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Is your Board a Perfect Ten? SEBI Issues Guidance to Evaluate Board of Directors

January 5, 2017
VOL II
ISSUE No. 02
January 05, 2017

Is your Board a Perfect Ten? SEBI Issues Guidance to Evaluate Board of Directors

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The Securities Exchange Board of India (SEBI) on January 5, 2017 issued directions on evaluation of performance of their directors to safeguard independence and impartiality and amplify corporate governance in the company. Though the Circular[1] issued by SEBI is intended to be treated as a guidance and does not constitute rules, this guidance has come forth in wake of the TATA-Mistry fiasco. The issue involving the Tata conglomerate, showed the defenselessness of independent directors in India when up against a dominant shareholder and for the first time, a chairman of several public listed companies was pursued to be evicted from a directorial position on grounds of no confidence.

 

Legal Scaffold vis a vis the Corporate Ambience

 

The Companies Act, 2013 and SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 contain expansive provisions on evaluation of the performance of the board as a whole, individual directors (including independent directors and Chairperson) and various committees of the board. These provisions also specify responsibilities of various persons / committees for conduct of such evaluation and certain disclosure requirements as a part of the listed entity’s corporate governance obligations. Pursuant to Section 149 (8)[2] Clause VIII of Schedule-IV provides for performance evaluation of independent directors. As per this clause, performance evaluation of independent directors shall be done by the entire board of directors, excluding the director being evaluated. It is on the basis of this report that the furtherance of an independent director’s term is decided. Therefore, keeping this in mind, small shareholders of three listed TATA Companies had approached the Bombay High Court seeking the removal provision in Section 169[3] to apply only for a removal pursuant to a poor performance evaluation by the board of an non-independent director; the reason being that an Independent director represents the welfare and interests of minority shareholders and therefore their removal should not be voted upon by promoter/ dominant shareholders[4].

 

SEBI wants companies to ensure that deliberations within the board are healthy and free-flowing, critical and dissenting submissions are also heard and conflicts of interest are monitored and dealt with appropriately. The Guidance focuses on:

 

  • The subject of evaluation that involves evaluation on multiple levels. Such as the Board of directors as a whole, committees of the Board, Individual Directors, or the chairperson (including chairperson, CEO, Independent Directors, non-independent directors).

  • Process of evaluation involves identifying the objectives of the evaluation including laying down of objectives that may be standard for all board evaluations or specific objectives privy to a particular evaluation. The criteria of the evaluation adopted would depend on the position held by the persons concerned. Further, it should be taken note of, if the board takes a review of high risk issues that impact the organization regularly. Another important aspect of evaluation of the board is to ascertain if the board monitors and manages potential conflicts of interest of management, members of the board of directors and shareholders, including misuse of corporate assets and abuse in related party transactions. Assessments should be carried out both internally, and externally as provided under the relevant provisions of the Companies Act, 2013.

  • Feedback to the persons being evaluated is imperative to conducting a free flowing evaluation procedure. Feedback to the individual directors, the Board and the Committees is crucial for success of Board Evaluation. Such feedback can be given by the chairman either orally or in written to the members and other persons concerned.
  • An Action plan should be formulated by the board based on the results of the evaluation process. The action plan must focus on areas of improvement, including training and skill building g objectives. The action plan should also list the list of required actions. Further, these actions should be reviewed from time to time.

  • Disclosure to stakeholders on various aspects under SEBI LODR and Companies Act, 2013 requires disclosure of manner of formal annual evaluation of the Board, its committees and individual directors and of performance evaluation criteria for independent directors to the shareholders on an annual basis. Additionally, for more transparency, many entities worldwide voluntarily provide additional disclosures including the results of the Board evaluation, action taken on the basis of the evaluation, current status, etc. to various stakeholders. The same may be added to the list of disclosures prepared.
  • Frequency of board evaluation, the Board Evaluation is required to be done once a year. The entity, if it so desires, may also conduct such evaluation more frequently. Since Board evaluation is a continuous process, it is felt that feedback provided to the members during meetings and otherwise, whether oral or written, is more effective for continuous improvement and ideally complements the annual evaluation process.
  • Responsibility of board evaluation, the responsibility of Board evaluation lies on different persons depending on the subject of evaluation under relevant statutes. Globally, the role of directing the process of Board evaluation and of ensuring its usefulness in improving the Board efficiency lies on the Chairperson. Hence, to achieve maximum advantage of the course, the role and purpose of Chairperson in Board Evaluation necessitates to be laid out clearly in advance.
  • Review requirements highlight that Board evaluation requires periodical review for improvement. The responsibility of such review of the evaluation process lies with the Board of Directors under applicable laws.

