PROJECT REPORT

(SUBMITTED FOR THE DEGREE OF B.COM. HONOURS IN

ACCOUNTING & FINANCE UNDER THE UNIVERSITY OF
CALCUTTA)
Title of the Project
Corporate Governance
Submitted by
Name of the Candidate: NAVRAS JAMEEL
Registration No.
Name of the College
College Roll No.
Supervised by
Name of the Supervisor:
Name of the College:
Month & Year of Submission

Annexure- IA
Supervisor's Certificate
This is to certify that Mr.Navras Jameel a student of B.Com.
Honours in Accounting & Financeof BGES under the University of
Calcutta has worked under my supervision and guidance for
his/her Project Work and prepared a Project Report with the
titlewhich he/she is submitting, is his/her genuine and original
work to the best of my knowledge.
Signature:
Name:
Plac
e:
Date
:

Designation:
Name Of the College:

Annexure- IB
Student's Declaration
I hereby declare that the Project Work with the title (in block
letters)submitted by me for the partial fulfillment of the degree of
B.Com. Honours in Accounting & Finance under the University of
Calcutta is my original work and has not been submitted earlier
to any other University /Institution for the fulfillment of the
requirement for any course of study.
I also declare that no chapter of this manuscript in whole or in
part has been incorporated in this report from any earlier work
done by others or by me. However, extracts of any literature
which has been used for this report has been duly acknowledged
providing details of such literature in the references.
Signature:
Nam
e:
Plac
e:

Address:
2

Date
:

Registration Number:

Table of Content

Serial
Numbe
Topic
r
1. Introduction
2. National and
International
Scenario
3. Presentation,
Analysis & Findings
4. Conclusion &
Recommendations

Page
Numbers
4-10
11-20
21-42
43-49

Introduction
CorporateGovernance is essentially all about howcorporations are
directed, managed, controlled and heldaccountable to their
shareholders. In India, the question ofCorporate Governance has
come up mainly in the wake ofeconomic liberalization and deregularization of industry andbusiness. The objective of any
corporate governance system isto simultaneously improve
corporate performance andaccountability as a means of attracting
financial and humanresources on the best possible terms and of
preventingcorporate failure. With the rapid pace of globalization
manycompanies have been forced to tap international
financialmarkets and consequently to face greater competition
thanbefore. Both policymakers and business managers
havebecome increasingly aware of the importance of
improvedstandards of Corporate Governance.

DEFINITION OF CORPORATE GOVERNANCE

Definition of Corporate Governance varies widely.Corporate
Governance could be defined as ways of bringingthe interests of
investors and managers into line and ensuringthat firms are run
for the benefit of investors. It isconcerned with the relationship
between the internalgovernance mechanisms of corporations and
societysconception
of
the
scope
of
corporate
accountability.Corporate governance is the acceptance by
management of theinalienable rights of shareholders as the true
owners of thecorporation and of their own role as trustees on
behalf of theshareholders.It is about commitment to values, about
ethical businessconduct and about making a distinction between
personal andcorporate funds in the management of a company.
CorporateGovernance consists of procedures and processes
according towhich an organisation is directed and controlled.
TheCorporate Governance structure specifies the distribution
ofrights and responsibilities among the different participants inthe
organisation such as the board, managers, shareholdersand other
stakeholders and lays down the rules and proceduresfor decisionmaking. Corporate Governance is aboutpromoting corporate
4

fairness, transparency and accountability. In simple terms

Corporate Governance can be defined as aset of laws, rules,
regulations, systems, principles, process bywhich a company is
governed.

NEED FOR CORPORATE GOVERNANCE IN INDIA

A corporation is a congregation of various stakeholders,namely
customers, employees, investors, vendor partners,government
and society. In this changed scenario an Indiancorporation, as also
a corporation elsewhere should be fairand transparent to its
stakeholders in all its transactions. Thishas become imperative in
todays globalized business worldwhere corporations need to
access global pools of capital,need to attract and retain the best
human capital from variousparts of the world, need to partner
with vendors on megacollaborations and need to live in harmony
with thecommunity. Unless a corporation embraces and
demonstratesethical conduct, it will not be able to
succeed.Corporations need to recognize that their growth
requiresthe cooperation of all the stakeholders; and such
cooperationis enhanced by the corporations adhering to the best
CorporateGovernance practices. In this regard, the management
needs toact as trustees of the shareholders at large and
preventasymmetry of benefits between various sections
ofshareholders, especially between the owner-managers and
therest of the shareholders.
Liberalization and its associated developments, i.e.
deregulation,
privatization
and
extensive
financial
liberalization,have made effective Corporate Governance very
crucial.Cases of frauds, malpractices can render capital
marketreforms
desultory.
Independent
and
effective
corporategovernance reforms are, therefore, necessary in order
torestore the credibility of capitalmarket and to facilitate theflow
of investment finance of firms. There are various reformswhich
were channeled through a number of different pathswith the
Security and Exchange Board of India (SEBI)and the Ministry of
Corporate Affairs, Government of India (MCA) playing important
roles.

COMMITTEE ON CORPORATE GOVERNANCE

There are various committees formed with a view toreforming the
Corporate Governance in India since 1990s.Some of the
recommendations of these committees arehighlighted below:
1. Confederation of Indian Industries (CII) set up a taskforce in
1995 under Rahul Bajaj, a reputedindustrialist. In 1998, the
CII
released
the
code
calledDesirable
Corporate
Governance. It looked intovarious aspects of Corporate
Governance and wasfirst to criticize nominee directors and
suggesteddilution of government stake in companies.
2. SEBI had set up a Commission under Kumar Manlagam Birla.
This committee covered issues relating to protection of
investor interest, promotion of transparency, building
international standards in terms of disclosure of information.
3. The Department of Companies Affairs (DCA) modified the
Companies Act, 1956. It undertakes periodic review and
brings about amendments in the Companies Act, 1956. In
1999, the Act introduced the provision relating to nomination
facilities for shareholders and share buybacks and for
formation of Investor education and protection fund.
4. The Department of Corporate Affairs constitutedNaresh
Chandra Committee in 2002. The committeetalks extensively
about the statuary auditor-companyrelationship, rotation of
statutory audit firms/partners,procedure for appointment of
auditors anddetermination of audit fees, true and fair
statement offinancial affairs of companies.
5. SEBI appointed Narayan Murthy Committee in 2002. Its
report mainly focuses on and makes mandatory
recommendations regarding responsibilities of audit
committee, quality of financial disclosure, requiring boards to
assess and disclose business risks in the companys annual
reports.

CLAUSE 49 OF THE LISTING AGREEMENT

After
liberalization
serious
efforts
have
been
made
towardsoverhauling the system with SEBI formulating the Clause
6

49of
the
Listing
Agreements
dealing
with
corporate
governance.Clause 49 of the Listing Agreement to the Indian
stockexchange comes into effect from 31 December 2005. It
hasbeen formulated for the improvement of corporate
governancein all listed companies. Clause 49 of Listing
Agreements, ascurrently in effect, includes the following key
requirements:
Board Independence: Boards of directors of listedcompanies
must have a minimum number ofindependent directors. Where
the Chairman is anexecutive or a promoter or related to a
promoter or asenior official, then at least one-half the board
shouldcomprise
independent
directors.
In
other
cases,independent directors should constitute at least one third of
the board size.

Audit
Committees:
Listed
companies
must
have
auditcommittees of the board with a minimum of threedirectors,
two-thirds of whom must be independent.In addition, the roles
and responsibilities of the auditcommittee are to be specified in
detail.
Disclosure: Listed companies must periodically makevarious
disclosures regarding financial and othermatters to ensure
transparency.
CEO/CFO certification of internal controls: The CEOand CFO of
listed companies must (a) certify that thefinancial statements are
fair and (b) acceptresponsibility for internal controls.
Annual Reports: Annual reports of listed companiesmust carry
status reports about compliance withcorporate governance
norms.

