You are on page 1of 80






M.B.A. (SEM. IV) 520857164
2009 - 2010








(CENTRE CODE: 02816)

JULY 2010

I express my sincere thanks to Mrs. Janhavi Khandekar, Principal,

and Dr. G.B.Vishe, Principal, Dnynasadhana College, Thane, for granting me
opportunity of undertaking this project.

I am grateful to Prof. R.V.Rajwade for his guidance and analysis, which has
contributed greatly in improving the quality of work done during the tenure of this

I wish to thank Mrs. Priti Alkari, Deputy Company Secretary of “Raymond

Ltd.” for her wholehearted support and guidance during the project.

I am also thankful to all those whose best wishes and support helped me in
completion of this project, especially my spouse, friends and my parents for guiding in
proper time.


I, SUCHITA SIDDHARTH JOSHI, student of Sikkim Manipal University studying

in M.B.A. (Semester IV) hereby declare that I have completed project on
MANAGEMENT in the academic year 2009- 2010. The information submitted is true
and original to the best of my knowledge.


Certified that this project report titled “CORPORATE GOVERNANCE” is the

bonafide work of “SUCHITA SIDDHARTH JOSHI”, who carried out the project

work under my supervision.




On completion of my Masters in Law, I decided to pursue MBA. My aim was to take

up such subject that would give me an opportunity to work on subjects related to law as
well as Human resources. And hence I have chosen this topic of “Corporate
Governance” for my project work.
Corporate governance is a new area undertaken and implemented by companies to
derive different benefits like creating confidence in minds of all stakeholders of the
This project highlights on the concept, objects and models of corporate governance. It
also throws light on why corporate governance gained momentum in India.
During my visit to Raymond Ltd I interviewed Mrs. Priti Alkari, Deputy Company
Secretary, which helped me to observe whether CG was followed in its strict sense or if
it was restricted only to a policy on paper.
My project report consists of corporate governance practices followed in two
companies. These case studies prove that corporate governance practice is followed for
the sake of compliance by one company and by other company beyond expectations of
Law, SEBI and stakeholders.
The issue of corporate governance has become a matter of concern for corporations as
they see it as a prerequisite for attracting funds from foreign financial institutions.
Moreover, investors want to ensure that the companies they invest in are not only
managed properly, but also have proper corporate governance.

Corporate governance is beyond the realm of law. It cannot be regulated by legislation

alone. Legislation can only lay down a common framework – the "form" to ensure
standards. The "substance" will ultimately determine the credibility and integrity of the
process. Substance is inexorably linked to the mindset and ethical standards of the

In ancient India, the ruling emperors decided the concept and practice of governance.
The treatise on economic administration, Arthashastra, written roughly 315 years
before Christ, developed a complete structure of governance in a kingdom with clear
demarcation of authority, responsibility and accountability. In the Far East, Japan and
China also placed the governance in the hands of their kings.

In the post Christ period, with improved navigation and availability of vessels, the
traders from Europe, especially the Portuguese and the Dutch explored the known
expanse of the earth and gave rise to global trading entities. These entities reported to
the kings. This was the beginning of corporate governance. As we approach the 16th
century, the most powerful trading nation, England, formed a variety of regulations and
regulatory authorities such as joint stock companies and Bank of England to govern all
trading activities on a platform of accountability, efficiency, effectiveness and stake
holder’s satisfaction. The concept of corporate governance was the basic platform for
these regulations and regulatory authorities and over a period of time the concept and
its practice took a firm root for all activities.

As market forces increasingly replace government controls, corporate governance is

fast gaining prominence in business circles. The issue of corporate governance has
become a matter of concern for corporations as they see it as a prerequisite for
attracting funds from foreign financial institutions. Moreover, investors want to ensure
that the companies they invest in are not only managed properly, but also have proper
corporate governance, Investors regard corporate governance as a control mechanism
that ensures the optimum use of human, physical and financial resources for an
enterprise. Further, GATT and WTO regulations call for adherence to good governance
We have come across companies which apparently were very efficiently managed but
which landed in troubles due to poor governance. There are cases in India where the
companies that are considered as blue chip companies, going in for allegedly illegal
transactions like Hawala transactions, which raise questions about the level of their
governance. In other words, the issue of corporate governance is an issue of agency
function namely how to ensure that the interests of the investors are taken care of This
is not only in terms of return on investment by effective management, but also ensuring
that the enterprises do not indulge in corrupt practices or acts which are unethical Such
practices may have adverse consequences on the long-term interests of the
Corporate governance is concerned with the way in which corporate entities are
governed, as distinct from the way in which businesses within those companies are
managed It addresses various issues facing the boards of directors, which relate to the
interaction with top management, relationship with the owners, other stakeholders and
society at large. Ensuring better corporate performance through involvement in strategy
formulation aid policymaking corporate conformance through top management
supervision and accountability to the stakeholders come under the ambit of corporate
Corporate governance in a developing-country setting takes on additional importance.
Good corporate governance is vital because of its role in attracting foreign investment.
The extent of foreign investment, in turn, shapes the prospects for economic growth for
many developing countries. This Note presents an in-depth inquiry into corporate
governance in one such developing country, India. While India's corporate-governance
framework is advanced for a developing country, it still can be significantly improved.


The term Corporate Governance is not easy to define. The term governance relates to a
process of decision making and implementing the decisions in the interest of all
stakeholders. It basically relates to enhancement of corporate performance and ensures
proper accountability for management in the interest of all stakeholders.

The Cadbury Report of 1991 on Corporate Governance considers it as a system

through which corporates are guided and directed. On the basis of this definition, the
Core Objectives of Corporate Governance can be defined as under: • Strategic Focus •
Predictability • Transparency • Participation • Accountability • Efficiency &
Effectiveness • Stakeholder Satisfaction. The Strategy Focus defines the direction the
organization should take to meet its goals and to ensure Stakeholder Satisfaction. The
Strategic Focus should be based on Predictability as the evolution of strategies have to
consider the dynamic environment within which it has to operate and hence the
challenges from the environment need to be anticipated. A well-designed process to
evolve and deploy strategy has to have Transparency for all stakeholders so that there is
a commitment and an understanding of the result expected from the operations. For
proper execution of any processes aimed at achieving the desired end result,
Participation of all stakeholders is important and actually necessary. The participation
should have a clear goal of Efficiency and Effectiveness of the organization as a whole
and this where Accountability is the key. All stakeholders have to have a clear
understanding of their accountability for the most effective operations of any

“Corporate governance involves a set of relationships between a company’s

management, its board, its shareholders and other stakeholders also the structure
through which objectives of the company are set, and the means of attaining those
objectives and monitoring performance are determined.”
– Preamble to the OECD Principles of Corporate Governance, 2004
“…fundamental objective of corporate governance is the ‘enhancement of the long-
term shareholder value while at the same time protecting the interests of other
stakeholders.” SEBI (Kumar Mangalam Birla) Report on Corporate Governance,
January, 2000

"Corporate governance is maximizing the shareholder value in a corporation while

ensuring fairness to all stakeholders, customers, employees, investors, vendors, the
government and the society-at-large. Corporate governance is about transparency and
raising the trust and confidence of stakeholders in the way the company is run. It is
about owners and the managers operating as the trustees on behalf of every shareholder
- large or small." - Shri N.R. Narayana Murthy, Chief Mentor, Infosys Limited.

Corporate governance is essentially about leadership:

– leadership for efficiency;
– leadership for probity;
– leadership with responsibility; and
– leadership which is transparent and which is accountable.
“Corporate Governance is the application of best management practices,
Compliance of law in true letter and spirit and adherence to ethical standards for
effective management and distribution of wealth and discharge of social responsibility
for sustainable development of all stakeholders”.- The Institute of Company
Secretaries of India

Report of SEBI committee (India) on Corporate Governance defines corporate

governance as the acceptance by management of the inalienable rights of shareholders
as the true owners of the corporation and of their own role as trustees on behalf of the
shareholders. It is about commitment to values, about ethical business conduct.
Corporate governance practices are a set of structural arrangements that ire emerging in
free-market economies to align the management of companies with the interests of their
shareholders (in particular) and other stakeholders, and society at large.
Corporate governance addresses three basic issues:
• Ethical issues
• Efficiency issues, and
• Accountability issues
Ethical issues are concerned with the problem of fraud, which is becoming wide spread
in capitalist economics. Corporations often employ fraudulent means to achieve their
goals. They form cartels to exert tremendous pressure on the government to formulate
public policy, which may sometimes go against the interests of individuals and society
at large. At times corporations may resort to unethical means like bribes, giving gifts to
potential customers and lobbying tinder the cover of public relations in order to achieve
their goal of maximizing long-term owner value.

Efficiency issues are concerned with the performance of management. Management is

responsible for ensuring reasonable returns on investment made by shareholders. In
developed countries, individuals usually invest money through mutual, retirement and
tax funds. In India, however, small shareholders are still an important source of capital
for corporations as the mutual finds industry is still emerging. The issues relating to
efficiency of management is of concern to shareholders as there is no control
mechanism through which they am control the activities of the management whose
efficiency is detrimental for returns on their (shareholders) investments.

