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Presentation on

CORPORATE G OVERN ANCE BY

PUNIT K ABROLV.P.(FINANCE) & SECRETARY

PUNJAB CHEMICALS AND CROP PROTECTION LTD.

AT

UNIVERSITY BUSINESS SCHOOLPANJAB UNIVERSITY, CHANDIGARH

19TH OCTOBER, 2007

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• GOVERNANCE – ‘the action OR manner of Governing’• - ‘a mode of living and behavior’.• CORPORATE

GOVERNANCE – the process by which the

Companies are governed

and managed.

- the set of standards, which

aims to improve the

Company’s image, efficiency and

effectiveness.

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CONCEPT / ELEMENT OF GOOD CORPORATE GOVERNANCE BASED ON:

• complete transparency.• integrity and accountability of the management.• greater focus on Investor Protection and Public Interest.• social responsibility.• system of checks and balances between key players in

the Corporate – Board, Management, Auditors and Shareholders.

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WHY CORPORATE GOVERNANCE?

• Corporate Governance is required because:

To have a good, transparent, legal, honest, ethical and socially responsible systems to run the business for the benefit of all stakeholders.

Basically all above are the general, expected and desirable system of working in any organisation.

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• However, this was given a legal shape or binding in the Corporate Sector in view of the following reasons:

-Problems in the Corporate Performance of leading Companies.

-Epidemic of Securities Scam.

-Perceived lack of effective Board oversight.

-Financial crisis in the World and also in India.

-Downfall of Economy and Vanishing of Wealth.

-NPA’s in Banks.

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-Vanishing of NBFC and Plantation Companies.

-Depositors and Shareholders were betrayed.

-Loss of Interest of the Investors.

-Recession which:

-affected production.

-created unemployment.

-created unrest in the Society.

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Genesis Abroad

• Modern trend of developing CG guidelines and code of best practices begin in the early 1990’s in U.K.

• Thereafter in USA and Canada due to problems in Corporate performance.

Accordingly,Cadbury Report in U.K. – 1992 defined CG as the “system by which organisations are directed & controlled.

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Pioneer reference Code for Stock Exchanges both in U.K. and abroad.

General Motors Board Guidelines in U.S.A.

Dey Report in Canada.

Were the influential sources for guidelines and code initiatives adopted by other countries.

-Financial Reporting Council (FRC), UK – 2003 published new Combined Code known as the UK Code (2003) based upon the revision of the Combined Code (1998).

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-Report of Derek Higgs on the role and effectiveness of Non-Executive Directors (NED).

-Recommendation on Audit Committees by Robert Smith.

-King’s Committee in South Africa to harmonize the Code of CG in listed companies.

-Blue Ribbon Committee, 1998, 1999 on improving the effectiveness of Corporate Audit Committees and issued recommendations. On that basis the NYSE and other exchanges revised their listing standards relating to Audit Committee.

.

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-Sarbanes – Oxley Act, 2002 of U.S.A.

-in view of number of Corporate and Accounting Standards involving prominent Companies in the U.S.

-Significant changes to Federal Securities Laws in the U.S.A. specifically protection to whistleblowers.

-OECD Principles of Corporate Governance, originally adopted by 30 countries in 1999 (provided framework of CG at macro level).

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OECD PRINCIPLES OF CORPORATE GOVERNANCE – 2004 EDITION,

Revised OECD Principles of CG, 2004- now reflect global consensus regarding critical importance of good CG in contributing to the Economic vitality and stability of the Economies.

• Ensuring the basis for an effective corporate governance Framework.The CG framework should promote transparent and efficient markets, be consistent with the rule of law and clearly articulate the division of responsibilities among different supervisory, regulatory and enforcement authorities.

VII. The rights of shareholders and key ownership functions.The CG framework should protect and facilitate the exercise of shareholders’ rights.

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I. The equitable treatment of shareholders.