VOLUNTARY GUIDELINES ISSUED BY MINISTRY OF

CORPORATE AFFAIRS
Voluntary Guidelines on Corporate Governance wereissued by the
Ministry of Corporate Affairs in December2009. Few guidelines are
worth mentioning:
1. Board of Directors
Appointment of Directors
7

 Companies should issue formal letters ofappointment to NonExecutive Directors (NEDs) and
Independent Directors as is done by them whileappointing
employees and Executive Directors. Sucha formal letter should
form a part of the disclosure toshareholders at the time of the
ratification of his/herappointment or re-appointment to the Board.
The offices of chairman of the board and chiefexecutive officer
should be separate.
The companies may have a Nomination Committeecomprised of
a majority of Independent Directors,including its Chairman. A
separate section in theAnnual Report should outline the guidelines
beingfollowed by the Nomination Committee and the roleand
work done by it during the year underconsideration.
Independent Directors and NEDs should hold nomore than
seven directorships.
Independent Directors
The Board should put in place a policy for specifyingpositive
attributes of Independent Directors such asintegrity, experience
and expertise, foresight,managerial qualities and ability to read
andunderstand financial statements. Disclosure aboutsuch policy
should be made by the Board in its reportto the shareholders.
Such a policy may be subject toapproval byshareholders.
All Independent Directors should provide a detailedCertificate of
Independence at the time of theirappointment, and thereafter
annually. IndependentDirectors should be restricted to six-year
terms. Theymust leave for three years before serving
anotherterm, and they may not serve more than three tenuresfor
a company.
Independent Directors should have the ability to meetwith
managers and should have access toinformation.
Remuneration of Directors
NEDs should be paid either a fixed fee or apercentage of profits.
Whichever payment method iselected should apply to all NEDs.

NEDs paid withstock-options should hold onto those options

forthree years after leaving the board.
Independent Directors should not be paid with stockoptions or
profit-based commission.
The Remuneration Committee should have at leastthree
members with the majority of NEDs, and atleast one Independent
Director. Their decisionsshould be made available in the Annual
Report.
2. Duties of the Board
The Board should provide training for the directors.
The Board should enable quality decision-making bygiving the
members timely access to information.
The Board should put in systems of risk managementand review
them every six months.
The Board should review its own performanceannually and state
its methods in its Annual Report.
The Board should put in a system to ensurecompliance with the
law, which should be reviewedannually. All agenda items should
be assessed for itsimpact on minority shareholders.
3. Audit Committee of Board
The Audit Committee should be composed of at leastthree
members, with Independent Directors in themajority and an
Independent Director as thechairperson.
The Audit Committee is responsible for reviewingthe integrity of
financial statements, the companysinternal financial controls,
internal audit function andrisk management systems. The Audit
Committeeshould also monitor and approve all Transactions.
4. Auditors
The Audit Committee should be consulted on theselection of
auditors. The committee must besupplied with relevant
information about the auditingfirm.
Every auditor should provide a certificate statinghis/her/its
arms length relationship with the clientcompany.

 The audit partner should be rotated every three years;the firm

should be rotated every five years. Auditpartners should have a
cooling off period of threeyears before they work with the client
companyagain; the firm should have a cooling off period offive
years.
The Committee may appoint an internal auditor.
5. Institution of a Mechanism for Whistle blowing
The companies should ensure the institution of amechanism for
employees to report concerns aboutunethical behavior, actual or
suspected fraud, orviolation of the companys code of conduct or
ethicalpolicy.
The companies should also provide for adequatesafeguards
against victimization of employees whoavail of the mechanism,
and also allow direct accessto the Audit Committee Chairperson in
exceptionalcases.

AMENDMENTS IN COMPANIES ACT

The Companies Bill 2011 is expected to be brought beforeIndian
Parliament for consideration in the forthcoming Budgetsession.
The provisions of the Companies Bill is related toeligibility, power
and function of Auditor and AuditCommittee, appointment and
qualification of Directors,Independent Directors, meeting of the
board and its power.

10

National
Scenario

and

International

INTERNATIONAL SCENARIO
There were several frauds and scams in the corporate history of
the world. It was felt that the system for regulation is not
satisfactory and it was felt that it needed substantial external
regulations. These regulations should penalize the wrong doers
while those who abide by rules and regulations, should be
rewarded by the market forces. There were several changes
brought out by governments, shareholder activism, insistence of
mutual funds and large institutional investors, that corporate they
invested in adopt better governance practices and in formation of
several committees to study the issues in depth and make
recommendations,
codes
and
guidelines
on
Corporate
Governance that are to be put in practice. All these measures
have brought about a metamorphosis in corporate that realized
that investors and society are serious about corporate
governance.

DEVELOPMENTS IN USA
Corporate Governance gained importance with the occurrence of
the Watergate scandal in United States. Thereafter, as a result of
subsequent investigations, US regulatory and legislative bodies
were able to highlight control failures that had allowed several
major corporations to make illegal political contributions and to
bribe government officials. This led to the development of the
Foreign and Corrupt Practices Act of 1977 that contained specific
provisions regarding the establishment, maintenance and review
of systems of internal control. This was followed in 1979 by
Securities and Exchange Commissions proposals for mandatory
reporting on internal financial controls. In 1985, following a series
of high profile business failures in the US, the most notable one of
which being the savings and loan collapse, the Tradway
Commission was formed to identify the main cause of
11

misrepresentation in financial reports and to recommend ways of

reducing incidence thereof. The Tradway Report published in 1987
highlighted the need for a proper control environment,
independent audit committees and an objective internal audit
function and called for published reports on the effectiveness of
internal control The commission also requested the sponsoring
organizations to develop an integrated set of internal control
criteria to enable companies to improve their control.

DEVELOPMENTS IN UK
In England, the seeds of modern corporate governance were sown
by the Bank of Credit and Commerce International (BCCI) Scandal.
The Barings Bank was another landmark. It heightened peoples
awareness and sensitivity on the issue and resolve that
something ought to be done to stem the rot of corporate
misdeeds. These couple of examples of corporate failures
indicated absence of proper structure and objectives of top
management. Corporate Governance assumed more importance
in light of these corporate failures, which was affecting the
shareholders and other interested parties.
As a result of these corporate failures and lack of regulatory
measurers from authorities as an adequate response to check
them in future, the Committee of
Sponsoring Organizations (COSO) was born. The report produced
in 1992 suggested a control framework and was endorsed a
refined in four subsequent UK reports: Cadbury, Ruthman, Hampel
and Turbull. There were several other corporate failures in the
companies like Polly Peck, British & Commonwealth and Robert
Maxwells Mirror Group News International were all victims of the
boom-to-bust decade of the 1980s. Several companies, which saw
explosive growth in earnings, ended the decade in a memorably
disastrous manner. Such spectacular corporate failures arose
primarily out of poorly managed business practices. The
publication of a serious of reports consolidated into the Combined
Code on Corporate Governance (The Hampel Report) in 1998
resulted in major changes in the area of corporate governance in
United Kingdom. The corporate governance committees of last
decade have analyzed the problems and crises besetting the

12

corporate sector and the markets and have sought to provide

guidelines for corporate management. Studying the subject
matter of the corporate codes and the reports produced by
various committees highlighted the key practical problem and
concerns driving the development of corporate governance over
the last decade.

WORLD BANK ON CORPORATE GOVERNANCE

The World Bank, involved in sustainable development was one of
the earliest economic organizations to study the issue of
corporate governance and suggest certain guidelines. The World
Bank report on corporate governance recognizes the complexity
of the concept and focuses on the principles such as
transparency, accountability, fairness and responsibility that are
universal in their applications.
Corporate governance is concerned with holding the balance
between economic and social goals and between individual and
communal goals. The governance framework is there to
encourage the efficient use of resources and equally to require
accountability for the stewardship of those resources. The aim is
to align as nearly as possible, the interests of individuals,
organizations and society.
The foundation of any corporate governance is disclosure.
Openness is the basis of public confidence in the corporate
system and funds will flow to those centers of economic activity,
which inspire trust. This report points the way to establishment of
trust and the encouragement of enterprise. It marks an important
milestone in the development of corporate governance.

