Elements of Corporate Governance: formula sheet

Key formulas

Definition of corporate governance

Corporate governance = system by which a company is directed and controlled

Use this as the opening line of any definition answer. Add that it balances the interests of all stakeholders.

Core principles

Transparency + Accountability + Fairness + Responsibility (+ Independence)

Learn the four main ones first. Mention independence as an additional principle if the question asks for more.

CSR Committee composition (Section 135(1))

At least 3 directors, including at least 1 independent director

Applies to companies meeting the net worth, turnover or net profit limits in the section. If a company need not appoint an independent director under section 149(4), two or more directors are enough.

CSR spending (Section 135(5))

Minimum spend = 2% × average net profit of the 3 immediately preceding financial years

A link between governance and social responsibility. Net profit is calculated as per section 198.

Board size (s. 149(1))

Minimum: public company 3, private company 2, One Person Company 1. Maximum: 15

A company may appoint more than fifteen directors by passing a special resolution.

Resident director (s. 149(3))

At least one director who stays in India for not less than 182 days in the financial year

For a newly incorporated company, it applies proportionately in the year of incorporation.

Independent directors in a listed public company (s. 149(4))

At least one-third of total directors; any fraction is rounded up to one

Example: a board of 8 gives 8 ÷ 3 = 2.67, so the fraction is rounded off as one and the answer is 3 independent directors.

Term of independent director (s. 149(10), (11))

Up to 5 consecutive years per term; maximum 2 consecutive terms

Reappointment for a second term needs a special resolution and disclosure in the Board's report. A cooling-off period of 3 years applies before fresh appointment.

Independent director declaration (s. 149(7))

At the first board meeting they attend, then at the first meeting of every financial year, and whenever circumstances change

The declaration states that they meet the independence criteria.

Nomination and Remuneration Committee (s. 178(1))

Three or more non-executive directors; at least one-half independent

Required for every listed public company and other prescribed classes. The chairperson of the company may be a member but cannot chair this committee.

Stakeholders Relationship Committee (s. 178(5), (6))

Required if the company has more than 1,000 shareholders, debenture-holders, deposit-holders and other security holders at any time in the financial year; chairperson must be a non-executive director

It considers and resolves grievances of security holders.

Penalty for contravention of s. 178 (s. 178(8))

Company: fine ₹1,00,000 to ₹5,00,000. Each officer in default: penalty of ₹1,00,000

As per the text supplied. Inability to resolve a grievance in good faith is not a contravention.

Stakeholder definition

Stakeholder = any person or group that affects, or is affected by, the company

Divide into internal (shareholders, directors, management, employees) and external (customers, suppliers, lenders, government, community).

Accountability toolkit

Accountability = Disclosure + Transparency + Ethical conduct

Use this as the skeleton of any answer on how governance balances interests.

Stakeholders Relationship Committee (Section 178)

Applies where a company has more than 1,000 shareholders, debenture-holders, deposit-holders and other security holders at any time during a financial year

Chairperson must be a non-executive director. The committee considers and resolves grievances of security holders. Inability to resolve a grievance in good faith is not a contravention.

Nomination and Remuneration Committee (Section 178)

Three or more non-executive directors, at least one-half independent

Applies to every listed public company and other prescribed classes. The company chairperson may be a member but cannot chair it.

Director's disclosure of interest (Section 184)

Disclose at first Board meeting as a director, then at first meeting of every financial year, and on any change

A director interested in a contract with a firm or body corporate must disclose and not participate in that meeting. A contract made without disclosure is voidable at the company's option. Penalty for contravention: ₹1,00,000.

Applicability test

Net worth ≥ ₹500 crore OR turnover ≥ ₹1,000 crore OR net profit ≥ ₹5 crore (immediately preceding financial year)

Any one condition is enough. Net profit is calculated as per section 198.

Minimum CSR spend

CSR spend = 2% × average net profit of the 3 immediately preceding financial years

Add the three years' net profits, divide by 3, then take 2%. If the company is under three years old, use the preceding years completed.

CSR Committee composition

Minimum 3 directors, including at least 1 independent director

If the company need not appoint an independent director under section 149(4), it needs 2 or more directors.

Small CSR amount exemption

CSR amount ≤ ₹50 lakh → no Committee; Board performs its functions

Section 135(9). The spending duty still remains.

Unspent amount, ongoing project

Transfer to Unspent CSR Account within 30 days of financial year end; spend within 3 financial years from transfer

If not spent, transfer to a Schedule VII Fund within 30 days of completing the third financial year.

Unspent amount, other than ongoing project

Transfer to a Schedule VII Fund within 6 months of the expiry of the financial year

The Board must also give reasons in its report.

Penalty for default

Company: lower of 2 × amount not transferred or ₹1 crore. Officer in default: lower of 1/10 of that amount or ₹2 lakh

Applies to default under sub-sections (5) or (6).

Who must have CSR (Section 135(1))

Net worth ≥ ₹500 crore OR turnover ≥ ₹1,000 crore OR net profit ≥ ₹5 crore, in the immediately preceding financial year

Meeting any one test is enough.