The CG framework should ensure the equitable treatment of all shareholders, including minority and foreign shareholders. All shareholders should have the opportunity to obtain effective redress for violation of their rights.

IV. The role of stakeholders in CG.

The CG framework should recognise the rights of stakeholders established by law or through mutual agreements and encourage active co-operation between corporations and stakeholders in creating wealth, jobs, and the sustainability of financially sound enterprises.

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I. Disclosure and transparency

The CG framework should ensure that timely and accurate disclosure is made on all material matters regarding the corporation, including the financial situation, performance, ownership and governance of the Company.

IV. The responsibilities of the Board

The CG framework should ensure the strategic guidance of the Company, the effective monitoring of management by the Board and the Board’s accountability to the Company and the shareholders.

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Genesis in India

Principal Legislation and Regulatory Authority of Corporate Management in India have been:

- Companies Act, 1956.

- MRTP Act, 1969.

- FERA, 1973 (replaced by FEMA, 1999).

- IDRA, 1951.

- Office of Controller of Capital Issues upto 1992 (Regulatory Authority for the capital market).

- SEBI.

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However, after the experience of 50 years, the need to review these Acts was felt.

Development in India.From Cadbury Committee’s Report, the interest generated in Indian Companies; therefore, CII published a ‘Desirable Code of CG – Voluntary adopted by some Companies.’

Developing human capacity and building institutions to sustain and expand CG practices.

Addressing CG issues that go beyond Country.

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• Indian View and Efforts on Corporate Governance:

India did not remain behind in implementing some of the good points of Corporate Governance as a policy measure. The Govt. understood that in view of the opening up of the economy and for inviting Foreign Institutional Investors to the country for direct and indirect investment, the corporate sector was required to become internationally competitive in preparing financial and general information and its sharing. The fundamentals of atleast organised corporate sector was required to fulfill international requirements. The working was required to be transparent, open and accessible to all the stakeholders.

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Keeping in view the above, some of the policy changes done by the Indian Government are:

• The Companies (Amendment) Act,1999.The major amendments were on

-Buy Back of Shares.-Issue of Sweat Equity Shares.-Nomination of Shares.-Transmission of Shares.-Unpaid Dividend Account.-Investor Education & Protection Fund.

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2. Securities Laws (Amendment) Act,1999.

-Expansion of the definition of ‘Securities’ to include Derivatives of securities and instruments of Collective Investment Schemes.

-Authorisation to Central Govt. to delegate powers under the SCRA to the Reserve Bank of India – to regulate transactions in securities as may be specified from time to time.

3. Securities Laws (Second Amendment) Act,1999.

-Transfer of appellate functions of the Central Govt. to the Securities Appellate Tribunal.

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4. Securities Contracts (Regulation) Act,1956.-Definition of ‘Derivatives’ to include a security derived from debt instrument, shares, loans, risk instruments contract for differences or any other form of security and a contract which derives its value from prices or index of number of underlying securities. The units or any other instruments issued by any collective investment scheme to the investor.-Permission to enter into contract other than such spot delivery contract or cash without the approval of SEBI.

5. Working Group for Recertification of Company Law.-Recommended that Companies should voluntarily appoint independent audit Committees. It is suggested that Chamber of Commerce should play catalytic role.

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6. Proactive Governance by Financial Institutions.The Finance Ministry have asked the Financial Institutions to take full responsibility for Corporate Governance in Companies where they have substantial stakes. The directives to Financial Institutions issued to insist on:a. making adequate disclosures.b. compliance towards AS.c. maintaining distance between the Chairman and CEO where applicable.d. holding regular meetings with proper recording and dis-semination of proceedings.Financial Institutions implemented new norms for appointment of nominee Directors (combined exposures is above 50 crores or their shareholding above 26 percent or in event of Company showing signs of problems). -insisting on setting up of Audit Committees.-adequate number of independent Directors.-strengthen of Internal Control Structure.

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7. Corporate Governance through Listing Agreements.