The management of a corporation is accountable to its various stakeholders.

"Accountability issues" emerge out of the stakeholders' need for transparency of
management in the conduct of business. Since the activities of a corporation influence
the workers, customers and Society at large, some of the accountability issues tire
concerned with the social responsibility that a corporation must shoulder.

The growing scale of corporations and their style of functioning have raised many new
issues that must be addressed by corporate governance. Some of these issues are:
• The growth of private companies
• Tire magnitude and complexity of corporate groups
• The importance of institutional investors
• Rise in hostile activities of predators (take over.)
• Insider trading
• Litigations against directors
• Need for restructuring of boards
• Changes in auditing practices
The emergence of private companies and the growing complexity of corporate groups
is one of the main concerns of corporate governance. Initially, limited liability
companies were incorporated to raise outside capital. Later, these corporations used
their powers as a legal person under law to acquire shares in other companies. This
resulted in the formation of new companies that took over the assets and liabilities of
the original companies before winding them up. This led to a spate of mergers and
acquisitions in the late nineteenth and twentieth centuries.
Corporate governance is also concerned with the growing influence of institutional
investors on the corporations. Issues concerning hostile takeovers particularly
management buy-outs, tire also addressed by corporate governance. Insider trading,
imbalanced boards and compliance with international accounting standards the other
issues that are addressed by corporate governance.
Jenson feels that corporations should incur some cost to ensure management
compliance. These costs result from setting up of monitoring mechanisms like boards,
which require appointment of outside independent directors to carry out checks like
audits to evaluate the performance of top management. These theories of corporate
governance laid the foundations for further studies in corporate governance.
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. It integrates all the participants
involved in a process, which is economic, and at the same time social.

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. Hence it harmonizes the need for a company to strike a balance at
all times between the need to enhance shareholders' wealth whilst not in any way being
detrimental to the interests of the other stakeholders in the company. Further, its
objective is to generate an environment of trust and confidence amongst those having
competing and conflicting interests.

It is integral to the very existence of a company and strengthens investor's confidence

by ensuring company's commitment to higher growth and profits. Broadly, it seeks to
achieve the following objectives:

 A properly structured board capable of taking independent and objective

decisions is in place at the helm of affairs;
 The board is balance as regards the representation of adequate number of non-
executive and independent directors who will take care of their interests and
well-being of all the stakeholders;
 The board adopts transparent procedures and practices and arrives at decisions
on the strength of adequate information;
 The board has an effective machinery to subserve the concerns of stakeholders;
 The board keeps the shareholders informed of relevant developments impacting
the company;
 The board effectively and regularly monitors the functioning of the
management team;
 The board remains in effective control of the affairs of the company at all times.

The overall endeavour of the board should be to take the organisation forward so as to
maximize long term value and shareholders'
Evolution of corporate governance in India
Earlier the government was expected to ensure good corporate conduct. Most
shareholders believed that stringent government controls would prevent malpractices of
the corporations for fear of punishment. However, there was soon a growing realization
that government was not always the best guardian of public interest. Shareholders
began to feel the need for market driven corporate governance flint would be more
democratic and flexible. This led to the birth of self imposed corporate governance
within the corporate system. The active participation of various stakeholders like
shareholders, financial institutions, etc. have strengthened the corporate governance
mechanism and helped it to evolve beyond set of static rules.

Many factors have contributed to the evolution of corporate governance. Some of this
• The responsibility for ensuring good corporate conduct shifted from
government to a free-market economy.
• Active participation of individual and institutional investors.
• Increasing competition in global economy.
With the relaxation of direct and indirect administrative controls by the government,
alternative mechanisms became necessary to monitor the performance of corporations
in free-markets. Shareholders believed that market forces could ensure good corporate
conduct (self imposed) by way of rewarding success and punishing failures of
corporations. Many free-market economies laid down effective regulations to monitor
the corporations. However, regulations alone do not ensure good governance. To
become effective, they must be enforceable by law.

The second factor that boosted corporate governance is the growth of global fund
management business. Institutional investors such as insurance companies, pension and
tax funds account for more than half the capital in the corporations of USA, This trend
is also growing in India. Earlier Institutional investors did not monitor the activities of
the corporations in which they invested. But the competition in the fund management
business has forced them to take an active role in governance in order to safeguard their
investments in the corporations. Now, many institutional investors express their views
strongly with regard to various matters such is financial and operational performance,
business strategy, remuneration of top-level managers etc. Along with the non-
executive directors, these institutional investors monitor the performance of
The active investor demands good performance in the form of return oil investment and
they also expect timely and accurate information regarding the performance of the
company. Institutional investors can exert pressure on the management as they own a
considerable share in the capital and any criticism from these investors can have a
major impact oil the share prices. Investors believe that only strong corporate
governance mechanisms and practices can save them from the ever-growing power of
corporations, which call influence public policy to the detriment of investors.
The enhanced competition ill the global economy has compelled corporations to
perform better by going in for cost-cutting, corporate restructuring, mergers &
acquisitions, downsizing etc. All these activities can be carried out successfully only if
there is proper corporate governance. Thus, market forces, active individual and
institutional investor participation, and enhanced competition have helped corporate
governance to evolve beyond a set of static rules.
• Unlike South-East and East Asia, the corporate governance initiative in India
was not triggered by any serious nationwide financial, banking and economic
• The initiative in India was initially driven by an industry association, the
Confederation of Indian Industry
• In December 1995, CII set up a task force to design a voluntary code of
corporate governance.
• The final draft of this code was widely circulated in 1997.
• In April 1998, the code was released. It was called Desirable Corporate
Governance: A Code.
• Between 1998 and 2000, over 25 leading companies voluntarily
followed the code: Bajaj Auto, Hindalco, Infosys, Dr. Reddy’s
Laboratories, Nicholas Piramal, Bharat Forge, BSES, HDFC, ICICI and
many others
• Following CII’s initiative, the Securities and Exchange Board of India (SEBI)
set up a committee under Kumar Mangalam Birla to design a mandatory-cum-
recommendatory code for listed companies
• The Birla Committee Report was approved by SEBI in December 2000
• Became mandatory for listed companies through the listing agreement, and
implemented according to a rollout plan:
– 2000-01: All Group A companies of the BSE or those in the S&P CNX
Nifty index… 80% of market cap.
– 2001-02: All companies with paid-up capital of Rs.100 million or more
or net worth of Rs.250 million or more.
– 2002-03: All companies with paid-up capital of Rs.30 million or more
– Following CII and SEBI, the Department of Company Affairs (DCA) modified
the Companies Act, 1956 to incorporate specific corporate governance
provisions regarding independent directors and audit committees.
– In 2001-02, certain accounting standards were modified to further improve
financial disclosures. These were:
– Disclosure of related party transactions.
– Disclosure of segment income: revenues, profits and capital employed.
– Deferred tax liabilities or assets.
– Consolidation of accounts.
– Initiatives are being taken to (i) account for ESOPs, (ii) further increase
disclosures, and (iii) put in place systems that can further strengthen auditors’

With the goal of promoting better corporate governance practices in India, the Ministry
of Corporate Affairs, Government of India, has set up National Foundation for
Corporate Governance (NFCG) in partnership with Confederation of Indian Industry
(CII), Institute of Company Secretaries of India (ICSI) and Institute of Chartered
Accountants of India (ICAI).

Studies of corporate governance practices across several countries conducted by the

Asian Development Bank, International Monetary Fund, Organization for Economic
Cooperation and Development and the World Bank reveal that there is no single model
of good corporate governance.

The OECD Code also recognizes that different legal systems, institutional frameworks
and traditions across countries have led to the development of a range of different
approaches to corporate governance. However, a high degree of priority has been
placed on the interests of shareholders, who place their trust in corporations to use their
investment funds wisely and effectively is common to all good corporate governance

One area of concern is whether the accounting firm acts as both the independent auditor
and management consultant to the firm they are auditing. This may result in a conflict
of interest which places the integrity of financial reports in doubt due to client pressure
to appease management. The power of the corporate client to initiate and terminate
management consulting services and, more fundamentally, to select and dismiss
accounting firms contradicts the concept of an independent auditor. Changes enacted in
the United States in the form of the Sarbanes-Oxley Act (in response to the Enron
situation as noted below) prohibit accounting firms from providing both auditing and
management consulting services. Similar provisions are in place under clause 49 of
SEBI Act in India.