Comment

The principal role of the board of directors is to oversee the function of the organization and ensure that it continues to operate in the best interests of all stakeholders. Given the complexity of today’s organizations, that is no simple or straightforward task. Today, board effectiveness is a key performance driver of the Indian companies. Though the guidelines issued by the key regulator are not binding upon the listed companies to adhere to, but highlights that the thrust of SEBI is tiling towards board management and board well-being to ensure that the interests of the stakeholders are not thwarted by scuffles within the board or conflicting interests of
directors

[1] SEBI/HO/CFD/CMD/CIR/P/2017/004

[2] This section highlights that The company and independent directors shall abide by the provisions specified in Schedule IV.

[3] This section mentions the right of shareholders to remove a director in the general meeting through ordinary resolution is a legal Right that cannot be damaged or taken away by MoA, AoA or any other documents or agreement.

[4] K. Vijayraghavan & Reena Vacharia, Tata Shareholders Move High Court Against Rule on Removing Independent Directors, The Economic Times (December 14, 2016)

 http://economictimes.indiatimes.com/news/company/corporate-trends/tata-shareholders-move-high-court-against-rule-on-removing-independent-directors/articleshow/55969004.cms 

 


The Companies (Incorporation) Amendment Rules, 2016 is all SPICe

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Source:Internet

The year 2016 concluded with The Ministry of Corporate Affairs making amendments to the Companies (Incorporation) Rules, 2014 by notifying the Companies (Incorporation) Fifth Amendment Rules, 2016. These Rules became effective on January 1, 2017. The Fifth Amendment Rules made several Revisions in the Companies (Incorporation) Rules, 2014 with the view of making effective the Simplified Proforma for Incorporation of Companies Electronically (SPICe) that was introduced by the Ministry in October, 2016. These revisions revisions were made with a vision of promoting ease of doing business and incorporating companies in India. The thrust of the incorporation rules have diametrically shifted from P to E (Hyperlink: https://ssrana.in/News/CL%20Connect%20Newsletter/2016/04/From-P-to-E-Smidgeons-of-Digitization-on-Companies-Fourth-Amendment-Rules-2016.htm).

Major Highlights

  • Rule 4 of the Incorporation Rules, 2014 applies to One Person Companies (OPC) where subscriber to the Memorandum of an OPC shall nominate a person who shall become a member of the OPC in event of the subscriber’s demise or incapacity to contract. The name of the nominee shall be duly mentioned in the Memorandum of the OPC. After this Fifth Amendment in the Rules, such nomination shall be filed in Form INC-32[1] (SPICe) along with the nominee’s consent in Form INC-3[2].
  • Rule 10 of the amended rules stipulate that when Articles contain entrenchment provisions, the company shall notify the Registrar of any such entrenchment provision in Form INC-7[3] or INC-32 (SPICe)[4] along with the prescribed fee at the time of Incorporation of the Company. However, the rule regarding existing companies shall remain same and the filings can be done in Form MGT 14[5] within thirty days of the date of entrenchment of Articles with the prescribed fee.
  • Rule 12has been expanded in scope and now states that an application shall be filed with the registrar in Form INC 7 [6] (Part I Company with more than seven subsidiaries) and Form INC 32 (SPICe)[7].
  • Rule 36, of the Incorporation Rules that introduced the Integrated Process for Incorporation has been removed. This rule was introduced by the Companies (Incorporation) Amendment Rules, 2015 for the purpose of simplifying the filing of forms for incorporation of a Company. The Companies (Incorporation) Forth Amendment Rules, 2016 had introduced Rule 38, unveiling the SPICe Rules. The Fifth Amendment provides that in case of incorporation of Section 8 Company[8], Form INC 32[9] shall be filed along with Form INC 13 (MoA)[10] and Form INC 31 (AoA)[11] as attachments. As under this rule application for Director Identification Number (for up to three directors), reservation of a name, incorporation of a company, reservation of a name for OPC, Private Company, Public Company, and Section 8 Company shall be filed in Form INC 32 (SPICe)[12] with the concerned registrar with a fee of INR 500 in addition to the fee prescribed in the Companies (Registration of Offices and Fees) Rules, 2015.
  • Further, the Fifth Amendment Rules, in order to go paperless and digital, prescribes that a promoter or an applicant of the proposed company shall propose only one name in Form INC 32 (SPICe). Additionally, now subscribers, witness, or witnesses, shall affix their Digital Signatures to the Memorandum of Association and Articles of Association.
  • Now, a company adhering to these Rules to incorporate a company shall furnish a verification of their registered under Section 12 (2)[13] of the Act by filing Form INC 32[14]. Form INC 32[15] shall not be required to be filed in case the proposed company maintains its registered office as the given corresponding address. Form INC 2 will be omitted from the principal Rules.

