CORPORATE GOVERNANCE

1) INTRODUCTION

MEANING
Corporate governance refers to the accountability of the Board of
Directors to all stakeholders of the corporation i.e. shareholders,
employees, suppliers, customers and society in general towards giving
the corporation a fair, efficient and transparent administration. It is
more than company administration. It refers to a fair, efficient and
transparent functioning of the corporate management system. It is a
code of conduct; the Board of Directors must abide by; while running
the corporate enterprise. It is a set of systems, procedures and
practices which ensure that the company is managed in the best
interest of all corporate stakeholders.

Popular definitions of corporate governance:

(1) “Corporate governance means that company managers its business
in a manner that is accountable and responsible to the shareholders. In
a wider interpretation, corporate governance includes company’s
accountability to shareholders and other stakeholders such as
employees, suppliers, customers and local community.” –
Catherwood.

(2) “Corporate governance is the system by which companies are
directed and controlled.” – The Cadbury Committee (U.K.)

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NEED
(i) Wide Spread of Shareholders:

Today a company has a very large number of shareholders spread all
over the nation and even the world; and a majority of shareholders
being unorganised and having an indifferent attitude towards
corporate affairs. The idea of shareholders’ democracy remains
confined only to the law and the Articles of Association; which
requires a practical implementation through a code of conduct of
corporate governance.

(ii) Changing Ownership Structure:

The pattern of corporate ownership has changed considerably, in the
present-day-times; with institutional investors (foreign as well Indian)
and mutual funds becoming largest shareholders in large corporate
private sector. These investors have become the greatest challenge to
corporate managements, forcing the latter to abide by some
established code of corporate governance to build up its image in
society.

(iii) Corporate Scams or Scandals:

Corporate scams (or frauds) in the recent years of the past have
shaken public confidence in corporate management. The event of
Harshad Mehta scandal, which is perhaps, one biggest scandal, is in
the heart and mind of all, connected with corporate shareholding or
otherwise being educated and socially conscious. The need for
corporate governance is, then, imperative for reviving investors’

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confidence in the corporate sector towards the economic development
of society.

(iv) Greater Expectations of Society of the Corporate Sector:

Society of today holds greater expectations of the corporate sector in
terms of reasonable price, better quality, pollution control, best
utilisation of resources etc. To meet social expectations, there is a
need for a code of corporate governance, for the best management of
company in economic and social terms.

(v) Hostile Take-Overs:

Hostile take-overs of corporations witnessed in several countries, put
a question mark on the efficiency of managements of take-over
companies. This factor also points out to the need for corporate
governance, in the form of an efficient code of conduct for corporate
managements.

(vi) Huge Increase in Top Management Compensation:

It has been observed in both developing and developed economies
that there has been a great increase in the monetary payments
(compensation) packages of top level corporate executives. There is
no justification for exorbitant payments to top ranking managers, out
of corporate funds, which are a property of shareholders and society.
This factor necessitates corporate governance to contain the ill-
practices of top managements of companies.

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(vii) Globalisation:

Desire of more and more Indian companies to get listed on
international stock exchanges also focuses on a need for corporate
governance. In fact, corporate governance has become a buzzword in
the corporate sector. There is no doubt that international capital
market recognises only companies well-managed according to
standard codes of corporate governance.

Pillars of corporate governance

(i)Transparency

Transparency means having nothing to hide. For a company, this
means it allows its processes and transactions observable to outsiders.
It also makes necessary disclosures, informs everyone affected about
its decisions, and complies with legal requirements. After the financial
scandals in the early 2000s, transparency has played a bigger role in
preventing fraud from happening again, especially at such a large
scale. But aside from stopping the next illegal moneymaking scheme,
transparency also builds a good reputation of the company in
question. When shareholders feel they can trust a company, they are
willing to invest more, and this greatly helps in lowering cost of
capital. Therefore, a company gets its ROI on the money it spent on
improving transparency.

Transparency is a critical component of corporate governance because
it ensures that all of a company’s actions can be checked at any given
time by an outside observer. This makes its processes and transactions

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verifiable, so if a question does come up about a step, the company
can provide a clear answer.

But although transparency is a necessity for the whole company, its
presence is even more important at the top where strategies are
planned and decisions are made. Shareholders expect that the
corporate board is open about their actions; otherwise, distrust will
form. And when trust breaks, shareholders tend to stay away and
invest somewhere else.

(ii) Accountability

Accountability embraces ownership of strategy and task required to
attain organisational goals. This also means owing reward and risk in
clear context of predetermined value proposition.. When the idea of
accountability is approached with this positive outlook, people will be
more open to it as a means to improve their performance. This applies
from the staff all the way up to top leadership embracing Risk
management within defined formal appetite for risk. This also include
fostering culture of compliance to create real and perceived believe
that the entity is operation within internal and external boundaries.
(iii) Fairness
Fairness means “treating all stakeholders s including minorities,
reasonably, equitably and provide effective redress for violations.
Establishing effective communication mechanism is important in
ensure just and timely protection of resource sand people asset as well
correcting of wrongs

(iv) Independence

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This independent assurance insures that: (1) The representation or acceptance test results are accurate and provide a fair and equitable basis for construction acceptance (2) Quality control testing is accurate and thus will properly indicate process quality.In progressing transparency it is important for non-direct actors to obtain confidence that that executive actors are leading the entity towards pre-defined intent and not using it for self and obtain expert advisory on how applied approached can be improved. Assurance services provide independent and professional opinions that reduce the information risk (risk that comes from incorrect information). All shareholders shall have equal rights to participate in the management of the Issuer – to participate at shareholders’ meetings and receive information that shareholders need in order to make decisions. including the right to receive a share of the Issuer’s profit as dividends or in another 6 | Page . Independent assurance is the verification by a third party (not directly responsible for QA and acceptance of the product/deliverable and/or the reliability of test results obtained from quality control and acceptance testing.  It shall be important to ensure that all the holders of shares of one category have also equal rights. OECD PRINCIPLES OF CORPORATE GOVERNANCE (i)Ensuring shareholders’ rights and participation at shareholders’ meetings The Issuers shall ensure equal attitude towards all the shareholders – holders of one category of shares.

The attendance of members of the Issuer’s management institutions and auditor at shareholders' meetings shall be necessary to ensure information exchange between the Issuer’s shareholders and members of management institutions as well as to fulfil the right of shareholders to receive answers from 7 | Page .  The Issuer shall prepare a policy for the division of profit. It is recommended to discuss the policy of profit division at a shareholders’ meeting thus ensuring that as possibly larger a number of shareholders have the possibility to acquaint themselves with it and to express their opinion on it. way in proportion to the number of the shares owned by them if such right is stipulated for the shares owned by them. it is recommended to take into account not only the provision of immediate benefit for the Issuer’s shareholders by paying dividends to them but also the expediency of profit reinvesting.  In order to protect the Issuer’s shareholders’ interest to a sufficient extent. announce and organize a shareholders’ meeting are asked to comply with all the issues referred to in these Recommendations in relation to calling shareholders’ meetings and provision of shareholders with the required information. not only the Issuers but also any other persons who in compliance with the procedure stipulated in 6 legislative acts call. The Report shall specify where the Issuer's profit distribution policy is made available. auditors. (ii) Participation of members and member candidates of the Issuer’s management institutions at shareholders' meetings Shareholders' meetings shall be attended by the Issuer’s board members. and as possibly many council members. which would increase the value of the Issuer in future. In the preparation of the policy.