The Enron collapse is an example of misleading financial reporting. Enron concealed

huge losses by creating illusions that a third party was contractually obliged to pay the
amount of any losses. However, the third party was an entity in which Enron had a
substantial economic stake. In discussions of accounting practices with Arthur
Andersen, the partner in charge of auditing, views inevitably led to the client

In India, the concept of corporate governance is still in its nascent stage. The
recommendations of Kumaramangalam Birla and CII committees' reports are the first
steps in India towards ensuring better corporate governance. Prior to these
recommendations SEBI has take various steps to strengthen corporate governance in
India. Some of these steps are as follows:
• Strengthening of disclosure norms for Initial Public Offers following the
recommendations of the Committee set up by SEBI under the Chairmanship of Shri Y
H Malegam;
• Providing information in directors' reports for utilization of funds and variation
between projected and actual use of funds according to the requirements of the
Companies Act ' inclusion of cash flow and funds flow statement in annual reports
• Declaration of quarterly results;
• Mandatory appointment of compliance officer for monitoring the share transfer
process and ensuring compliance with various rules and regulations;
The underlying principles of corporate governance revolve around three basic inter-
related segments. These are:
 Integrity and Fairness
 Transparency and Disclosures
 Accountability and Responsibility
The organizational framework for corporate governance initiatives in India consists of
the Ministry of Corporate Affairs (MCA) and the Securities and Exchange Board of
India (SEBI). The first formal regulatory framework for listed companies specifically
for corporate governance was established by the SEBI in February 2000, following the
recommendations of Kumarmangalam Birla Committee Report. It was enshrined as
Clause 49 of the Listing Agreement.

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

The Ministry of Corporate Affairs had also appointed Naresh Chandra Committee on
Corporate Audit and Governance in 2002 in order to examine various corporate
governance issues. It made recommendations in two key aspects of corporate
governance: financial and non-financial disclosures: and independent auditing and
board oversight of management.
The Main Constituents of Good Corporate Governance are:

 Role and powers of Board: the foremost requirement of good corporate

governance is the clear identification of powers, roles, responsibilities and
accountability of the Board, CEO and the Chairman of the board.
 Legislation: a clear and unambiguous legislative and regulatory framework is
fundamental to effective corporate governance.
 Code of Conduct: it is essential that an organization's explicitly prescribed
code of conduct is communicated to all stakeholders and is clearly understood
by them. There should be some system in place to periodically measure and
evaluate the adherence to such code of conduct by each member of the
 Board Independence: an independent board is essential for sound corporate
governance. It means that the board is capable of assessing the performance of
managers with an objective perspective. Hence, the majority of board members
should be independent of both the management team and any commercial
dealings with the company. Such independence ensures the effectiveness of the
board in supervising the activities of management as well as make sure that
there are no actual or perceived conflicts of interests.
 Board Skills: in order to be able to undertake its functions effectively, the
board must possess the necessary blend of qualities, skills, knowledge and
experience so as to make quality contribution. It includes operational or
technical expertise, financial skills, legal skills as well as knowledge of
government and regulatory requirements.
 Management Environment: includes setting up of clear objectives and
appropriate ethical framework, establishing due processes, providing for
transparency and clear enunciation of responsibility and accountability,
implementing sound business planning, encouraging business risk assessment,
having right people and right skill for jobs, establishing clear boundaries for
acceptable behaviour, establishing performance evaluation measures and
evaluating performance and sufficiently recognizing individual and group
 Board Appointments: to ensure that the most competent people are appointed
in the board, the board positions must be filled through the process of extensive
search. A well defined and open procedure must be in place for reappointments
as well as for appointment of new directors.
 Board Induction and Training: is essential to ensure that directors remain
abreast of all development, which are or may impact corporate governance and
other related issues.
 Board Meetings: are the forums for board decision making. These meetings
enable directors to discharge their responsibilities. The effectiveness of board
meetings is dependent on carefully planned agendas and providing relevant
papers and materials to directors sufficiently prior to board meetings.
 Strategy Setting: the objective of the company must be clearly documented in
a long term corporate strategy including an annual business plan together with
achievable and measurable performance targets and milestones.
 Business and Community Obligations: though the basic activity of a business
entity is inherently commercial yet it must also take care of community's
obligations. The stakeholders must be informed about the approval by the
proposed and on going initiatives taken to meet the community obligations.
 Financial and Operational Reporting: the board requires comprehensive,
regular, reliable, timely, correct and relevant information in a form and of a
quality that is appropriate to discharge its function of monitoring corporate
 Monitoring the Board Performance: the board must monitor and evaluate its
combined performance and also that of individual directors at periodic intervals,
using key performance indicators besides peer review.
 Audit Committee: is inter alia responsible for liaison with management,
internal and statutory auditors, reviewing the adequacy of internal control and
compliance with significant policies and procedures, reporting to the board on
the key issues.
 Risk Management: risk is an important element of corporate functioning and
governance. There should be a clearly established process of identifying,
analysing and treating risks, which could prevent the company from effectively
achieving its objectives. The board has the ultimate responsibility for
identifying major risks to the organization, setting acceptable levels of risks and
ensuring that senior management takes steps to detect, monitor and control
these risks.

A good corporate governance recognizes the diverse interests of shareholders, lenders,

employees, government, etc. The new concept of governance to bring about quality
corporate governance is not only a necessity to serve the divergent corporate interests,
but also is a key requirement in the best interests of the corporates themselves and the

Also, irrespective of the model, there are three different forms of corporate
responsibilities which all models do respect:

 Political Responsibilities: the basic political obligations are abiding by

legitimate law; respect for the system of rights and the principles of
constitutional state.
 Social Responsibilities: the corporate ethical responsibilities, which the
company understands and promotes either as a community with shared values
or as a part of larger community with shared values.
 Economic Responsibilities: acting in accordance with the logic of competitive
markets to earn profits on the basis of innovation and respect for the
rights/democracy of the shareholders which can be expressed in terms of
managements' obligation as 'maximizing shareholders value'.
1] Anglo - American Model
Many models of corporate governance try to involve various stakeholders like
shareholders, employees and financial institutions in the governance of the company. In
this section we will discuss the Anglo -American, German Japanese, and Indian models
of corporate governance.
In this model of corporate governance, shareholders elect the board of directors. They
take up the advisory role. Shareholders usually control a private corporation through
the board of directors. The board of directors performs three functions on behalf the
shareholders: representation, direction and oversight. The Board appoints and
supervises the officers (managers) who take care of the daily activities of the

The structural framework of the Anglo-American model as laid down by the legal
system is shown in the Figure below. Employees, suppliers and creditors are
stakeholders in the corporation. The creditors have a lien on the assets of the
corporation The Board of Directors designs the policy of the corporation, which is then
implemented by the management, using a well-designed information system the board
monitors the implementation of this policy in the organization. This model is most
suitable for a production or manufacturing organization as it facilitates efficient
monitoring of production, exchange and performance.
2] German model of corporate governance
In the Gentian model of corporate governance, even though the shareholders own the
corporation, they do not directly control the governance mechanism. Half of the
members on the supervisory board are elected by file labor unions while the remaining
are elected by the shareholders (owners). In this model the employees are not just
stakeholders, but also have a say in the governance mechanism.

Thus, employees become responsible for the policies that are to be implemented by
them for attaining the objectives (profit, market share, high volumes ... etc) of the
organization. Tire supervisory board, which is appointed jointly by the shareholders
and the labor unions (employees), appoints and monitors the management board. This
management board conducts the day-to-day operations of the organization
independently. But, it has to report to the supervisory board. One of the Unique features
of this model is that the labor relations' officer finds a place on the management board,
This ensures workers participation in the governance mechanism This model of
corporate governance and the relationship between various constituents is as shown in
Figure below.

3 ] Japanese Model
In the Japanese model of corporate governance, the financial institutions have a major
say in the governance mechanism. The shareholders, along with the banks, appoint the
members of the board. In this model even the president is appointed on the basis of a
consensus between the shareholders and the banks. The president consults the board
and their relation is hierarchical in nature. Usually the board ratifies whatever decisions
the president takes. The financial institutions that finance the business have a crucial
role in it even though the shareholders are the owners of the business. In this model, the
executive management (board of directors) carries out file management function.
Sometimes the financial institutions monitor the management function by nominating
the managerial personnel. The banks even have the power to suspend the board in case
of an emergency. This model is as shown in the Figure below.