Comment

The Ministry of Corporate Affairs had in a trail of amendments in the year 2016 made way for easy incorporation procedures by introducing the SPICe Rules and now by bringing forth the Fifth Amendment Rules that substantially reduces the time in readying the incorporation documents. Therefore, a company can now be incorporated in much lesser time.

[1] Form INC 32 deals with a single form for the reservation of name, incorporation of a new company or for allotment of DIN. It is supported by documents such as details of directors and subscribers, MoA and AoA etc.

[2] Form INC 3 is the nominee consent form for a One Person Company. This is a non e form.

[3] Form INC 7 is an application form for incorporation of a company other than a one person company.

[4] Supra note 1.

[5]A company or liquidator has to file with the concerned RoC certain resolutions and agreements. These are to be filed after being passed at the meeting of the Board / Shareholders / Creditors of the company. The particulars of such resolutions or / and agreement are to be filed through this eForm.

[6] Supra note 3.

[7] Supra note 1.

[8]This Section deals with incorporation of Not for Profit Companies in India under the Companies Act, 2013.

[9] Supra note 1.

[10] MOA of Section 8 company registration (previously called section 25 company) has been prescribed in form INC-13 by the companies act 2013 followed by rule 19 sub rule 2 of companies incorporation rule 2014.

[11] INC -31 was introduced to choose a pre-drafted Articles of Association.

[12] Supra note 1.

[13] This Section of the Companies Act, 2013 prescribes that a company shall furnish to the Registrar the verification details of its registered office within thirty days of its incorporation in the prescribed manner.

[14]Supra note 1.

[15] Supra note

[16] The erstwhile form prescribed the filing for registration of a One Person Company.

 


Service charge not mandatory at restaurants and hotels: Ministry of Consumer Affairs

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Source:Internet 

Have you ever stormed out of a restaurant, regretting having paid their service charge? Well, you may never have to do that again. The Ministry of Consumer Affairs stated on December 14, 2016, that customers dissatisfied with the service rendered to them could choose not to pay the service charge levied by the hotel or restaurant. The Government had clarified earlier in the Parliament that the authorities could act against those levying a service charge without the knowledge and consent of consumers on charges of indulging in ‘unfair trade practices’. The statement also stressed the need of the State Government to sensitize businesses operating in the food and hospitality industry to display information that service charge is optional in their premises. The Ministry said this was done due to the increasing number of complaints from the consumers who said they were being forced to pay service charge in lieu of tips, between 5 % and 20%, irrespective of the kind of service provided.

However, on January 2, 2017, the National Restaurant Association of India (hereinafter referred to as the ‘NRAI’) vociferously clarified that the charging of service charge is a matter of policy of an individual restaurant, and a customer not happy with the charging of the same has the discretion of not using the facility by the restaurant. The NRAI also stated that there are even judicial pronouncements to support that ‘service charge’ can be charged by hotels and restaurants. The same has been upheld by the National Consumer Disputes Redressal Commission, inNitin Mittal vs. Pind Baluchi (2012),Wenger & Company and others vs. their Workmen (1963) and
Ram Bagh Palace Hotel, Jaipur vs. The Rajasthan Hotel Workers Union, Jaipur (1976).

The NRAI also assures that the charges would be clearly displayed in the menu cards of the restaurants so that the consumers are aware of all the charges they are paying.

However, the cases cited by the NRAI do not directly relate to the court favoring the charging of service charge from the consumers. Therefore, there is a need to further analyze the concerned judgements.

In Nitin Mittal vs. Pind Baluchi (2012), the petitioner filed the case relating to the difference in the charges for packed food and the food which was served in the restaurant. The Court held that there can be some difference in the above two charges, since it is a contractual matter between the parties and the extra charge may be for maintenance of the restaurants. In this concerned case, no emphasis was given solely on the matter of service charge by the court. However, the case was decided against the petitioners, since the petitioners were not clear with the issues and claims. The judgement cannot form a strong precedent in favor of charging of service charge.
 

In the case of, Management of Wenger & Co. vs. Their Workmen (1962), the issue revolved round the dispute between the hotel management and its workmen and the matter did not directly relate to the issue of payment of service charge by the consumers. Therefore, the NRAI has erred in citing this judgment as a precedent to back their argument in favor of paying service charge by the consumers.