OECD PRINCIPLES
Organization for Economic Co-operation and Development (OECD)
was one of the earliest non-governmental organizations to work
on and spell out principles and practices that should govern
corporate in their goal to attain long-term shareholder value.

13

The OECD were trend setters as the Code of Best practices are
associated with Cadbury report. The OECD principles in summary
include the following elements:
i)
ii)
iii)
iv)
v)

The rights of shareholders

Equitable treatment of shareholders
Role of stakeholders in corporate governance
Disclosure and Transparency
Responsibilities of the board

The OECD guidelines are somewhat general and both the AngloAmerican system and Continental European (or German) system
would be quite consistent with it.

SARBANES- OXLEY ACT, 2002

The Sarbanes-Oxley Act (SOX) is a sincere attempt to address all
the issues associated with corporate failure to achieve quality
governance and to restore investors confidence. The Act was
formulated to protect investors by improving the accuracy and
reliability of corporate disclosures, made precious to the securities
laws and for other purposes. The act contains a number of
provisions that dramatically change the reporting and corporate
directors governance obligations of public companies, the
directors and officers. The important provisions in the SOX Act are
briefly given below:
i) Establishment of Public Company Accounting Oversight Board
(PCAOB): SOX creates a new board consisting of five members
of whom two will be certified public accountants. All
accounting firms have to get registered with the board. The
board will make regular inspection of firms. The board will
report to SEC. The report will be ultimately forwarded to
Congress.
ii)Audit Committee: The SOX provides for new improved audit
committee. The committee is responsible for appointment,
fixing fees and oversight of the work of independent auditors.
The registered public accounting firms should report directly to
audit committee on all critical accounting policies.

14

iii)

Conflict of Interest: The public accounting firms should not

perform any audit services for a publically traded company.
iv) Audit Partner Rotation: The act provides for mandatory rotation
of lead audit or coordinating partner and the partner reviewing
audit once every 5 years.
v)
Improper influence on conduct of Audits: According to act, it is
unlawful for any executive or director of the firm to take any
action to fraudulently influence, coerce or manipulate an audit.
vi) Prohibition of non-audit services: Under SOX act, auditors are
prohibited from providing non-audit services concurrently with
audit financial review services.
vii) CEOs and CFOs are required to affirm the financials: CEOs and
CFOs are required to certify the reports filed with the Securities
and Exchange Commission (SEC).
viii) Loans to Directors: The act prohibits US and foreign companies
with Securities traded within US from making or arranging
from third parties any type of personal loan to directors.
ix) Attorneys: The attorneys dealing with publicly traded
companies are required to report evidence of material violation
of securities law or breach of fiduciary duty or similar
violations by the company or any agent of the company to
Chief Counsel or CEO and if CEO does not respond then to the
audit committee or the Board of Directors.
x)
Securities Analysts: The SOX has provision under which
brokers and dealers of securities should not retaliate or
threaten to retaliate an analyst employed by broker or dealer
for any adverse, negative or unfavorable research report on a
public company. The act further provides for disclosure of
conflict of interest by the securities analysts and brokers or
dealers.
xi) Penalties: The penalties are also prescribed under SOX act for
any wrong doing. The penalties are very stiff.
The Act also provides for studies to be conducted by Securities
and Exchange Commission or the Government Accounting Office
in the following area:
i)
ii)

Auditors Rotation
Off balance Sheet Transactions

15

iii)
iv)
v)

Consolidation of Accounting firms & its impact on industry

Role of Credit Rating Industry
Role of Investment Bank and Financial Advisers

The most important aspect of SOX is that it makes it clear that

companys senior officers are accountable and responsible for the
corporate culture they create and must be faithful to the same
rules they set out for other employees. The CEO for example,
must be responsible for the companys disclosure, controls and
financial reporting.

NATIONAL SCENARIO
There have been several major corporate governance initiatives
launched in India since the mid-1990s. The first was by the
Confederation of Indian Industry (CII), Indias largest industry and
business association, which came up with the first voluntary code
of corporate governance in 1998. The second was by the SEBI,
now enshrined as Clause 49 of the listing agreement. The third
was the Naresh Chandra Committee, which submitted its report in
2002. The fourth was again by SEBI the Narayan Murthy
Committee, which also submitted its report in 2002. Based on
some of the recommendation of this committee, SEBI revised
Clause 49 of the listing agreement in August 2003.
Subsequently, SEBI withdrew the revised Clause 49 in
December 2003, and currently, the original Clause 49 is in force.

THE CII CODE

More than a year before the onset of the Asian crisis, CII set up a
committee to examine corporate governance issues, and
recommend a voluntary code of best practices. The committee
was driven by the conviction that good corporate governance was
essential for Indian companies to access domestic as well as
global capital at competitive rates. The first draft of the code was
prepared by April 1997, and the final document (Desirable
Corporate Governance: A Code), was publicly released in April
16

1998. The code was voluntary, contained detailed provisions, and

focused on listed companies.
Desirable Disclosure
Listed companies should give data on high and low monthly
averages of share prices in a major stock exchange where the
company is listed; greater detail on business segments, up to
10% of turnover, giving share in sales revenue, review of
operations, analysis of markets and future prospects. Major
Indian stock exchanges should gradually insist upon a corporate
governance compliance certificate, signed by the CEO and the
CFO. 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. These must be
given in a tabular format that shows where the company stands
relative to higher and lower ranking.
Companies that default on fixed deposits should not be
permitted to accept further deposits and make inter-corporate
loans or investments or declare dividends until the default are
made good.
The CII code is voluntary. Since 1998, CII has been trying induce
companies to disclose much greater information about their
boards. Consequently, annual reports of companies that abide by
the code contain a chapter on corporate governance.

KUMAR MANGALAM
AND CLAUSE 49

BIRLA

COMMITTEE

REPORT

While the CII code was well-received and some progressive

companies adopted it, it was felt that under Indian conditions a
statutory rather than a voluntary code would be more purposeful,
and meaningful. Consequently, the second major corporate
governance initiative in the country was undertaken by SEBI. In
early 1999, it set up a committee under Kumar Mangalam Birla to
promote and raise the standards of good corporate governance.
In early 2000, the SEBI board had accepted and ratified key
recommendations of this committee, and these were incorporated
into Clause 49 of the Listing Agreement of the Stock Exchanges.
17

This report pointed out that the issue of corporate governance

involves besides shareholders, all other stakeholders. The
committees recommendations have looked at corporate
governance from the point of view of the stakeholders and in
particular that of shareholders and investors.
The control and reporting functions of boards, the roles of the
various committees of the board, the role of management, all
assume special significance when viewed from this perspective.
At the heart of committees report is the set of recommendations,
which distinguish the responsibilities, and obligations of the
boards and the management in instituting the systems for good
C.G. Many of them are mandatory. These recommendations are
expected to be enforced on listed companies for initials
disclosures. This enables shareholders to know, where the
companies are in which they have involved. The committee
recognized that India had in place a basic system of corporate
governance and that SEBI has already taken a number of
initiatives towards raising the existing standards.
The committee also recognized that the Confederation of Indian
Industries (CII) had published a code entitled Desirable code of
corporate of Governance and was encouraged to note that some
of the forward looking companies have already reviewed their
annual report through complied with the code.
Now to protect investors especially shareholders from any
malpractices and injustice the Securities and Exchange Board of
India appointed committee on corporate governance on May 7,
1999 under chairmanship of Shri Kumar Mangalam Birla, Member
of SEBI Board to promote standard of Corporate Governance.
The Constitutions of Committee
The committee has identified the three key constituents of
corporate governance as the shareholders, the Board of Directors
and the Management. Along with this the committee has
identified major 3 aspects namely accountability, transparency
and equality of treatment for all shareholders. Crucial to good
corporate governance are the existence and enforceability of
regulations relating to insider information and insider trading.