4] Indian Model

The Indian model of corporate governance is a mix of the Anglo-American and

German models. Corporations in India can be grouped into three categories: private
companies, public companies, banks and other corporations.
The founder, his family, and associates closely hold the private companies and they
exercise maximum control over the activities of the company The businesses of private
companies like that of the Tata group, the Reliance group, or the Birla group, are
financed by retained earnings or/and debt. The role of external equity finance is
In the case of public enterprises, the central and state governments choose tile members
of the board. Even after the disinvestment of some public sector companies, the
government continues to have a considerable hold over the activities of the company.
Here the interests of the stakeholders are given low priority, large public sector
enterprises are run to serve the interests of the government rather than aiming for
efficiency and maximizing long-term owner value.
A director assumes two roles while governing the activities of an organization. They
• The performance role
• The conformance role
Performance Role
In this role, the director performs various activities that are aimed at improving [fie
overall performance of the corporation. Firstly, a director act as a source of knowhow,
expertise and external information, secondly, he caters to needs of the corporation for
networking, representing and adding status.
The director brings into the corporation the knowledge and experience required to solve
the problems that the board faces, Outside directors sometimes play the role of
-specialists," drawing upon their expertise, knowledge and skills in different areas such
as finance marketing, law, and engineering. The outside directors appointed by the
corporations on their boards usually play the role of specialists. The outside directors
act as the eye of the board to the external world. They bring in information related to
international markets, the financial or technological environment etc, which is not
readily accessible to the corporation. Generally outside directors are hand picked from
influential groups in the society. Corporations use them to gain access to these groups.
The directors represent the company on public forums or committees. They act with the
media on behalf of the corporation.
The presence of outside directors who are renowned in various fields enhances the
status, reputation and credibility of the board. This boosts customer/shareholder
confidence in the company.
Conformance Role
In this role the director is concerned with ensuring that the company follows the
policies and procedures laid down by the board. Directors usually accomplish this by
questioning and supervising the executive management. Conformance role is a very
tricky role as it involves, monitoring and evaluating their own performance, (in case of
majority/All-executive boards.
What Should a Board Do?
1. Exercise leadership, enterprise, integrity and judgment in directing the corporation so
as to achieve continuing prosperity for the corporation and to act in the best interests of
the business enterprise in a manner based on transparency, accountability and
2. Ensure that through a managed and effective process board appointments are made
that provide a mix of proficient directors, each of whom is able to add value and to
bring independent judgment to bear on the decision-making process;
3. Determine the corporation's purpose and values, determine the strategy to achieve its
purpose and to implement its values in order to ensure that it survives and thrives, and,
ensure that procedures and practices are in place that protect the corporation's assets
and reputation;
4. Monitor and evaluate the implementation of strategies, policies, management
performance criteria and business plans;
5. Ensure that the corporation complies with all relevant laws, regulations and codes of
best business practice;
6. Ensure that the corporation communicates with shareholders and other stakeholders
7. Serve the legitimate interests of the shareholders of the corporation and account to
them fully;
8. Identify the corporation's internal and external stakeholders and agree on a policy, or
policies, that indicate how the corporation should relate to them;
9. Ensure that no one person or a block of persons has unfettered power and that there
is an appropriate balance of power and authority on the board which is, inter alia,
usually reflected by separating the roles of the chief executive officer and Chairman,
and by having a balance between executive and non-executive directors,
10. Regularly review processes and procedures to ensure the effectiveness of the
board's its internal systems of control, so that its decision-making capability and the
accuracy of its reporting and financial results are maintained;
11. Regularly assess its performance and effectiveness as a whole, and that of the
individual directors, including the chief executive officer,
12. Appoint the chief executive officer and at least participate in the appointment of
senior management, ensure the motivation and protection of intellectual capital intrinsic
to the corporation, ensure that there is adequate training in the corporation for
management and employees, and a succession plan for senior management;
13. Take care that all technology and systems used in the corporation are adequate to
properly run the business and ensure that it remains a meaningful competitor;
14. Identify key risk areas and key performance indicators of the business enterprise
and monitor these factors;
15. Ensure annually that the corporation will continue as a going concern for the next
fiscal year.
Independent outside directors is in good position to analyze issues that are brought to
the notice of the board from a perspective that is different from that of the executive
directors. This independent evaluation of the top management's performance
overcomes the danger of adoption of a narrow vision of the executive board.

The company law lays down the duties and responsibilities of the board of directors.
Directors also have certain duties and responsibilities, which are embedded in the laws
of insolvency, consumer protection, employment act, mergers and monopolies, and
other securities and stock exchange rules. The responsibilities of the directors may
differ from country to country, but there are some responsibilities that are common to
directors all over the world. These are:
• Responsibilities to shareholders
• Obligation to maintain honesty and integrity.

The shareholders of a company appoint the directors. Hence, the basic responsibility of
the directors is towards the shareholders. Directors fulfill this responsibility by
providing strategic direction to the company by setting appropriate policies and
monitoring the performance of the top management. Directors are also accountable to
the shareholders. They have to give the shareholders regular reports and accounts,
which are duly audited, Directors are expected to be honest in their dealings with the
shareholders and to take decisions that will benefit the organization as a whole. All the
shareholders must be given adequate and accurate information regarding every issue
that could affect their interests.


The Companies Act makes directors liable for the following:
- Misrepresentations in offer documents and annual accounts
- Failure to refund subscription money to investors
- Contravention of the law
Duties of Directors
- Exercise care in the discharge of functions as directors.
- Attend board meetings and devote sufficient time and attention to the affairs of the
- Not to be negligent and not to commit or let others commit tort-liable acts Act in the
best interest of the company and its stockholders and customers
- Not to misuse power
- Protect interests of creditors
- Maintain confidentiality
- Not to make secret profits and make good loss, if accrued due to breach of duty, of
- Not to exercise powers for a collateral purpose.
- Not to waste company assets.
The role of the chairman is to manage the board and ensure that its policies are put into
practice by the management. He also has to work closely with the company secretary to
address legal issues. The chairman must have a good understanding of the financial
standing of the company. He must keep a strict watch on the company's actual
performance. The chairman should have a clear idea of where the company stands and
where it is headed.
He should also have clear understanding of the way in which a company is managed He
must identify shortcomings and see that the board discusses these. A chairman should
play a proactive role and should be in a position to identify a problem even before the
CEO recognizes or senses it. By being proactive the chairman can help the CEO take
corrective action before things get out of hand, The chairman also plays crucial role in
maintaining good relations between the board and the company' stakeholders. In the
process of maintaining such relations lie ensures that the board makes decisions in
accordance with the interest of shareholder and all other stakeholders of the company.
The primary responsibility of the chairman lies in catering to the internal needs of the
board and its conduct. He has to handle people from varied fields who serve the board
A chairman must have good interpersonal relations. For ensuring functioning of it
board a chairman should forge good relationships with the CEO, executive and not
executive directors.

Relationship with the CEO

The chairman must have a good relationship with the CEO. This will not only give him
broad understanding of 'what is going on in the organization, but also allow him
determine whether the CEO is working towards achieving the set targets or not.
Strained relations between the CEO and chairman may turn out to be detrimental the
company. Differences with the chairman may compel the CEO to withhold information
from him.

Relationship with Executive Directors

It is the responsibility of the chairman to ensure that the executive directors report the
activities of the organization in an honest way. The information presented to the
executive directors determines the effectiveness of the contribution of the no executive

Relationship with non-executive Directors

Cordial relations with the non-executive directors enable the chairman to motivate,
them to make decisions that are beneficial to the company. A good chairman should
have the ability to attract and maintain good non-executive directors on his board.


Some of the functions of a chairman, apart from the roles and responsibilities discussed
above are:
- To set standards and ensure that policies and practices are in place.
- To ensure that the directors take good decisions.
- To make sure that directors are continuously upgraded to the levels required
investors to meet the current and future needs of the company.
- To act decisively in times of crisis
- To act as a representative of the company.


The primary role of a CEO is to run the organization in an efficient
manner to produce the desired results. Apart from running the business effectively, the
CEO is expected to have a constructive working relationship with the chairman and the

Relation with the Chairman

The CEO should establish a constructive working relationship with the chairman. This
requires a high degree of trust, respect, and an ability to communicate openly with each
other. When the CEO and chairman know each others strengths and weakness they can
work closely, complementing each others strengths to set the future course of the

Relation with Directors

The CEO should maintain cordial relationships with the directors to ensure that they
Act in the interest of the whole organization instead of pursuing the narrow interests of
the owners (shareholders, employees, banks, government etc.) The CEO can use his
good relations with the directors to motivate them to participate actively in improving
the performance of various departments of the organization.
Functions of the CEO
In addition to the roles discussed above, a CEO is expected to be able.
 To assist the executive directors in Formulating strategic proposals that have to
 endorsed by the board.
 To provide leadership and direction to all his executive directors.
 To develop a plan for implementing the strategy formulated by the board and/or
 Management.
 To act as representative of the executive directors when interacting with the
non-executive directors.
 To present the company to major investors, the media and government.
 To be a source of inspiration, leadership and direction to the employees,
customers and suppliers.
 To be able to identify the situations that requires intervention.
The primary function of the Board of directors is to take responsibility for the
performance of the corporation and work to promote its interests on behalf of the
shareholders, to whom it is accountable. Corporate boards oversee the performance of
the corporation, its CEO and the top-level managers. The board ensures that timely and
accurate reports are provided oil corporate performance, including the financial
conditions and non-financial indicators of the corporation. It monitors corporate
performance by closely following the progress of the corporation towards the pre-set
goals and targets. The board provides strategic guidance to the corporation; it studies
the future trends so that the corporation has the necessary and adequate resources to
secure its long-term position. The board has to maintain good relations with the
stakeholders and try to keep the shareholders happy. Apart from carrying out the above
functions, the board enacts various performance and conformance roles.