which includes also the responsibility for the realization of the objectives and strategies determined by the Issuer and the responsibility for the results achieved. The board shall have the obligation to manage the business of the Issuer. This document must be also available at the registered office of the Issuer. then it shall be admissible that this person does not attend the shareholders' meeting. thus ensuring a successful work of the board and an increase in the Issuer’s value. By using the right to ask questions shareholders have the possibility to obtain information on the circumstances that might affect the evaluation of the financial report and the financial situation of the Issuer. This shall in particular apply to council members. The powers of the board shall be stipulated in the Board Regulations or a similar document. If a council member candidate or auditor candidate is unable to attend the shareholders' meeting due to an important reason. . (iii) Obligations and responsibilities of the Board The Issuers shall clearly and expressively determine the obligations and authorities of the board and responsibilities of its members. In fulfilment of its obligations. which is to be published on the website of the Issuer on the Internet. In this case. The attendance of the auditor shall not be mandatory at shareholders' meetings at which issues connected with the finances of the Issuer are not dealt with. competent persons to the questions submitted. the board shall adopt decisions guided by interests of all the shareholders and preventing any potential conflict of interests. 8 | Page . all the substantial information on the candidate shall be disclosed before the shareholders' meeting. The board shall be responsible for the said to the council and the shareholders' meeting. Shareholders' meetings shall be attended by the Issuer’s official candidates whose election is planned at the meeting.

year of birth. the following information on every Issuer’s board member shall be published: name. position. as well as the financial activity of the Issuer. description of the last three year’s professional experience. The board shall be responsible also for the compliance with all the binding regulatory acts. It shall be the obligation of every board member to avoid any. which specifies the skills. even only supposed. The Issuer shall prepare a summary of the requirements to be set for every board member. risk management. On the Issuer’s website on the Internet. information on positions in other capital companies. In composing the board. education. education. office term. interest conflicts in his/her work. surname. number of the Issuer’s or its parent companies/subsidiaries shares owned by the member. (iv) Board composition and requirements for board members A board composition approved by the Issuer shall be able to ensure sufficiently critical and independent attitude in assessing and taking decisions. (v) Identification of interest conflicts in the work of board members Every board member shall avoid any interest conflicts in his/her work and be maximally independent from any external circumstances and willing to assume responsibility for the decisions taken and comply with the general ethical principles in adopting any decisions connected with the business of the Issuer. previous work experience and other selection criteria for every board member. it shall be observed that every board member has appropriate education and work experience. In taking 9 | Page .

industry-led and industry.Egypt.00. decisions. from the private as well as public sectors. and enhancing efficiency. interfacing with thought leaders.  CII is a non. Board members shall notify on any deal or agreement the Issuer is planning to conclude with a person who has close relationship or is connected with the board member in question. as well as inform on any interest conflicts occurred during the validity period of concluded agreements. including SMEs and MNCs and an indirect membership of over 1. competitiveness and business opportunities for industry through a range of specialized services and strategic global linkages. and USA. On the occurrence of any interest conflict or even only on its possibility. playing a proactive role in India’s development process.UK. It has 64 offices. board members shall be guided by the interests of the Issuer and not use the cooperation offers proposed to the Issuer to obtain personal benefit.  Founded in 1895.000  CII works closely with government on policy issues. CII has over 7200 members. non-for-profit. 2) CII DESIRABLE CORPORATE GOVERNANCE CODE CONFEDERATION OF INDIAN INDUSTRY  The Confederation of Indian Industry (CII) is an association of Indian business which works to create an environment conductive to the growth of industry in the country.Singapore. a board member shall notify other board members without delay.government. including 9 centres of excellence in India and 7 overseas offices in Australia. China.managed organisation. as well as institutional partnerships with 224 counterpart 10 | P a g e .

(b) The promotion of transparency within business and industry. Banks or Financial Institutions. (c)The need to move towards international standards in terms of disclosure of information by the corporate sector. the Public sector. to strengthen a growth process that meets the aspirations of today’s India. (d) To develop a high level of public confidence in business and industry. The objective was to develop and promote a code for corporate governance to be adopter and followed by Indian companies. all of which are corporate entities. especially the small investors. DESIRABLE CORPORATE GOVERNANCE CODE  In 1996. organisations in 90 countries.  This initiative by CII flowed from public concerns regarding the following: (a)Protection of investor interest.  The CII Theme for 2014-2015 is ‘Accelerating Economic Growth’. be these in the Private sector. CII ROLES  To identify and strengthen industry's role in the economic development of the country  To act as a catalyst in bringing about the growth and development of Indian Industry 11 | P a g e . CII serves as a reference point for Indian industry and the international business community. CII took a special initiative on corporate governance- the first institutional initiative in Indian industry.

A single board. It closely interacts on policy issues at both the central and state levels.  To reinforce industry's commitment to society  To provide up-to-date information and data to industry and government  To create awareness and support industry's efforts on quality. if it performs well. there is nothing to suggest that a two-tier board. environment. CII RECOMMENDATION FOR EFFECTIVE CORPORATE GOVERNANCE  Recommendation 1 There is no need to adopt the German system of two-tier boards to ensure desirable corporate governance. Equally. and consumer protection  To identify and address the special needs of the small sector to make it more competitive  To promote cooperation with counterpart organisations  To work towards the globalisation of Indian industry and integration into the world economy This is done by adopting a proactive and partnership approach with the government on various national and international issues concerning the Indian economy. is the panacea to all corporate problems. energy management.or multi-tiered board. Extensive dialogue and interaction with members and all sections of the community to build consensus are held. 12 | P a g e . per se. can maximise long term shareholder value just as well as a two.

who should constitute • At least 30 per cent of the board if the Chairman of the company is a non-executive director • At least 50 per cent of the board if the Chairman and Managing Director is the same person.100 cores and above should have professionally competent. not passive advisors • have clearly defined responsibilities within the board such as the Audit Committee • know how to read a balance sheet. The present commission of 1% of net 13 | P a g e . of course. cash flow statements and financial ratios and have some knowledge of various company laws. Recommendation 2 Any listed companies with a turnover of Rs. profit and loss account.  Recommendation 4 For non-executive directors to play a material role in corporate decision making and maximising long term shareholder value. excludes those who are invited to join boards as experts in other fields such as science and technology  Recommendation 5 To secure better effort from non-executive directors. non- executive directors. they need to: • become active participants in boards. This. companies should: • Pay a commission over and above the sitting fees for the use of the professional inputs. independent.  Recommendation 3 No single person should hold directorships in more than 10 listed companies.

• Consider offering stock options. so as to relate rewards to performance. the board must contain: • Annual operating plans and budgets. including cases of theft and dishonesty of a material nature. and any effluent or pollution problems. • Show cause. together with up-dated long term plans. manpower and overhead budgets. Stock options are rewards contingent upon future appreciation of corporate value. or 3% (if there is no managing director) is sufficient. 14 | P a g e . companies should give the attendance record of the concerned directors. Commissions are rewards on current profits. As a general practice. demand and prosecution notices received from revenue authorities which are considered to be materially important. and placed before. • Quarterly results for the company as a whole and its operating divisions or business segments. If a director has not been present (absent with or without leave) for 50 per cent or more meetings. An appropriate mix of the two can align a non- executive director towards keeping an eye on short term profits as well as longer term shareholder value. dangerous occurrences.  Recommendation 7 Key information that must be reported to. one should not re-appoint any director who has not had the time attend even one half of the meetings. • Fatal or serious accidents.  Recommendation 6 While re-appointing members of the board. then this should be explicitly stated in the resolution that is put to vote. (Material nature is any exposure that exceeds 1 per cent of the company’s net worth). • Internal audit reports. profits (if the company has a managing director). • Capital budgets.

