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8/7/2019 Final - Ethics Project
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Corporate
Governance ² AnIndian
Experience
Upasana Gupta (15911)
Diwakar Anand (15912)
Skiti Lakhmani (15926)
Ashima Sehgal (15933)
BFIA 3
Shaheed Sukhdev College of
Bu ine tudie
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:It is easy to dodge our responsibilities, but we cannot
dodge the consequences of dodging our responsibilities .9
Josiah Charles Stamp(English Economist and President of the Bank of England)
Term Paper for Business Ethics
Submitted byUpasana Gupta (15911)
Diwakar Anand (15912)
Skiti Lakhmani (15926)
Ashima Sehgal (15933)
BFIA III
Corporate Governance ² An Indian Experience
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Ack wl g m s
We would like to take this opportunity to thank Ms. Achint Arora, who gave us the opportunity to work
on this project and mentored us through our course of it.
We would also like to express our gratitude towards Mr. Suresh Anand, CA, Sachit Khera, Article,
KPMG and Karan Khera, Article, AS Associates, for enhancing our understanding of our topic, and
helping us gain an insight into the way the corporate world observes corporate governance. In the end,
we would also like thank the library staff who helped us find journals, magazines and books related to
our study.
The project would not have been conceived and executed without your support. Thank you all.
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Contents
S.No. Particulars Page1. INTRODUCTION 1
2. CORPORATE GOVERNANCE: INDIAN
PERSPECTIVE
4
3. CII CODE, 1998 6
4. KUMAR MANGALAM BIRLA COMMITTEE REPORT,
1999
10
5. GOT ETHICS? (INFOSYS CASE STUDY) 16
6. NARESH CHANDRA COMMITTEE REPORT, 2002 24
7. NARAYANA MURTHY COMMITTEE REPORT, 2003 28
8. REVISED CLAUSE 49 OF THE LISTING
AGREEMENT
32
9. DR. J J IRANI RECOMMENDATIONS, 2005 40
10. CURRENT SCENARIO 46
11. CONCLUSION 51
12. ANNEXURES
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Introduction
The subject of corporate governance leapt to global business limelight from relative obscurity after a string
of collapses of high profile companies. Enron, the Houston, Texas based energy giant, and WorldCom, the
telecom behemoth, shocked the business world with the magnitude of their unethical and illegal operations.
Worse, they seemed to indicate only the tip of a dangerous iceberg. While corporate practices in the US
companies came under attack, it appeared that the problem was far more widespread. Large and trusted
companies from Parma at in Italy to the multinational newspaper group Hollinger Inc., revealed significant
and deep-rooted problems in their corporate governance. Even the prestigious New York Stock Exchange
had to remove its director, Dick Grasso, amidst public outcry over excessive compensation. It was clear that
something was amiss in the area of corporate governance all over the world.
And while these high-profile corporate governance failures have brought the subject to the forefront, the
issue has always been central to finance and economics.
Not surprisingly, it is particularly important for developing countries, since it is fundamental to financial and
economic development. Recent research has established that financial development is largely dependent on
investor protection in a country. Effective corporate governance systems promote the development of strong
financial systems, which, in turn, have an unmistakably positive effect on economic growth and poverty
reduction. It also enhances access to external financing by firms, leading to greater investment, as well as
higher growth and employment. Poor corporate governance also hinders the creation and development of
new firms.
Further, good corporate governance lowers of the cost of capital by reducing risk, and creates higher firm
valuation, once again boosting real investments. It also ensures better resource allocation, and the return on
assets (ROA) has been shown to be about twice as high in the countries with the highest level of equityrights protection as in countries with the lowest protection. Finally, good corporate governance can remove
mistrust between different stakeholders, reduce legal costs and improve social and labour relationships and
external economies like environmental protection.
The central issue to corporate governance is the nature of the contract between shareholder representatives
and managers telling the latter what to do with the funds contributed by the former. The shareholders do not
have the expertise or the inclination to run the business, so these must go to management. The efficient limits
to these powers constitute much of the subject of corporate governance. The reality is even more
complicated and biased in favour of management.
In real life, managers wield an enormous amount of power in joint-stock companies and the commonshareholder has very little say in the way his or her money is used in the company. Most shareholders do not
care to attend the General Meetings to elect or change the Board of Directors, and often grant their ³proxies´
to the management. Even those that attend the meeting find it difficult to have a say in the selection of
directors as only the management gets to propose a slate of directors for voting.
Often the CEO himself is the Chairman of the Board of Directors as well. Consequently the supervisory role
of the Board is often severely compromised and the management, who really has the keys to the business,
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can potentially use corporate resources to further their own self- interests rather than the
interests of the shareholders.
Common areas of management action that may be sub-optimal or contrary to shareholders¶ interests (other
than outright stealing) involve excessive executive compensation, transfer pricing (i.e. transacting with
privately owned companies at other-than- market rates to siphon off funds), managerial entrenchment (i.e.
managers resisting replacement by a superior management) and sub-optimal use of free cash flows (i.e. the
use to which the managers put the retained earnings of the company). In the absence of profitable investment
opportunities, these funds are frequently squandered on questionable empire-building investments and
acquisitions when their best use is to be returned to the shareholders.
Keeping a professional management in line is only one, though perhaps the most important, of the issues in
corporate governance. Essentially corporate governance deals with effective safeguarding of the investors¶
and creditors¶ rights and these rights can be threatened in several other ways. For instance, family businesses
and corporate groups are common in many countries including India. Inter-locking and ³pyramiding´ of
corporate control within these groups make it difficult for outsiders to track the business realities of
individual companies in these behemoths. In addition, managerial control of these businesses are often in the
hands of a small group of people, commonly a family, who either own the majority stake, or maintain
control through the aid of other block holders like financial institutions. Their own interests, even when they
are the majority shareholders, need not coincide with those of the other ± minority ± shareholders. This often
leads to expropriation of minority shareholder value through actions like ³tunneling´ of corporate gains or
funds to other corporate entities within the group. Such violations of minority shareholders¶ rights also
comprise an important issue for corporate governance.
The history of the development of Indian corporate laws has been marked by interesting contrasts. However,
concerns about corporate governance in India were, however, largely triggered by a spate of crises in the
early 90¶s ± the Harshad Mehta stock market scam of 1992 followed by incidents of companies allotting
preferential shares to their promoters at deeply discounted prices as well as those of companies simply
disappearing with investors¶ money.
These concerns about corporate governance stemming from the corporate scandals as well as opening up to
the forces of competition and globalization gave rise to several investigations into the ways to fix the
corporate governance situation in India. One of the first among such endeavors was the CII Code for
Desirable Corporate Governance developed by a committee chaired by Rahul Bajaj. The committee was
formed in 1996 and submitted its code in April 1998. Later SEBI constituted two committees to look into the
issue of corporate governance ± the first chaired by Kumar Mangalam Birla that submitted its report in early
2000 and the second by Narayana Murthy three years later. The SEBI committee recommendations have
had the maximum impact on changing the corporate governance situation in India. The Advisory Group on
Corporate Governance of RBI¶s Standing Committee on International Financial Standards and Codes also
submitted its own recommendations in 2001.
A comparison of the various recommendations reveals the progress in the thinking on the subject of
corporate governance in India over the years. An outline provided by the CII was given concrete shape in the
Birla Committee report of SEBI. SEBI implemented the recommendations of the Birla Committee through
the enactment of Clause 49 of the Listing Agreements. They were applied to companies in the BSE 200 and
S&P C&X Nifty indices, and all newly listed companies, on March 31, 2001; to companies with a paid up
capital of Rs. 10 crore or with a net worth of Rs. 25 crore at any time in the past five years, as of March 31,
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2002; to other listed companies with a paid up capital of over Rs. 3 crore on March 31,
2003. The Narayana Murthy committee worked on further refining the rules.
The recommendations also show that much of the thrust in Indian corporate governance reform has been on
the role and composition of the board of directors and the disclosure laws. The Birla Committee, however,
paid much-needed attention to the subject of share transfers which is the Achilles¶ heel of shareholders¶ right
in India.
Clearly much more needs to be accomplished in the area of compliance. Besides, in the area of corporate
governance, the spirit of the laws and principles is much more important than the letter. Consequently,
developing a positive culture and atmosphere of corporate governance is essential is obtaining the desired
goals. Corporate governance norms should not become just another legal item to be checked off by managers
at the time of filing regulatory papers.
Corporate Governance:
Indian Perspective
Based on the recommendations of the Committee on Corporate
Governance under the Chairmanship of Wikipedia defines
corporate governance as ³Corporate governance is the set of
processes, customs, policies, laws, and institutions affecting the
way a corporation (or company) is directed, administered or
controlled. Corporate governance also includes the relationships
among the many stakeholders involved and the goals for which the
corporation is governed. ́
SEBI¶s Committee on Corporate Governance defines corporate
governance as the "acceptance by management of the inalienable
rights of shareholders as the true owners of the corporation and of their own role as trustees on behalf of the
shareholders. It is about commitment to values, about ethical business conduct and about making a
distinction between personal & corporate funds in the management of a company."
With corporate Governance becoming the new buzzword in the business arena today the need for a
structured and unambiguous reference for code of corporate governance assumes significant importance.
The evolution of corporate governance norms in India has been in the form of various recommendations and
reports that incorporate changes in the desired norms in the context of time. The Companies Act, 1956 does
provide for certain legislative norms in relation to corporate governance in India, such as Section 198
(overall maximum managerial remuneration), Section 299 (disclosure of interests by director), Section 309
& 269 (remuneration of directors) and certain other section of the Act read along with Clause 49 of the
Listing Agreement which provides for procedure relating to the disclosures, composition of board of
directors, composition of audit committee including the appointment of independent directors and certain
disclosures relating to accounting treatment, related party transaction. And these legislative norms are
Legislative norms are
supported by various
committee reports such as the
CII code, Birla committee,
Murthy committee etc, which
form the skeleton of corporate
governance and disclosure
norms in India
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supported by various committee reports such as the CII code, Birla committee, Murthy
committee etc. These reports form the skeleton of corporate governance and disclosure norms in India.
Also, despite excellent rules and regulations, scams like Satyam and recently Citibank have rocked the
financial services industry. So where does the problem lie? The problem lies in the fact that at present,
corporate governance is still seen as a notional, voluntary set of ³guidelines´ that define lines of
accountability that segregate the relationship between the company and key corporate
individuals.Regulatory authorities are inadequately staffed and lack sufficient number of skilled people. This
has led to less than credible enforcement. Delays in courts compound this problem.
Thus corporate governance in India still lies between the murky shades of black and white, a clear gray area,
in India. The challenge lies in codifying corporate governance norms in quantifiable, crystal clear terms that
leave no wriggle room. And then follow it up with excellent regulatory mechanism and strict
implementation. Only then can corporate governance be not just a voluntary action by a few but something
that transcends barriers of size, industry, sector etc to become a rule in India¶s emerging corporate sector.
