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Tuesday, September 28, 2010

Clause 49 vs. SOX

A) Internal control:-

Clause 49(revised) :-

CEO/CFO 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 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.

Sec. 302 of Sarbanes-Oxley:-

The principle executive 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. Here in the Sarbanes Oxley Act the public company accounting oversight board will review the same and not the audit committee.

a. In Clause 49 the audit committee will review the internal control mechanism whereas as per the Sarbanes Oxley Act the public company accounting oversight board will review the same.

b. In Clause 49 Internal Control is only specified but no elaborative details are given about it whereas in Sec. 404 of the Sarbanes Oxley act the details regarding the same are specified.

B) Audit Committee composition:-

Section 301 of Sarbanes-Oxley:-

The committee (or equivalent body) 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 member of the audit committee. Each member of the company's audit committee must be a director and must otherwise be independent.

Clause 49 (revised) :-

1. The audit committee shall have minimum three directors as members.

2. Two-thirds of the members of audit committee shall be independent directors.

3. All members of audit committee shall be financially literate and at least one

member shall have accounting or related financial management expertise.

In Sarbanes Oxley act the number of directors constituting the audit committee is not specified. Also the frequency, the time gap between the meetings of audit committee is not specified. This points are clear in the Clause 49.

C) Independent Director:-

As per Sarbanes-Oxley:-

In order to be considered independent the one who does not

1. Accept any consulting, advisory or other compensatory fee from the issuer.

2. Be an affiliated person of the issuer or any subsidiary there of.

As per Clause 49 (revised) :-

For the purpose of the sub-clause (ii), the expression ‘independent director’ shall mean a non-executive director of the company who:

a. apart from receiving director’s 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;

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 executive of the company in the immediately preceding three

financial years;

d. is not a partner or an executive or was not partner or an executive during the

preceding three years, of any of the following:

i) the statutory audit firm or the internal audit firm that is associated with the company, and

ii) the legal firm(s) and consulting firm(s) 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 49 the definition of the independent director is wider in scope than the one in Sarbanes Oxley Act.

Shareholders / Investors complaints:-

Sec. 301 of Sarbanes-Oxley:-

As per this section, each audit committee shall establish procedures for

1. The receipt, retention and treatment of complaints received by the issuer regarding accounting, internal accounting controls or auditing matters and

2. the confidential, anonymous submission by employee of the issuer of concerns regarding questionable accounting or auditing matters.

Clause 49 (revised) :-

Shareholders section in the disclosures of clause 49 states that:

A board committee under the chairmanship of a non-executive director shall specifically look into the redressal of shareholder and investors complaints like transfer of shares, non-receipt of balance sheet, non-receipt of declared dividends etc. This Committee

shall be designated as ‘Shareholders/Investors Grievance Committee’.

Sarbanes Oxley act mainly considers the accounts related queries whereas Clause 49 covers the topic in the broad sense.

E) Penal Provisions:-

Clause 49 (revised) :-

For violation of the listing agreement, Section 23E of Securities Contract Regulation Act, 1956 provides for a pecuniary penalty of upto Rs.25 crores-on the company.

Sec. 302 of Sarbanes-Oxley:-

For violation of Sarbanes-Oxley Act, Section 906 provides for fines and imprisonment of up to $ 1 million and 10 years for knowing violations of Section 906, and up to $5 million and 20 years for willful violations

F) Code of Conduct/Ethics:-

Section 406 of Sarbanes-Oxley:-

The act directs the companies to disclose if they have adopted code of conduct, if not, reasons thereof. Code of ethics for senior financial officers: 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 49(Revised):-

1.The Board shall lay down a code of conduct for all Board members and senior management of the company. The code of conduct shall be posted on the website of the company.

2. All Board members and senior management personnel shall affirm compliance with the code on an annual basis. The Annual Report of the company shall contain a declaration to this effect signed by the CEO.

3. For this purpose, the term "senior management" shall mean personnel of the company who are members of its core management team excluding Board of Directors. Normally, this would comprise all members of management one level below the executive directors, including all functional heads.

As per the above paragraph, in the Indian context, 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 Sarbanes-Oxley restricts the code of conduct to be applicable to only 'principal financial officer and comptroller or principal accounting officer, or persons performing similar functions.

G) Public Company Accounting Oversight Board:-

As per the Sarbanes Oxley act, a Public Company Accounting Oversight Board 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 49. In India the ICAI is legally empowered to carry out most of the regulatory, oversight and disciplinary functions outlined in the SOX Act (barring prosecution and levying of penalties). But the public perception is that the ICAI mechanisms are slow and the institute is not interested in adequately disciplining the members. In India the functions of PCAOB are carried out by various regulatory agencies viz. SEBI, RBI, ICAI, ICSI, ICWAI etc. If there were to be an Indian version of the PCAOB, then such powers would need to be withdrawn from the existing regulatory agencies and concentrated in the proposed public oversight board.

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