 Audit Committees should consist of at least three members. • Any issue which involves possible public or product liability claims of a substantial nature.  Audit Committees should assist the board in fulfilling its functions relating to corporate accounting and reporting practices. or intellectual property. accounts and basic elements of company law. all drawn from a company’s non-executive directors. financial and accounting controls.20 cores should set up Audit Committees within two years. brand equity. • Default in payment of interest or non-payment of the principal on any public deposit. • Recruitment and remuneration of senior officers just below the board level. • Labour problems and their proposed solutions. • Transactions that involve substantial payment towards goodwill. the Audit Committees should have clearly defined Terms of Reference and its members must be willing to spend more time on the company’s work in relation to other non-executive directors. • Details of any joint venture or collaboration agreement. including any judgement or order which may have either passed strictures on the conduct of the company.  To be effective. or materially substantial non-payment for goods sold by the company. who should have adequate knowledge of finance. and/or to any secured creditor or financial institution.100 cores or a paid-up capital of Rs. or taken an adverse view regarding another enterprise that can have negative implications for the company. • Defaults such as non-payment of inter-corporate deposits by or to the company. including appointment or removal of the Chief Financial Officer and the Company Secretary. and financial statements and proposals that accompany the public issue of 15 | P a g e .  Recommendation 8  Listed companies with either a turnover of over Rs.

analysis of markets and future prospects. if a company consolidates.  Recommendation 10  Consolidation of Group Accounts should be optional and subject to • The FIs allowing companies to leverage on the basis of the group’s assets. • The Income Tax Department using the group concept in assessing corporate income tax. listed companies should give data on:  High and low monthly averages of share prices in a major Stock Exchange where the company is listed for the reporting year.  Audit Committees should periodically interact with the statutory auditors and the internal auditors to ascertain the quality and veracity of the company’s accounts as well as the capability of the auditors themselves. review of operations.  However.  If a company chooses to voluntarily consolidate. then the definition of “group” should include the parent company and its subsidiaries (where the reporting company owns over 50% of the voting stake). it should not be necessary to annex the accounts of its subsidiary companies under section 212 of the Companies Act.  Recommendation 9 Under “Additional Shareholder’s Information”. any security—and thus provide effective supervision of the financial reporting process. 16 | P a g e . giving share in sales revenue.  Greater detail on business segments up to 10% of turnover.

100 cores or paid-up capital of Rs.20 cores)  Recommendation 12 For all companies with paid-up capital of Rs.  The accounting policies and principles conform to standard practice. integrity and fair presentation of the financial statements and other information in the Annual Report. 20 cores or more. signed by the CEO and the CFO. and where they do not.  Recommendation 11 Major Indian stock exchanges should gradually insist upon a compliance certificate. which clearly states that:  The management is responsible for the preparation.  Recommendation 14 It would be desirable for FIs as pure creditors to rewrite their covenants to eliminate having nominee directors except: a) In the event of serious and systematic debt default.  The board has overseen the company’s system of internal accounting and administrative controls systems either director or through its Audit Committee (for companies with a turnover of Rs.  Recommendation 13 Government must allow far greater funding to the corporate sector against the security of shares and other paper. the quality and quantity of disclosure that accompanies a GDR issue should be the norm for any domestic issue. 17 | P a g e . full disclosure has been made of any material departures. and which also suggest that the company will continue in business in the course of the following year.

S. an Advisory Group on Corporate Governance was formed under the chairmanship of Dr. 3) CORPORATE GOVERNANCE IN BANKS  EVOLUTION OF CORPORATE GOVERNANCE IN BANKS  As prelude to institutionalize Corporate Governance in banks. Ganguly.Verma which submitted its report in January 2003.  Keeping all these recommendations in view and the cross country experience.S. the Reserve Bank initiated several measures to strengthen the corporate governance in the Indian Banking Sector. Following its recommendations in March 2001 another Consultative group was constituted in November 2001 under the Chairmanship of Dr. The noteworthy minimum benchmarks noted by the Group relate to the following:  Strategies and techniques basic to sound corporate governance  Organizational structure to ensure oversight by board of directors and individuals not involved in day to day running of business  Ensuring that the direct lines of supervision of different business areas are different  Ensuring independent risk management and audit functions 18 | P a g e .  This move was further reinforced by certain observations of the Advisory group on Banking Supervision under the Chairmanship of Shri M. H. R. with a view to strengthen the internal supervisory role of the Boards in banks in India. b) In case of the debtor company not providing six-monthly or quarterly operational data to the concerned FI(s). A. Patil.

the gruelling question is not how the outside financiers (shareholders) 19 | P a g e . things are a bit different. which in turn may not have pure economic motives in mind. Here. the State Bank of India and its subsidiaries. When Government is the owner. A mixed ownership structure can bring the different objectives of shareholding on a common platform and help in reconciling them. and the public ownership being treated as a transitional phenomenon. Government ownership is one of the primary issue that can have a direct impact on the quality of corporate governance. Things start getting worse. Though the general principle of corporate governance is valid for the public sector entities. In Public sector banks. in developing countries and especially in India. in contrast to the traditional Corporate Governance issues stemming from the outside financial. when uncertainties looms involving ownership issues. Further. Ensuring an environment supportive of sound corporate governance  Role of supervisors The issue pertaining to corporate governance becomes more critical on case of the banks whose controlling power is linked with Government. but they simply cannot imitate the private sector banks in this respect. they constitute a huge share of business in the banking industry in India  Secondly. expectation of change in ownership can result in the change of institutional structure of significance difference. In India almost 80% of the banking operations are under the control of the public sector banks consisting of the nationalised banks. it is highly unlikely that they are going to be phased out in due course. Issues relating to the separation of ownership and management in both private and public sectors banks needs to be addressed. the right of the private shareholders are considerably curtailed as their approval is not required for paying dividend or formalising the annual accounts. The importance of corporate governance issues in public sector banks is important due to two principal reasons:  Firstly. it is accountable to the political institutions.

but also as to how they can (including minority shareholders) exercise control over the big inside shareholders The most important development in the field of corporate governance and investor protection in India has been the establishment of the securities and Exchange Board of India (SEBI) in 1992 and its gradual empowerment since then. Payment and Settlement Systems Act. a regulated industry and that banks have access to government safety nets. including the regulations of SEBI regarding public issues and other guidelines applicable to listed banking though there is scope for enhancing effective implementation NEED FOR CORPORATE GOVERNACNE IN BANKS Banks are critical components of the economy while providing finance for commercial enterprises. The importance of banks to national economies is underscored by the fact that banking is. Hence the banks need to stimulate the interest of investors at all times. basic financial services to a broad segment of the population and access to payment systems. 2007. Banks in India are facing increasing competition. other relevant Statutes and the Directives. Foreign Exchange Management Act. Prudential regulations and other Guidelines/ Instructions issued by RBI and other regulators from time to time. In order to meet the statutory need of having sound Capital Adequacy requirements. 1999. within and outside India. banks are accessing the Capital Market at regular intervals. both in terms of markets for its products and for sources of fund. The Basel committee in the year 1999 had brought out certain important principles on corporate governance for banking organisations which more or less have been adopted in India. 1934. Reserve Bank of India Act. Investors believe that a bank with good governance will provide them a safe place for 20 | P a g e . 1949.exert management control. Today the banks are governed by the Banking Regulation Act. almost universally.