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CII Code, 1998
The CII code is one of the oldest codes on corporate governance in India, written in 1996 and finalized in
1998. It sought to define the term ³corporate governance´ in clear, unambiguous terms. This initiative by CIIflowed from public concerns regarding the protection of investor interest, especially
the small investor; the promotion of transparency within business and industry; the need to move towards
international standards in terms of disclosure of information by the corporate sector and, through all of this,
to develop a high level of public confidence in business and industry.
1. Board of directors:-
³Obviously not all well governed companies do well in
the market place. Nor do the badly governed ones
always sink. But even the best performers risk stumbling
some day if they lack Strong and independent boards of directors´-Business Week, 1996
y The full board should meet a minimum of six
times a year, preferably at an interval of two months,
and each meeting should have agenda items that require
at least half a day¶s discussion
y Any listed companies with a turnover of Rs.100
crores and above should have professionally competent,
independent, nonexecutive directors, who should
constitute at least 30 percent of the board if the Chairman of the company is a non-executive director
or at least 50 percent of the board if the Chairman and Managing Director is the same person.
y No single person should hold directorships in more than 10 listed companies
2. Remuneration of directors:-
y Most non-executive directors receive a sitting fee which cannot exceed Rs.2,000 per meeting. The
Working Group on the Companies Act recommended that this limit should be raised to Rs.5,000.
Although this is better than Rs.2,000, it is hardly sufficient to induce serious effort by the non-
executive directors.
y To secure better effort from non-executive directors, companies should:
y Pay a commission over and above the sitting fees for the use of the professional inputs. The present
commission of 1% of net profits (if the company has a managing director), or 3% (if there is no
managing director) is sufficient.
y Consider offering stock options, so as to relate rewards to performance.
3. Reappointment of directors:-
CII flowed from public concerns
regarding the protection of investor
interest, especiallythe small investor; the promotion of
transparency within business and
industry and the need to move
towards international standards.
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While re-appointing members of the board, companies should give the attendance
record of the concerned directors. If a director has not been present (absent with or without leave) for 50
percent or more meetings, then this should be explicitly stated in the resolution that is put to vote. As a
general practice, one should not reappoint any director who has not had the time attend even one half of
the meeting.
4. Disclosure Requirements:-
y Key information that must be reported to, and placed before, the board must contain:
y Annual operating plans and budgets, together with up-dated long term plans.
y Capital budgets, manpower and overhead budgets.
y Quarterly results for the company as a whole and its operating divisions or business segments.
y Internal audit reports, including cases of theft and dishonesty of a material nature.
y Show cause, demand and prosecution notices received from revenue authorities which are
considered to be materially important. (Material nature is any exposure that exceeds 1 percent of the
company¶s net worth).
y Fatal or serious accidents, dangerous occurrences, and any effluent or pollution problems.
y Default in payment of interest or non-payment of the principal on any public deposit, and/or to any
secured creditor or financial institution.
y Defaults such as non-payment of inter-corporate deposits by or to the company, or materially
substantial non-payment for goods sold by the company.
y Any issue which involves possible public or p roduct liability claims of a substantial nature,
including any judgement or order which may have either passed strictures on the conduct of the
company, or taken an adverse view regarding another enterprise that can have negative implications
for the company.
y Details of any joint venture or collaboration agreement.
y Transactions that involve substantial payment towards goodwill, brand equity, or intellectual
property.
y Recruitment and remuneration of senior officers just below the board level, including appointment
or removal of the Chief Financial Officer and the Company Secretary.
y Labour problems and their proposed solutions.
y Quarterly details of foreign exchange exposure and the steps taken by management to limit the risks
of adverse exchange rate movement, if material.
5. In relation to audits:-
i. Listed companies with either a turnover of over Rs.100 crores or a paid-up capital of Rs.20 crores
should set up Audit Committees within two years.
ii. Audit Committees should consist of at least three members, all drawn from a company¶s non-
executive directors, who should have adequate knowledge of finance, accounts and basic elements
of company law.
iii. To be effective, the Audit Committees should have clearly defined Terms of Reference and its
members must be willing to spend more time on the company¶s work vis-à-vis other nonexecutive
directors.
iv. Audit Committees should assist the board in fulfilling its functions relating to corporate accounting
and reporting practices, financial and accounting controls, and financial statements and proposals
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that accompany the public issue of any security²and thus provide effective
supervision of the financial reporting process.
v. Audit Committees should periodically interact with the statutory auditors and the internal auditors to
ascertain the quality and veracity of the company¶s accounts as well as the capability of the auditors
themselves.
vi. For Audit Committees to discharge their fiduciary responsibilities with due diligence, it must be
incumbent upon management to ensure that members of the committee have full access to financial
data of the company, its subsidiary and associated companies, including data on contingent
liabilities, debt exposure, current liabilities, loans and investments.
vii. By the fiscal year 1998-99, listed companies satisfying criterion (1) should have in place a strong
internal audit department, or an external auditor to do internal audits; without this, any Audit
Committee will be toothless
6. Additional Shareholder information:-
i. Under ³Additional Shareholder¶s Information´, listed companies should give data on:
ii. High and low monthly averages of share prices in a major Stock Exchange where the company is
listed for the reporting year.
iii. Greater detail on business segments up to 10% of turnover, giving share in sales revenue, review of
operations, analysis of markets and future prospects.
7. Creditor Rights:-
As creditors are not shareholders, and so long as their dues are being paid in time, they should desist from
demanding a seat on the board of directors.
It would be desirable for FIs as pure creditors to re-write their covenants to eliminate having nominee
directors except:a) in the event of serious and systematic debt default; and
b) in case of the debtor company not providing six-monthly or quarterly operational data to the
concerned FI(s).
8. Credit Rating:-
y If any company goes to more than one credit rating agency, then it must divulge in the prospectus
and issue document the rating of all the agencies that did such an exercise.
y It is not enough to state the ratings. These must be given in a tabular format that shows where the
company stands relative to higher and lower ranking. It makes considerable difference to an investor to know whether the rating agency or agencies placed the company in the top slots, or in the middle,
or in the bottom.
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Ku ar Man a a Bir a Co ittee
Report, 1999
Need for the report
The CII National Task Force, constituted under the chairmanship of Mr. Rahul Bajaj, presented the draft
guidelines and the code of Corporate Governance for public comments and suggestion in April 1997, on the
basis of which, the Desirable Corporate Governance Code was finalized. CII presented the Code for
information, for understanding and for implementation of Indian business and industry in 1998.
During the process of preparation of this code three aspects
were considered crucial by the committee. Firstly, there is no
unique structure of "corporate governance" in the developed
world; nor is one particular type unambiguously better than
others. That's why mechanical import of the concept is not
possible. Secondly, the Indian companies, banks and financial
institutions (FIs) can no longer afford to ignore better
corporate practices. Lastly, corporate governance goes far
beyond company law. The quantity, quality and frequency of
financial and managerial disclosure, the extent to which the
board of directors exercise their fiduciary responsibilities
towards shareholders, the quality of information thatmanagement share with their boards, and the commitment to run transparent companies that maximize long
term shareholder value cannot be legislated at any level of detail. This committee made 17 recommendations
on different subject of corporate governance.
While this was a huge leap for the country in the area of corporate governance norms, it was clearly
inadequate. Security and Exchange Board of India (SEBI) also constituted a committee under the
chairmanship of Shri Kumar Mangalam Birla to see the matters of corporate governance and recommend
necessary suggestion. The objective of the committee was to view corporate governance from the
perspective of investors and shareholders and to prepare a code to suit the Indian corporate environment, as
corporate governance frameworks are not exportable. For this purpose committee identified three major
constituents viz. shareholders, the board of directors and the management and three key aspects viz.
accountability, transparency and equal treatment for all stakeholders of corporate governance. The
committee made twenty-five recommendations and categorized them as mandatory and non-mandatory.
The Committee therefore agreed that the fundamental objective of corporate governance is the "enhancement
of shareholder value, keeping in view the interests of other stakeholder". This definition harmonises the need
for a company to strike a balance at all times between the need to enhance shareholders¶ wealth whilst not in
any way being detrimental to the interests of the other stakeholders in the company.
The report submitted by the committee was the first formal and comprehensive attempt to evolve a µCode of
Corporate Governance', in the context of conditions prevailing in governance in Indian companies, as well
as the state of capital markets.
While the CII Code was a
huge leap for the country in
the area of corporate
governance norms, it was
rather inadequate.
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The Committee's terms of the reference were to:
y suggest suitable amendments to the listing agreement executed by the stock exchanges with the
companies and any other measures to improve the standards of corporate governance in the listed
companies, in areas such as continuous disclosure of material information, both financial and non-
financial, manner and frequency of such disclosures, responsibilities of independent and outside
directors;
y draft a code of corporate best practices; and
y Suggest safeguards to be instituted within the companies to deal with insider information and insider
trading.
The primary objective of the committee was to view corporate governance from the perspective of the
investors and shareholders and to prepare a µCode' to suit the Indian corporate environment.
The committee had identified the Shareholders, the Board of Directors and the Management as the three key
constituents of corporate governance and attempted to identify in respect of each of these constituents, their
roles and responsibilities, as also their rights in the context of good corporate governance.
Corporate governance has several claimants ±shareholders and other stakeholders - which include suppliers,
customers, creditors, and the bankers, the employees of the company, the government and the society at
large. The Report had been prepared by the committee, keeping in view primarily the interests of a particular class of stakeholders, namely, the shareholders, who together with the investors form the principal
constituency of SEBI while not ignoring the needs of other stakeholders.
Mandatory and non-mandatory recommendations:-
The committee divided the recommendations into two categories, namely, mandatory and non- mandatory.
The recommendations which were absolutely essential for corporate governance could be defined with
precision and which could be enforced through the amendment of the listing agreement could be classified as
mandatory. Others, which were either desirable or which may have required change of laws were classified
as non-mandatory.
1. Applicability:-
y Applicable to the listed companies, their directors, management, employees and professionals
associated with such companies.
y The ultimate responsibility for putting the recommendations into practice lies directly with the
board of directors and the management of the company.
y Recommendations will apply to all the listed private and public sector companies, in accordance
with the schedule of implementation.
y As for listed entities, which are not companies, but body corporates (e.g. private and public sector
banks, financial institutions, insurance companies etc.) incorporated under other statutes, the
recommendations will apply to the extent that they do not violate their respective statutes, andguidelines or directives issued by the relevant regulatory authorities.
