Corporate Governance & Clause 49 - New challenges

Presentation by Parvesh Aghi

Outline
Section I Corporate Governance- The Concept

Section II

Benefits of Corporate Governance

Section III India

Evolution of Corporate Governance in

Section IV

Clause 49 of the Listing Agreement

What Does Corporate Governance Mean?  

The relationship between all the stakeholders in a company. This includes the shareholders, directors, and management of a company, as defined by the corporate charter, bylaws, formal policy and rule of law.

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What is the purpose of Corporate Governance 4 .

i.then agents people who have all the ideas . Adam Smith talks about two kinds of people what he calls principal¶s. people who undertake activities 5 .e how do we allocate scarce resources to the most effective uses. people who have all the money .more money than idea¶s .What is the purpose of Corporate Governance   CG answers the basic question in economics . more ideas than money.

 The purpose of CG and therefore the purpose of board of directors of a corporation is to be intermediaries between the two.how to best allocate the money. to figure out how to allocate . the resources. the capital that belongs to the principals to the best activities the activities that will contribute to most value to the society 6 .

operating and controlling a company with a view to achieve long term strategic goals to satisfy shareholders.Concept and Objectives  It is a system of structuring. apart from meeting environmental and local community needs. customers and suppliers. 7 . employees. and complying with the legal and regulatory requirements. creditors.

transparency and accountability. In other words. 8 . 'good corporate governance' is simply 'good business'. processes and principles which ensure that a company is governed in the best interest of all stakeholders.Concept and Objectives    Corporate Governance may be defined as a set of systems. It is about promoting corporate fairness. It is the system by which companies are directed and controlled.

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 Commitment to values and ethical conduct of business.  Statutory and legal compliances.  Protection of shareholder interests.It ensures:  Adequate disclosures and effective decision making to achieve corporate objectives. 10 .  Transparency in business transactions.

The fundamental objective of corporate governance is to enhance shareholders' value and protect the interests of other stakeholders by improving the corporate performance and accountability.  The aim of "Good Corporate Governance" is to ensure commitment of the board in managing the company in a transparent manner for maximizing long-term value of the company for its shareholders and all other partners. 11 .

. «. employees.. the government and the society-at-large. investors. contd 12 ...... customers. Corporate governance is about transparency and raising the trust and confidence of stakeholders in the way the company is run.... vendors."Corporate governance is maximizing the shareholder value in a corporation while ensuring fairness to all stakeholders....

Narayana Murthy.R.large or small. Infosys Limited. Chief Mentor.«. 13 ." .It is about owners and the managers operating as the trustees on behalf of every shareholder .Shri N.

Objective of Corporate Governance 14 .

The board is balance as regards the representation of adequate number of nonexecutive and independent directors who will take care of their interests and wellbeing of all the stakeholders.  15 . A properly structured board capable of taking independent and objective decisions is in place at the helm of affairs.

 The board adopts transparent procedures and practices and arrives at decisions on the strength of adequate information. The board keeps the shareholders informed of relevant developments impacting the company. 16   . The board has an effective machinery to subserve the concerns of stakeholders.

The board remains in effective control of the affairs of the company at all times.  17 . The board effectively and regularly monitors the functioning of the management team.

The Benefits of Corporate Governance  It contributes not only to the efficiency of a business enterprise. corporations need to access global pools of capital as well as attract and retain the best human capital from various parts of the world  18 . but also. to the growth and progress of a country's economy.

Increase efficiency of their activities and minimize risks. Strengthen their reputation and raise the level of investors and clients' trust 19 . Get an easier access to capital markets and decrease the cost of capital. Attract strategic investors.      Well governed companies mitigate µnonbusiness¶ risks . Increase growth rate.

It was found out that more than 84% of the global institutional investors are willing to pay a premium for the shares of a wellgoverned company over one considered poorly governed but with a comparable financial record 20 .  Empirical evidence and research conducted in recent years supports the proposition that it pays to have good CG.