18

These matters are currently being examined over here. The

committee had received good comments from almost all experts
institutions, chamber of commerce Adrian Cadbury Cadbury
Committee etc.
Corporate Governance Objectives
Corporate Governance has several claimants shareholders,
suppliers, customers, creditors, the bankers, employees of
company and society. The committee for SEBI keeping view has
prepared primarily the interests of a particular classes of
stakeholders namely the shareholders this report on corporate
governance. It means enhancement of shareholder value keeping
in view the interests of the other stack holders. Committee has
recommended C.G. as companys principles rather than just act.
The company should treat corporate governance as way of life
rather than code.
Schedule of implementation
The
committee
recognized
that
compliance
with
the
recommendations would involve restructuring the existing boards
of companies. Within financial year 2000-2001, not later than
March 31, 2001 by all entitles, which are included either in-group
A of the BSE on in S&P CNX Nifty index as on January 1, 2000.
However, to comply with recommendations, these companies
may have to begin the process of implementation as early as
possible. These companies would cover more than 80% of the
market capitalization.
Within Financial year 2001-2002 but not later than March 31,
2002 by all the entities which are presently listed with paid up
share capital of Rs. 10 crores and above an net worth of Rs. 25
crores as more any time in the history of the company. Within
financial year 2002-03 but not later than market 31, 2003 by all
the entities which are presently listed with paid up share capitals
of Rs. 3 crores and above.

NARESH CHANDRA COMMITTEE REPORT

19

The Naresh Chandra committee was appointed in August 2002 by

the Department of Company Affairs (DCA) under the Ministry of
Finance and Company Affairs to examine various corporate
governance issues. The Committee submitted its report in
December 2002. It made recommendations in two key aspects of
corporate governance: financial and non-financial disclosures: and
independent auditing and board oversight of management.
The committee submitted its report on various aspects concerning
corporate governance such as role, remuneration, and training
etc. of independent directors, audit committee, the auditors and
then relationship with the company and how their roles can be
regulated as improved. The committee stingily believes that a
good accounting system is a strong indication of the management
commitment to governance.

NARAYANA MURTHY COMMITTEE

CORPORATE GOVERNANCE

REPORT

ON

The fourth initiative on corporate governance in India is in the

form of the recommendations of the Narayana Murthy committee.
The committee was set up by SEBI, under the chairmanship of Mr.
N. R. Narayana Murthy, to review Clause 49, and suggest
measures to improve corporate governance standards. Some of
the major recommendations of the committee primarily related to
audit committees, audit reports, independent directors, related
party transactions, risk management, directorships and director
compensation, codes of conduct and financial disclosures.

20

Presentation, Analysis & Findings

Corporate governance in India gained prominence in the wake of
liberalization during the 1990s and was introduced, by the
industry association Confederation of Indian Industry (CII), as a
voluntary measure to be adopted by Indian companies. It soon
acquired a mandatory status in early 2000s through the
introduction of Clause 49 of the Listing Agreement, as all
companies (of a certain size) listed on stock exchanges were
required to comply with these norms. In late 2009, the Ministry of
Corporate Affairs has released a set of voluntary guidelines for
corporate governance, which address a myriad corporate
governance issues.
These voluntary guidelines mark a reversal of the earlier
approach, signifying the preference to revert to a voluntary
approach as opposed to the more mandatory approach prevalent
in the form of Clause 49. However in a parallel process, key
corporate governance norms are currently being consolidated
into an amendment to the Companies Act, 1956 and once the
Companies Bill,2011 is approved the corporate governance
reforms in India would have completed two full cycles - moving
from the voluntary to the mandatory and then to the voluntary
and now back to the mandatory approach.
The Anglo-Saxon model of governance, on which the
corporate governance framework introduced in India is primarily
based on, has certain limitations in terms of its applicability in the
Indian environment. For instance, the central governance issue in
the US or UK is essentially that of disciplining management that
has ceased to be effectively accountable to the owners who are
dispersed shareholders.
However, in contrast to these countries, the main issue of
corporate governance in India is that of disciplining the dominant

21

shareholder, who is the principal block-holder, and of protecting

the interests of the minority shareholders and other stakeholders.
This issue and the complexity arising from the application of
alien corporate governance model in the Indian corporate and
business environment is further compounded by the weak
enforcement of corporate governance regulations through the
Indian legal system.
Furthermore, given that corporate governance is essentially
a soft issue, whose essence cannot be captured by quantitative
and structural factors alone, one of the challenges of making
corporate governance norms mandatory is the need to
differentiate between form and content; for instance, how do we
determine whether companies actually internalize the desired
governance norms or whether they look at governance as a
check-the-box exercise to be observed more in letter than in
spirit.
Currently, corporate governance reforms in India are at a
crossroads; while corporate governance codes have been drafted
with a deep understanding of the governance standards around
the world, there is still a need to focus on developing more
appropriate solutions that would evolve from within and therefore
address the India-specific challenges more efficiently.
This paper compiles a history of the evolution of corporate
governance reforms in India and through a survey of existing
research, identifies issues that are peculiar to the Indian context
and which are not being adequately addressed in the existing
corporate governance framework.
Lastly, this paper
the field of corporate
policy formulation in
corporate governance
conditions.

suggests the need for robust research in

governance research that would support
order to make the next generation of
reforms more effective for the Indian

22

Evolution of Corporate Governance in India A Chronological

Perspective
Corporate governance is perhaps one of the most important
differentiators of a business that has impact on the profitability,
growth and even sustainability of business. It is a multi-level and
multi-tiered process that is distilled from an organizations culture,
its policies, values and ethics, especially of the people running the
business and the way it deals with various stakeholders.
Creating value that is not only profitable to the business but
sustainable in the long-terminterests of all stakeholders
necessarily means that businesses have to runand be seen to
be runwith a high degree of ethical conduct and good
governance where compliance is not only in letter but also in
spirit.
Historical Perspective
At the time of Independence in 1947, India had functioning stock
markets, an active manufacturing sector, a fairly developed
banking sector, and also a comparatively well- developed Britishderived convention of corporate practices. From 1947 through
1991, the Indian Government pursued markedly socialist policies
when the State nationalized most banks and became the principal
provider of both debt and equity capital for private firms.
The government agencies that provided capital to private firms
were evaluated on the basis of the amount of capital invested
rather than on their returns on investment. Competition,
especially foreign competition, was suppressed. Private providers
of debt and equity capital faced serious obstacles in exercising
oversight over managers due to long delays in judicial
proceedings and difficulty in enforcing claims in bankruptcy. Public
equity offerings could be made only at government-set prices.
Public companies in India were only required to comply with
limited governance and disclosure standards enumerated in the
23

Companies Act of 1956, the Listing Agreement, and the

accounting standards set forth by the Institute of Chartered
Accountants of India (ICAI).
Faced with a fiscal crisis in 1991, the Indian Government
responded by enacting a series of reforms aimed at general
economic liberalization. The Securities and Exchange Board of
India (SEBI)India's securities market regulatorwas formed in
1992, and by the mid-1990s, the Indian economy was growing
steadily, and Indian firmshad begun to seek equity capital to
finance expansion into the market spaces created by liberalization
and the growth of outsourcing. The need for capital, amongst
other things, led to corporate governance reform and many major
corporate governance initiatives were launched in India since the
mid- 1990s; most of these initiatives were focused on improving
the governance climate in corporate India, which, at that time,
was somewhat rudimentary.
Codifying Good Governance Norms
The first major initiative was undertaken by the Confederation of
Indian Industry (CII), Indias largest industry and business
association, which came up with the first voluntary code of
corporate governance in 1998. More than a year before the onset
of the East Asian crisis, the CII had set up a committee to
examine corporate governance issues, and to recommend a
voluntary code of best practices.
Drawing heavily from the Anglo-Saxon Model of Corporate
Governance, CII drew up a voluntary Corporate Governance Code.
The first draft of the code was prepared by April 1997, and the
final document titled Desirable Corporate Governance: A Code
was publicly released in April 1998. The code was voluntary,
contained detailed provisions and focused on listed companies.
Although the CII Code was welcomed with much fanfare and even
adopted by a few progressive companies, it was felt that under
24