2. Board of directors:-
y The Board of a Company provides leadership and strategic guidance, objective judgement
independent of the management to the Company and exercises control over the Company.
y The Board must fulfil its legal requirements and also must be aware and understanding of its
responsibilities
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y An effective corporate governance system is one, which allows the Board to
perform these dual functions efficiently
a) Functions of BOD:-
y Directs the Company by formulating and reviewing the Company¶s policies.
y Controls the Company and its management by laying down the code of conduct.
y Is accountable to the shareholders for creating, protecting and enhancing wealth and resources of the Company.
y Is not involved in day to day management of the Company.
b ) Composition:-
y Executive directors are involved in the day to day management of the Companies
y Non executive directors bring external and wider perspective and independence to the decision
making. (Non executive directors may be independent or non-independent.)
y Independent Directors
i. Receive director¶s remuneration
ii. Do not have any other material pecuniary relationship or transactions with the
Company, its promoters, its management etc.,
iii. Emphasis on the calibre of the non executive directors.
c) Mandatory Recommendations:-
y Optimum combination of executive and non-executive directors with not less than 50% of the
board comprising the non executive directors.
y At least one third of the board should comprise of independent directors
y Institutions should appoint nominees on the board of Companies only on a selective basis where
such appointment is considered necessary to protect the interest of the Institution
y The role of the Chairman is to ensure that the board meetings are conducted in an effective
manner. The Chairman¶s role should in principle be different from that of the Chief Executive.
d) N on-mandatory Recommendation:-
y A non executive Chairman should be entitled to maintain a Chairman¶s Office at the Company's
expense and also allowed reimbursement of expenses incurred in the performance of his duties.
3. Audit Committee:-
Oversight of the finance function and monitoring
Relies on the senior financial management and the outside auditors.
a) Mandatory recommendations
y A qualified and independent audit committee should be set up by the board of a Company. This
would go a long way in enhancing the credibility of the financial disclosures of a Company and
promoting transparency
y Audit Committee
o Minimum of 3 members ( non executive directors, majority being independent and with at
least one director having financial and accounting knowledge)
o The chairman of the committee should be an independent director.
o The Chairman should be present at AGM to answer shareholder queries.
o The Company Secretary should act as the Secretary to the Committee
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y Frequency of meetings and quorum of the Audit committee
o Meet at least thrice a year
o One meeting before finalization and one every 6 months
o Quorum should be either 2 members or 1/3rd of the members of the audit committee
whichever is higher and there should be a minimum of two independent directors. ( this is a
mandatory recommendation
y Powers of the Audit Committee
o Oversight of the company¶s financial reporting process and the disclosure of its financial
information to ensure that the financial statement is correct, sufficient and credible.
o Recommending the appointment and removal of external auditor, fixation of audit fee and also
approval for payment for any other services.
o Reviewing with management the annual financial statements before submission to the board,
focussing primarily on:
o Any changes in accounting policies and practices.
o Major accounting entries based on exercise of judgement by management.
o Qualifications in draft audit report.o Significant adjustments arising out of audit.o The going concern assumption.
o Compliance with accounting standards
o Compliance with stock exchange and legal requirements concerning financial statements.o Any related party transactions i.e. transactions of the company of material nature, with promoters
or the management, their subsidiaries or relatives etc. that may have potential conflict with the
interests of company at large.
o Reviewing with the management, external and internal auditors, the adequacy of internal control
systems.
o Reviewing the adequacy of internal audit function, including the structure of the internal audit
department, staffing and seniority of the official heading the department, reporting structure,
coverage and frequency of internal audit.
o Discussion with internal auditors of any significant findings and follow-up thereon.
o Reviewing the findings of any internal investigations by the internal auditors into matters where
there is suspected fraud or irregularity or a failure of internal control systems of a material nature
and reporting the matter to the board.
o Discussion with external auditors before the audit commences, of the nature and scope of audit.
Also post-audit discussion to ascertain any area of concern.
o Reviewing the company¶s financial and risk management policies.
o Looking into the reasons for substantial defaults in the payments to the depositors, debenture
holders, share holders (in case of non-payment of declared dividends) and creditors.
4. Board procedures:-
y The Board meetings should be held at least 4 times in a year with a maximum time gap of 4
months between any two meetings.
y A director should not be a member in more than 10 committees or act as a Chairman of more than
5 committees across all companies in which he is a director.y Every director must inform the Company about the Committee positions he occupies in other
Companies and notify changes as and when they take place.
a) Management
y Management is responsible for ensuring that the principles of corporate governance are adhered to
and enforced.
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b ) Mandatory recommendation
Disclosures must be made by the management to the Board relating to all material financial
and commercial transactions, where they have personal interest that may have potential
conflict with the interest of the Company at large
5. Shareholders:-
y The GBM provide an opportunity to the shareholders to address their concerns to the Board of
Directors and comment on and demand any explanation on the Annual report or on the overall
functioning of the Company.
a) Mandatory recommendations
y Responsibilities of Shareholders
o Show a greater degree of interest and involvement in the appointment of directors and the
auditors.
o Inform themselves about the new directors.
o Shareholders rightso Right to transfer and registration of shares.
o Obtaining relevant information on the Company on a timely and regular basis
o Participating and voting in shareholder meetings
o Electing members of the Board
o Right to information on takeovers, sale of assets or divisions of the Company and changes in
the Capital structure.
o Half yearly declaration of financial performance including summary of significant events in
the last 6 months should be sent to each household of shareholders.
y A board committee under the chairmanship of a non-executive director should be formed to
specifically look into the redressal of shareholder complaints like transfer of shares, non-receipt of
balance sheet, non receipt of declared dividends etc.
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³We've always striven hard for respectability, transparency and to create an ethical organisation. There are
certain expectations that we haven't fulfilled. But we're also a very young organisation and in areas like
track record of management, we may be low because we're yet to show longevity.´
- Narayana NR Murthy,
N. R. Narayana Murthy is as well known as a promoter of corporate governance reform and excellent
corporate workplace ethical practices, as he is as the co-founder of Infosys Technologies Ltd. Infosys, which
employs over 58,000 people worldwide, provides consulting and IT services. It is one of the pioneers in
strategic offshore outsourcing of software services. Murthy is a fervent believer in globalization, a major
influence on the thinking of author Tom Friedman (The World Is Flat: A Brief History of the Twenty-first
In os s Case Stud
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Century) and a leader of India¶s technology revolution. His approach to corporate
governance and workplace values have been no less influential on the most dynamic and successful
technology companies in India.
The Company¶s Vision Is: "To be a globally respected corporation that provides best-of breed business
solutions, leveraging technology, delivered by best-in-class people." And, its Mission is: "To achieve our
objectives in an environment of fairness, honesty, and courtesy towards our clients, employees, vendors and
society at large."
Infosys¶s stresses that its operations are driven by key values that it calls C-LIFE:
1. Customer Delight: A commitment to surpassing our customer expectations.
2. Leadership by Example: A commitment to set standards in our business and transactions and be an
exemplar for the industry and our own teams.
3. Integrity and Transparency: A commitment to be ethical, sincere and open in our dealings.
4. Fairness: A commitment to be objective and transaction-oriented, thereby earning trust and respect.
5. Pursuit of Excellence: A commitment to strive relentlessly, to constantly improve ourselves, our
teams, our services and products so as to become the best.
Corporate Governance is an area of critical importance to Infosys and one where it has sought to be a global
leader. It is seeking to use its model example to promote far higher standards in India and Murthy has been
one of the most vocal and influential advocates of corporate governance reform in his country.
The company states: ³We believe that sound corporate governance is critical to enhance and retain investor
trust. Accordingly, we always seek to ensure that we attain our performance rules with integrity. Our Board
exercises its fiduciary responsibilities in the widest sense of the term. Our disclosures always seek to attain
the best practices in international corporate governance. We also endeavor to enhance long-term shareholder
value and respect minority rights in all our business decisions.´
The Infosys corporate governance philosophy is based on the following principles:
1. Satisfy the spirit of the law and not just the letter of the law.
2. Corporate governance standards should go beyond the law.
3. Be transparent and maintain a high degree of disclosure levels. When in doubt, disclose.
4. Make a clear distinction between personal conveniences and corporate resources.
5. Communicate externally, in a truthful manner, about how the company is run internally.
6. Comply with the laws in all the countries in which the company operates.
7. Have a simple and transparent corporate structure driven solely by business needs.
8. Management is the trustee of the shareholders¶ capital and not the owner.
Infosys stresses that at the core of its corporate governance practice is the Board, which oversees how themanagement serves and protects the long-term interests of all the stakeholders of the company. It states: ³We
believe that an active, well-informed and independent Board is necessary to ensure the highest standards of
corporate governance. Majority of the Board, 9 out of 16, are independent members. Further, we have
compensation, nomination, investor grievance and audit committees, which are comprisedof independent
directors.´
CII Code and Kumar Mangalam Birla Committee Report: An Analysis
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Infosys has clearly set the highest standards when it comes to adopting sound Corporate Governance
practices among Indian companies. The CII code on ³Desirable Corporate Governance´, introduced in 1996,
was a voluntary code. And Infosys was among the first companies in India to adopt the code and make their
corporate governance practices transparent.
In this section, we are analysing the changes in the corporate governance norms and recommendations
brought about by the Kumar Mangalam Birla Committee Report ( KM BC Report ). For this, we are
evaluating the corporate governance reports, part of Annual Reports, of the years 1998-99 (CII Code) and
1999-2000 (KMBC Report).
Overall, it was observed that Infosys promptly complied with all mandatory recommendations and most
voluntary recommendations as suggested by the KMBC Report.
1. Board of Directors:-
CII Code Compliance KMBC Report Compliance
Any listed company with
a turnover of Rs. 100
crore and higher should
have professionally
competent, independent,
non-executive directors
who should constitute at
least 30% of the board if
the chairman of the
company is a non-
executive director, or at
least 50% of the board if
the chairman and themanaging director is the
same person.
In fiscal 1999, non-
executive directors
constituted 40% of the
board. The board had
divided the responsibility
for the management of
the company between an
executive chairman and
CEO, and a managing
director, president and
COO. The non-executive
directors are independent
and accomplished professionals in the
corporate and academic
worlds.
The committee
recommends that the
board of a company have
an optimum combination
of executive and non-
executive directors with
not less than 50% of the
board comprising the
non-executive directors.
The number of
independent directors
depends on the nature of
the chairman of the board. In case a company
has a non-executive
chairman, at least one-
third of the board should
comprise of independent
directors, and in the case
a company has an
executive chairman, at
least half of board should
be independent
(Mandatoryrecommendation).
As of March 31, 2000,
non-executive directors
constituted 50% of the
board. The board had
divided the responsibility
for the management of
the company between the
chairman and CEO and
the managing director,
president and the COO.
The full board should
meet a minimum of six
times a year, preferably
at a interval of two
months.
The board of directors
met nine times during
the year with a clearly
defined agenda for each
meeting.
The committee
recommends that the
board meetings should
be held at least four
times a year, with a
maximum gap of four
The board of directors
met nine times during
the year 1999-2000.
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months between any two
meetings.
It is observed that the voluntary recommendations of the CII Code were followed, as well the revision by the
KMBC Report was also complied with. The number of non-executive directors was increased from 40% to
50% following the revision. The distribution of the responsibilities was maintained status quo, between the
various positions of responsibility in the organisation structure. Also, although the minimum number of
board meetings was decreased from 6 to 4, the company continued to hold 9 meetings a year. The decrease
may have been prompted by setting up of various committees to monitor each aspect of the company¶s
functioning. But in this respect, the company has displayed that it is not following these recommendations to
satisfy the letter of the recommendation, but the intent.