Kumarmangalam Committee Recommendations - Composition of Audit

The composition of the audit committee is based on the fundamental premise of
independence and expertise. The Committee therefore recommends that
• the audit committee should have minimum three members, all being non executive
directors, with the majority being independent, and with at least one director having
financial and accounting knowledge;
• the chairman of the committee should be an independent director.
• the chairman should be present at Annual General Meeting to answer shareholder
• the audit committee should unite such of the executives, as it considers appropriate
(and particularly the head of the finance function) to be present at the meetings of the
Committee but on occasions it may also meet without the presence of any, executives
of the company, Finance director and head of internal audit and when required, a
representative of the external auditor should be present as invitees for the meetings of
the audit committee;
• the Company Secretary should act as the secretary to the committee.
(These are mandatory recommendations.)

Strategic Role of the Board:

The primary role of the board is to supervise the quality of strategic thinking of the
executive committee. When necessary, the board can take corrective measures to guide
the top management to develop strategies to achieve corporate goals.
The board has a final say in the strategy that decides the fate of the company. The
board has the right to either pass the decisions taken by the executives or question the
effectiveness of these strategies. Hence it is the responsibility of the executives to come
up with proposals for the board to agree on, to improve oil using their collective
experience and expertise in various fields of business, The board, therefore, plays key
role & in leading and directing the organization. Effective boards are familiar with the
activities of the organization and can, as a result, play a major role in guiding the
strategic decision making process of the company. At times, non-executive director on
the board identify and warn the CEO about operational issues that may lead to crisis
situation. The board performs its role in strategy development in the following levels.
• Systematic level strategy
• Structural and portfolio strategy
• Implementation strategy
• Systematic level strategy

Systematic level strategy, formulation is based on the board's understanding of what is

happening in the national, international and global environment. The board's
knowledge about the external environment extends too many areas: socio-political
environment, potential market trends, the impact of changes in technology and the
international competitive forces that have in effect on the company. Since the board
members scan the external environment regularly, they can provide the
executives/management crucial inputs for effective decision-making.
Structural and portfolio strategy is concerned with decisions regarding the structure
of the company and the businesses that it should enter into. The board addresses issue
like what changes can be done in the structure of the company to achieve the growth
aspirations of the board. This level of strategic thinking involves discussions among the
board of directors and the management, relating to acquisitions, mergers, strategic
alliances or sale of a part of the business.
Implementation strategy is concerned with the board's role in ensuring that the
strategy is feasible. 'The board ensures that a broad game plan for implementing the
policies and strategies is in place, so that the management can deliver the desired
Policy Making Role of the Board
The board of directors frames guidelines or policies to ensure that the business plans
and management decisions conform to the corporate strategy. These policies cover all
the key areas like marketing, finance, personnel, operations, customer relations and
research and development. The board develops broad policies for the above areas and
the executives of the organization draw up derived policies (pricing, advertising, sales
and distribution in the marketing field). These policy statements are usually, published
and made available to employees.

Monitoring and Supervisory Role

The board monitors and supervises the corporation to ensure that it adopts the right
strategic direction. It regularly checks whether the business is following the policies
laid down for achieving the goals and inquires into the causes of deviations, if any. The
board reviews the plans, policies and strategies of the corporation in the light of the
changing competitive environment. If necessary it makes changes in the corporations'
strategies. For effective executive supervision, a board has to monitor all the activities
or the company that are crucial for ensuring consistent growth and building market
share. For example, the board of a manufacturing company may have to monitor the
activities concerned with financial performance, market performance, product and
services performance, technological performance, management and organizational
performance, employee relations, acquisitions and divestments, corporate social
responsibility etc.


The board relies on independent outside directors to monitor management performance.
Some important committees usually set up by the board, comprising outside directors,
 Audit committee
 Remuneration committee
 Nomination committee
 Audit Committee
The committee usually consists of independent directors who report to the board. These
committees act as a link between the board and the external auditors. The audit
committee looks into all the matters raised by the external auditors relating to the
management systems and tries to resolve any objections that the auditors raise about the
published financial accounts. Some of the functions of a corporate audit committee are:
To discuss with independent auditors any problems that they experience in completing
the audit.
To review file interim and final accounts in toto
Powers and Functions of the Audit Committee
Being a committee of the board, the audit committee derives its powers from the
authorization of the board. The Committee recommends that such powers should
include powers:
1 .To investigate any activity within its terms of reference.
2. To seek information from any employee.
3. To obtain outside legal or oilier professional advice.
4. To secure attendance of outsiders with relevant expertise, if it considers necessary.
(This is a mandatory recommendation)
As the audit committee acts as the bridge between the board, the statutory auditors and
internal auditors, the Committee recommends that its role should include the following:
1. Oversight of the company's financial reporting process and the disclosure of its
financial information to ensure that the financial statement is correct, sufficient and
2. Recommending the appointment and removal of external auditor, fixation of audit
fee and also approval for payment for any other services.
3. Reviewing with management the annual financial statements before submission to
the board focusing primarily on:
a. Any changes in accounting policies and practices.
b. Major accounting entries based on exercise of. judgment by management.
c. Qualifications in draft audit report.
d. Significant adjustments arising out of audit.
e. The going concern assumption.
f. Compliance with accounting standards
g. Compliance with stock exchange and legal requirements concerning financial
h. Any related party transactions i.e. transactions of the company of material nature,
with promoters or the management, their subsidiaries or relatives etc. that may have
potential conflict with the interests of company at large.
4. Reviewing with the management, external and internal auditors, the adequacy of
internal control systems.
5. Reviewing the adequacy of internal audit function, including the structure of the
internal, audit department, staffing and seniority of the official heading the department,
reporting structure, coverage and frequency of internal audit.
6. Discussion with internal auditors of any significant findings and follow-up thereon.
7. Reviewing the findings of any internal investigations by the internal auditors into
matters here there is suspected fraud or irregularity or a failure of internal control
systems of a material nature and reporting the matter to the board.
8. Discussion with external auditors before the audit commences, of the nature and
scope of audit. Also post-audit discussion to ascertain any area of concern.
9. Reviewing the company's financial and risk management policies.
10. Looking into the reasons for substantial defaults in the payments to the depositors,
debenture holders, shareholders (in case of non-payment of' declared dividends) and
To inform the board about the effectiveness of Internal controls and the quality of
financial reporting as pointed out by the independent auditors.
To make recommendations regarding the audit fee, selection and replacement of

Remuneration Committee
Shareholders are becoming concerned about the lack of transparency regarding the
remuneration of directors and top-level managers. The board sets up the remuneration
or compensation committee to objectively review the remuneration packages of the
executive directors and other top-level managers. This committee, which is made up of
independent directors, chalks out the remuneration policy. Such a policy checks the
unreasonable increase of executive remuneration.
The remuneration committee designs a transparent remuneration policy that can attract
and retain directors and top management and motivate them to achieve the long-term
goals of the organization.
Nomination Committee
These committee are usually set up to select the new non-executive directors. Usually,
it is headed by the chairman and it shortlists and interviews the final candidates.
A code is a set of rules, which are accepted as general principles, or a set of written
rules, which state how people in a particular organization or country should behave,
Thus, it is a set of standards agreed on by a group of people who do a particular job. A
regulation is an official rule that lays down how things should be done. Both codes and
regulations are "sets of rules" or "principles" or "standards" that are intended to control,
guide, or manage behavior or the conduct of individuals working in organizations, the
basic difference being that codes are "self-imposed or self regulated" sets of rules,
while regulations are "official," i.e. imposed by the State (government).
Many corporate governance codes were developed by non-governmental organizations.
Stock exchanges, investor groups and professional associations were responsible for
promoting and commissioning codes or principles for corporate governance. In addition
to the codes developed by non-governmental organizations, governments also issue
rules or guide lines on matters concerning, governance through capital market
regulatory organizations like SEBI.
Losses suffered by investors and leaders in the recent past (throughout the world) raised
concern about standards of financial reporting and accountability of management.
Many believed that these losses could have been avoided if companies had transparent
reporting practices and good corporate governance. In recent e-governments and
corporates have made sincere efforts to design corporate codes govern the functioning
of corporations. Some of the important reports on corporate governance published in
India and abroad are:
 Kumar Mangalam Birla Committees
 CII Committee Report
 Cadbury Committee Report
 OECD Report
Cadbury Committee Report
A committee was set up under the chairmanship of Adrian Cadbury in July 1991 the
Financial Reporting Council, the London Stock Exchange and the accountant
profession to took into the financial aspects of corporate governance. The committee
first submitted its report for public scrutiny on 27 May, 1992. The recommendations
made by the Cadbury Committee are as follows
 Decision -making power should not be vested in a single person. i.e. there
should be a separation of the roles of chairman and chief executive.
 Non-executive directors should act independently while giving their judgment
issues of strategy, performance, allocation of resources and designing codes
 A majority of directors should be independent non-executive directors, i.e. III,
should not have any financial interests in the company.
 The term of a director should not exceed three years. This can be extended on
with the prior approval of the shareholders.
 There should be full transparency in matters relating to directors emoluments.
There should be a judicious mix of salary and performance related pay.
 A Remuneration committee made up wholly or largely to non-executive
director should decide on the pay of the executive directors.
 The Interim company report should give the balance street information and
should. be reviewed by the auditor.
 The pension funds should be managed distinct from the company.
 There should be a "professional and objective" relationship between the boar
and the executives.
 Information regarding the audit fee should be made public and there should t
regular rotation of auditors.
The recommendations made by the Cadbury committee were widely accepted by
corporates in U.K. and they became a reference point for many other committees,
which were set up by various governments all over the world. Refer to Appendix II for
summary of the Cadbury report.