If investors are not confident with the level of disclosure.´ (Arthur Levitt. former chairman of the US Securities & Exchange Commission) . If a country opts for lax accounting and reporting standards.³If a country does not have a reputation for strong corporate governance practices. All enterprises in that country suffer the consequences. capital will flow elsewhere. capital will flow elsewhere. capital will flow elsewhere.

Regulators for CG   Ministry of Corporate Affairs (MCA) Securities and Exchange Board of India (SEBI) ICAI ICSI ICWAI    .

Evolution of CG in India  December 1995: CII sets up task force to design voluntary code of corporate governance. April 1998: CII releases ³Desirable Corporate Governance Code´ May 1999: SEBI sets up the Kumar Mangalam Birla Committee February 2000: Clause 49 introduced pursuant to KM Birla Report 23    .

 2002: DCA sets up Naresh Chandra CommitteeReport recommends financial and non-financial disclosures and independent auditing and board oversight of management (Draft Companies Bill) . 2005: Deadline for compliance with modified Clause 49 24    . 2002: Narayana Murthy Committee set up by SEBI to review clause 49 2003: Clause 49 modified to reflect some of Narayana Murthy¶s recommendations December.

on the development of appropriate framework for promoting good corporate governance standards. These are:Cadbury Committee Report-The Financial Aspects of Corporate Governance (1992) 25 . etc. codes and practices to be followed globally.Guidelines/Principles At International Level   There are several reports and recommendations of the International Committees/ Associations.

  



Sarbanes Oxley Act (2002) OECD Principles of Corporate Governance (2004) The Combined Code, Principles of Good Governance and Code of Best Practice, London Stock Exchange (1998)

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CORPORATE GOVERNANCECLAUSE 49 
  

based on SEBI circular dated Oct, 2004, clause 49 of the listing agreements revised by stock exchanges was to be implemented on or before 31st march 2004 Extended upto 31st December, 2005

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Applicability of clause 49
It is applicable to those seeking listing for the first time, to those already listed and to all those with a paid-up share capital of more than Rs 3 crore or a recorded net worth of Rs 25 crore anytime during their history.  Most listed companies will get covered 

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Clause-49        Board of Directors Audit committee Subsidiary companies Disclosures CEO/CFO Certification Report on Corporate Governance Compliance 29 .

Board of Directors     Composition.1.Executive & non-executive Not less than 50% to be non-executive Number of independent directors: when there is non-executive chairman at least 1/3rd When there is executive chairman at least ½ of the Board Independent director shall mean a nonexecutive director of the company who: 30 .

its senior management etc. not related to promoters/ management at board level or at one level below the board was not an executive of the company in the immediate three financial years. its promoters. not a supplier. service provider customer or lessor. not a substantial shareholder of the company holding over 2% of the 31 share capital.Independent director a) does not have any material pecuniary relationships or transactions with the company. Was not a partner or an executive of audit firm/ legal firms or consulting firms for last three years.lessee. b) c) d) e) f) .

NON-EXECUTIVE DIRECTORCOMPENSATION AND DISCLOSURES.  Compensation/ stock options to independent directors to be approved by the board and prior approval of the shareholders is required  Disclosure on annual basis regarding the shares held by non-executive directors non-executive directors to disclose their stock holding( both held by them or on beneficial basis) prior to their appointment 32  .

33 .TERM OF NON-EXECUTIVE DIRECTORS  shall not exceed nine years comprising of three terms of three years each running continuously.

Board Meetings    The board shall meet at least four times a year . 34 . with a maximum time gap of three months between any two meetings. A director shall not be a member in more than 10 committees or act as Chairman of more than five committees. The minimum information to be made available to the board is given in Annexure± I A.

Capital budgets and any updates. Minutes of meetings of audit committee and other committees of the board 35 . Quarterly results for the company and its operating divisions or business segments.    Annual operating plans and budgets and any updates.

36 . dangerous occurrences. any material effluent or pollution problems. prosecution notices and penalty notices which are materially important Fatal or serious accidents.  Show cause. demand.

CODE OF CONDUCT  a code of conduct shall be prepared for board members and senior management which shall be posted on the website.  37 . board members/ senior management to affirm compliance of the code and the annual report should contain such a declaration signed by chairman.

