clause 3, the board shall adopt a code of conduct for the directors as well as members of senior management of the company and all board members and senior management personnel are to affirm it annually. There is no such re<uirement under the Companies Act. f5 Au-it Committee./ The re<uirements prescribed in regard to audit committee are much more specific than those prescribed under section ),)A of the Companies Act. The re<uirement of being >financially literate is not there in the act. imilarly the act does not provide specifically for checking of related party transactions, management decisions, management letters, whistle blower mechanism etc. g5 Other Aspects./ +. 2isclosure in the annual report in respect of non e"ecutive directors regarding their pecuniary relationships, packages, stock options etc.

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). Be<uirements regarding the disclosures. -. Certification by C1!8C9!. 3. Beport on corporate governance.

List of Abbre2iations
C$$ C&O C*O $CA$ $CS$ 45 Confederation of Indian Industry 45 Chief 1"ecutive !fficer 45 Chief 9inancial !fficer 45 Institute of Chartered Accountants of India 45 Institute of Company ecretaries of India

$C6A$ 45 Institute of Cost and &orks Accountants of India 3CAO'45 $ublic Company Accounting !versight 'oard RB$ S&B$ SO' 45 Beserve 'ank of India 45 45 ecurities and 1"change 'oard of India arbanesI!"ley Act

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Bibliography
+7 )7 1'I circular Fo. 1'I8C9282IJ8C%8+8)**38+)8+*, dated ),5!ct5)**3 arbanes !"ley Act enacted by the senate and house of representatives of #nited tates of America on )-5Ian5)**) -7 Faresh Chandra Committee report on Khow to e"amine the Auditor5 Company relationship, regulating auditors etc.L dated *+5(ul5)**37 Beport on full day seminar on KCorporate %overnance doing the right thingL organized by the IC I dated ))5(an5)**@ @7 Ta"manns Chartered Accounts Today 6fortnightly magazine7 0arch +A to 0arch -+ 4 An article by 0r. T. F. $andey 61"5Chairman C'2T7 A7 Corporate %overnance report of Infosys Technologies Jimited for the financial year )**-5)**3.

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