Another significant difference in the two sets of codes was the CII Code stipulated, ³To secure better effort
from non-executive directors, companies should pay a commission over and above the sitting fees for the use
of professional inputs. The present commission of 1% of net profits (if the company has a managing
director) or 3% (if there is no managing director) is sufficient; Consider offering stock options so as to relate
rewards to performance. An appropriate mix of the two can align a non-executive director towards keeping
an eye on short term profits as well as long term shareholder value.´
In 1998-99, the non-executive directors were eligible for a commission of up to 0.5% of the net profits of the
company, the total amounting to Rs. 24 lakhs. However, no stock options were granted due to regulatory
constraints.
The KMBC Report required the setting up of a formal remuneration committee. ³The committee
recommends that the board should set up a remuneration committee to determine on their behalf, and on the
behalf of the shareholders with agreed terms of reference, the company¶s policy on specific remuneration
packages for executive directors. To avoid conflicts of interest, the remuneration committee should comprise
at least three directors, all of whom shall be non-executive directors, the chairman of the committee being an
independent director.´These recommendations were strictly complied with. All members of the compensation committee,
including its chairman, were independent, non-executive directors of the company.
2. Disclosure of Corporate Governance
The KMB Committee recommended that ³there should be a
separate section on Corporate Governance in the Annual
Reports of companies, with a detailed compliance report on
Corporate Governance. Non-compliance of any mandatory
recommendations with reasons thereof and the extent towhich the non-mandatory recommendations have been
adopted should be specifically highlighted. This will enable the shareholders and the securities market to
assess for themselves the standards of corporate governance followed by a company. (Mandatory
recommendation)´
The remarkable aspect is that Infosys had been following this particular practice since before this
recommendation was made, even though there were no suggestions to this effect in the CII Code. It is proof
that Infosys has upheld high standards of corporate governance, and disclosures. Wherever the norms were
Corporate Governance is an
area of critical importance to
Infosys and one where it has
sought to be a global leader
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not followed, even though voluntary, it was mentioned explicitly, and there was no
intention to mislead the users of the Report by any omissions.
3. Audit Committee
CII Code ± ³The Audit Committee should consist of at least three members, all drawn from a company¶s
non-executive directors, who should have adequate knowledge of finance, accounts and basic elements of
company law.´
The Audit Committee of the company consisted of four non-executive directors, with Mr. Deepak
Satwalekar (of HDFC Bank) as the chairman. There was no mention of the minimum no. of meetings of the
audit company. But the audit committee met twice in the year and reviewed the reports of the internal
auditors and the statutory auditors.
The recommendations for the Audit Committee by KMBC Report were maintained at membership of the
audit committee to three non-executive directors. The committee also maintained status quo with four
members, and chaired by Mr. Deepak Satwalekar. In addition, the KMBC Report also prescribed the quorum
as either two members or one-third of the members of the audit committee, whichever higher, with atleast
two independent directors. This stipulation was also complied with.
It is mentioned that the CII Code did not prescribe the minimum no. of meetings for the Audit Committee,
but was set at least 3 meetings a year by the KMBC Report. The company failed to observe this
recommendation, and only two meetings were held, as before.
It is significant to note that Infosys consciously expanded the scope of its Audit Committee from:
To provide reasonable assurance of:
a. Safety of assets against unauthorised use and disposition b. Maintenance of proper accounting records and the reliability of financial information used within
the business or for publication, and
c. Internal controls and internal checks within the company
(CII Code)
to:
Reviewing with management and focussing primarily on
a. Any changes in accounting policies and practices
b. Major accounting entries based on exercise of judgement by management
c. Qualifications in draft audit reportd. Significant adjustments arising out of audit
e. Going concern assumption
f. Compliance with accounting standards
g. Compliance with stock exchange and legal requirements concerning financial statements
h. Any related party transactions, i.e. any material transactions with promoters or management.
Conclusion:-
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Infosys is popularly called the ³high priest of corporate governance´, and not without reason. Through these
recommendations and compliance disclosures, it is evident that the company upheld high standards of
managerial ethics, as well as transparency. It satisfied most of the recommendations of the two codes, with
minor exceptions, which were also adequately disclosed.
However, it was also observed that where the norms which it failed to observe, it maintained the
performance as the previous year. Although this may seem as being rigid, and an argument that the company
failed to observe the new recommendations and was able to satisfy only those which were already in line
with its existing practices, may be given. However, we must note that the time difference between the release
of the report (Nov 1999) and the close of the FY was not substantial to come to the conclusion, as the
contravention might have been temporary and due to lack of sufficient time for implementation.
It is also significant to note here that the company has strong corporate governance practices in place,
embedded into its structure and operations, and it follows not just the recommendations made in India, but
also the Cadbury Report (U.K.) and the Blue Ribbon Report (U.S.A).
The Stakeholder Theory of Business Ethics states, in a nutshell, that a business may be considered ethical f it
takes care of the interests of all its stakeholders- both primary and secondary, for e.g. employees, suppliers,
customers etc.
The Social Contract theory of Business Ethics states that businesses have an ethical obligation towards the
members of a given society. The theory creates and embeds mutual agreement between members of societies
and established businesses. The members of a society permit business to be created in these establishments
for certain specified benefits that enhance the welfare of the societies. These benefits include economic
efficiency, improved decision-making and improving the capacity of acquisition and use of modern
technology and resources.
As is evident, Infosys is a strongly ethical company, as supported by both these theories of business ethics asit satisfies the tenets of both of them to qualify as an ethical company.
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Naresh Chandra Co ittee
Report, 2002
The Naresh Chandra committee was set up to recommend standards and practices with relation to auditing
processes in India in 2002. The Government of India set up this committee triggered by the huge auditing
scams of Enron, WorldCom, Quest etc. which rocked the global economy in 2001,even leading to shutting
down of auditing giant-Arthur Andersen. These exposed the lacunae in auditing norms especially in areas of
auditor independence, conflicts of interest, corporate responsibility etc. Thus this report is preventive rather
than prescriptive in nature.
1. Auditor-Company Relationship:-
y Prohibition of any direct financial interest in the audit client by the audit firm, its partners or
members of the engagement team as well as their µdirect relatives¶. It applies when an interest of
more than 2 per cent of the share of profit or equity capital of the audit client is under the auditor.
y Prohibition of receiving any loans and/or guaranteesfrom or on behalf of the audit client by the
audit firm, its partners or any member of the engagement team and their µdirect relatives¶
y Prohibition of personal relationships, which would exclude any partner of the audit firm or
member of the engagement team being a µrelative¶ of any of key officers of the client company,
y Prohibition of service or cooling off period, under which any partner or member of the
engagement team of an audit firm who wants to join an audit client, or any key officer of the client
company wanting to join the audit firm, would only be allowed to do so after two years from the time
they were involved in the preparation of accounts and audit of that client.
y Prohibition of undue dependence on an audit client.So that no audit firm is unduly dependent on
an audit client, the fees received from any one client and its subsidiaries and affiliates, all together,
should not exceed 25 per cent of the total revenues of the audit firm. However, to help newer and
smaller audit firms, this requirement will not be applicable
to audit firms for the first five years from the date of
commencement of their activities, and for those whose
total revenues are less than Rs.15 lakhs per year.
y Also, a list of prohibited non-auditing services has
also been provided which include services such as
actuarial, investment banking, internal audit etc.
In the same vein the committee recognizes that it makes
sense for auditing corporations to widen horizons by
engaging in business consulting subject to the some covenants.
The Government of India set
up this committee, triggered
by the huge auditing scams of
Enron, WorldCom, Quest etc.
which rocked the global
economy.
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2. Rotation of auditors:-
In line with international standards the committee does not legislate in favour of compulsory rotation of
auditors. However it recommends that the partners and at least 50 per cent of the engagement team
(excluding article clerks and trainees) responsible for the audit of either a listed company, or companies
whose paid up capital and free reserves exceeds Rs.10 crore, or companies whose turnover exceeds Rs.50
crore, should be rotated every five years.
3. Disclosure of qualification and subsequent action:-
The committee takes the issue of qualification of report very seriously and recommends the following steps.
y In case of a qualified auditor¶s report, the audit firm may read out the qualifications, with
explanations, to shareholders in the company¶s annual general meeting.
y It should also be mandatory for the audit firm to separately send a copy of the qualified report to the
ROC, the SEBI and the principal stock exchange (for listed companies), about the qualifications, with
a copy of this letter being sent to the management of the company.
4. Certificate of Independence:-
The Committee felt that it will be good practice for the audit firm to annually file a certificate of
independence to the Audit Committee and/or the board of directors of the client company. This will help in
ensuring that the auditors have retained their independence throughout their period of engagement.
5. Regulating the regulators:-
An important question that this committee tries to address is of regulating the regulators. It recommends
setting up of three independent Quality Review Boards (QRB), one each for the ICAI, the ICSI and ICWAI,
to periodically examine and review the quality of audit, secretarial and cost accounting firms, and pass
judgement and comments on the quality and sufficiency of systems, infrastructure and practices.
6. Independent Directors:-
The committee not only defines the number and persons qualifies to be independent director but also feels
that to be really effective, independent directors need to have a substantial voice, by being in a majority. It
was felt that rather than the management or the promoters, the Committee should put its weight behindminority shareholders and other stakeholders such as consumer or creditors. The committee therefore
recommends that independent directors have adequate presence and strength on the Board, especially of the
companies that are listed or, being public companies above a specific size.
Also, the minimum board size of all listed companies, as well as unlisted public limited companies with a
paid-up share capital and free reserves of Rs.10 crore and above or turnover of Rs.50 crore and above should
be seven ² of which at least four should be independent directors.
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However, this will not apply to:
a) unlisted public companies, which have no more than 50 shareholders and which are without debt of
any kind from the public, banks, or financial institutions, as long as they do not change their
character,
b) Unlisted subsidiaries of listed companies.
7. Question of remuneration:-
The maximum sitting fee permitted by the DCA is Rs.5,000. The committee was repeatedly reminded that
peanuts fetch monkeys. The Committee believes that companies cannot hope to get the best talent unless
they make it worthwhile for professionals to extend their time and expertise. The committee was cautioned
that far too much payment may itself impair independence, just as over -reliance on a single client
compromises the independence of auditors. However, the committee felt that advantages of adequate
remuneration require government to review the position.
8. Corporate Serious Fraud Office:-
Corporate frauds are so intricate that they can only be unravelled by a multi-disciplinary task force. The
Committee, therefore, suggest setting up a Corporate Serious Fraud Office (CSFO), without, at this stage,
taking away the powers of investigation and prosecution from existing agencies, in the Department of
Company Affairs with specialists inducted on the basis of transfer/deputation and on special term contracts
.This should be in the form of a multi-disciplinary team that not only uncovers the fraud, but is able to direct
and supervise prosecutions under various economic legislations through appropriate agencies
9. Competitive position:-
The profession of accountancy in India is dominated by small firms. This has not only opened them to
threats of competition from larger better organised international firms, but has also limited their ability tofund top class human resource development. The Committee felt that, in the long run, Indian audit firms will
have to consolidate and grow if they are to compete, especially in non-statutory functions, internationally.