adds on to the importance of Corporate Governance issues in banks. Banks. the incorporation of corporate governance practices in the assessment of credit risks pertaining to lending process will encourage the corporate sector in turn to improve their internal corporate governance practices. just like any other organization are incorporated entities.  Banks. the primary requirements of corporate governance apply to them as any other incorporated entity. First. help in channelizing the people’s saving. Second. Good corporate governance is therefore an important factor in a competitive environment. the most important one is the fact that banks form an integral part of the economy of the country. It is of crucial importance therefore that have strong corporate governance practices. employees. including corporate governance practices. Investors.  Among other features. importance of implementing modern corporate governance standards is conditioned by the global tendency to consolidation in the banking sector and a need in further capitalization. and any failure in a bank might have a direct bearing on the financial health of the country. Banks should ensure that they match the global benchmark in Corporate Governance Practices. customers.  The capital structure of bank is unique in two ways. As a result of which. investment and also give netter returns. banks tend to have very little equity relative to other firms. Added to this certain features that are very specific to banks. which are 21 | P a g e . customers.  Banks are also important catalysts for economic reforms. banks’ liabilities are largely in the form of deposits. employees and vendors have all become more discerning and are demanding greater transparency and fairness in all dealings. Because of the systemic function of banks. To attract and retain the commitment of investors.

by their basic definition are highly leveraged financial institutions.  The second important driver of a good corporate governance stems from their funding patterns. Banks. banks create liquidity for the economy. the stakeholders in banks. In this connection it is important to remind of the COSO framework that was framed with this intention in mind. Thus. with the equity capital of the shareholders being reduced to a miniscule proportion of loan capital in the form of borrowing and deposits of deposits from customers of the bank. while their assets often take the form of loans that have longer maturities. The former relates to situations where the banks own personnel indulge in corrupt and unethical practices. (mainly the depositors and lenders) have a rightful claim of accountability from the banks and their boards. The liquidity production function may cause a collective-action problem among depositors because banks keep only a fraction of deposits on reserve at any one time.  The third important element in the Corporate Governance structure relates to the control function. 22 | P a g e . The incidents of the external frauds are so devastating that special attention is being mandated both for their prevention as well as their post scenario analysis. As a result of this. Control functions in banks deal with internal frauds as well as external frauds. This mismatch between deposits and liabilities becomes a problem in the unusual situation of a bank run. It is imperative to discuss the same in brief. available to creditors/depositors on demand. Depositors cannot obtain repayment of their deposits simultaneously because the bank will not have sufficient funds on hand to satisfy depositors at once. the principle attribute that makes banks as financial intermediaries “special” is their liquidity production function. By holding illiquid assets and issuing liquid liabilities. The latter deals with situations where the customers of the bank try to seek for malpractices.

which re- enforces the need for capital adequacy requirements under the current conventions. failing to comply with stipulated norms can be one of the challenging issues of Corporate Governance framework. It also issued a consultative document titled “The New Basel Capital Accord” in April 2003. 23 | P a g e . with a minimum capital adequacy of 8 per cent. failure to adhere to the regulatory norms have never reduced. The higher the tier. With Banks being under intense watch of the central bank as well as other regulatory bodies. Basel II is based on three pillars:  Minimum capital requirements  Basel II provides guidelines for calculation of minimum regulatory capital ratios and confirms the definition of regulatory capital and 8% minimum coefficient for regulatory capital over risk-weighted assets. the less subordinated securities a bank is allowed to include in it. The Committee in 1988 introduced the Concept of Capital Adequacy framework. of banking supervisory authorities. that most failures (crashes) in banks have occurred due to compliance failure situations. known as Basel Capital Accord. With a lot of reports and norms. established by the Central Bank Governors of the G10 developed countries in 1975. BASEL II RECOMMENDATIONS The Basel Committee on Banking Supervision is a committee. to replace the 1988 Accord. Each tier must be of certain minimum percentage of the total regulatory capital and is used as a numerator in the calculation of regulatory capital ratios. Basel II divides the eligible regulatory capital of a bank into three tiers.  Finally. This accord is commonly known as Basel II and is currently under finalization. it is a common observation. being introduced (The Basel II norms being the latest of them).

the higher its weight. the risk position of the bank. retained earnings and certain innovative capital instruments.  The monitoring of the adequacy of capital in relation to risks inherent in a bank's activities is primarily the responsibility of bank management. disclosed reserves. which significantly increases risk-weighted assets and lowers regulatory capital ratios. The riskier the asset. and are calculated by using the sum of assets that are multiplied by respective risk weights for each asset type. and medium. Supervisors should take appropriate supervisory action if they are not satisfied with the result of this process. which are used as a denominator in regulatory capital ratios. and includes shareholders' equity. the resulting capital levels and quality of 24 | P a g e . The main innovation of Basel II in comparison to Basel I is that it takes into account the credit rating of assets in determining risk weights. as well as their ability to monitor and ensure their compliance with regulatory capital ratios.  Supervisory Review Process  Supervisors should review and evaluate banks’ internal capital adequacy assessments and strategies. This monitoring should be performed through the bank’s internal assessment process. Tier 1 capital is the most strict definition of regulatory capital that is subordinate to all other capital instruments. The notion of risk-weighted assets is intended to punish banks for holding risky assets.  Another important part in Basel II is refining the definition of risk-weighted assets. hybrid instruments. The higher the credit rating. the lower risk weight.and long-term subordinated loans. Tier 3 consists of Tier 2 plus short-term subordinated loans. The supervisory authorities should regularly review this process. Tier 2 is Tier 1 instruments plus various other bank reserves.

General discussions with senior management alone are insufficient. the manner in which business risks and activities are aggregated. The periodic review can involve some combination of: • On-site examinations or inspections • Off-site review • Discussions with bank management • Review of work done by external auditors (provided it is adequately focused on the necessary capital issues) • Periodic reporting. The emphasis of the review should be on the quality of the bank’s risk management and controls and should not result in supervisors functioning as bank management. and management’s record in responding to emerging or changing risks. Supervisors may wish to adopt an approach to focus more intensely on those banks whose risk profile or operational experience warrants such attention. Supervisors should also evaluate the degree to which the bank has in place a sound internal process to assess capital adequacy.  Supervisors should review the bank’s processes to determine: • That the target levels of capital chosen are comprehensive and relevant to the current operating environment • That these levels are properly monitored and reviewed by senior management • That the composition of capital is appropriate for the nature and scale of the bank’s business.  Market Discipline  Pillar 3 recognises that market discipline has the potential to reinforce capital regulation and other supervisory efforts to 25 | P a g e . capital held. a detailed review by supervisors of each banks’ internal analysis will be required.  Supervisors should consider the quality of the bank’s management information reporting and systems. because of the substantial impact that errors in the methodology or assumptions of formal analyses can have on implied capital requirements.  However.