Indian conditions a statutory rather than a voluntary code would

be far more purposive and meaningful, at least in respect of
essential features of corporate governance.
Consequently, the second major corporate governance initiative
in the country was undertaken by SEBI. In early 1999, it set up a
committee under Kumar Mangalam Birla to promote and raise the
standards of good corporate governance.
The Birla Committee specifically placed emphasis on independent
directors in discussing board recommendations and made specific
recommendations
regarding
board
representation
and
independence. The Committee also recognized the importance of
audit committees and made many specific recommendations
regarding the function and constitution of board audit
committees. In early 2000, the SEBI board accepted andratified
the key recommendations of the Birla Committee, which were
incorporated into Clause 49 of the Listing Agreement of the Stock
Exchanges.
The Naresh Chandra committee was appointed in August 2002 by
the Department of Company Affairs (DCA) under the Ministry of
Finance and Company Affairs, to examine various corporate
governance issues. The Committee submitted its report in
December 2002. It made recommendations in terms of two key
aspects of corporate governance: financial and non-financial
disclosures, and independent auditing and board oversight of
management.
It also made a series of recommendations regarding, among other
matters, the grounds for disqualifying auditors from assignments,
the type of non-audit services that auditors should be prohibited
from performing, and the need for compulsory rotation of audit
partners. The fourth initiative on corporate governance in India is
in the form of the recommendations of the Narayana Murthy
Committee.

25

This committee was set up by SEBI under the chairmanship of Mr.

N.R. Narayana Murthy, in order to review Clause 49, and to
suggest measures to improve corporate governance standards.
Some of the major recommendations of the committee primarily
related to audit committees, audit reports, independent directors,
related party transactions, risk management, directorships and
director compensation, codes of conduct and financial disclosures.
The Murthy Committee, like the Birla Committee, pointed that
international developments constituted a factor that motivated
reform and highlighted the need for further reform in view of the
recent failures of corporate governance, particularly in the United
States, combined with the observations of Indias stock
exchanges thatcompliance with Clause 49 had up to that point
been uneven. Like the Birla Committee, the Murthy Committee
examined a range of corporategovernance issues relating to
corporate boards and audit committees, as well as disclosure to
shareholders and, in its report, focused heavily on the role and
structure of corporate boards, while strengthening the definition
of director independence in the then-existing Clause 49,
particularly to address the role of insiders on Indian boards.
In its present form, Clause 49, called Corporate Governance,
contains eight sections dealing with the Board of Directors, Audit
Committee, Remuneration of Directors, Board Procedure,
Management, Shareholders, Report on Corporate Governance,
and Compliance, respectively. Firms that do not comply with
Clause 49 can be de-listed and charged with financial penalties.
In the light of the clear consideration of Anglo-American standards
of governance by both the Birla and Murthy Committees, it is not
surprising that Indias corporate governance reform effort should
contain provisions similar to the reform efforts undertaken outside
India that adopted such models. In its final report, the Birla
Committee noted its dual reliance on international experiences
both as an impetus for reform following high-profile financial
26

reporting failures even among firms in the developed economies,

and as a model for reform. Significantly, the Birla Committee
singled out the corporate governance reports and codes being
applied in the US and UK, such as the Report of the Cadbury
Committee, the Combined Code of the London Stock Exchange,
and the Blue Ribbon Committee on Corporate Governance in the
US. The Committee even directly sought out the input of Sir
Adrian Cadbury, chair of the Cadbury Committee, commissioned
by the London Stock Exchange, in addition to Indian business
leaders.
While the report of the Murthy Committee did not explicitly cite
the Anglo-Americanmodels of governance, it was clearly a
reaction to events in the United States,particularly given the
timing of the report, which followed just a few months after the
enactment of the Sarbanes-Oxley Act (SOA).
There are striking
similarities between Clause 49 and the leading Anglo-American
corporate governance standards, in particular the Cadbury
Report, the OECD Principles of Corporate Governance, and
Sarbanes- Oxley.
Indias corporate governance reform efforts did not cease after
the adoption of Clause 49. In parallel, the review and redrafting of
the Companies Act, 1956 was taken up by the Ministry of
Corporate Affairs (MCA) on the basis of a detailed consultative
process and the Government constituted an Expert Committee on
Company Law under the Chairmanship of Dr. J.J. Irani on 2
December 2004 to offer advice on a new Companies Bill. Based,
among other things, on the recommendations of the Irani
Committee, the Government of India introduced the Companies
Bill, 2008, in the Indian Parliament, which sought to enable the
corporate sector in India to operate in a regulatory environment
characterized by best international practices that foster
entrepreneurship and investment. However, due to the dissolution
of the Fourteenth Lok Sabha, the Companies Bill, 2008, lapsed but

27

since the provisions of the Companies Bill, 2008 were broadly

considered to be suitable for addressing various contemporary
issues relating to corporate governance, the Government decided
to re-introduce the Companies Bill, 2008, as the Companies Bill,
2011, without any change in it except the Bill year.
In January 2009, the Indian corporate community was rocked by a
massive accounting scandal involving Satyam Computer Services
(Satyam), one of Indias largest information technology
companies. The Satyam scandal prompted quick action by the
Indian government, including the arrest of several insiders and
auditors of Satyam, investigations by the MCA and SEBI, and
substitution of the companys directors with government
nominees.
For corporate leaders, regulators, and politicians in India, as well
as for foreign investors, this necessitated a re-assessment of the
countrys progress in corporate governance. As a consequence of
various corporate scams, Indias ranking in the CLSA Corporate
Governance Watch 2010e slid from third to seventh in Asia.
Shortly after the news of the scandal broke, the CII began
examining the corporate governance issues arising out of the
Satyam scandal and in late 2009, the CII task force listed
recommendations on corporate governance reform.
In his foreword to the Task Force Report, Mr. Venu Srinivasan,
President of CII, while emphasizing the unique nature of the
Satyam scandal, suggested that it was is a one-off incident and
that the overwhelming majority of corporate India does business
in a sound and legal manner. Nonetheless, the CII Task force put
forth important recommendations that attempted to strike a
balance between over-regulation and promotion of strong
corporate governance norms by recommending a series of
voluntary reforms.

28

In addition to the CII, a number of other corporate groups have

joined the corporate governance dialogue. The National
Association of Software and Services Companies (NASSCOM) also
formed a Corporate Governance and Ethics Committee chaired by
N.R. Narayana Murthy, a leading figure in the field of Indian
corporate governance reforms. The Committee issued its
recommendations in mid-2010, focusing on the stakeholders in
the company. The report emphasized recommendations relating
to the audit committee and a whistle blower policy, and also
addressed the issue of the need to improve shareholder rights.
Additionally, the Institute of Company Secretaries of India (ICSI)
has also put forth a series of corporate governance
recommendations.
Inspired by industry recommendations, the MCA, in late 2009,
released a set of voluntary guidelines for corporate governance.
These Voluntary Guidelines address myriad corporategovernance
matters, including the independence of the boards of directors;
the responsibilities of the board, the audit committee, auditors,
and secretarial audits; and mechanisms to encourage and protect
whistle blowing. The MCA also indicated that the guidelines
constituted a first step in the process of facilitating corporate
governance and that the option to perhaps move to something
more mandatory remains open.
In parallel, subsequent to the introduction of the Companies Bill,
2009 in the Lok Sabha, the Central Government received several
suggestions for amendments in the said Bill from the various
stakeholders and the Parliamentary Standing Committee on
Finance who also made numerous recommendations in its report.
In view of the large number of amendments suggested to the
Companies Bill, 2009, arising from the recommendations of the
Parliamentary Standing Committee on Finance and suggestions of
the stakeholders, the Central Government decided to withdraw
the Companies Bill, 2009 and introduce a fresh Bill incorporating