The Government should consider amending the Partnership Act to provide for partnerships with limited
liability, especially for professions which do not allow their members to provide services as a corporate
body.
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Narayana Murthy Co ittee
Report, 2003
The SEBI Committee on Corporate Governance was constituted under the Chairmanship of Shri N. R.
Narayana Murthy, Chairman and Chief Mentor of Infosys Technologies Limited. The committee, to the likes
of most committees was successful in discussing, recommending and drafting a code, pertaining to the
mentioned laid down points; elucidated as follows:
I. Audit Committees - Review of information by audit committees:-
Mandatory Recommendations:-
Audit committees of publicly listed companies should be required to review the following information
mandatorily:
i. Financial statements and draft audit report, including quarterly / half-yearly financial information;
ii. Management discussion and analysis of financial condition and results of operations;
iii. Reports relating to compliance with laws and to risk management;
iv. Management letters / letters of internal control weaknesses issued by statutory/ internal auditors;
and
v. Records of related party transactions.
II. Financial literacy of members of the audit committee:-
Mandatory Recommendations:-
All audit committee members should be "financially literate" and at least one member should have
accounting or related financial management expertise.
III. Audit Reports and Audit Qualifications:-
The Committee has made the following two recommendations:
Mandatory Recommendation:-
A. Disclosure of accounting treatment: - In case a company has followed a treatment different from
that prescribed in an accounting standard, management should justify why they believe such
alternative treatment is more representative of the underlying business transaction. Management
should also clearly explain the alternative accounting treatment in the footnotes to the financial
statements.
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B . Audit qualifications: - Companies should be encouraged to move towards a
regime of unqualified financial statements. This recommendation should be reviewed at an
appropriate juncture to determine whether the financial reporting climate is conducive towards a
system of filing only unqualified financial statements.
IV. Related Party Transactions:-
Mandatory Recommendation:-
A statement of all transactions with related parties including their bases should be placed before the
independent audit committee for formal approval / ratification. If any transaction is not on an arm's length
basis, management should provide an explanation to the audit committee justifying the same.
V. Risk Management - Board disclosures:-
Mandatory Recommendation:-
Procedures should be in place to inform Board members about the risk assessment and minimization
procedures. These procedures should be periodically reviewed to ensure that executive management controls
risk through means of a properly defined framework.
Management should place a report before the entire Board of Directors every quarter documenting the
business risks faced by the company, measures to address and minimize such risks, and any limitations to the
risk taking capacity of the corporation. This document should be formally approved by the Board.
Training of Board members:-
The Committee noted that there is a real necessity for Board members to understand the components of the
business model and the accompanying risk parameters. However, the Committee also noted that Board
members can always ask for information relating to the business model of the company. It also observed that
the process of Board review of business risks will be a mandatory recommendation of the Committee.
Therefore, training of Board members could be made recommendatory.
Non-mandatory Recommendation:-
Companies should be encouraged to train their Board members in the business model of the company as well
as the risk profile of the business parameters of the company, their responsibilities as directors, and the best
ways to discharge them.
VI. Proceeds from Initial Public Offerings ("IPO") - Use of proceeds:-
Mandatory Recommendation:-
Companies raising money through an Initial Public Offering ("IPO") should disclose to the Audit
Committee, the uses / applications of funds by major category (capital expenditure, sales and marketing,
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working capital, etc), on a quarterly basis. On an annual basis, the company shall prepare
a statement of funds utilised for purposes other than those stated in the offer document/prospectus. This
statement should be certified by the independent auditors of the company. The audit committee should make
appropriate recommendations to the Board to take up steps in this matter.
VII. Code of Conduct - Written code for executive management:-
Mandatory Recommendation:-
It should be obligatory for the Board of a company to lay down the code of conduct for all Board members
and senior management of a company. This code of conduct shall be posted on the website of the company.
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 off by the CEO and
COO.
Explanation - For this purpose, the term "senior management" shall mean personnel of the company who are
members of its management / operating council (i.e. core management team excluding Board of Directors).
Normally, this would comprise all members of management one level below the executive directors.
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Revised C ause 49 of the
Listin A ree ent
Based on the recommendations of the Committee on Corporate Governance under the Chairmanship of Shri
Kumar Mangalam Birla, the SEBI had specified principles of Corporate Governance and introduced a new
clause 49 in the Listing agreement of the Stock Exchanges in the year 2000. These principles of Corporate
Governance were made applicable in a phased manner and all the listed companies with the paid up capital
of Rs 3 crores and above or net worth of Rs 25 crores or more at any time in the history of the company,
were covered as of March 31, 2003.
Application of Revised Clause 49:-
The revised clause 49 is applicable to the listed companies, in accordance with the schedule of
implementation given above. However, for other listed entities, which are not companies, but body corporate
(e.g. private and public sector banks, financial institutions, insurance companies etc.) incorporated under
other statutes, the revised clause will apply to the extent that it does not violate their respective statutes, and
guidelines or directives issued by the relevant regulatory authorities. The revised clause is not applicable to
the Mutual Fund Schemes.
Obligations on Stock Exchanges:-
The Stock Exchanges are put under obligation to ensure that all the provisions of Corporate Governance
have been complied with by the company seeking listing for the first time, before granting any new listing.
For this purpose, it would be satisfactory compliance if these companies set up the Boards and constitutecommittees such as Audit Committee, shareholders/ investors grievances committee, etc. before seeking
listing. The stock exchanges have been empowered to grant a reasonable time to comply with these
conditions if they are satisfied that genuine legal issues exists which will delay such compliance. In such
cases while granting listing, the stock exchanges are required to obtain a suitable undertaking from the
company. In case of the company failing to comply with this requirement without any genuine reason, the
application money shall be kept in an escrow account till the conditions are complied with. The Stock
Exchanges have also been required to set up a separate monitoring cell with identified personnel to monitor
the compliance with the provisions of the Corporate Governance, and to obtain the quarterly compliance
report from the companies which are required to comply with the requirements of Corporate Governance.
The stock exchanges are required to submit a consolidated compliance report to SEBI within 30 days of the
end of each quarter.
HIGHLIGHTS OF THE NEW AMENDMENTS:-
1 . W idening the Definition of Independent Director:-
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Under the revised clause 49, the definition of the expression µindependent director¶ has
been expanded. The expression µindependent director¶ mean non-executive director of the company who ²
i. apart from receiving director¶s remuneration, does not have any material pecuniary relationships or
transactions with the company, its promoters, its senior management or its holding company, its
subsidiaries and associated companies;
ii. is not related to promoters or management at the board level or at one level below the board;
iii. has not been an executive of the company in the immediately preceding three financial years;
iv. is not a partner or an executive of the statutory audit firm or the internal audit firm that is associated
with the company, and has not been a partner or an executive of any such firm for the last three
years. This will also apply to legal firm(s) and consulting firm(s) that have a material association
with the entity.
v. is not a supplier, service provider or customer of the company. This should include lessor-lessee
type relationships also; and
vi. is not a substantial shareholder of the company, i.e. owning two percent or more of the block of
voting shares.
It has been clarified that the Institutional Directors on the boards of companies are independent directors
whether the institution is an investing institution or a lending institution.
2 . Compensation to N on Executive Directors and Disclosure thereof:-
As per earlier clause 49, the compensation to be paid to non-executive directors was fixed by the Board of
Directors, whereas the revised clause requires all compensation paid to non-executive directors to be fixed
by the Board of Directors and to be approved by shareholders in general meeting. There is also provision for
setting up of limits for the maximum number of stock options that can be granted to non-executive directors
in any financial year and in aggregate. The stock options granted to the non-executive directors to be vested
after a period of at least one year from the date of retirement of such non-executive directors.
Placing the independent directors and non-executive directors on equal footing, the revised clause provides
that the considerations as regards compensation paid to an independent director shall be the same as those
applied to a non-executive director. The companies have been put under an obligation to publish their
compensation philosophy and statement of entitled compensation in respect of non-executive directors in its
annual report. Alternatively, this may be put up on the company¶s website and a reference thereto in the
annual report. The company is also required to disclose on an annual basis, details of shares held by non-
executive directors, including on an ³if-converted´ basis.
The revised clause also requires non-executive directors to disclose prior to their appointment their stock
holding (both own or held by / for other persons on a beneficial basis) in the listed company in which they
are proposed to be appointed as directors,. These details are required to be accompanied with their notice of appointment.
3 . P eriodical Review b y Independent Director:-
The revised clause 49 requires the Independent Director to periodically review legal compliance reports
prepared by the company and any steps taken by the company to cure any taint.The revised clause specifies
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that no defence shall be permitted that the independent director was unaware of
this responsibility in case of any proceedings against him in connection with the aff airs of the
company.
4 . Code of Cond uct:-
The revised clause 49 requires the Board of a company to lay down the code of conduct for all Board
members and senior management of a company and the same to be posted on the website of the company.
Accordingly, all Board members and senior management personnel have been put under an obligation to
affirm compliance with the code on an annual basis and a declaration to this effect signed by the CEO and
COO is to be given in the Annual Report of the Company.
It has been clarified that the term senior management will include personnel of the company who are
members of its management / operating council (i.e. core management team excluding Board of Directors).
Normally, this would comprise all members of management one level below the executive directors.
5 . N on±Executive Directors ± N ot to hold office for more than N ine Years:-
Revised clause 49 limits the term of the office of the non-executive director and provides that a person shall
be eligible for the office of non-executive director so long as the term of office does not exceed nine years in
three terms of three years each, running continuously.
6 . Audit Committee:-
Two explanations have been added in the revised clause 49. The first explanation defines the term
³financially literate´ to mean the ability to read and understand basic financial statements i.e. balance sheet,
profit and loss account, and statement of cash flows. It has also been clarified that a member is considered tohave accounting or related financial management expertise if he or she possesses experience in finance or
accounting, or requisite professional certification in accounting, or any other comparable experience or
background which results in the individual¶s financial sophistication, including being or having been a Chief
Executive Officer(CEO), Chief Financial Officer(CFO), or other senior officer with financial oversight
responsibilities.
7 . Review of information b y Audit Committee:-
The Audit Committee is required to mandatorily review financial statements and draft audit report, including
quarterly / half-yearly financial information, management discussion and analysis of financial condition andresults of operations, reports relating to compliance with laws and to risk management, management letters/
letters of internal control weaknesses issued b y statutory / internal auditors, and records of related party
transactions.
The appointment, removal and terms of remuneration of the Chief Internal Auditor shall be subject to review
by the Audit Committee.