and hence the capital adequacy of the 26 | P a g e . risk assessment and management processes. The Committee believes that supervisors have a strong interest in facilitating effective market discipline as a lever to strengthen the safety and soundness of the banking system. The June Consultative paper was supplemented by a more detailed paper. The feedback from both these consultative exercises has been positive and has led us to conclude that transparency and the market discipline it can generate should form an integral part of the New Basel Capital Accord. The Committee has widened its analysis to consider other elements of the New Basel Capital Accord where disclosure may make an important contribution. risk exposures. These included the key features of the capital held as a cushion against losses.is to complement the operation of minimum capital requirements (Pillar 1) and the supervisory review process (Pillar 2). The Committee aims to encourage market discipline by developing a set of disclosure recommendations (and requirements) 1 which will allow market participants to assess key pieces of information on the scope of application. These would enable market participants to assess the bank's ability to remain solvent.  The purpose of Pillar 3 – market discipline . risk exposure and capital adequacy a bank should make. Market discipline imposes strong incentives on banks to conduct their business in a safe. sound and efficient manner.  In the June 1999 Consultative paper. the Committee outlined its intention to incorporate market discipline as a fundamental element of the New Basel Capital Accord. the Committee has outlined templates to provide a suggested format in which disclosure could be made. on the types of disclosure on capital. Where appropriate. and the risk exposures that may give rise to such losses. It can also provide a bank with an incentive to maintain a strong capital base as a cushion against potential future losses arising from its risk exposures. promote safety and soundness in banks and financial systems. The Consultative paper suggested some general types of public disclosure that should be released by banks on a timely basis. issued for consultation in January 2000. capital.

since banks will be collecting this data for internal purposes and they will be benefiting from the more risk sensitive capital requirements that result from the use of bank specific inputs. The Committee does not expect that the incremental costs of making such information public to be high. institution. where reliance on internal methodologies gives banks more discretion in assessing capital requirements. The Committee believes that such disclosures have particular relevance under the New Basel Capital Accord. The Basel Committee on Banking Supervision (the Committee) published guidance in 1999 to assist banking supervisors in promoting the adoption of sound corporate governance practices by banking organisations in their countries. This guidance drew from principles of corporate governance that were published earlier that year by the Organisation for Economic Co-operation and Development (OECD) with the purpose of assisting governments in their efforts to evaluate and improve their frameworks for corporate governance and to provide guidance for financial market regulators and participants in financial markets. their high degree of sensitivity to potential difficulties arising from ineffective corporate governance and the need to safeguard depositors' funds. Since the publication of those documents. corporate governance for banking organisations is of great importance to the international financial system and merits targeted supervisory guidance. issues related to corporate governance have continued to attract considerable national and international attention in light of a number of high-profile breakdowns 27 | P a g e . and therefore set out separate disclosures where internal methodologies are used. ENHANCING CORPORATE GOVERNANCE IN BANKS Given the important financial intermediation role of banks in an economy.

A revised version of the 1999 paper was released for public consultation in July 2005. regulations. and in order to offer practical guidance that is relevant to the unique characteristics of banking organisations. but is rather intended to assist banking organisations in enhancing their corporate governance frameworks. the Committee is publishing this revision to its 1999 guidance. The implementation of the principles set forth in this paper should be proportionate to the size. The Basel Committee is issuing this paper to supervisory authorities and banking organisations worldwide to help ensure the adoption and implementation of sound corporate governance practices by banking organisations. economic significance and risk profile of the bank and the group (if any) to which it belongs. the OECD published revised corporate governance principles in 2004. This guidance is not intended to establish a new regulatory framework layered on top of existing national legislation. Recognising that revised guidance could also assist banking organisations and their supervisors in the implementation and enforcement of sound corporate governance. takes into account comments received during the consultative period. codes and supervisory expectations 28 | P a g e . The application of corporate governance standards in any jurisdiction will depend on relevant laws. and to assist supervisors in assessing the quality of those frameworks. or in jurisdictions that pose impediments to information flows. structure. regulation or codes.in corporate governance. complexity. This paper. In response to requests to assess the OECD principles in view of such developments. This paper also presents some considerations for corporate governance related to the activities of banking organisations that are conducted through structures that may lack transparency. which broadly retains the structure of the 1999 paper.

supervision and by maintaining constant interaction with the management. the movement of share prices in the market.IMPACT OF CORPORATE GOVERNANCE NORMS IN BANKS The RBI move to strengthen Corporate Governance led to seminal changes in the bank administration. They cover identification of responsibilities of the Boards of banks. and shareholder and stakeholder rights and controls. Liabilities and Systems) supervisory process takes into account the working of the board and its committees including the Audit committee. Moreover. This model has been further modified to include risk based supervision. Management. lower level of non-performing assets. increased appetite of investors to look at banks for investment in bank centric equity market further speaks of broad market opinion of bank’s performance and reflection of market confidence. The new evolution is intended to manage influx of a range of financial risks entering the market with their nuances. Chartered Accountant directors on 29 | P a g e . The sustained profitability. constituted at the instance of RBI. Audit Committee of the Boards. effectiveness of the management in ensuring regulatory compliance and adequacy of control exercised by the head/controlling offices. disclosure and transparency in published accounts. the audit function is an important element of the corporate governance process and the independence of this function is crucial to good corporate governance. In order to ensure both professionalism and independence of these committees. Asset Quality. The corporate governance framework in banks has been strengthened through regulation. Moreover. performs the role of overseeing concerns about internal controls and recommendations for their improvement. The rating on management (M) which has been introduced as part of the CAMELS (Capita. improved return on assets etc are some of the laud indicators of the sustaining policy of operating sound banking system. Earnings.

Further. CSR Practices in Indian Banks Banking in India originated in the last decades of the 18th century with the establishment of General Bank of India in 1786 and the Bank of Hindustan set up in 1870 (however both of the banks are now defunct). Their branches can have a compliance function that reports to their head office on the branches’ compliance with RBI inspection findings and features arising out of internal inspections and statutory audit. RBI has been withdrawing its nominees from the boards of well-managed old private banks. In order to improve the effectiveness of the non-official directors and bring in effective corporate governance at the board level in banks. guidelines have been issued focusing the attention of directors on certain areas such as (i) the prescribed calendar of reports / returns to be placed before the Board / Managing Committee of the bank (iv) corrective action required to be taken by the bank on issues of supervisory concern (v) adherence to the deadlines for complying with various action points committed under Monitor able Action Plan during discussions in Annual Financial Inspection findings as well as achievement of targets agreed during Memorandum of Understanding (MOU) discussions with RBI. Foreign banks are not insisted upon to have local audit committee for their Indian branches. Of late. the guidelines also require the directors to keep watch on matters which come to the board of the banks as also what should have come to the board and to inform the Department of Banking Supervision on matters of supervisory concern.the boards of banks are mandatory members and the Chairman or Chief Executive Officer is not to be part of the Audit Committee. the Government also nominates directors on the boards of all PSBs. At present. the commercial banking structure in India consists of Scheduled Commercial Banks & Unscheduled Banks. RBI has Nominee directors on the boards of all PSBs and some of the old private sector banks. Further. 30 | P a g e . The oldest bank existing in India is the State Bank of India and the apex regulatory authority of Indian banking sector is Reserve Bank of India.