29

the recommendations of Standing Committee and suggestions of

the stakeholders. The revised Bill, namely, the Companies Bill,
2011 was introduced in the Lok Sabha on 14 December 2011;
however the same was withdrawn by the Government on 22
December and sent back for consideration by the Standing
Committee on Finance.
The Companies Bill, 2011 is expected to be presented in
Parliament in the 2012 budget session.
Though the corporate governance efforts in India have been
spearheaded by SEBI over the last decade, the more recent steps
have been taken by the MCA. Also there has been an effort to
consolidate corporate governance norms into the Companies Act,
1956. Towards that end, the Companies Bill, 2011, does contain
several aspects of corporate governance which have hitherto
been the mainstay of Clause 49. This represents a trend towards
legislating on corporate governance rather than leaving it to the
domain of the Listing Agreement. It also signifies a shift in
corporate governanceadministration from SEBI, which oversees
the implementation of Clause 49, towards the MCA, which
administers the Companies Act.
Full Circle
A significant feature of the corporate governance reforms in India
has been its voluntary nature and the active role played by public
listed companies in improving governance standards in India. CII,
a non-government, not-for-profit, industry-led and industrymanaged organization dominated by large public listed firms had
played an active role in the development of Indias corporate
governance norms.
What began as a voluntary effort soon acquired mandatory status
through the adoption of Clause 49, as all companies (of a certain
size) listed on stock exchanges were required to comply with
these norms, a trend which was further reinforced by the
30

introduction of stringent penalties for violation of the prescribed

norms. While the Voluntary Corporate Governance guidelines of
2009 represented a move back to a voluntary framework for
corporate governance, recent efforts to consolidate corporate
governance norms into the Companies Act, 1956 marks a reversal
of the earlier approach. In that sense, the corporate governance
norms in India appear to have completed twofull cycles of
oscillating between the voluntary and the mandatory approaches.

GUIDELINES
GOVERNANCE
I.

FOR

CORPORATE

BOARD OF DIRECTORS

A. Appointment Of Directors
Appointments to the Board:i.

Companies should issue formal letters of appointment to Non

- Executive Directors (NEDs) and Independent Directors - as
is done by them while appointing employees and Executive
Directors. The letter should specify:
The term of the appointment;
The expectation of the Board from the appointed director;
theBoard-level committee(s) in which the director is
expected toserve and its tasks;
The
fiduciary
duties
that
come
with
such
an
appointmentalong with accompanying liabilities;
Provision for Directors and Officers (D&O) insurance, if any;
The Code of Business Ethics that the company expects
itsdirectors and employees to follow;
The list of actions that a director should not do while
functioningas such in the company; and
The remuneration, including sitting fees and stock
optionsetc., if any.

31

ii.

Such formal letter should form a part of the disclosure to

shareholders at the time of the ratification of his/her
appointment or re-appointment to the Board. This letter
should also be placed by the company on its website, if any,
and in case the company is a listed company, also on the
website of the stock exchange where the securities of
thecompany are listed.

Separation of Offices of Chairman & Chief Executive Officer:To prevent unfettered decision making power with a single
individual,there should be a clear demarcation of the roles
and responsibilities ofthe Chairman of the Board and that of
the Managing Director/ChiefExecutive Officer (CEO). The
roles and offices of Chairman and CEOshould be separated,
as far as possible, to promote balance of power.
Nomination Committee:i.

The companies may have a Nomination Committee

comprising of majority of Independent Directors, including its
Chairman. ThisCommittee should consider:
proposals for searching, evaluating, and recommending
appropriate Independent Directors and Non-Executive
Directors [NEDs], based on an objective and transparent set
of guidelines which should be disclosed and should, interalia, include the criteria for determining qualifications,
positive attributes, independence of a director and
availability of timewith him or her to devote to the job;
determining
processes
for
evaluating
the
skill,
knowledge,experience and effectiveness of individual
directors as well asthe Board as a whole.
ii.
With a view to enable Board to take proper and reasoned
decisions, Nomination Committee should ensure that the
Board comprises of a balanced combination of Executive
Directors and Non-ExecutiveDirectors.
32

iii.
iv.

The Nomination Committee should also evaluate and

recommend the appointment of Executive Directors.
A separate section in the Annual Report should outline the
guidelines being followed by the Nomination Committee and
therole and work done by it during the year under
consideration.

Number of Companies in which an Individual may become a

Director:i.

ii.

For reckoning the maximum limit of directorships, the

following categories of companies should be included:
public limited companies,

private companies that are either holding or

subsidiarycompanies of public companies.
In case an individual is a Managing Director or Whole-time
Director in a public company the maximum number of
companies in which such an individual can serve as a NonExecutiveDirector or Independent Director should be
restricted to seven.

B. Independent Directors

Attributes for Independent Directors:i.

The Board should put in place a policy for specifying positive

attributes of Independent Directors such as integrity,
experience and expertise, foresight, managerial qualities and
ability to read and understand financial statements.
Disclosure about such policy should be made by the Board in
its report to the shareholders. Such a policy may be subject
to approval by shareholders.

33

ii.

All Independent Directors should provide a detailed

Certificate of Independence at the time of their appointment,
and thereafter annually. This certificate should be placed by
the company on its website, if any, and in case the company
is a listed company, also on the website of the stock
exchange where the securities of the company are listed.

Tenure for Independent Director:i.

ii.
iii.

iv.

An Individual may not remain as an Independent Director in

a company for more than six years.
A period of three years should elapse before such an
individual is inducted in the same company in any capacity.
No individual may be allowed to have more than three
tenures as Independent Director in the manner suggested in
'i' and 'ii' above.
The maximum number of public companies in which an
individual may serve as an Independent Director should be
restricted to seven.

Independent Directors to have the Option and Freedom to meet

Company Management periodically:i.

ii.

In order to enable Independent Directors to perform their

functions effectively, they should have the option and
freedom to interact with the company management
periodically.
Independent Directors should be provided with adequate
independent office space and other resources and support
by the companies including the power to have access to
additional information to enable them to study and analyze
various information and data provided by the company
management.
C. Independent Directors

34

Guiding Principles-Linking Corporate and Individual Performance:i.

ii.

iii.

The companies should ensure that the level and composition

of remuneration is reasonable and sufficient to attract, retain
and motivate directors of the quality required to run the
company successfully. It should also be ensured that
relationship of remuneration to performance is clear.
Incentive schemes should be designed around appropriate
performance benchmarks and provide rewards for materially
improved
company
performance.
Benchmarks
for
performance laid down by the company should be disclosed
to the members annually.
Remuneration Policy for the members of the Board and Key
Executives should be clearly laid down and disclosed.
Remuneration packages should involve a balance between
fixed and incentive pay, reflecting short and long term
performance objectives appropriate to the company's
circumstances and goal.
The performance-related elements of remuneration should
form a significant proportion of the total remuneration
package of Executive Directors and should be designed to
align their interests with those of shareholders and to give
these Directors keen incentives to perform at the highest
levels.

Remuneration of Non-Executive Directors (NEDs):i.

The companies should have the option of giving a fixed

contractual remuneration, not linked to profits, to NEDs. The
companies should have the option to: (a) Pay a fixed
contractual remuneration to its NEDs, subject to an
appropriate ceiling depending on the size of the company; or
(b) Pay upto an appropriate percent of the net profits of the
company.

35

ii.

iii.
iv.

The choice should be uniform for all NEDs, i.e. some should
not be paid a commission on profits while others are paid a
fixed amount.
If the option chosen is i (a)' above, then the NEDs should not
be eligible for any commission on profits.
If stock options are granted as a form of payment to NEDs,
then these should be held by the concerned director until
three years of his exit from the Board.

Structure of Compensation to NEDs:i.

ii.

The companies may use the following manner in structuring

remuneration to NEDs:

Fixed component: This should be relatively low, so as to

align NEDs to a greater share of variable pay. These should
not be more than one-third of the total remuneration
package.

Variable component: Based on attendance of Board and

Committee meetings (at least 75% of all meetings should be
an eligibility pre-condition)

Additional variable payment(s) for being: (a) the

Chairman of the Board, especially if he/she is a nonexecutive
chairman (b) the Chairman of the Audit Committee and/or
other committees (c) members of Board committees.
If such a structure (or any similar structure) of remuneration
is adopted by the Board, it should be disclosed to the
shareholders in the Annual Report of the company.