Minimum CSR spend (Section 135(5))

CSR spend ≥ 2% × average net profit of the three immediately preceding financial years

If the company is less than three years old, use the preceding years it has completed. Net profit is calculated under Section 198.

CSR Committee (Section 135(1))

At least 3 directors, including at least 1 independent director

If the company need not appoint an independent director, two or more directors are enough.

No Committee needed (Section 135(9))

CSR amount ≤ ₹50 lakh → Board performs the Committee's functions

The amount to be spent must not exceed fifty lakh rupees.

Role of the Committee (Section 135(3))

Formulate and recommend policy → recommend expenditure → monitor policy

The Board then approves the policy and ensures the activities are undertaken.

Unspent amount (Section 135(5) and (6))

Ongoing project: transfer to Unspent CSR Account within 30 days from the end of the financial year, spend within 3 financial years of the transfer. Other unspent amount: transfer to a Fund specified in Schedule VII within six months of the expiry of the financial year

In both cases the Board must state the reasons for not spending in its report. If the ongoing-project amount is still unspent after three financial years, it goes to a Schedule VII Fund within 30 days of the completion of the third financial year.

Penalty (Section 135(7))

On default in complying with sub-section (5) or (6). Company: lower of 2 × the amount required to be transferred or ₹1 crore. Officer in default: lower of 1/10 of the amount required to be transferred or ₹2 lakh

The amount is the one required to be transferred to the Schedule VII Fund or the Unspent CSR Account, as the case may be. Learn it as 'whichever is less'.

Quick revision

• Corporate governance is the system by which a company is directed and controlled, with fairness, transparency and accountability.
• The board must account to shareholders and other stakeholders, not only to promoters.
• Nomination and Remuneration Committee: three or more non-executive directors, at least one-half independent; the chairperson of the company may be a member but cannot chair it.
• Stakeholders Relationship Committee: needed where a company has more than one thousand security holders in a year; chairperson must be a non-executive director.
• Stakeholders Relationship Committee considers and resolves grievances of security holders.
• Section 135 applies to companies with net worth of ₹500 crore or more, turnover of ₹1,000 crore or more, or net profit of ₹5 crore or more in the immediately preceding financial year.
• CSR Committee has three or more directors, including at least one independent director; where no independent director is required, two or more directors are enough.
• If the CSR amount does not exceed ₹50 lakh, no CSR Committee is needed and the Board performs its functions.
• The committee recommends the CSR Policy and the spend, and monitors the policy; the Board approves the policy and ensures activities are carried out.
• Minimum CSR spend each year is two per cent of the average net profit of the three immediately preceding financial years, with preference to the local area.
• Unspent amount for an ongoing project goes to the Unspent CSR Account within thirty days of year-end, and must be spent within three financial years.
• CSR activities must fall within the areas listed in Schedule VII.

Common mistakes

• Defining corporate governance only as 'rules for companies'. Fix: Say it is the system by which a company is directed and controlled, balancing the interests of all stakeholders.
• Mixing up transparency and accountability. Fix: Transparency is about disclosing information. Accountability is about answering for decisions and facing consequences.
• Saying every company must have independent directors. Fix: Section 149(4) names every listed public company. Other public companies are covered only if the Central Government prescribes. Always name the company type.
• Rounding down the one-third fraction. Fix: The Act says any fraction in the one-third number is rounded off as one. So 2.67 becomes 3, not 2.
• Treating shareholders as the only stakeholders. Fix: Always list employees, customers, lenders, government and community too. Say governance balances all interests.
• Mixing up disclosure and transparency. Fix: Disclosure is what is shared and when. Transparency is how clear, true and open that information is.
• Saying all three conditions must be met for CSR to apply. Fix: Remember the word 'or'. Meeting any one of net worth, turnover or net profit triggers Section 135.
• Taking 2% of the current year's profit. Fix: Always use the average of the three immediately preceding financial years.
• Treating any donation or charity as CSR. Fix: Only spending that falls in a Schedule VII area counts. Always name the area.
• Counting a contribution to a political party as CSR. Fix: Remember that contributions to political parties are excluded.

Exam tips

• Always open with a definition. Even a one-line definition earns marks in short notes.
• Learn the four main principles in order and keep one-line meanings ready for each.
• For 'importance' questions, give four to five separate points, not one long paragraph.
• If a question links governance to CSR, quote section 135 facts exactly: three or more directors, at least one independent, and 2% of the average net profit of three preceding years.
• In Paper 3 you may choose questions, so pick this topic when you can write a definition, principles and importance fully.
• Learn the numbers as a list: 3 / 2 / 1, 15, 182 days, one-third, one-half, 5 years, 2 terms, 3 years, 1,000 holders.
• In written answers, state the rule first, then the purpose. Examiners give marks for both.
• For difference questions, such as executive versus non-executive or non-executive versus independent, use a point-by-point comparison in bullets.