SEBI had constituted a committee on Corporate Governance under the Chairmanship of Kumar Manglam Birla, Member, SEBI Board to promote and raise standard of Corporate Governance in respect of listed Companies. The SEBI Board in its meeting held on January 25,2000 considered the recommendation of the committee and decided to make the amendments to the listing agreement in pursuance of the decision of the Board.

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Naresh Chandra Committee, 2002

To examine the:

-Auditor – Company relationship.

-Role of Independent Directors.

-Disciplinary mechanism over auditors.

-Concept of CEO/CFO Certification.

Narayana Murthy Committee, 2003.

SEBI after review of the disclosures made by large number of Companies observed considerable variance in the extent and quality of disclosures made by the Companies in the Annual Reports.

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Therefore, the ‘NMC 2003’ was set up to review the existing code on CG to:

a. assess adequacy of existing practices, and

b. suggest improvements to the existing practices.

SEBI adopted the recommendations of ‘NMC 2003’ and ensured Compliance by the Companies with the Revised Clause 49 of the Listing Agreement by 31st December, 2005.

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Revised Clause 49

Implementation Schedule

d. For entities seeking listing for the first time, at the time of seeking in-principle approval for such listing.

e. For existing, listed entities which were required to comply with Clause 49 which is being revised i.e. those having a paid up share 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 by April 1, 2005.

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To submit quarterly compliance report to the Stock Exchanges within 15 days from the end of every quarter (signed by the Compliance Officer/CEO).

-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 49 will apply to the extent that it does not violate their respective statues and guidelines or directives issued by the relevant regulatory authorities.

-Revised Clause 49 is not applicable to Mutual Funds.

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-The Stock Exchanges shall set up a separate monitoring cell with identified personnel to monitor the compliance with the provisions of the revised Clause 49 on CG.

-Revised Clause 49 shall submit a consolidated Compliance Report to SEBI within 60 days from the end of each quarter.

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COMPLIANCES

UNDER

CORPORATE GOVERNANCE

W.E.F. 01.01.2006

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1. Composition of Board of Directors

The Chairman is Non Executive, 1/3 of the Board should be Independent Directors & if the Chairman is Executive, ½ of the Board should be Independent Directors.

2. Meetings

4 meetings in a year, with a maximum time gap of 4

months between 2 meetings.

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1. Changes with regard to Compensation to the Non-Executive Directors.

A fees/compensation, if any paid to non-executive Directors, including independent directors, shall be fixed by the Board of Directors and shall require previous approval of shareholders in general meeting. The shareholders resolution shall 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.

Deletion in this item has been notified.

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1. Code of Conduct

a) The Board shall lay down a code of conduct for all Board Members and Senior Management of the Company. The Code of Conduct shall be posted on the website of the Company.

b) All Board members and senior management personnel shall affirm compliance with the Code on annual basis. The Annual Report of the Company shall contain a declaration to this effect signed by the CEO.

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1. Committees

a. To ensure that a Director is not a member in more than 10 committees or Chairman of more than 5 committees across all companies in which he is a directors.

b. If a director is holding a committee position exceeding the aforesaid limits, he should be advised to vacate position on such number of committees to comply with this clause.

Ensure that every director has informed the company about the committee position he occupies in other companies and notify changes as and when they take place.

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5A. Audit Committee:

1. Minimum 3 members2. 2/3 Independent Directors3. All members shall be financially literate and at least one member shall have financial and accounting knowledge.4. The Chairman of the committee to be independent director. 5. Committee to meet atleast 4 times a year and the gap between two meetings shall not exceed 4 months.6. 2 or 1/3 of the members, whichever is higher to constitute quorum of the meeting. There should be a minimum of two independent members present.

7.Chairman to be present in AGM 8.Secretary to act as Secretary of the Committee.

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POWERS OF AUDIT COMMITTEE

To investigate any activity within its terms of reference.

To seek information from any employee.

To obtain outside legal or other professional advise.

To secure attendance of outsiders with relevant expertise, if deemed necessary.