Remuneration of Independent Directors (IDs):i.

In order to attract, retain and motivate Independent

Directors of quality to contribute to the company, they
should be paid adequate sitting fees which may depend
upon the twin criteria of Net Worth and Turnover of
companies.

36

ii.

The IDs may not be allowed to be paid stock options or profit

based commissions, so that their independence is not
compromised.

Remuneration Committee:i.

ii.

iii.

iv.

v.

Companies should have Remuneration Committee of the

Board. This Committee should comprise of at least
threemembers, majority of whom should be non-executive
directors with at least one being an Independent Director.
This Committee should have responsibility for determining
the remuneration for all executive directors and the
executive chairman, including any compensation payments,
such as retirement benefits or stock options. It should be
ensured that no director is involved in deciding his or her
own remuneration.
This Committee should also determine principles, criteria
and the basis of remuneration policy of the company which
should be disclosed to shareholders and their comments, if
any, considered suitably. Whenever, there is any deviation
from such policy, the justification/reasons should also be
indicated/disclosed adequately.
This Committee should also recommend and monitor the
level and structure of pay for senior management, i.e. one
level below the Board.
This Committee should make available its terms of
reference, its role, the authority delegated to it by the Board,
and what it has done for the year under review to the
shareholders in the Annual Report.

II. BOARD OF DIRECTORS

A. Training Of Directors
i.

The companies should ensure that directors are inducted

through a suitable familiarization process covering, inter-alia,

37

their roles, responsibilities and liabilities. Efforts should be

made to ensure that every director has the ability to
understand basic financial statements and information and
related documents/papers. There should be a statement to
this effect by the Board in the Annual Report.
Besides this, the Board should also adopt suitable methods
to enrich the skills of directors from time to time.
B. Enabling Quality Decision Making
The Board should ensure that there are systems, procedures and
resources available to ensure that every Director is supplied, in a
timelymanner, with precise and concise information in a form and
of a quality appropriate to effectively enable/ discharge his duties.
The Directors should be given substantial time to study the data
and contribute effectively to Board discussions.

C. Risk Management
i.

ii.

The Board, its Audit Committee and its executive

management should collectively identify the risks impacting
the company's business and document their process of risk
identification, risk minimization, risk optimization as a part of
a risk management policy or strategy.
The Board should also affirm and disclose in its report to
members that it has put in place critical risk management
framework across the company, which is overseen once
every six months by the Board. The disclosure should also
include a statement of those elements of risk, that the Board
feels, may threaten the existence of the company.

38

D.Evaluation Of Performance Of Board Of Directors,

CommitteesThereof And Of Individual Directors
iii.

The Board should undertake a formal and rigorous annual

evaluation of its own performance and that of its committees
and individual directors. The Board should state in the
Annual Report how performance evaluation of the Board, its
committees and its individual directors has been conducted.

E. Board to place Systems to ensure Compliance with

Laws
i.

ii.

iii.

In order to safeguard shareholders' investment and the

company's assets, the Board should, at least annually,
conduct a review of the effectiveness of the company's
system of internal controls and should report to shareholders
that they have done so. The review should cover all material
controls, including financial, operational and compliance
controls and risk management systems.
The Directors' Responsibility Statement should also include a
statement that proper systems are in place to ensure
compliance of all laws applicable to the company. It should
follow the comply or explain principle.
For every agenda item at the Board meeting, there should be
attached an Impact Analysis on Minority Shareholders
proactively stating if the agenda item has any impact on the
rights of minority shareholders. The Independent Directors
should discuss such Impact Analysis and offer their
comments which should be suitably recorded.

III. AUDIT COMMITTEE OF BOARD

A. Audit Committee Constitution

39

The companies should have at least a three-member Audit

Committee,with Independent Directors constituting the majority.
The Chairman ofsuch Committee should be an Independent
Director. All the members ofaudit committee should have
knowledge of financial management,audit or accounts.

B. Audit Committee Enabling Powers

i.

ii.

The Audit Committee should have the power to

have independent back office support and other
resources from the company;

have access to information contained in the records of

the company; and

obtain professional advice from external sources.

The Audit Committee should also have the facility of
separate discussions with both internal and external auditors
as well as the management.

C. Audit Committee - Role and Responsibilities

i. The Audit Committee should have the responsibility to monitor the integrity of the financial statements of the
company;
review the company's internal financial controls, internal
audit function and risk management systems;
make recommendations in relation to the appointment,
reappointment and removal of the external auditor and to
approve the remuneration and terms of engagement of the
external auditor;
review and monitor the external auditor's independence and
objectivity and the effectiveness of the audit process.
ii.
The Audit Committee should also monitor and approve all
Related
Party
Transactions
including
any
modification/amendment in any such transaction.
40

iv.

A statement in a prescribed/structured format giving details

about all related party transactions taken place in a
particular year should be included in the Board's report for
that year for disclosure to various stake holders.

IV. AUDIT COMMITTEE OF BOARD

A. Appointment of Auditors
i.

The Audit Committee of the Board should be the first point of

reference regarding the appointment of auditors.
ii.
The Audit Committee should have regard to the profile of the
audit firm, qualifications and experience of audit partners,
strengths and weaknesses, if any, of the audit firm and other
related aspects.
iii. To discharge its duty, the Audit Committee should:
discuss the annual work programme and the depth and
detailing of the audit plan to be undertaken by the auditor,
with the auditor;
examine and review the documentation and the certificate
for proof of independence of the audit firm, and
recommend to the Board, with reasons, either the
appointment/re-appointment or removal of the statutory
auditor, along with the annual audit remuneration.

B. Certificate of Independence
i.

ii.

Every company should obtain a certificate from the auditor

certifying his/its independence and arm's length relationship
with the client company.
The Certificate of Independence should certify that the
auditor together with its consulting and specialized services
affiliates, subsidiaries and associated companies or network
or group entities has not/have not undertaken any prohibited

41

non-audit assignments for the company and are independent

vis--vis the client company.

C. Certificate of Independence
i.

In order to maintain independence of auditors with a view to

look atan issue (financial or non-financial) from a different
perspectiveand to carry out the audit exercise with a fresh
outlook, the companymay adopt a policy of rotation of
auditors which may be as under: Audit partner - to be rotated once every three years
Audit firm - to be rotated once every five years.
ii.
A cooling off period of three years should elapse before a
partnercan resume the same audit assignment. This period
should be fiveyears for the firm.
D.Certificate of Independence
i.

ii.

With a view to ensure proper and accountable audit, there

shouldbe clarity between company management and
auditors
on
thenature
and
amount
of
information/documents/
records
etc.
andperiodicity/frequency
for
supply/obtaining
such
information/documents/ records etc.
In any case the auditor concerned should be under an
obligationto certify whether he had obtained all the
information he soughtfrom the company or not. In the latter
case, he should specificallyindicate the effect of such non
receipt of information on thefinancial statements.

E. Certificate of Independence
In order to ensure the independence and credibility of the internal
auditprocess, the Board may appoint an internal auditor and such
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auditor,where appointed, should not be an employee of the

company.