Periodical Review by BOD Board to make periodical review of compliance report of all laws applicable to the company and Steps taken by the company to rectify instances of non-compliance   38 .

AUDIT COMMITTEE   Audit committee is an operating committee of the Board of Directors charged with oversight (supervision) of financial reporting and disclosure. Committee members are drawn from members of the company's board of directors 39 .

AUDIT COMMITTEE  The audit committee shall have minimum three directors as members .   40 . The audit committee shall meet at least 4 times in a year. Two thirds of the members of audit committee shall be independent directors All members of the audit committee shall be financially literate with one member having accounting/ financial management expertise.2.

recommending the appointment and removal of external auditor. sufficient and credible. Review annual as well as quarterly financial statements with the management before submitting the same to BOD 41 . fixation of audit fee and also approval for payment for any other services.ROLE OF AUDIT COMMITTEE    oversight of the company¶s financial reporting processes and the disclosure of its financial information to ensure that the financial statement is correct.

debenture holders. shareholders(in case of non payment of declared dividends) and creditors.ROLE OF AUDIT COMMITTEE     discussion with external auditors before the audit commences about nature and scope of audit as well as post audit discussion to ascertain any area of concern. reviewing the company¶s financial and risk management policies. to look into the reasons for substantial defaults in the payment to the depositors. Discussion with internal auditors any significant finding and follow up thereon 42 .

 To review the functioning of the Whistle Blower mechanism. 43 . in case the same is existing.

yearly financial information. legal compliance and risk management observations of statutory / internal auditors.AUDIT COMMITTEE : MANDATORY REVIEWS      financial statement / audit report / quarterly / half. record of significant related party transactions 44 . appointment / removal of chief internal auditor.

45 .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 advice. to secure attendance of outsiders with relevant expertise. if it considers necessary.

3. SUBSIDIARY COMPANIES    one independent director of holding company to be on the board of non-listed subsidiary company. board minutes of subsidiary company shall be placed for review by the board of holding company. audit committee of the holding company shall review financial statements / investments of subsidiary company. directors report of the holding company shall confirm that the affairs of the subsidiary companies have been reviewed 46  .

4. 47 . DISCLOSURES: ACCOUNTING TREATMENT  Management shall disclose justifying the different accounting treatment than the accounting standards .

DISCLOSURES: RELATED PARTY TRANSACTIONS   Summary of related party transactions. their basis bifurcating transactions in normal course of business and individual transactions not in normal course of business and Details and management¶s justification for any material transaction not on arms length basis 48 .

Any deviation of funds from the purposes stated in offer document/prospectus/notice to be reported to audit committee along with reasons.DISCLOSURES: PROCEEDS FROM PUBLIC ISSUES  The company shall disclose the uses and application of funds arising out of public issues . right issues . preferential issues etc. 49  .

DISCLOSURES: RISK ASSESSMENT    Risk management procedure to be laid down for the management and to be reviewed periodically A quarterly report certified by Compliance Officer on business risk and measures to minimise risks an limitations to the risk taking capacity of the company This document shall be formally approved by the Board. 50 .

The company shall disclose the number of shares and convertible instruments held by directors in annual report.  51 .DISCLOSURES REMUNERATION OF DIRECTORS  All the elements of remuneration of individual directors shall be disclosed in annual report.

DISCLOSURES SHAREHOLDER   All the presentations and quarterly results made by the company to the analysts shall be put on company¶s website . 52 . A committee shall be formed to look into the complaints of shareholders like transfer of shares .non receipt of balance sheet. dividend etc .

where they have personal interest 53 .DISCLOSURES: BY MANAGEMENT  By senior management of all material financial and commercial transactions.

CERTIFICATION BY CEO/CFO TO THE BOARD That they have reviewed the financial statements and cash low statement for the year and:    These do not contain any materially untrue statement or omit any material fact There were no fraudulent. 54 .5. illegal transactions violative of the co¶s Code of Conduct They accept responsibility for establishing and maintaining internal controls and have evaluated their effectiveness.

a separate cell is being set up by the stock exchanges to monitor the compliance of the provisions. 55   .6. the report contains the entire provisions of the new corporate governance clause. REPORT ON CORPORATE GOVERNANCE TO THE STOCK EXCHANGES  a compliance report within 15 days from the close of the quarter in the revised format.