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8 . Disclosure of Accounting Treatment:-
The revised clause 49 requires that in case a company has followed a treatment different from that prescribed
in an Accounting Standards, the management of such company shall justify why they believe such
alternative treatment is more representative of the underlined business transactions. Management is also
required to clearly explain the alternative accounting treatment in the footnote of financial statements.
9 . W histle Blower P olicy:-
Companies have been required to formulate an Internal Policy on access to Audit Committees. Personnel
who observe any unethical or improper practice (not necessarily a violation of law) can approach the Audit
Committee without necessarily informing their supervisors.
Companies are also required to take measures to ensure that this right of access is communicated to all
employees through means of internal circulars, etc. The employment and other personnel policies of the
company should also contain provisions protecting ³whistle blowers´ from unfair termination and other
unfair or prejudicial employment practices.
Companies have also been required to affirm that it has not denied any personnel access to the Audit
Committee of the company (in respect of matters involving alleged misconduct) and that it has provided
protection to ³whistle blowers´ from unfair termination and other unfair or prejudicial employment
practices. Such affirmation should form part of the Board¶s report on Corporate Governance that is required
to be prepared and submitted together with the annual report.
10 . S ubsidiary Companies:-
The revised clause 49 provides that the provisions relating to the composition of the Board of Directors of the holding company are also applicable to the composition of the Board of Directors of subsidiary
companies. The clause further requires that at least one independent director on the Board of Directors of the
holding company should be a director on the Board of Directors of the subsidiary company.
The Audit Committee of the holding company has been empowered to review the financial statements, in
particular the investments made by the subsidiary company and the minutes of the Board meetings of the
subsidiary company to be placed for review at the Board meeting of the holding company. It is further
required that the Board¶s report of the holding company should state that they have reviewed the affairs of
the subsidiary company also.
11 . Disclosure of contingent liabilities :-
The revised clause 49 requires the management to provide a clear description in plain English of each
material contingent liability and its risks, which shall be accompanied by the auditor¶s clearly worded
comments on the management¶s view. This section is required to be highlighted in the significant
accounting policies and notes on accounts, as well as, in the auditor¶s report, where necessary.
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12 . Additional Disclosures:-
The revised Clause 49 of the Listing Agreement requires the following additional disclosures:
i. Basis of related party transactions:- A statement of all transactions with related parties shall be
placed before the Audit Committee for formal approval/ratification. If any transaction is not on an
arm¶s length basis, management is required to justify the same to the Audit Committee.
ii. Board Disclosures ±Risk management:-The Board members should be informed about the risk
assessment and minimization procedures. These procedures shall be periodically reviewed to ensure
that executive management controls risk through means of a properly defined framework.
Management shall place a quarterly report certified by the compliance officer of the company,
before the entire Board of Directors documenting the business risks faced by the company, measures
to address and minimize such risks, and any limitations to the risk taking capacity of the corporation.
This document shall be formally approved by the Board.
iii. Proceeds from Initial Public O fferings (IP O s):- When money is raised through an Initial Public
Offering (IPO), it shall disclose to the Audit Committee, the uses / applications of funds by major
category (capital expenditure, sales and marketing, working capital, etc), on a quarterly basis as a
part of their quarterly declaration of financial results. Further, on an annual basis, the company shall
prepare a statement of funds utilized for purposes other than those stated in the offer
document/prospectus. This statement shall be certified by the independent auditors of the company.
The Audit Committee shall make appropriate recommendations to the Board to take up steps in this
matter.
13 . Certification b y CEO/C F O:-
CEO (either the Executive Chairman or the Managing Director) and the CFO (Whole-Time Finance Director
or other person discharging this function) of the company has been put under an obligation to certify that, to
the best of their knowledge and belief, they have reviewed the balance sheet and profit and loss account andall its schedules and notes on accounts, the cash flow statements as well as the Directors¶ Report and these
statements do not contain any materially untrue statement, omits any material fact or do they contain
statements that might be misleading. Further they are required to certify that these statements together
present a true and fair view of the company, and are in compliance with the existing accounting standards
and/or applicable laws/regulations.
The revised clause requires them to be responsible for establishing and maintaining internal controls, to
evaluate the effectiveness of internal control systems of the company, and to disclose to the auditors and the
Audit Committee, deficiencies in the design or operation of internal controls, if any. They are also required
to disclose to the auditors as well as the Audit Committee, instances of significant fraud, if any, that involves
management or employees having a significant role in the company¶s internal control systems, whether or
not there were significant changes in internal control and / or of accounting policies during the year.
14 . Report on Corporate Governance:-
The companies have been required to submit a quarterly compliance report in the prescribed format to the
stock exchanges within 15 days from the close of the quarter. The report has to be submitted either by the
Compliance Officer or the Chief Executive Officer of the company after obtaining due approvals.
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15 . Company S ecretary in P ractice to Issue Certificate of Compliance:-
This is a landmark amendment authorizing Company Secretaries in Practice among other professionals to
issue certificate of compliance of clause 49. The revised clause requires the company to obtain a certificate
from either the auditors or practicing company secretaries regarding compliance of conditions of corporate
governance and annex the certificate with the directors¶ report, which is sent annually to all the shareholders
of the company. The same certificate is also required to be sent to the Stock Exchanges along with the
annual returns filed by the company.
16 . Additional disclosure in the Report on Corporate Governance:-
The following additional items are required to be disclosed in the suggested list of Items to be included In
the Report on Corporate Governance in the Annual Report of Companies.
i. Disclosure of accounting treatment, if different, from that prescribed in Accounting Standards with
explanation.
ii. Whistle Blower policy and affirmation that no personnel has been denied access to the audit
committee.
17 . Additional Disclosures under N on-Mandatory Requirements
The following additional disclosures are required to be made under the non-mandatory requirements:
i. Audit qualifications: - Company may move towards a regime of unqualified financial statements.
ii. Training of Board M embers: - Company shall train its Board members in the business model of the
company as well as the risk profile of the business parameters of the company, their responsibilities
as directors, and the best ways to discharge them.iii. M echanism for evaluating Non-Executive Board M embers:-The performance evaluation of non-
executive directors should be done by a peer group comprising the entire Board of Directors,
excluding the director being evaluated; and Peer Group evaluation should be the mechanism to
determine whether to extend / continue the terms of appointment of non-executive directors.
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Dr. J J Irani
Reco endations, 2005
Need for the recommendation
The existing Companies Act, 1956 is a voluminous document with 781 sections. It also contains provisions
that cover aspects which are essentially procedural in nature. In
certain areas, it prescribes quantitative limits which are now
irrelevant on account of changes that have taken place over a
period of time. This format has also resulted in the law
becoming very rigid since any change requires an amendment
of the law through the parliamentary process. Therefore, the law
has failed to take into account the changes in the national andinternational economic scenario speedily. As a result, in some
quarters, it is being regarded as outdated.
However, this need not be the case since many essential features
of corporate governance which are already recognized in the
Companies Act, 1956 need to be retained and articulated
further. What is required is that along with the changes in the
substantive law, wherever required, a review of procedural
aspects may also be undertaken so as to enable greater degree of self-regulation and easy compliance.
Therefore, This would enable the law to remain dynamic and to adapt to the changes in business
environment.1
I. Independent Directors:-
The Concept and Numbers of Independent Directors:-
The committee is of the opinion that since the Board is entrusted with a duty to balance the interests of the
stakeholders of the company, the existence of Independent directors on the Board of a Company would
improve corporate governance. Hence, it becomes a stipulation for public companies or companies with a
significant public interest.
The whole idea behind the concept is to bring an element of objectivity to the Board process towards the
general interests of the company and thereby to the benefit of minority interests and smaller shareholders.
Independence, therefore, is not to be viewed merely as independence from Promoter Interests but from the
point of view of vulnerable stakeholders who cannot otherwise get their voice heard.2Thus, it is imperativefor Law to recognize the principle of independent directors and spell out their role, qualifications and
liability. At the same time, care should be taken to bring distinguished prescription as per the different
categories of companies.
Major Recommendations:-
1J.J IRANI recommendations Report-Law and Adaption to Changing circumstances
2J.J IRANI recommendations Report-Ministry Of Corporate Affairs
It is recommended that the
Company Law may be so
drafted that while essential
principles are retained in thesubstantive law, procedural
and quantitative aspects are
shifted to the rules.
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1. A committee with a minimum of one third of the total number of directors as
independent directors, irrespective of whether the Chairman is executive or non-executive,
independent or not. This extends to companies listed on the exchange and accepting public deposits.
2. Nominee directors appointed by Banks/Financial Institutions (FIs) or in pursuance of any agreement
or government appointees representing Government shareholding should not constitute as
Independent Directors as they represented specific interest.
Differentiation from Clause-49:-
1. Independent Directors Should constitute
a) 50% where there is an executive chairman
b) 33% where the chairman is non-executive
2. Nominee directors appointed by Banks/Financial Institutions (FIs) were considered as independent
3. Not mandatory for a subsidiary company to co-opt an independent director of the holding company
as an independent director on its board.
II. Definition of Independent Director/ Attributes of Independent Directors:-
Major Recommendations:-
The Committee insisted on a definition of Independent Director to be provided in law.
The expression µindependent director¶ should mean a non-executive director of the company who:-
a) Apart from receiving director¶s remuneration, does not have, and none of his relatives or
firms/companies controlled by him have, any material pecuniary relationships or transactions with
the company, its promoters, its directors, its senior management or its holding company, its
subsidiaries and associate companies which may affect independence of the director. For this
purpose ³control´ should be defined in law;
b) is not a relative of the above mentioned;
c) is not a supplier to the company;
d) is not a the statutory audit firm or the internal audit firm, the legal firm(s) and consulting firm(s) that
have a material association with the company, its holding and subsidiary companies;
Differentiation from Clause-49:-
THE J.J Irani committee has recommended a one year cooling off period against a 3 year cooling off in the
Clause-49.
III. Audit Committee for Accounting and Financial matters:-
Major Recommendations:-
The Committee recommends that:-
a) Majority of the Directors to be independent directors;
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b) Chairman of the Committee also to be independent;
c) one of the members should possess good financial oversight;
d) The appointment of auditor is made on the same lines as under the provisions of the Companies act,
1956.
Other recommendations:-
y CEO and CFO should certify all internal controls mandated by the audit committee. A separate
statement on the assessment should also be provided in the director¶s report.
y The law should also provide for an active role for the shareholders¶ associations in ensuring high
quality of financial reporting.
Differentiation from Clause-49:-
1. The audit committee shall have minimum three directors as members. Two-thirds of the members of
audit committee shall be independent directors.
2. There is no stipulation regarding the no of meetings in a year for the audit committee
IV. Shareholders¶ Rights:-
Major Recommendations:-
C . S takeholders¶ Relationship Committee:
i. Compulsory formation of a Stake Holders Relationship Committee to monitor the redressal of
their grievances provided that the combined base of
a) Shareholder,
b) deposit holder,
c) debenture holder
Is thousand or more.
ii. A Non-Executive director should chair the Committee.