In recent years an attempt has been initiated to ensure socially responsible behavior of banking sector in a more organized manner. the socio-economic development of the country by focusing on the activities like.  INITIATIVES TAKEN BY RBI The importance attached to corporate governance in banks is reflected in the fact that the Reserve Bank had constituted at least three committees/ working groups to assess and make appropriate recommendations. women's empowerment. poverty eradication. poverty eradication.  Expansion phase (mid-60s to 1984). education. These areas include children welfare. rural development. vocational training. health and medical care. education. RBI also insisted upon taking measures for sustainable development of economy through realizing the dire necessity of CSR. banking in India has evolved through four distinct phases:  Foundation phase (1950s till the nationalization of banks in 1969). healthcare. protection to girl child and employment. The CSR in Indian Banking Sector is aimed towards addressing the financial inclusion. The major thrust areas for CSR practice in Indian banks are common in public sector and private sector banks. These are: 31 | P a g e . environment. self-employment training and financial literacy trainings.Since independence. infrastructure development. community welfare. and environmental Protection etc. Reserve Bank of India (2007) stated that CSR entails the integration of social and environmental concerns by companies in their business operations and also in interactions with their stakeholders.  Consolidation phase (1985 to 1991)  Reforms phase (since 1992). rural area development. providing financial services to the unbanked or untapped areas of the country.

Patil) made detailed assessment and gave recommendations of which those relating to PSBs is an important component. to the extent applicable in the Indian environment. A.S. as well as of other committees and advisory bodies. transparency. Verma) has also made some recommendations on corporate governance. Ganguly) was constituted to review the supervisory role of Boards of banks and financial institutions and to obtain feedback on the functioning of the Boards vis-à-vis compliance.S. assess the status in India vis-à-vis the best global practices in regard to standards and codes. disclosures. audit committees etc. H.  A Standing Committee on International Financial Standards and Codes was constituted to.  A Consultative Group of Directors of banks and financial institutions (Chairman Dr. The Groups made their recommendations after a comprehensive review of the existing framework as well as of current practices and benchmarked the recommendations with international best practices as enunciated by the Basel Committee on Banking Supervision. inter alia. An Advisory Group on Corporate Governance (Chairman: Dr. and make recommendations for making the role of Board of Directors more effective. R.  The Advisory Group on Banking Supervision (Chairman : Mr M. The Groups made far reaching 32 | P a g e .

Quality and concentration of ownership The ownership issue in banks straddles a few crucial issues that have been engaging our attention and a policy environment is being sought to be created that would confirm to the best principles of governance. 33 | P a g e . The issue of corporate governance in banks. if not all. While proceeding with analysis and possible legislative actions. changes that could be brought about within the existing legislative framework have been implemented. Unique corporate governance challenges are posed where the ownership structure lacks transparency or where there insufficient checks and balances on inappropriate influences of controlling shareholders.proposals to improve corporate governance and many. like any organization. do require legislative processes and they are necessarily time consuming and often realizable only in medium-term. I. While there can be different views on the issue of concentrated ownership there is clearly recognition that significant shareholders should pass the fitness and propriety tests. needs to be addressed in regard to (i) quality and concentration of ownership. (ii) quality of Management (iii) prudential framework and (iv) the mechanism for effective oversight of Board of Directors.

shall be entitled to exercise Banking Companies voting rights in respect of any shares (Acquisition and held by him in excess of one percent of Transfer of the total voting rights of all the Undertakings) Acts. entails the following: (i) Voting rights restriction as per banking laws In terms of the statutory provisions under the various banking acts. shall be . shall exercise Banking Regulation voting rights on poll in excess of ten Act.1949] percent of the total voting rights of all the shareholders. the voting rights. Nationalised Banks – No shareholder. in consultation with RBI can raise the above voting 34 | P a g e . 1970/80] State Bank of India (SBI) No shareholder. other than the Central [Section 3(2E) of Government. when exercised.1955) excess of ten percent of the issued capital.The current legal and policy framework with respect to ownership in banks. have been stipulated as under: Private Sector Banks – No person holding shares. (Government. in respect of [Section 12(2) of any share held by him. other than RBI. at a sectorial level.(Section 11 of State entitled to exercise voting rights in Bank of India Act. shareholders of the nationalised bank.

revised in February 2004. RBI had issued guidelines in September 1999. 10% and 30%. 35 | P a g e . shall be entitled to exercise voting rights in excess of one percent of the issued capital of the subsidiary bank concerned. beneficial or otherwise) of an individual or group to equivalent of 5 percent or more of the paid-up capital of the bank. 1959] No shareholder. For higher thresholds. by him in excess of two hundred shares. acknowledgement from RBI for acquisition/transfer of shares is required for all cases of acquisition of shares which will take the aggregate holding (direct and indirect. on the grant of acknowledgement for acquisition and transfer of shares. other than SBI. In terms of these.[Section No person shall be registered as a 19(1) and (2) of SBI shareholder in respect of any shares held (Subsidiary Bank) Act. (ii) Acknowledgement of RBI for transfer of shares more than 5% In respect of private sector banks. right to more than ten percent). increasingly stricter criteria would be adopted for considering granting of acknowledgements. SBI Associates .

Subordinated debt instruments. Preference shares eligible for capital status. c. II. Any other instrument approved as in the nature of capital. Board of Directors The framework in respect of ensuring effective oversight by the Board of Directors incorporates the following: (i) Statutory requirement regarding composition of Board of Directors (ii) BOD establishes strategic objectives and a set of corporate values that are communicated throughout the banking organisation. banks’ / FIs’ investments in the equity capital of subsidiaries are at present deducted from their Tier I capital for capital adequacy purposes. Equity shares. 36 | P a g e . Further. d. and e. (iii) Restrictions on cross holdings A bank's aggregate investment in the following instruments issued by other banks and financial institutions is permitted up to 10 per cent of the investing bank's capital funds (Tier I plus Tier II capital a. Hybrid debt capital instruments. b.

Further. The board of the bank must ensure in public interest that the nominated / elected directors execute 37 | P a g e . role and responsibilities of directors and the Board (viii) Covenants & undertaking: A declaration and undertaking is required to be obtained from the proposed / existing directors. individually and collectively. Where a bank is part of a wider group either as parent or subsidiary a number of of issues arise from the corporate governance perspective in that it is likely to affect to a certain extent structure and activities of both parent and subsidiary boards.(iii) BOD have an obligation to understand the risk profile of the institution and ensure adequate capital to cover the risk (iv) Unique challenge when the institutions have complex corporate structures. (v) Excessive outsourcing of intragroup activities also causes concerns from the supervisors point of view. The directors are required to execute a covenant binding them to discharge their responsibilities to the best of their abilities. the issue related to the broader issue of fit and proper status of directors and signing of the covenants should be one of the criteria to be eligible to be a director of a bank. (vii) Guidelines regarding criteria for appointment of directors. Need for effective control of subsidiaries by the parent board. (vi) Group dimension also creates conflict of interest within the Group which have to be managed.