Lastly, in the case of Rambagh Palace Hotel, Jaipur vs. The Rajasthan Hotel Workers (1976) though there is little mention about the dispute of service charge and the service charge being properly utilized for workers or maintenance and the dearness allowance given to the employees, however there is no significant mention of the issue relating to the payment and non-payment of the service charge by the consumers. Thus, this judgement also cannot be used as a judicial precedent by the NRAI to back their argument.
 

It will be interesting to note further developments in this matter as globally speaking, service charge is very common and known by different names like ‘tips’ in UK and ‘gratuity’ in the US.

 


EPF UPDATE

  • >The 2017 Enrolment Campaign

    The Central Government vide its notification[1] dated December 30, 2016 inserted paragraph 82A to the Employees’ Provident Funds Scheme, 1952 (EPF Scheme) in respect of the Employees’ Enrolment Campaign, 2017. These changes were notified under the Employees’ Provident Funds (Seventh Amendment) Scheme, 2016 which came to effect on January 1, 2017 and shall continue to stay effective till March 31, 2017.

    The notification gives all the employers an opportunity to declare details of all employees who were for any reason whatsoever, unenrolled, but eligible for Provident Fund membership between April 1, 2009 to December 31, 2016.

    The declarant employer shall under the prescribed Declaration Form for Employees’ Enrolment Campaign, 2017 (2017 Enrolment Campaign Form) provide particulars of his name along with the address and the code number of the Factory/ establishment in the Form. Further, the declarant must give details of the Account Number, the Universal Account Number, the Name of the Employee along with the Employee’s father’s name (in case of married women, the husband’s name), Date of Birth, sex, Date of eligibility for membership under the EPF Scheme along with previous Account Number and particulars of any previous service.

    It must be noted that, the employers shall within fifteen days from the date of declaration dispatch their contribution along with the employee’s contribution that had been taken from the employees’ wages along with the interest and damages. However, the employer will not be liable to pay the contribution if the same has not been taken from the wages of the employee.

    The employer should obtain Form-11[2] from all the employees declared under the campaign and the same is to be signed by the employer. In view thereof, filing of Form-11 is a mandatory prerequisite to filing of the
    2017 Enrolment Campaign Form.

    Further, the employer may revel in the backdrop of incentives that he may receive. If an employee’s contribution has been declared as not deducted by the employer, the same may be waived. Also, damages of INR 1 per annum are to be paid to the employees who have been declared/ enrolled under the scheme, which shall be remitted along with a simple interest @12% per annum[3]. The collection of the contribution made under this declaration will not bear any administrative cost on the employer.

[1]G.S.R 1190(E)

[2]Form-11 pertains to declaration by a person taking up employment in any establishment on which EPF Scheme, 1952 and/ or EPS, 1995 is applicable.

[3]No. Coord/3(1)2016/EPF Member Enrolment Scheme, 2017
www.epfindia.com/site_docs/PDFs/Circulars/…/Coord_FAQ_EEC_04012017.pdf

    Moreover, declarations that are made prior to an inquiry initiated under Section 7A[4] shall be legally valid and it cannot be denied by the Regional Provident Fund Commissioner. Therefore, once a notice under the aforesaid section is issued, the declaration cannot be made.

  • Online Claims Made Easy

    The Labour Ministry’s notification dated January 4, 2017[5] introduced the idea of electronic settlement of Provident Fund claims under which, for settling claims online, the subscribers will be needed to activate their Universal Account Numbers (UAN) seeded with Know Your Customer (KYC) particulars. The same should be supplemented with the details of the concerned pensioner’s bank accounts, Aadhaar and permanent account number (PAN).

    Therefore, if a pensioner is not yet enrolled for Aadhaar, he/she is required to do so by January 31, 2017. For individuals who have not yet received the Aadhaar number or are yet to enroll for it can continue to receive the benefits under the scheme by providing the following details:

    • Identity certificate issued by the employer or the Employees’ Provident Fund Organization (EPFO) with the Universal Account Number (UAN).
    • Aadhaar enrolment ID of the member/pensioner or a copy of the request made for the Aadhaar enrolment.

    These abovementioned documents will have to be submitted to the Employees’ Provident Fund Organization (EPFO) along with a copy of either a voter ID card, passport, PAN card, driving license or a certificate of identity approved by an Indian Gazetted Officer.

    Furthermore, the Employees Provident Fund Organization is pressing hard for reducing human interactions with employers by digitizing the compliance procedures to shoot up the levels of productivity, transparency and responsibility.

[4] This Section under The Employees’ Provident Funds and Miscellaneous Provisions Act, 1952 deals with issuance of notice of inquiry by the Provident Fund Commissioners pertaining to Determination of Monies Due from Employers.

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