D . Meetings of Directors:-
y The Committee opines that law should assist the use of technology to carry out statutory processes
efficiently.
y Use of electronic means (Teleconferencing and video conferencing included) to carry out meetings
should be allowed; and
y Directors who participate through electronic means should be counted for attendance and form part
of Quorum.
E . Director Information on A ppointment:-
The committee has suggested that every company should disclose particulars of the directors
appointed in the public domain through statutory filing of information by the board of directors.
Differentiation from Clause-49:
1. Compulsory formation of a Stake Holders Relationship/Investors grievance Committee was
recommended by the committee
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2. Only disclosures on website were allowed
V. Disclosure Requirements:-
Major Recommendations:-
A. Related party transactions:
1. The committee had in mind two options to regulate the related party transaction
i. Government Approval-based regime;
ii. Shareholder Approval and Disclosure-based regime
Based on the international standards, the later approach was considered appropriate.
B . Board remuneration:-
The committee recommended a remuneration policy based on company wishes in ored to ensure the
retention of talented and motivated directors. However it should be transparent and based on principles that
ensure fairness, reasonableness and accountability.
Differentiation from Clause-49:
The managerial remuneration is currently subjected to Government approvals, both in terms of remuneration
for each class and the overall remuneration permissible. On the other hand, the committee has emphasized
more on disclosures (both on quantity and quality) rather than providing limits/ceilings.
Other requirements:-
A. Chief financial officer
y The Committee was of the view that the concept of appointment of CFO should be recognized under
the Act. He should also be made responsible for preparation and submission of financial statements
to the Board along with Managing Director, CEO, CFO, and the Company Secretary.
y The law should also provide for an active role for the shareholders¶ associations in ensuring high
quality of financial reporting.
B . P
rovision of N
on- Au
dit S
ervices:
The committee wanted to raise the prohibition on the auditors to provide the non audit services subject to a
prescribed threshold of materiality. However, all non audit services must be approved b y the audit
committee.
C . P rotection to W histle Blowers:
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Law should recognize the ³Whistle Blower Concept´ by enabling protection to
individuals who expose offences by companies, particularly those involving fraud. Such
protection should extend to normal terms and conditions of service and from harassment. Further, if such
employees are themselves implicated, their cooperation should lead to mitigation of penalties to which they
may otherwise be liable. In regard to the potentially insolvent companies, it is essential that self regulatory
measures be required to be taken by a company to protect the interests of various stakeholders, preserve
assets and adopt such other measures as may be necessary to contain insolvency. This would enable Whistle
Blowing on impending insolvency.3
Current Scenario
Regulation:-
Companies Act, 1956: Principle legislation providing the formal structure for corporate governance.
Other legislations:
y Monopolies and Restrictive Trade Practices Act, 1969 (which is replaced by the Competition
Act 2002)
y Foreign Exchange Regulation Act,1973 (which has now been replaced by Foreign Exchange
Management Act,1999)y Industries (Development and Regulation) Act, 1951 and other legislations
Board of Directors:-
3Committee definition of the whistle blower concept :J.J IRANI (recommendations)Report, 2004
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y The Desirable Corporate Governance Code by CII (1998) for the first time
introduced the concept of independent directors for listed companies and compensation paid to
them.
y The Kumar Mangalam Birla Committee (2000) then suggested that for a company with an
executive Chairman, at least half of the board should be independent directors, else at least one-
third.
y The Revised Clause 49 based on the report by the Narayana Murthy Committee further elaborates
the definition of Independent Directors.
y The Revised Clause 49 now also states that all compensation paid to non ±executive directors,
including independent directors shall be fixed by the Board and shall require prior approval of
shareholders in the General meeting and that limit shall be placed on stock options granted to non
executive directors.
y The Board is also required to draft a µCode of Conduct¶ and affirm compliance to the same
annually.
Audit Committee:-
y In India, section 292A of the Companies Act 1956 requires every company with paid up capital
above Rs. Five crore to have an Audit Committee which shall consist of not less than three
directors and such number of other directors as the Board may determine of which two thirds of the
total number of members shall be directors, other than managing or whole-time directors.
y The Desirable Corporate Governance Code by CII (1998) also recommended listed companies with
either a turnover of over Rs.100 crores or a paid-up capital of Rs.20 crores to set up Audit
Committees within two years.
y In furtherance to the same the Kumar Mangalam Birla Committee, Naresh Chandra Committee and
the Narayana Murthy Committee recommended constitution, composition for audit committee to
include independent directors and also formulated the responsibilities, powers and functions of the
Audit Committee.
y The Audit Committee and its Chairman are also entrusted with the ethics and compliance
mechanisms of an organization, including review of functioning of the whistleblower mechanism,
where it exists.
Subsidiary Companies:-
The Narayana Murthy Committee recommended making provisions relating to the composition of the Board
of Directors of the holding company to be made applicable to the composition of the Board of Directors of
subsidiary companies and to have at least one independent director on the Board of Directors of the holding
company on the Board of Directors of the subsidiary company, were incorporated in the Revised Clause 49
of the Listing Agreement. Besides the Audit Committee of the holding Company is to review the financial
statements, in particular investments made by the subsidiary and disclosures about materially significant
transactions ensures that potential conflicts of interests with those of the company may be taken care of.
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A. Role of Institutional Investors:-
If a company wants institutional investor participation, it will have to convincingly raise the quality of
corporate governance practices. Indian companies thus need to adopt the best practices such as the OECD
Corporate Governance Principles (revised in 2004) that serve as a global benchmark. In countries like India
where corporate ownership still continues to be highly concentrated, it is important that all shareholders
including domestic and foreign institutional investors are treated equitably.
B. Shareholders' Grievance Committee
y As one of its mandatory recommendations, the Kumar Mangalam Birla Committee propounded the
need to form board committee under the chairmanship of a non-executive director to specifically
look into the redressing of shareholder complaints like transfer of shares, non-receipt of balance
sheet, non-receipt of declared dividends etc.
y The Revised Clause 49 now mandates the formation of such a committee in light of the
recommendations of these committees and any defaults by the company in payments to
shareholders.
a) Risk Management
y The Kumar Mangalam Birla Committee report included mandatory Management Discussion &
Analysis segment of annual report that includes discussion of industry structure and
development, opportunities, threats, outlook, risks etc. as well as financial and operational
performance and managerial developments in Human Resource /Industrial Relations front.
y Risk Management was propounded for the first time by the Narayana Murthy Committee Report
by which it required that the company shall lay down procedures to inform Board members
about the risk assessment and minimization procedures. These procedures shall be periodically
reviewed to ensure that executive management controls risk through means of a properly defined
framework. This is incorporated in the Revised Clause 49 as a part of internal disclosures to the
Board.
b ) Ethics
y Every organization whether it is a company, club or a fraternal order, has expectations of how
its members should act among each other and with those outside its organization. A code of
conduct creates a set of rules that become a standard for all those who participate in the group
and exists for the express purpose of demonstrating professional behaviour by the members of
the organization.
y The Naresh Chandra Committee for the first time recommended that companies should have an
internal code of conduct. The Report by Narayana Murthy Committee further recommended
that a company should have a mechanism (whistle blower) to report on any unethical or improper practice or violation of code of conduct observed and that Audit Committee would be
entrusted with the role of reviewing functioning of the mechanism.
y The Revised Clause 49 incorporated these recommendations further mandating directors of
every listed company to lay down a Code of Conduct and post the code on their company¶s
website. The Board members and all senior management personnel are required to affirm
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compliance with the code annually and include a declaration to this effect
by the CEO in the Annual Report.
y The recommendation of Narayana Murthy Committee to make Audit Committee responsible
for reviewing the functioning of the whistle blower mechanism, where it exists, is incorporated
in the Revised Clause 49.
c) Executive Remuneration
y Though the Revised Clause 49 does not mandate formation of a Remuneration Committee,
Section 309(1) of the Companies Act, 1956 requires that the remuneration payable both to the
executive as well as non-executive directors be determined by the board in accordance with and
subject to the provisions of section 198 either by the articles of the company or by resolution or
if the articles so require, by a special resolution, passed by the company in a general meeting.
Further, Schedule VI of the Act requires disclosure of Director's remuneration and computation
of net profits for that purpose.
y The Desirable Corporate Governance Code by CII (1998) also mandated the disclosure of each
director¶s remuneration and commission as a part of Director¶s Report.
y The Kumar Mangalam Committee then in its report included a non-mandatory requirement to
constitute a Remuneration Committee to determine on their behalf and on behalf of the
shareholders with agreed terms of reference, the company¶s policy on specific remuneration
packages for executive directors including pension rights and any compensation payment.
y The Naresh Chandra Committee further recommended on remuneration of Independent
directors.
y Presently, under Revised Clause 49, all fees/compensation, if any paid to non-executive
directors, including independent directors, are to be fixed by the Board of Directors and require
previous approval of shareholders in general meeting. The shareholders¶ resolution is to specify
the limits for the maximum number of stock options that can be granted to non-executive
directors, including independent directors, in any financial year and in aggregate.
d) CEO/C F O Certification
y Internal control is a process, effected by an entity¶s board of directors, management and other
personnel, designed to provide reasonable assurance regarding the achievement of objectives in
the following categories:
o Effectiveness and efficiency of operations,
o Reliability of financial reporting, and
o Compliance with applicable laws and regulations.
y The Naresh Chandra Committee for the first time required the signing officers, to declare that
they are responsible for establishing and maintaining internal controls which have been
designed to ensure that all material information is periodically made known to them; and have
evaluated the effectiveness of internal control systems of the company. Also, that they have
disclosed to the auditors as well as the Audit Committee deficiencies in the design or operation
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of internal controls, if any, and what they have done or propose to do to
rectify these deficiencies.
y The Revised Clause 49 requires the CEO and CFO to certify to the board the annual financial
statements in the prescribed format and the establishment of internal control systems and
processes in the company. CEOs and CFOs are, thus, accountable for putting in place robust
risk management and internal control systems for their organization¶s business processes.
Conc usion
y With a rampant increase in corporate scandals and thus the ensuing interest in corporate governance,
a plethora of corporate governance norms and standards have emerged across the globe. The
Sarbanes-Oxley legislation in the USA, the Cadbury Committee recommendations for European
companies and the OECD principles of corporate governance have set the benchmark for global
standards on corporate governance. India has been no exception to this rule. The Satyam scam, the
UTI scam, DSQ Software scam are evidences that justify the need for corporate governance in India.
According to a live-mint report, more than 87% of the companies were hit by a financial fraud from
2008-10 suggesting lack of transparency. Thus, several committee¶s and groups have looked into
this issue that undoubtedly deserves all the attention it can get.
y The continuous focus on stakeholder protection in India has led to the development of norms and
standards for the listed companies. But at the same time, bringing the private companies that form
the major part of the Indian corporate entities into a well knitted system of corporate governance has
remained unaddressed. The sheer importance of this problem can be understood from the fact that
only 1500 companies out of more than 50 thousand companies in India are only listed. The agency
problem is likely to be less marked there as ownership and control are generally not separated.