To ensure both professionalism and independence. so as to discharge their duties to the best of their abilities. the deeds of covenants as recommended by Dr. Ganguly Group. etc. Board level committees that are required to be set up are Risk Management committee. with the responsibility of ensuring efficacy of the internal control and audit functions in the bank besides compliance with the inspection report of the RBI. (x) Audit committee of the Board In 1995. large banks may conduct such programmes in their own training centres. the Chartered Accountant Directors on the boards of banks are mandatory members. (ix) Training / Seminars: The banks have been advised to ensure that the directors are exposed to the latest managerial techniques. 38 | P a g e . but the Chairman would not be part of the Audit Committee. the RBI directed banks to set up Audit Committees of their Boards. The Boards have also been given the freedom to constitute any other committees. to render advice to it. risk management systems etc. technological developments in banks. internal and concurrent auditors. Asset Liability Management committee (ALCO). and financial markets. While RBI can offer certain training programmes/seminars in this regard at its training establishments. Apart from the above.

with the approval of their Board. III. (xii) ‘Fit and proper’ assessment in respect of all persons to be appointed on the Boards of private sector banks. MR and OR management emphasizing role of Board & Senior management: As the primary responsibility of laying down risk parameters and establishing an integrated risk management and control system rests with the Board of Directors. Quality of management 1. to eliminate the gaps in compliance with the risk management guidelines issued by RBI and ensure that they have efficient and robust risk management systems in place. the banks were advised that all assessments of the risk management systems should be placed before the Board. (xiii) The earlier practice of RBI nominating directors on the Boards of all private sector banks has yielded place to such nomination in select private sector banks. Senior management consists of a core group of individuals responsible for the day to day management of the bank –should have necessary skills and oversee line managers in specific business areas and activities consist with policies and procedures laid down by the Board. On the basis of such evaluation banks should initiate appropriate steps. 39 | P a g e . (xi) Sound practices for CR.

2. Fit and proper norms for CEO and directors were laid down in terms of circular dated June 25. Senior Management establishes effective system of internal controls 3.’ 4. in the interest of depositors. Hence the emphasis on capital adequacy. connected and related party transaction regulations. etc. Involvement of Nomination Committee of the Board in such an exercise should be seriously considered as a formal process. Powers for removal of managerial personnel. It was mandated that ‘On appointment of Directors. should be done in regard to their suitability for the post by way of qualifications and technical expertise. Appropriate accounting standards. risk based supervision enforcement of 40 | P a g e . IV Prudential standards The whole principle of capital regulation is that the owners will monitor if they have much at stake either in the form of capital or future profits. due diligence of the directors of all banks – be they in public or private sector. Similarly the need for prudential norms on income recognition and asset classification and provisioning is required because of the nature of bank balance sheets-loan assets do not lend themselves to proper valuation. 5. Prior approval of Reserve Bank of India for appointment of CEO as well as terms and conditions thereof. CEO and directors. 2004.

market participants and supervisors need fundamental information about the bank’s business.corporate governance rules are essential for promoting sound corporate governance. Certain disclosures mandated from corporate governance angle are: .Related party transactions: 41 | P a g e . In fact the importance of corporate governance permeates the Core Principles for banking Supervision against which we assess our practices. Such information can help provide the appropriate perspective and context to understand a bank’s activities and help in the effective operation of market discipline which would indirectly address any weaknesses in corporate governance and also encourage enhanced role of corporate governance on the level and quality of disclosures. TRANSPERANCY AS A TOOL TO PROMOTE CORPORATE GOVERNANCE To accurately evaluate a bank’s disclosures about its financial position and financial performance and its risks and risk management strategies. Thus transparency and good corporate governance can be seen as complementary issues – like two sides of the same coin. management and corporate governance.

KMP are the whole time directors for an Indian bank and the chief executive officer for a foreign bank having branches in India. banks are required to disclose their ‘domestic’ and ‘international’ operations as geographical and ‘Treasury’. . For reporting of business information under geographical and business segments in terms of AS 17. Related parties for a bank are its parent. The disclosure format includes both qualitative and quantitative aspects and has been devised to 42 | P a g e . 1949. While there is no accounting standard in India for disclosure of derivatives business by incorporated entities.Segment reporting: . 1934. . ‘Other banking operations’ and ‘Residual operations’ as business segments. Relatives of KMP would be on the lines indicated in Section 45 S of the R. rule or condition specified by Reserve Bank under the Act. Act. .B. Key Management Personnel (KMP) and relatives of KMP. RBI has prescribed a minimum framework for disclosures by banks on their risk exposures in derivatives. where control exists within the meaning of AS 18.I.RBI also puts in public domain details of the levy of penalty on a bank for contraventions of any of the provisions of the Act or non-compliance with any other requirements of the Banking Regulation Act.. subsidiary(ies). irrespective of whether there have been transactions. associates/ joint ventures. order.The banks are required to disclose the name and nature of related party relationship.

recognition of income. the associated risks and business purposes served. premiums and discounts. The discussion is expected to include: o the structure and organization for management of risk in derivatives trading. valuation of outstanding contracts. 43 | P a g e . The banks are also required discuss their risk management policies pertaining to derivatives with particular reference to the extent to which derivatives are used. risk reporting and risk monitoring systems. o the scope and nature of risk measurement . It broadly included the notional as well as mark to market value of outstanding derivative contracts along with the credit equivalents for the same. risk management systems. provisioning. o policies for hedging and / or mitigating risk and strategies and processes for monitoring the continuing effectiveness of hedges / mitigants. and o accounting policy for recording hedge and non-hedge transactions.provide a clear picture of the exposure to risks in derivatives. collateral and credit risk mitigation. objectives and policies.

On the basis of the recommendations of this committee. Going forward. under appropriate heads: 44 | P a g e . By providing independent analyses of the strengths and weaknesses of banks. which are required to be incorporated in the listing agreement between the company and the stock exchange. ROLE OF RATING AGENCIES ON CORPORATE GOVERNANCE The role of rating agencies in influencing corporate governance has started being appreciated.  SEBI CODE OF CORPORATE GOVERNANCE To promote good corporate governance. rating agencies should focus more on governance risks and develop a methodology that explicitly assesses the quality of governance. An overview of SEBI guidelines on corporate governance is given below.Apart from the above. SEBI issued certain guidelines on corporate governance. To managements and boards. . their comments can be early warning signals which can impel bank strengthening measures. rating agencies play a critical role in the capital market. in case of listed banks there is added ‘market oversight’ which subjects them to additional post-listing disclosures. SEBI (Securities and Exchange Board of India) constituted a committee on corporate governance under the chairmanship of Kumar Mangalam Birla.

(iv)The Chairman shall be present at the Annual General Meeting to answer shareholders’ queries. and at least one director having financial and accounting knowledge. (iii)The Chairman of the committee will be an independent director. at least. who apart from receiving director’s remuneration. 45 | P a g e . (b) Audit Committee: (i) The company shall form an independent audit committee whose constitution would be as follows: (ii) It shall have minimum three members. half of the Board should comprise of independent directors. at least. In case of non-executive chairman. The expression ‘independent directors’ means directors. (ii) The number of independent directors would depend on whether the chairman is executive or non-executive. one third of the Board should comprise of independent directors. and in case of executive chairman. with the majority of them being independent. all being non-executive directors. do not have any other material pecuniary relationship with the company.(a) Board of Directors: (i) The Board of Directors of the company shall have an optimum combination of executive and non-executive directors.