56 .7 COMPLIANCE  The company has to obtain a certificate from the auditors or practicing company secretaries regarding compliance of corporate governance.

Non ± Mandatory requirements     Remuneration committee Audit qualifications Training of board of directors Whistle Blower Policy 57 .

WHISTLE BLOWER POLICY  company to have an internal policy on access to audit committee by employees on unethical and improper practice. the affirmation shall from part of the board report on corporate governance.    58 . company shall affirm that it has not denied any personal access to audit committee and has provided protection to whistle blowers from unfair termination etc. the policy to be communicated to employees and included in the HR manual.

Thank you. 59 .

Management will usually also touch on the upcoming year. the MD&A provides an overview of the previous year of operations and how the company fared in that time period. outlining future goals and approaches to new projects. especially for those analyzing the fundamentals. which include management and management style.Management Discussion & Analyses report  Among other things. 60 . The MD&A is a very important section of an annual report.

This Management Discussion & Analysis should include discussion on the following matters within the limits set by the company¶s competitive position: 61 . Analysis report should form part of the Annual Report to the shareholders.

62 . Internal control systems and their adequacy. Outlook Risks and concerns. Discussion on financial performance with respect to operational performance. Segment±wise or product-wise performance.      Opportunities and Threats.

if a company has Rs 45 crores worth of liabilities and Rs 65 crores in assets. This term can be applied to companies and individuals.Net worth    The amount by which assets exceed liabilities. this is known as shareholders' (or owners') equity and is determined by subtracting liabilities on the balance sheet from assets. the company's net worth (shareholders' equity) is Rs 20 crores 63 . For a company. For example.

Cynthia Cooper of World com. Sherron Watkins of Enron and Coleen Rowley of FBI are some of the examples .What is whistle blowing   The release of information by a member or a former member of an organisation that is evidence of illegal and /or immoral conduct in the organisation or the conduct in the organisation that is not in the public interest .

This gives employees an incentive to behave in ways that will boost the company's stock price. If the company's stock rises. issued as a form of non-cash compensation. Restrictions on the option attempt to align the holder's interest with those of the business' shareholders. holders of options generally experience a direct financial benefit.  An employee stock option is a call option on the common stock of a company. 65 .

Accounting For Fixed Assets Segment Reporting 66 .Accounting Standards Issued by the Institute of Chatered Accountants of India       Disclosure of accounting policies Valuation Of Inventories Contingencies and events Occurring after the Balance sheet Date Depreciation accounting.

protect interest of investors by ensuring full disclosures.LISTING AGREEMENT      Listing means admission of securities to dealings on a recognised stock exchange. 67 . mobilize savings for economic development. The objectives of listing are mainly to : provide liquidity to securities.

which cost investors billions of dollars when the share prices of affected companies collapsed. Adelphia . Tyco International.Sarbanes±Oxley Act   The bill was enacted as a reaction to a number of major corporate and accounting scandals including those affecting Enron. Peregrine Systems and WorldCom. These scandals. shook public confidence in the nation's securities markets 68 .

Oxley. Representative Michael G.S. Senator Paul Sarbanes and U.S. It is named after sponsors U. 69 .

70 . executive and non-executive. There is no legal distinction made between executive and non-executive directors .   Types of directors There are two types of director.the difference is that non-executive directors do not get involved in the day-to-day running of the business.

     Executive directors perform operational and strategic business functions such as: managing people looking after assets hiring and firing entering into contracts 71 .

72 . and they usually have a role in monitoring executive management.  Non-executive directors use their experience and expertise to provide independent advice and objectivity. such as strategy and contract negotiation. A non-executive director might be appointed to carry out a specialist role on a part-time basis or for their expertise in specific activities.

 They usually work part time. attending board meetings and spending time on specific projects. 73 .

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