Minority shareholder exploitation, however, can very well be an important issue in many cases.
A code of conduct should
create value and not be
reduced to a compliance
protocol.
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y Development of norms and guidelines is an important step towards improving corporate governance
among Indian companies. However, the lack of implementation has been a major concern especially
with respect to averaged Indian companies. The greed and the influencing power of the entities like
stock markets, analysts, financial institutions, promoters and majority shareholders has also made
the implementation process difficult in the higher-end companies
y Even the most prudent norms can be hoodwinked in a system plagued with widespread corruption.
Hence, a code of conduct should create value and not be reduced to a compliance protocol. But this,
of course is an idealistic situation, in an un-ideal world. They say, follow the spirit of law, not the
letter. And that is the end which leads to a beginning of every new code.
Annexure
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Annexure I
Narayana Murthy panel report on corporate governance Is whistle blower policy
practical?
Rabindra Nath Sinha KOLKATA, April 7
THE whistle blower policy recommended in the recent report of SEBI's committee on corporate governance
and Clause 49 of the Listing Agreement, which was headed by Mr N.R. Narayana Murthy, Chairman and
chief mentor of Infosys Technologies, seems to have evoked the sharpest response from veteran company
secretaries, who have studied the key suggestions in detail.
In fact, judging by what they have to say, it is apparent that this particular recommendation, which is
intended to curb unethical and improper practices in corporates, is being singled out by company law
experts as simply impractical.
What is `whistle blower' policy? It is an internal policy on access to audit committees. What is the
committee's recommendation? Personnel who come to know about unethical or improper practices, whichmay not necessarily be a violation of law, should be able to approach the company's audit committee
"without necessarily informing their supervisors".
The committee wants corporates to take steps to see that this right of access is communicated to all
employees through internal circulars. Further, a company's employment and personnel policy should
provide a mechanism to protect whistle blowers from "unfair termination and other unfair, prejudicial
employment practices."
Senior company secretaries Business Line spoke to said that this recommendation, if implemented, would
be instrumental in breeding indiscipline as most likely the audit committee would be flooded with frivolous
complaints and minor issues. Many complainants might go by their personal likes and dislikes and thus the
possibility of the right of access to the audit committee being misused would always be there.
They noted that the committee had not said anything on providing evidence in support of a complaint,
disclosure of the identity of the complainant and the maximum number of complaints that an employeecould make in a year.
Elimination of unethical or improper practices is the responsibility of respective corporate promoters and
management, for which they have to put in place systems for efficient administration and transparent
transactions. Much also depends on the environment in which corporates operate and the policies that
govern their operations. A whistle blower policy can't be a foolproof safeguard against unethical and
improper practices, they contend.
The recommendation regarding composition of an audit committee has given rise to confusion. While this
panel has suggested that audit committee members should be non-executive directors, the Naresh
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42
Chandra c
¡ ¡
¢
£ £
ee that preceded it s ¤
¥ ¥
ested that only independent directors should be on audit
committee ¦ The reality is that while all independent directors are non-e§
ecutive directors it is not so vice
versa.
Re¥
arding contingent liabilities ̈ it has been suggested that management's views thereon and auditor's
comments on management's views should be given in the annual report.
According to senior company secretaries ̈ there are instances where contingent liability cannot be
ascertained, such as, labour disputes, court cases etc. As the description suggests, it's all contingent uponfuture developments and, therefore, it can't be proper for a management to pass a judgement about the
ris © involved. Ideally, a management should only give the bac © ground of a contingent liability.
The Narayana Murthy panel is for restricting the tenure of non-e§
ecutive directors to three terms of three
years each, running continuously. The Naresh Chandra panel said that after a nine year-term the director
would not be considered independent, but surely the concerned person would be able to continue as a
non-e§
ecutive director.
Company secretaries make two points If the intention is to follow the Naresh Chandra committee's
suggestion, the Narayana Murthy panel's recommendation should be redrafted. Representatives of a
promoter remain on the board of a company as non-independent directors. The recommendation now
made rules out continuation of promoter-directors on the board beyond nine years at a stretch.
It needs to be clarified whether a partner of an audit firm or a solicitor's firm can be treated as an
independent director of a company if his firm is the auditor or legal advisor of another company in the same group.
On analysts and media role
THE Narayana Murthy committee on corporate governance also discussed reports brought out from time
to time by security analysts and the media, specially the financial press.
As for reports of security analysts, the committee has desired SEBI to make rules for:
* Disclosure whether the company that is being written about is a client of the analyst's employer or an
associate of the analyst's employer, and the nature of services rendered to such company, if any
* Disclosure whether the analyst or the analyst's employer or an associate of the analyst's employer hold
or held (in the 12 months immediately preceding the date of the report) or intend to hold any debt or
equity instrument in the issuer company that is the sub ject matter of the report of the analyst.
Regarding scrutiny of the media, particularly the financial press, it has observed the committee considered
views e
§
pressed by members.The Press Council of India has prescribed a code of conduct for the financial media. However, verif ying
adherence to the code is difficult. A detailed review by SEBI on the sub ject is desirable, keeping in mind
issues such as transparency and disclosures, conflicts of interest, etc. before making any rule. SEBI should
consider having a discussion with the representatives of the media,specially the financial press.
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Annexure II
Mu
li, Ravi plan to push f o co po at governance norms
The succession plan, decided earlier, included N Ravi taking over as editor-in-chief after Rams retirementand Malini Parthasarathy taking over as editor of The Hindu
Vidhya Sivaramakrishnan
Chennai: The internal tussle in the family that publishesThe Hi ndu shows no signs of abating, with two
family members telling Mi nt that they plan to push for the retirement of the newspapers editor-in-chief N.
Ram and escalate some matters to the Company Law Board.
In telephone conversations, N. Murali, who has recently been re-designated as senior managing director,
and N. Ravi, who was supposed to take over as editor-in-chief of the group, said they would begin to push
for corporate governance norms in the firm.
Murali said there are three issues that he would focus on in the immediate future. One would be
retirement norms for family member directors and, therefore, the imminent retirement of Ram as agreed
by him in September 2009 and implementation of the succession framework as decided upon by board
members earlier. The succession plan included N. Ravi taking over as editor-in-chief after Rams retirement
and Malini Parthasarathy taking over as editor of The Hi ndu.
Fighting for rights: Senior managing director N. Murali says he would focus on retirement rules for family
member directors, entry norms for the younger generation and corporate governance issues for the firm.
Ar joon Manohar / Mint
The other two issues would be setting up of entry norms for the younger generation into the family
business and overall corporate governance issues, and fight for his rights as he was recently replaced by
another board member K. Bala ji.
I have been looking after all non-editorial areas of the company over many years and now my substantial
powers and responsibilities have been purportedly removed. And I have been given the position of senior
managing director, which is virtually a dummy position, said Murali. Therefore, I will fight for my powers,
including considering the option of going to the Company Law Board.
Events came to a head following an article published in The Ind ian Express on Thursday that spoke about an
internal tussle in the family due to Rams unwillingness to retire this year. Ram has threatened to initiate
defamatory proceedings against the senior editors and e
ecutives of The Ind ian Express.
It is unclear if he has initiated the proceedings, yet.
An email questionnaire sent to Ram was unanswered till late Friday evening.
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Discussions on corporate governance have been on for over two years now, said Ravi. But nothing has
moved so far. But now, it has gone out of hand and it is time to put it (corporate governance norms) in
place.
According to Ravi, he, along with Murali, had prepared a document that outlined broad corporate
governance norms and circulated it among the board members on 18 February and the details were yet to
be filled in. He said other board members wanted time to study the proposals.
Annexure III
The previous survey, carried out in 2008, had only 47% complaining on this count. At least 75% of Indian firms said
instances of fraud had increased over the past two years
Khushboo Narayan
Mumbai: With white-collar crime almost doubling from last year, financial fraud by insiders remains the single
greatest f ear of Indian companies, according to the results of a survey by audit and consulting firm KPMG. The results
were released on Tuesday.
Of the 1,000 companies covered in the survey, 87% said they had incurred losses of at least Rs10 lakh due to fraud in
2009.
The previous survey, carried out in 2008, had only 47% complaining on this count. At least 75% of Indian firms said
instances of fraud had increased over the past two years.
A lack of ob jective and independent internal audits, inadequate oversight of senior managements activities by the
audit committee, and weak regulatory environment were pinpointed as culprits for the spike in financial statement
frauds.
The 10th biennial India Fraud Survey Report 2010 reveals that 81% of the companies surveyed f eel that financial
statement fraud is the biggest threat in India, with at least 60% of them saying inadequate enforcement of regulations
has increased such fraud.
The findings of the report suggest that weak internal control systems, eroding ethical values and lack of legal action
against fraudsters create an environment conducive to such crimes.
The survey, conducted by KPMGs forensic wing in India, covered leading Indian firms from the public and private
sectors. The respondents included chairman and managing directors, chief o perating officers, chief financial officers,
internal auditors, heads of investigation divisions and other senior management officials.
Indian companies, according to the study, remain highly vulnerable to fraud in the absence of inadequate internal
control framework that can identif y and deal with such crimes. The report suggests that 41% of Indian firms do not
have fraud risk management systems.
The KPMG report shows that 45% of the firms have e
perienced fraudulent activities in the past two years, with
financial services and consumer markets showing the highest levels of risk.
But more than the lack of monitoring systems, what is prevalent and disturbing is the reluctance of companies toreport incidence of frauds. According to the survey, only 35% of the companies initiated legal action against a
perpetrator of fraud. A ma jority of the frauds had been investigated internally.
That, however, may be changing. Deepankar Sanwalka, head (forensic services), KPMG, said that following the scam
at Sat
am Computer Services Ltd, in which founder and chairman B. Ramalinga Ra ju admitted to showing non-
e
istent income over the years of Rs7,136 crore, the trend in fraud detection has changed.
Companies are more open to discuss and take action against fraudsters. Increasingly, fraud risk mitigation
mechanism are being discussed in management meetings, he said.
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The frauds covered in the survey include anti-corruption compliance. Almost 42% of the companies strongly believed
bribery is acceptable behaviour in India while 38% said it is an integral f eature of the practices in their industry.
According to the World Bank, bribes paid annually amount to more than $1 trillion (Rs44.5 trillion) globally.
India scores poorly on corruption and bribe payments in the list of organizations such as Transparency International,
which ranks countries based on corruption and propensity to demand bribes.
Indias corruption perception inde
score in 2009 was 3.4 on a scale of 0-10, with 10 being the least corrupt.
In 2008, it was one of the bottom four on the global bribe payers inde
, with a score of 6.8.The way to a cleaner balance sheet, however, may be harder than e
pected. As Rohit Maha jan, e
ecutive director
(advisory), forensic services, KPMG, told Mi nt, Indian firms lack (a) holistic approach to frauds. Focusing on financial
fraud will not help control white-collar crimes.