To seek information from any employee 3. if considered necessary. sufficient and credible. To investigate any activity within its terms of reference 2. as well as to have post-audit discussion to ascertain any area of concern. before the audit commences.(2) The audit committee shall have powers which should include the following: 1. (v) Reviewing the company’s financial and risk management policies. To secure attendance of outsiders with relevant expertise. (iii) Reviewing the adequacy of internal audit function (iv) Discussing with external auditors. (c) Remuneration of Directors: 46 | P a g e . the nature and scope of audit. To obtain outside legal or other professional advice 4. (3) The role of audit committee should include the following: (i) Overseeing of the company’s financial reporting process and the disclosure of its financial information to ensure that the financial statement is correct. (ii) Recommending the appointment and removal of external auditor.

(ii) A director shall not be a member of more than 10 committees or act as chairman of more than five committees. along with performance criteria. (e) Management: A Management Discussion and Analysis Report should form part of the annual report to the shareholders. stock options. containing discussion on the following matters (within the limits set by the company’s competitive position).The following disclosures on the remuneration of directors shall be made in the section on the corporate governance of the Annual Report: (i) All elements of remuneration package of all the directors i. (d) Board Procedure Some Points in this Regards are: (i) Board meetings shall be held at least. bonus. pension etc. with a maximum gap of 4 months between any two meetings. salary. (i) Opportunities and threats 47 | P a g e . across all companies. benefits.e. (ii) Details of fixed component and performance linked incentives. four times a year. in which he is a director.

(ii) Segment-wise or product-wise performance (iii) Risks and concerns (iv) Discussion on financial performance with respect to operational performance (v) Material development in human resource/industrial relations front. (ii) A Board Committee under the chairmanship of non-executive director shall be formed to specifically look into the redressing of shareholders and investors’ complaints like transfer of shares. non- receipt of Balance Sheet or declared dividends etc. shareholders must be provided with the following information: 1. This committee shall be designated as ‘Shareholders / Investors Grievance Committee’. (g) Report on Corporate Governance: 48 | P a g e . Nature of his expertise 3. A brief resume (summary) of the director 2. Number of companies in which he holds the directorship and membership of committees of the Board. (f) Shareholders: (i) In case of appointment of a new director or reappointment of a director.

2013. expertise and experience as required in the banking business. The Board presently comprises of 13 Directors and it provides diverse combination of professionalism. (h) Compliance: The company shall obtain a certificate from the auditors of the company regarding the compliance of conditions of corporate governance. They are committed to achieve the highest standards of corporate governance. The Board has an optimum combination of executive and non-executive Directors. and aspire to benchmark themselves with international best practices in this regard. with a detailed report on corporate governance.  CORPORATE GOVERNACNE IN AXIS BANK Corporate Governance is an integral part of the culture defined by values of ethics.  BOARD OF DIRECTORS The composition of the Board of Directors of the Bank is governed by the relevant provisions of the Companies Act. There shall be a separate section on corporate governance in the Annual Report of the company. the Banking Regulation Act. 1949 and revised Clause 49 of the Listing Agreement relating to Corporate Governance. transparency and ownership. This certificate shall be annexed with the Directors’ Report sent to shareholders and also sent to the stock exchange. the Rules made there under. knowledge. The Board has 7 Independent Directors constituting more than 49 | P a g e .

The role of the Board is to provide effective guidance and direction to the management so that it may ensure enduring sustainable value creation. 3.  CODE OF CONDUCT FOR DIRECTORS The code of conduct for the Board of Directors of the Bank is laid down with an aim to ensure transparency and high ethical standards in managing the affairs of the Bank. 2. Act in utmost good faith and fulfill the fiduciary obligations without allowing their independence of judgment to be compromised. one-half of its total membership strength and three women Directors. complete compliance with extant laws and regulations and consistently function in an ethical and efficient manner. Every Board Member shall adhere to the Code of Conduct and the Norms prescribed for monitoring and management of the conflict of interest. Not make any statement which has the effect of an adverse criticism of any policy or action of the Bank or which is 50 | P a g e . Act in accordance with the highest standards of personal and professional integrity. honesty. This code of conduct would be applicable to all the Board Members of the Bank and would be observed by the Members of the Board while carrying out the fiduciary duties conferred upon them by the statute. excellence in quality and ethical conduct. with diligence and responsiveness. Every Board Member shall: 1.

capable of affecting the relations between the Bank and the general public/government/regulators and the stakeholders. any illegal payments. Divestments and Mergers Committee 51 | P a g e . remuneration. Neither receive nor offer or make. donations or comparable benefits which are intended to or perceived to obtain business or uncompetitive favours for the conduct of the business. directly or indirectly. gifts. They are as follows: • Committee of Directors • Audit Committee • Risk Management Committee • Stakeholders Relationship Committee • Nomination and Remuneration Committee • Special Committee of the Board of Directors for Monitoring of Large Value Frauds • Customer Service Committee • Grievance Redressal Committee • Acquisition. 4.  BOARD COMMITTEES The Board of the Bank also conducts its business through various Committees constituted by the Board to deal with specific matters as per delegated powers for different functional areas of the Bank.

Elements of the Sustainability Framework are also reviewed by the Board and its Committees based on sustainability aspects related to functional roles of individual departments reporting to the Board and its Committees. The stakeholder feedback reaches the Board through various Board Committees. The Sustainability Framework is cascaded from the top management to individual departments to implement various initiatives. The Management Committee of the Bank is responsible to review the implementation of the Sustainability Framework of the Bank. • IT Strategy Committee • Corporate Social Responsibility Committee • Committee of Whole-Time Directors  SUSTAINABLE GOVERNANCE Sustainability is governed at the apex level by the Committee of Whole-time Directors of the Board. The Customer Service Committee 52 | P a g e . The Executive Director (Corporate Center) & Chief Financial Officer of the Bank oversees the implementation of the Sustainability Framework of the Bank and is supported by Business Responsibility & Sustainable Development Department. The Stakeholder Relationships Committee looks into shareholders’ grievances and feedback. The Nomination and Remuneration Committee reviews the organisation health through feedback from employee surveys conducted on a regular basis. The Bank has also set-up a Board-level Corporate Social Responsibility (CSR) Committee to oversee the CSR agenda.

 AXIS BANK HONOURED BY ICSI FOR EXCELLENCE IN CORPORATE GOVERNACNE Mumbai. Commenting on the recognition.oversees customer service related aspects including feedback received from customers through various channels. Group Executive. “It is indeed an honour for us to receive such a coveted recognition for Corporate Governance in the country. 2016: Axis Bank. " 53 | P a g e . Apart from the Board Committees. The Bank is among the top 5 companies across industries and the only Bank in the country to be bestowed with the honour. The recognition has been instituted by the ICSI to identify. Axis Bank said. the Board also has periodic reviews of various functions of the Bank which include aspects of stakeholder feedback. has been conferred the Certificate of Recognition for excellence in Corporate Governance by the Institute of Company Secretaries of India (ICSI). India’s third largest private sector bank. foster and reward the efforts by Indian companies in creating and establishing an atmosphere of good corporate citizenry. Rajesh Dahiya. for the year 2015. January 11. The Corporate Social Responsibility Committee is responsible for community development agenda. We stay committed to implementing and practicing the highest global standards of corporate governance in the organisation to create value for all our stakeholders in an inclusive and ethical manner.