Kumarmangalam Birla Committee Report

Kumar Mangalam Birla headed the committee appointed by, the Securities and
Exchange Board of India (SEBI) on May 7, 1999. The committee was formed to
promote and raise the standards of corporate governance. The objective of this
committee was to:
• Suggest suitable amendments to the listing agreement executed by the stock
exchanges with the Companies and any other measures to improve the standards of
corporate governance in the listed Companies, in areas such as continuous disclosure of
material information, both financial and non-financial, manner and frequency of such
disclosures, responsibilities of independent and outside directors;
• Draft a code of corporate best practices; and
• Suggest safeguards to be instituted within the companies to deal with insider
information and insider trading.
The Kumara Mangalam Birla Committee identified the shareholders, the board of
directors and the management of a company as the three constituents that have a key
role to play in corporate governance. This committee tried to identify the roles and
responsibilities of each of the above mentioned constituents in ensuring effective
corporate governance. Some of the recommendations made by Kumara Mangalam
Birla committee are as follows.
1. The Board should have an optimum combination of Executive and non-
executive directors and at least 50% of the Board should comprise of non-
executive directors. Further, at least one-third of the Board should comprise of
independent directors where Chairman is non-executive and at least half of the
Board should be independent in case of an executive Chairman,
2. A qualified and all independent "Audit Committee" should be set up by the
Board of the company. This would go a long way in enhancing the credibility of
the financial disclosures of a company and promoting transparency.
3. The Board should set up a "Remuneration Committee" to determine on their
behalf and on behalf of the shareholders with agreed terms of reference, the
company's policy of specific remuneration packages for executive directors
including pension rights and any compensation payment.
4. The Board should set up a committee under the chairmanship of a non-
executive/ independent director to specifically look into shareholder issues
including share transfer and redressing of shareholder complaints.
5. To expedite the process of share transfers, the Board should delegate the power
of share transfer to an officer or a committee or to the registrar and share
transfer agents. The delegated authority should attend to share transfer
formalities at least once in a fortnight.
6. The Corporate Governance section of the Annual Report should make
disclosures on remuneration paid to directors in all forms including salary,
benefits, bonuses, stock options, pension and other fixed as well as performance
linked incentives paid to the directors.
7. The Board meetings should be held at least four times in a year, with a
maximum time gap of four months between any two meetings and all
information recommended by the SEBI Committee should be placed at the
8. As a part of the disclosure related to management, in addition to the Directors'
Report, Management Discussion and Analysis Report should form part of the
Annual Report to the shareholders.
9. All company related information like quarterly results, presentation made by
Companies to analysts may be put on company's website or may be sent in such
a form so as to enable the stock exchange on which the company is listed to put
it on its own website.
10. There should be a separate section on Corporate Governance in the Annual
Report, with details on the level of compliance by the Company. Non-
compliance of any mandatory recommendations with reasons thereof and the
extent to which the no-mandatory recommendations have been adopted should
be specifically highlighted. The Non-executive Chairman of the Company
should be entitled to maintain an office at the Company's expense and also
allowed reimbursement of expenses incurred in performance of his duties. This
will enable him to discharge the responsibilities effectively (This is a non-
mandatory recommendation).
11. No Director should be a member in more than 10 committees or act as chairman
of more than five committees across all Companies in which he is a Director.
Furthermore, it should be a mandatory annual requirement for every Director to
inform the company about the committee positions he occupies in other
Companies and changes.
12. The Company should provide a brief resume, expertise in specific functional
areas and names of Companies, in which the person also holds the directorship
and the membership of committees of the board, while appointing a new
director or re-appointing an existing director. These should form part of the
notice to shareholders.
13. Disclosures to be made to the Board by the management relating to all material
financial and commercial transactions, where they have personal interest that
trial may a potential conflict with the interest of the company at large. These
include dealing in company shares, commercial dealings with both, which have
shareholding of management and their relatives, etc.
14. The half yearly declaration of financial performance including summary of the
significant events in last six months, should be sent to each household of
15. The financial institutions should under normal circumstances have no direct role
in the decision making of the board of the company. They should not have
nominees on the board, merely by virtue of their financial exposure in the
company. There is however a ground for the term lending financial institutions
to have nominees on the boards of the borrower Companies, to protect their
interests as creditors. In such cases, the nominee directors should take an active
interest in the activities of the board and assume equal responsibility, as any
other director on the board.
16. A separate section on compliance with the mandatory recommendations of
Clause 49 should form part of the report and details of non-compliance should
be highlighted.
17. A certificate from the auditors on compliance should form part of the Annual
Report and Annual Return and a copy his to be sent to the Stock Exchanges.
CII Report
The liberalization of the Indian economy and the growth of international competition
made Indian industry recognize the importance or corporate governance for enhancing
its ability to compete in the global market place.
In this context the Confederation of Indian Industry (CII) took the initiative to draft
some codes of corporate governance. A national task force on corporate governance
was set up in mid 1996 under the leadership of Mr. Rahul Bajaj, ex president, CII and
CMD, Bajaj Auto Ltd. Some of the recommendations made by the CII committee on
corporate governance are given below:
1. The full board should meet a minimum of six times a year, preferably it all
interval of two months, and each meeting should have agenda items that require
at least half a day's discussion.
2. Any listed company with a turnover of Rs. 100 crore and higher should have
professionally competent, independent, non-executive directors, who should
constitute at least 30% of the board if the chairman of the company is a non
executitive director, or at least 50% of the board if the chairman and managing
director is the same person.
3. No single person should hold directorships in more than ten Companies. This
ceiling excludes directorships in subsidiaries (where the group has over 50%
equity stake) or associate Companies (where the group has over 25% but no
more than 50% equity stake).
4. For non-executive directors to play a material role in corporate decision making
and maximizing long term shareholder value, they need to become active
participants on the board, not passive advisors; have clearly defined
responsibilities within the board such as the audit committee, and know-how to
read a balance sheet, profit and loss account, cash flow statements and financial
ratios and have some knowledge of various company laws. This, of course,
excludes those who are invited to join boards as experts in other fields such as
science and technology.
5. To secure better effort from non-executive directors, companies should pay a
commission over and above the sitting fees for the use of professional inputs.
The present commission or 1% of net profits (if the company has a managing
director), or 3% (if there is no managing director) is sufficient; Consider
offering stock options, so as to relate rewards to performance. Commissions are
rewards on current profits. Stock options ire rewards contingent upon future
appreciation of corporate value. Art appropriate mix of the two can align a non-
executive director towards keeping ant eye oil short-term profits as well as
long-term shareholder value.
6. While re-appointing members of the board, Companies should give the
attendance record of [be concerned directors. If a director his not been present
(absent with or without leave) for 50% or more meetings, then this should be
explicitly stated in the resolution that is put to vote. As a general practice, one
should not re-appoint any director who has not had the time to attend even one
half of the meetings.
7. Key information that must be reported and placed before the board must
• Annual operating plans aid budgets, together with up-dated long term
• Capital budgets, manpower and overhead budgets
• Quarterly results for the company as a whole and its operating divisions
or business segments
• Internal audit reports, including cases of theft and dishonesty of a
material nature
• Show cause, demand and prosecution notices received from revenue
authorities that are considered to be materially important. (Material
nature of any exposure that exceeds 1% of the company’s net worth)
Fatal or serious accidents, dangerous occurrences, and any effluent or pollution
• Default in payment of interest or non-payment of the principal on any
public deposit, and/or to any secured creditor or financial institution
• Defaults such as non-payment of inter-corporate deposits by or to the
company. or materially substantial non-payment for goods sold by the
• Any issue which involves possible public or product liability claims of a
substantial nature, including any judgment or order which may have
either passed strictures on the conduct of the company, or taken an
adverse view regarding another enterprise that can have negative
implications for the company
• Details of any joint venture or collaboration agreement
• Transactions that involve substantial payment towards goodwill, brand
equity or intellectual property
• Recruitment and remuneration of senior officers just below the board
level, including appointment or removal of the chief financial officer
and the company secretary
• Labor problems and their proposed solutions
• Quarterly details of foreign exchange exposure and the steps taken by
management to limit the risks of adverse exchange rate movement, if
8. Listed Companies with either a turnover of over Rs. 100 crore a paid-up capital
of Rs. 20 crore should set up audit committees within two years.
Audit committees should consist of at least three members, all drawn from a
company's non-executive directors, who should have adequate knowledge of
finance, accounts and basic elements of company law.
To be effective, the audit committee should have clearly defined terms of
reference and its members must be willing to spend more time on the company's
work vis-a-vis other non-executive directors.
Audit committees should assist the board in fulfilling its functions relating to
corporate accounting arid reporting practices, financial and accounting controls,
and financial statements and proposals that accompany the public issue of any
security- and thus provide effective supervision of the financial reporting
The audit committee 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.
For the audit committee to discharge its fiduciary responsibilities with due
diligence, it must be incumbent upon the management to ensure that members
of the committee have full access to financial data of the company, its
subsidiary and associated Companies, including data on contingent liabilities,
debt exposure, current liabilities, loans and investments.
By the fiscal year 1998-99, listed Companies with either a turnover of over Rs.
100 crore or a paid-up capital of Rs. 20 crore, should have in place a strong
internal audit department, or air external auditor to carry out internal audits;
without this, any audit committee will be toothless.
9. Under "Additional Shareholder's Information", 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; greater detail on
business segments, up to 10% of turnover, giving share in sales revenue, review
of operations, analysis of markets and future prospects.
10. Consolidation of group accounts should be optional and subject to the financial
institutions allowing Companies to leverage on the basis of the group’s assets
and the income tax department using the group concept in assessing corporate
income tax. If a company chooses to voluntarily consolidate, it should not be
necessary to annex the accounts of its subsidiary Companies under Section 212
of the Companies Act. However, if a company consolidates, then the definition
of “group" should include the parent company and its subsidiaries (where the
reporting company owns over 50% of the voting stake)
11. Major Indian Stock Exchanges should gradually insist upon a compliance
certificate, signed by the CEO and CFO which clearly states that, the
management is responsible for the preparation, integrity and fair presentation of
the financial statements and other information in the annual report and which
also suggest that the company will continue in business in the course of the
following year, the accounting policies and principles confirm to standard
practice, and where they do not, full disclosure has been made of any material
departures, the board has overseen the company's system of internal accounting
and administrative controls systems either directly or through its audit
committee (for Companies with a turnover of Rs. 100 crore or paid-up capital of
Rs. 20 crore).
12. For all Companies with a paid-up capital of Rs. 20 crore or more, the quality
and quantity of disclosure. A Companies GDR issue should be the norm for any
domestic issue.
13. Government must allow far greater funding to the corporate sector against the
security of shares and other paper.
14. It would be desirable for financial institutions as pure creditors to re write their
covenants to eliminate having nominee directors except in the event of serious
and systematic debt default and in cases of the debtor company not providing
six monthly or quarterly operational data to the concerned financial institutions.
15. If any company goes to more than one credit rating agency, then it must divulge
in the prospectus and issue document, the rating of all the agencies that did such
an exercise. It is not enough to state the ratings. These must be given in a
tabular format that shows where the company stands relative to higher and
lower ranking. It makes considerable difference to an investor to know, whether
the rating agency or agencies placed the company in the top slots, or in the
middle, or in the bottom. It is essential that we look at the quantity and quality
of disclosures that accompany the issue of company bonds, debentures, and
fixed deposits in the USA and Britain - if only, to learn what more can be done
to inspire confidence and create an environment of transparency. Finally,
Companies that are making foreign debt issues cannot have two sets of
disclosure norms: an exhaustive one for the foreigners and a relatively
minuscule one for Indian investors.
16. Companies that default on fixed deposits should not be permitted to accept
further deposits and make inter-corporate loans or investments until the default
is made good, and declare dividends until the default is made good.
17. Reduction in the number of Companies where there are nominee directors. It
has been argued by Financial Institutions that there are too many Companies
where they are on the board, and too few competent officers to do the task
properly. So, in the first instance financial institutions should take a policy
decision to withdraw from boards of Companies where their individual
shareholding is 5% or less, or total financial institutions holding is under 10%.
OECD Report
In a meeting held on 27-28 April 1998, OECD Ministers asked the OECD to develop a
set of corporate governance principles that could be useful to members and non-
member countries. In June 1998, the OECD ad-hoc Task Force on Corporate
Governance, with representatives from all member countries and key international
organizations, includes the World Batik. This body also had a number of
representatives from the private sectors and labour representatives with special
expertise in corporate governance. Even though the Principles are primarily aimed at
governments, they also provide guidance for stock exchanges, investors, private
corporations and national commissions on corporate governance as they deal with best
practices, listing requirements and codes of conduct. The Principles (refer to appendix
for detailed recommendations) by OECD fall into five broad areas:
• The rights of shareholders
• The equitable treatment of shareholders
• The role of stakeholders
• Disclosure and transparency
• The responsibilities of the board