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Conclusion & Recommendations

Recommendations
MAXIMUM TENURE OF INDEPENDENT DIRECTORS
A Maximum tenure of 6 years in aggregate should be specified for
independent directors and be made mandatory
INDEPENDENT DIRECTORS' DEFINITION
Clause 49 needs to be suitably amended by specifying positive
attributes for independent directors such as integrity, experience
and expertise, foresight, managerial qualities and ability to read
and understand financial statements etc.
NOMINEE DIRECTORS
Clause 49 specifically states that a nominee director be
considered independent. The nominee directors have a clear
mandate to safeguard the constituency they represent i.e. the
financial institution they represent. Hence to term them
independent is an anomaly. This anomaly needs to be rectified in
clause 49.
SEPARATION OF ROLES OF CHAIRMAN AND CEO
There should be a clear demarcation of the roles and
responsibilities of the Chairman of the Board and that of the
Managing Director/ CEO. The Roles of Chairman and CEO should
be separated to promote balance of power. A comply or explain
approach should be adopted.
DIRECTORS' DEVELOPMENT
Induction Training of directors should be made mandatory
covering roles, responsibilities and liabilities of a director. There
should be a statement to this effect by the Board in Annual
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Report. Further, Boards should adopt

programmes for enhancing their skills etc.

suitable

training

PERFORMANCE EVALUATION OF DIRECTORS

The board should undertake a formal and rigorous annual
evaluation of its own performance and that of its committees and
individual directors. Individual evaluation should aim to show
whether each director continues to contribute effectively and to
demonstrate commitment to the role (including commitment of
time for board and committee meetings and any other duties).
The chairman should act on the results of the performance
evaluation by recognizing the strengths and addressing the
weaknesses of the board and, where appropriate, proposing new
members be appointed to the board or seeking the resignation of
directors.
The board should state in the annual report how performance
evaluation of the board, its committees and its individual directors
has been conducted.
LIMIT ON NUMBER OF DIRECTORSHIPS
For reckoning the limit of 15 directorships, the following
category of companies be included: (i) public limited companies,
(ii) Private companies that are either holding or subsidiary
company.
In case an individual is a managing or whole-time director in a
listed company, the number of companies at which such an
individual can serve as non-executive director, be restricted to 10,
and the number of listed companies at which such an individual
can serve as a non-executive director, be restricted to 2.
The maximum number of listed companies in which an
individual can serve as a director be restricted to 7.
LIMIT ON MEMBERSHIP OF COMMITTEES

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The limits reckoned on membership/chairmanship of committees

should include all the committees of listed companies on which
such director is a member. This should be on a 'comply' or
'explain' basis.
REMUNERATION COMMITTEE TO BE MADE MANDATORY
The constitution of remuneration committee be made mandatory.
NOMINATIONS COMMITTEE TO BE MADE MANDATORY
The constitution of nomination committee be made mandatory.
CORPORATE COMPLIANCE COMMITTEE TO BE MADE MANDATORY
The constitution of Corporate Compliance Committee should be
made mandatory in respect of all public limited companies having
a paid-up capital of Rs.5 crores or more.
REMUNERATION POLICY FOR THE MEMBERS OF THE BOARD AND
KEY EXECUTIVES SHOULD BE CLEARLY LAID DOWN AND
DISCLOSED
Remuneration policy for the members of the Board and Key
Executives should be clearly laid down and disclosed.
Executive remuneration packages should involve a balance
between fixed and incentive pay, reflecting short and long term
performance
objectives
appropriate
to
the
company's
circumstances and goal.
Companies should ensure that the level and composition of
remuneration is sufficient and reasonable and that its relationship
to performance is clear.
Performance measures should include appropriate financial
targets, but non-financial targets should be taken into account for
long term sustainable commercial success.

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 Incentive schemes should be designed around appropriate

performance benchmarks and provide rewards for materially
improved company performance.
DIRECTORS' RESPONSIBILITY STATEMENT TO INCLUDE STATEMENT
ON COMPLIANCES
Directors' Responsibility Statement should include a statement
that proper systems are in place to ensure compliance of all laws
applicable to the company.
SECRETARIAL AUDIT
Secretarial Audit should be made mandatory in respect of listed
companies and certain other companies.
The Secretarial Audit be conducted by a Company Secretary in
Practice.
The report on the audit of secretarial records shall be submitted
by the secretarial auditor to the Corporate Compliance Committee
of the Board of Directors of the company.
The Secretarial Audit Report should form part of the Board's
Report.
WHISTLE BLOWER POLICY SHOULD BE MADE MANDATORY
Adoption of Whistle Blower Policy should be made mandatory, to
begin with, for listed companies. A model policy in this regard
may be specified covering important clauses that protect
employees' interests.
DEFINITION OF RELATIVE
The term 'relative' defined under the Companies Bill, 2008
suggests that only the lineal ascendant and descendants of such
individual related to him by marriage or adoption are considered
relative.

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 The term lineal ascendants and descendants should be clarified

by giving an indicate list.
The definition leaves out the immediate relatives of spouse i.e.
mother/father of spouse, brother/sister of spouse.
AUDIT PARTNER / FIRM ROTATION TO BE MADE MANDATORY
The Audit partner/Firm should be rotated on the grounds such as:
To maintain independence of Auditors.
To look at an issue (which may be financial or non-financial)
from different perspective.
To carry out an Audit exercise with fresh outlook i.e. when the
same person does an Audit continuously, he will have a fixed
mind set towards a company to which he is doing an Audit
continuously.
Periodicity of Rotation:
Audit Partner - Once every three years
Audit Firm Once every six years.
PROMOTERS SHAREHOLDING IN DEMATERIALIZED FORM
In Listed companies, the shares held by promoters should be held
in electronic form.
VERIFICATION OF PLEDGED SHARES
The promoters' shares that are pledged should be independently
verified by a Practicing, Company Secretary and this should be
stated in the quarterly certification given under Sec. 55 A of
Depositories Act.
STANDARDIZATION OF PRESENTATION IN ANNUAL REPORT

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To increase the readability of the Annual report, it is

recommended that there should be standard structure of the
Annual Report.
PROHIBITION OF SOLICITATION IN ANNUAL REPORT
Express and direct solicitation by companies in their Annual
Report to invest in the shares of the company should be strictly
prohibited.
DISCLOSURE BY INSTITUTIONAL INVESTORS OF THEIR CORPORATE
GOVERNANCE AND VOTING POLICIES AND VOTING RECORDS
It should be mandatory
for equity based mutual funds to disclose on their company
website their overall corporate governance and voting policies
with respect to their investments, including the procedures that
they have in place for deciding on the use of their voting rights
an annual disclosure of their voting records on their website.
DISCLOSURE OF MATERIAL
INSTITUTIONAL INVESTORS

CONFLICTS

OF

INTERESTS

BY

It should be mandatory for institutional investors to disclose as to

how they manage material conflicts of interests that may affect
the exercise of key ownership rights regarding their investments.
The disclosure should be made in the prospectuses and periodic
financial statements of the mutual funds.
DISCLOSURE POLICY REGARDING NATURE OF DISCLOSURE TO
INSTITUTIONAL INVESTORS
A directive be issued to clarify the nature of the information that
can be exchanged at meetings between institutional investors
and companies, in compliance with the Insider Trading
Regulations of 1992 and its 2002 amendment. The directive
should stress that it does not condone the selective disclosure of
49

information by companies to institutions and clearly set the

principle of equality of treatment of all shareholders by
corporations.
CONSULTATION AND VOTING AGREEMENTS
Clarification be issued about the circumstances under which
consultation and voting agreements between institutional
investors may take place without triggering the provisions of the
SEBI Act 1992 regarding substantial acquisitions of shares, or
those concerning market manipulation.
CONSTITUTION OF INVESTOR RELATIONS CELL
Constitution of Investor Relations Cell should be made mandatory
for Listed Companies. The Investor Relations meet after
declaration of financial results should be compulsorily webcast in
case of companies having a market capitalization of Rs.1000
Crore or more.

Conclusion
Since the late 1990s, significant efforts have been made by
the Indian Parliament, as well as by Indian corporations, to
overhaul Indian Corporate Governance. The current Corporate
Governance regime in Indian straddles both voluntary and
mandatory requirements like Voluntary Guidelines by Ministry of
Corporate Affairs. And for listed companies, the vast majority of
Clause 49 of the listing agreements requirements is mandatory.
The voluntary guideline on Corporate Governance by Ministry of
Corporate Governance is a benchmark for the Corporate
Governance practices in the Indian corporations, and hopefully
the corporate world will make the best use of it. Efforts are also
being made by the legislature to amend the Companies Act 1956.
As a result, amendments relating to Corporate Governance are
expected to be brought before Parliament in The Companies Bill
2011. India has one of the best Corporate Governance legal
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regimes but poor implementation together with socialistic policies

of the pre-reform era has affected corporate governance.

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