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ROLE OF AUDIT COMMITTEE

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.

Recommending to the Board, the appointment, re-appointment and, if required, the replacement or removal of the statutory auditor and the fixation of audit fees.

Approval of payment to statutory auditors for any other services rendered by the statutory auditors

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Reviewing, with the management, the annual financial statements before submission to the Board for approval, with particular reference to:

Matters required to be included in the Director’s Responsibility Statement to be included in the Board’s report in terms of clause (2AA) of section 217 of the Companies Act, 1956.

Changes, if any, in accounting policies and practices and reasons for the same.

Major accounting entries involving estimates based on the exercise of judgment by management.

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Significant adjustments made in the financial statements arising out of audit findings.

Compliance with listing and other legal requirements relating to financial statements.

Disclosure of any related party transactions.

Qualification in the draft audit report.

Reviewing with the management, the quarterly financial statements before submission to the board for approval.

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Reviewing, with the management, performance of statutory and internal auditors, adequacy of the internal control systems.

Reviewing the adequacy of internal audit function, if any, 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.

Discussion with internal auditors any significant findings and follow up thereon.

To review the functioning of the Whistle Blower mechanism, in case the same is existing.

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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.

Discussion with statutory auditors before the audit commences, about the nature and scope of audit as well as post-audit discussion to ascertain any area of concern.

To look into the reasons for substantial defaults in the payment to the depositors, debenture holders, shareholders (in case of non payment of declared dividends) and creditors.

Carrying out any other function as is mentioned in the terms of reference of the Audit Committee.

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Mandatory Review of information by Audit Committee

The Audit committee shall mandatorily review the following information:

Management discussion and analysis of financial condition and results of operations.

Statement of significant related party transactions. Management letters / letters of internal control

weaknesses issued by the statutory auditors. Internal audit reports relating to internal control

weaknesses. 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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1. Disclosures

A) Basis of related party transactions

1) A statement in summary form of transactions with related parties in the ordinary course of business shall be placed periodically before the Audit Committee.

2) Details of material individual transactions with related parties which are not in the normal course of business shall be placed before the Audit Committee.

3) Details of material individual transactions with related parties or others, which are not on an arm’s length basis should be placed before the Audit Committee, together with Management’s justification for the same.

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B) Disclosure of accounting treatment

Where in the preparation of financial statements, a treatment different from that prescribed in an accounting standard has been followed, the fact shall be disclosed in the financial statements, together with the management’s explanation as to why it believes such alternative treatment is more representative of the true and fair view of the underlying business transaction in the Corporate Governance Report.

C) Board Disclosures- Risk management

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.

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• D) Proceeds from public issues, rights issues, preferential issues etc.When money is raised through an issue, it shall disclose to the Audit Committee, the uses/applications of funds by major category 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/notice place it before the Audit Committee. Such disclosure shall be made only till such time that the full money raised through the issue has been fully spent. This statement shall be certified by the statutory auditors of the company. The Audit Committee shall make appropriate recommendations to the Board to take up steps in this matter.

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E) Remuneration of Directors:1. All pecuniary relationship or transactions of the non-

executive directors vis-à-vis the company shall be disclosed in the Annual Report.

2. Further the following disclosures on the remuneration of directors shall be made in the section on the corporate governance of the Annual Report.

– All elements of remuneration package of individual directors summarized under major groups, such as salary, benefits, bonus, stock options, pension, etc.

– Details of fixed component and performance linked incentives, along with the performance criteria.

– Service contracts, notice period, severance fees.– Stock option details, if any – and whether issued at a

discount as well as the period over which accrued and over which exercisable.

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1. The Company shall publish its criteria of making payments to non-executive directors in its annual report. Alternatively, this may be put up on the Company’s website and reference drawn thereto in the Annual Report.

3. The Company shall disclose the number of shares and convertible instruments held by non-executive directors in the annual report.