The rights of shareholders

The corporate governance framework should protect shareholders' rights.
The protection of the rights of shareholders and the ability of shareholders to influence
the behavior of the corporation are key for effective corporate governance.
Shareholders have the right to secure ownership and registration of shares, as well as
the right to share in the residual profits of the company. The ability to participate in
basic decisions concerning the company, chiefly by participation in general shareholder
meetings, is forth as an important right. The Principles call for disclosure of corporate
structures and devices that redistribute control over the company in ways that deviate
from proportionality to ownership. Transfers of controlling interest in the company
should take place under fair and transparent conditions and anti-takeover defenses not
be used to shield management front accountability. Investors are urged to use their
voting rights, This is very important, because even large shareholders can have no
effective role in shaping major decisions affecting the corporation if they fail to vote.

The equitable treatment of shareholders

The corporate governance framework should ensure the equitable treatment of all
shareholders, including minority and foreign shareholders. All shareholders should
have the opportunity to obtain effective redress for violation of their rights. In many
cases, controlling shareholders, boards and management use their control over the
corporation and over information to the detriment of non-controlling and foreign
investors. The Principles stipulate that board members, management and controlling
shareholders should deal fairly with all shareholders. It also states that insider trading
and self-dealing should be prohibited. The Principles call for maximum transparency
regarding the distribution of voting rights among all categories of shareholders and the
ways in which voting rights are exercised.

The role of stakeholders

The corporate governance framework, should recognize the rights of stakeholders (as
established by law) and encourage active cooperation between corporations and
stakeholders in creating wealth, jobs, and financially sound enterprises. This Principle
states that the corporate governance framework should recognize the legal rights of
stakeholders god encourage active co-operation between corporations and stakeholders
in creating wealth, jobs, and the sustainability of financially sound enterprises. This
issue is more important than the relatively short text devoted to it might suggest.
Certainly, we all recognize that one key aspect of corporate governance is ensuring the
flow of outside capital to firms. However, a good corporate governance structure also
has to be concerned with finding ways to encourage the various stakeholders in the firm
to make the much-needed investment in human and physical capital. As we observed in
the Annotation to this Principle, the competitiveness and ultimate success of a
corporation is the result of teamwork. Teamwork draws contributions from a range of
different sources: investors, employees, creditors, and suppliers. It is ultimately in the
long-term self-interest of firms to recognize that their employees and other stakeholders
constitute a valuable resource for building competitive and profitable Companies,
whether or not those employees or other stakeholders have a legal place in the
corporate governance structure.

Disclosure and transparency

The corporate governance framework should ensure that barely and accurate disclosure
is made on all material matters regarding the corporation, including the financial
situation, performance, ownership, and governance of the company. Transparency is
widely recognized as a central and indispensable element of an effective corporate
governance system. The Principles require the timely and accurate disclosure of
information on all material matters regarding the financial situation, performance,
ownership, and governance of the company. This information should be prepared in
accordance with high quality, standards. The Principles also requires for an animal
independent audit so as to impose an external, objective control on the preparation and
presentation of financial statements.
The role of the board
The corporate governance framework should ensure the strategic guidance of the
company, the effective monitoring of management by the board, and the board's
accountability to the company and the shareholders. The board is the main mechanism
for monitoring management and providing strategic guidance to the company. The
OECD has a number of different boards. Some boards emphasize the monitoring of
management conduct while other boards are more concerned with providing a strategic
vision for the corporations. The accountability of the board to the company and its
shareholders is a basic tenet of sound corporate governance everywhere. The Principles
make it clear that it is the duty of the board to act fairly with respect to all groups of
shareholders, to deal fairly with stakeholders and to assure compliance with applicable
laws. The responsibilities or the board include- reviewing corporate strategy and
planning, overseeing management (including remuneration); managing potential
conflicts of interest, and assuring the integrity of accounting, reporting and
communication systems. The Principles also stress the need for objective judgment on
corporate affairs by board members, independent of the opinion of management.