5. Non-executive directors shall be required to disclose their shareholding in the listed company in which they are proposed to be appointed as directors, prior to their appointment. These details should be disclosed in the notice to the general meeting called for appointment of such director.

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F) Management Discussions & Analysis Reports.(i) From now on, a “Management Discussion & Analysis”

Report would form as part of Directors Report or as an addition thereto forming part of the annual report to the shareholders. It should include the following matters.-Industry structure and developments.-Opportunities and Threats.-Segment-wise or product-wise performance.-Outlook.-Risks and concerns.-Internal control systems and their adequacy.-Discussions on financial performance with respect to operational performance.-Material developments in Human Resources/Industrial Relations front, including number of people employed.

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(ii) Senior management shall make disclosures to the Board relating to all material financial and commercial transactions, where they have personal interest, that may have a potential conflict with the interest of the Company at large. This would also include all members of management one level below the executive directors including all functional heads.

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(G) Shareholders(i) In case of the appointment of a new director or re-

appointment of a director the shareholders must be provided with the following information:a. A brief resume of the director.b. Nature of his expertise in specific functional areas.c. Names of the companies in which the person also holds the directorship and the membership of Committees of the Board.d. Shareholding of non-executive directors.

(ii) Quarterly results and presentations made by the company to analysts shall be put on company’s website or shall be sent in such a form so as to enable the stock exchange on which the company is listed to put it on its own website.

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iii) A board committee under the chairmanship of a non-executive director shall be formed to specifically look into the redressal of shareholders and investors complaints like transfer of shares, non-receipt of balance sheets, non-receipt of declared dividends, etc. This committee shall be designated as ‘Shareholders / Investors Grievance Committee’.

(iv)To expedite the process of share transfers, the Board of the Company shall delegate the power of share transfer to an officer or a committee or to the registrar and share transfer agents. The delegated authority shall attend to share transfer formalities atleast once in a fortnight.

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CEO/CFO Certification

The CEO, i.e. the Managing Director or Manager appointed in terms of the Companies Act, 1956 and the CFO i.e. the whole-time Finance Director or any other person heading the finance function discharging that function shall certify to the Board that:

a. They have reviewed financial statements and the cash flow statements for the year and that to the best of their knowledge and belief:

(i) These statements do not contain any materially untrue statement or omit any material fact or contact statements that might be misleading;

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(ii)These statements together present a true and fair view of the company’s affairs and are in compliance with existing accounting standards, applicable laws and regulations.b. There are to the best of their knowledge and belief, no transactions entered into by the company during the year which are fraudulent, illegal or violative of the company’s code of conduct.c. They accept responsibility for establishing and maintaining internal controls and that they have evaluated the effectiveness of the internal control systems of the Company and they have disclosed to the auditors and the Audit Committee, deficiencies in the design or operation of internal controls, if any, of which they are aware and the steps they have taken or propose to take to rectify these deficiencies.

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d. They have indicated to the auditors and the Audit Committee:

(i)Significant changes in internal control during the year.(ii)Significant changes in the accounting policies during the year and that the same have been disclosed in the notes to the financial statements; and(iii)Instances of significant fraud of which they have become aware and the involvement therein, if any, of the management or an employee having a significant role in the company’s internal control system.

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Report on CG and Mandatory requirement list of items to be included in the Report on CG in the Annual Report of the

Company.

The company shall submit a quarterly compliance report to the stock exchanges within 15 days from the close of quarter as per the format prescribed. The report shall be signed either by the Compliance Officer or the Chief Executive Officer of the company.

Report on Corporate Governance:• A separate section on “Corporate Governance” in the

Annual Report along with detailed compliance report on Corporate Governance is required to be provided.

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This report as per ANNEXURE 1 C shall contain following information:i)A brief statement on Company’s Philosophy on Code of Governance.ii) Board of Directors:1. Composition and category of Directors e.g. Promoter, Executive, Non-executive, Independent, Nominee etc., 2. Attendance of each director at the BOD meetings and the last AGM. 3. No. of other BODs or Board Committees he/she is a member of a chair person 4. No. of BOD meetings held, Dates on which held.iii)Audit Committee:1. Brief description of terms of reference

Composition, Name of Members and Chairperson 2. Meetings and attendance during the year.

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iv)Remuneration Committee:1.Brief description of terms of reference2.Composition 3.Attendance 4.Remuneration policy 5.Details of remuneration to all the directors as per format in main report.v)Shareholders committee:1.Name of the non executive director heading the committee2. Name and designation of compliance officer3. No. of shareholders complaints received4. No.of complaints not solved to the satisfaction of shareholders5. No. of pending share transfers.

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vi)General Body Meetings:

1.Location and time where last 3 AGMs held.

2.Whether any special resolutions passed in the previous AGMs.

3.Whether any special resolution passed last year through postal ballot -details of voting pattern etc.

4.Person who conducted the postal ballot exercise.

5.Whether any special resolution is proposed to be conducted through postal ballot.

6.Procedure for postal ballot.

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vii)Disclosures:1.Disclosures on materially significant related party transactions with promoters /directors/ management/ subsidiaries/relatives that may have potential conflict with the interests of the company. 2.Disclosure on non compliance by the company, penalties, strictures imposed on the company by Stock Exchanges, SEBI, any other statutory authority on any matter related to capital markets during the last 3 years.3.Whistle blower policy and affirmation that no personnel has been denied access to the Audit Committee.4.Details of compliance with mandatory requirements and adoption of the non-mandatory requirements of this clause.

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viii)Means of Communication :1.Quarterly results2.Newspapers in which results normally published3.Any web-site, where displayed4.Whether it also displays official news releases5.The presentations made to institutional investors or to the analysts.ix)General Shareholders information:1.AGM: Date, time and venue2.Financial year 3.Book closure date4.Dividend payment date5.Listing on stock exchanges 6.Stock code

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7. Market price data: high low during each month in the last financial year8. Performance of the share in comparison with major indices like BSE Sensex etc.9. Registrar and Transfer Agents10.Share Transfer System11.Distribution of Shareholding12.D-Mat of Shares and liquidity, 13.Plant locations14.Correspondence address etc.Outstanding GDRs / ADRs / Warrants or any convertible instruments, conversion date and likely impact on equity.

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NON-MANDATORY REQUIREMENTS(Annexure 1 D)

• Chairman of the Board:

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 performance of his duties.

Independent directors may have a tenure not exceeding in the aggregate, a period of nine years on the Board of a Company.

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Remuneration Committee:

The Board should set up 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.

To avoid conflicts of interest, the remuneration committee, which would determine the remuneration packages of the executive directors should comprise of at least three directors, all of whom should be non-executive directors, the chairman of committee being an independent director.

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All the members of the remuneration committee should be present at the meeting.

The Chairman of the remuneration committee should be present at the Annual General Meeting, to answer the shareholder queries. However, it would be upto the Chairman to decide who should answer the queries.

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Shareholder Rights

The half-yearly declaration of financial performance including summary of the significant events in last six-months, should be sent to each household of shareholders.

Audit Qualifications

Company may move towards a regime of unqualified financial statements.

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Training of Board Members:A Company may 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.

Mechanism for evaluating non-executive BoardMembers:

The performance evaluation of non-executive directors could be done by a peer group comprising the entire Board of Directors, excluding the director being evaluated; and Peer Group evaluation could be the mechanism to determine whether to extend / continue the terms of appointment of non-executive directors.

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Whistle Blower Policy:The Company may establish a mechanism for employees to report to the management concerns about unethical behaviour, actual or suspected fraud or violation of the company’s code of conduct or ethics policy. This mechanism could also provide for adequate safeguards against victimization of employees who avail of the mechanism and also provide for direct access to the Chairman of the Audit Committee in exceptional cases. Once established, the existence of the mechanism may be appropriately communicated within the organization.

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THANK YOU