Corporate Governance-Companies Act, 1956

The Companies Act, 1956 provides a broad legal framework for the operation of
Companies registered under this act. Prior to this legislation, The Companies Act,
1913, that was extensively amended in 1936 on lines of the English Companies Act,
1929. The Indian Version of the Companies Act is the result of the recommendations of
the Company Law Committee, constituted in 1950 under the chairmanship of
Mr.H.C.Bhaba. In nineties the working group constituted by the government had
recommended some amendments to the Companies Act and the new Companies Bill,
1997 was introduced in the Rajya Sabha on August 14, 1997.
Although law cannot replace code of best practices in ensuring better corporate
governance they can supplement them. The Companies Act has provisions like holding
board meetings at regular intervals, disclosure of interests in dealings with company by
board of directors which result in conflict of interest, maintenance of book of account,
audit, auditors report, directors report, etc.
Directors - Companies Act 1956
According to the Companies Act, on incorporation, a company becomes a legal entity.
Being a legal entity, it conducts its business with the help of representatives selected by
the shareholders. These representatives are known as "directors". According to Section
2(13), the term director includes 'any person occupying the position of a director by
whatever name called.' In order to determine whether a person is a director or not, it is
important to see if that person is appointed and authorized by tile articles of a company
to act on behalf of the company. A person who performs all the functions of a director,
but who is not duly appointed as one, cannot be considered a director. The Companies
Act makes it clear that only an individual can occupy the position of a director and no
firm, association or body corporate can become a director of a company. The
Companies Act defines the role and responsibility of directors.
Position of directors
According to the Companies Act in individual holding the position of a director of a
firm should act as a trustee, agent and managing partner. He is also required to take up
settle qualification shares if required by the articles of association. According to section
270, if the articles require a director to hold some share, he must acquire such
qualification shares in the company within two months of his appointment as a director.
When the articles of a company are altered to increase the qualification shares existing
directors who have acquired them according to the old norms, do not have to comply
with the new norms.
Section 272 lays down that a director who fails to acquire the qualification shares
within the specified period of two months will be liable to a fine upto 50 rupees per
day, Thus, these sections 270 and 272 are not applicable to a private company unless it
is a subsidiary of a public company (whose shares are traded in stock markets).
Disqualifications of a director
Section 274 of the Companies Act, 1956, provides that a person cannot be appointed as
a director in the following circumstances: if he is of unsound mind, if he is insolvent or
has applied for insolvency, if lie has been convicted by Court for any offence involving
moral turpitude and been sentenced to imprisonment for not less than six months, not
paid the calls send for the shares he holds or if he is found to be a fraudulent person.
Acts done by a director prior to disqualification are valid, but they can be reversed if it
is found that his appointment is invalid.
Section 275 says that a person can serve as a director for no more than 20 Companies.
Section 279 levies a penalty of five thousand rupees for each company, after the first
twenty, of which is the director. This limit is reduced to 15 in the new amendment to
the Companies Act, 1956.

Number of directors
A public limited company should have at least three directors, whereas companies
should have at least two directors, However, the minimum and maximum number of
directors to be appointed is usually specified in file Articles of the company. According
to Section 314 Directors are not to hold office or place of profit.
Increasing the number of directors
The number of directors can be increased or decreased within the limits fixed in the
Articles of a company, by passing an ordinary resolution. If the company wants to
increase the number of directors beyond the limit specified in the Articles, it has to get
the central government's approval.
Powers of board of directors
The Board of Directors can exercise the following powers on behalf of the company:
a. The power to make calls on shareholders in respect of money unpaid on their
b. The powers to issue debentures.
c. The power to borrow money otherwise than on debentures. However, a banking
Companies or from the Reserve Bank of India, the State Bank of India or any
other banks established by or under any Act.
d. The power to invest funds of the company. This power shall however be subject
to the provisions of Sections 293 and 372.
e. The power to grant loans. Again this power is subject to the provisions
contained in Sections 295 and 370.
The decisions mentioned in (c), (d) and (e) may, be delegated to any committee of
directors, managing director, the manager or any other principal officer of the
company or in the case of a branch office of the company or a principal officer of
its branch by a resolution passed at a meeting.
f. The power to fill casual vacancies in the Board.
g. The power to sanction a contract in which he is interested.
h. The power to recommend the rate of dividend to be declared by the company at
the Annual General Meeting, subject to the approval by the shareholders.
i. The power to appoint a person, a managing director or manager who is holding
either office in another company.
j. The power to invest in any share of any other body corporate.
In the last two cases, not only the powers be exercised at the boards' meeting but also
that every director present and entitled to vote must consent thereto.

Powers that can be only with the consent of the company at the general meeting:
a. The power to sell, lease, or otherwise dispose of the whole or part of the
undertaking of the company. Where the company's memorandum does not
empower it, it would be necessary for the company to alter the objects clause of
the Memorandum by passing a special resolution and also to obtain
confirmation of the Company Law Board.
b. Power to remit due by a director.
c. Power to borrow in excess of capital and reserves of the company.
d. Power to contribute to charities not directly, relating to the business of the
company, or the welfare of its employees any amount exceeding Rs.50,000 or
five percent of its average net profits of the last three financial years, whichever
is higher,
e. Power to invest compensation amounts received on compulsory acquisition of
any of its properties.
f. Power to appoint sole selling agents.
Appointment of directors
Directors may be appointed by
 Subscribing to the memorandum of association; section 254, Regulation 64 of
Table A.
 Shareholders in general meetings; section 255, 256, 257, 265
 Board of directors
 Central Government, Sections 408, 409
 Third parties

Duties of a director
1. Fiduciary duties: It includes the following:
• Not to exceed their authority and powers and to act with honesty and good faith.
• To act honestly and with utmost good faith.
• Not to use unpublished and confidential information belonging to the company
for their own purpose.
2. Duties of Care:
Like any, other agent, the director must
• Exercise reasonable care in managing the affairs of the company
• To act with best of skill and expertise
• To exhibit in the performance of his duty the same degree of care and prudence
that he would exercise on his own affairs.
3. Statutory duties:
A director of a firm should not enter into a contract with a company (belonging to his
relatives) for sale, purchase or supply of any goods unless with the consent of the
Board of Directors (Section 297). But, this is allowed in case of urgency (section 297
For Companies with rupees one crore or more should not enter into a contract with
Companies having connection to its directors without the prior approval of the central
Every director should reveal his financial interest in the contract, if any to the board.
(Section 299).
Other duties include, duty not to delegate, duty to attend board meetings, duty to
convene annual general meeting.
Liability of directors:
Directors who do not carry out their duties diligently and honestly are subject to the
following liabilities:
Unlimited Liability: Section 322 and 323 states that, in a limited company, the liability
of all or any of the directors or managers may be made unlimited, if so provided by the
memorandum of association.
Liability for breach of fiduciary duty: A director, as a trustee for the company, may
incur liability for breach of his fiduciary duty to the company.
Personal Liabilities: The directors are liable to indemnify the company if its funds are
used by the directors for purposes that the company cannot sanction.
A director is personally liable for any losses incurred or profits forgone by the company
due to the acts of the directors, which are in breach of trust.
The directors are personally liable for the losses sustained by the company as a result of
their negligence in the discharge of their duties. In some cases, directors can be held
liable to third parties (e.g. in case of miss allotment of shares.)
Criminal Liability: Under the Companies Act, criminal proceedings against directors
may be instituted in pursuance of the provisions contained in various sections, resulting
in imprisonment.
Removal of directors
The Board of Directors can be removed by the shareholders, the Central government or
by the Company Law Board.
 A company under Section 284 can remove a Director before the expiry of the
period of office by passing an ordinary resolution.
 The Central Government, under Section 388B to 388E of the Companies Act
1956, can remove a Director on the recommendation of the Company Law
 The Company Law Board can terminate a Director when it receives a
application for his removal, accusing the directors of mismangement.
Remuneration of directors:
The remuneration of the managing director and whole time director, will be determined
either by the articles, or by a resolution of the General body or by special resolution, if
required by, the articles (Section 309(1)). This remuneration will not include any
amounts paid to the director for services rendered in any other capacity if the services
are professional in nature and the director possesses the requisite qualification for
practice of the profession (Section 309(1))

The remuneration of a director can be paid as follows:

In the form of a fee for each board meeting attended by him.
According to Section 309(3), a whole time director or a managing Director may be
paid a fixed remuneration on a monthly basis or at a specified percentage of the net
profits of the company or a mix of these two elements. The percentage of profit paid
out should not be more than 5% of net profit for one director and 10% of all the
Directors other than the whole time directors and managing director can be paid either
on a monthly, quarterly or annual basis, with the approval of the Government. They can
be paid in the form of a commission, provided a special resolution is passed authorizing
such payment. This payment should not exceed 1% of the net profit of the company.
Managing director
Companies Act, Section 2(26) defines a managing director as a director who is
entrusted with substantial powers of management.
Appointment of Managing Director: A managing director can be appointed in one of
the following ways.
• By virtue of an agreement with the company,
• By virtue of a resolution passed by the Board of Directors, and
• By virtue of the Memorandum/Article of Association.
Remuneration of Managing Director: A Managing Director's remuneration should
not exceed 5% of the net profits of the company. In case there is more than one
director aggregate remuneration can be upto 10% [309(3)].
Resignation of the Managing Director: A managing director can resign from 1hQ
post. The resignation comes into effect only when the company approves it. After
resigning, the MD can still continue as air ordinary director.
Number of Companies: An individual can act as the managing director of any number
of private Companies that are riot subsidiaries of a public company. In case a person
act as the managing director of a subsidiary of a public company, he can take up the
managing director post of only one other company.
Tenure of Appointment.- According to Section 317, the managing director of a public
company or a private company, which is a subsidiary of a public company, can be
appointed for a period of not more than 5 years. He can be reappointed for another five
years on completion of his term.
Interview: Corporate Governance in Raymond Ltd.


1) What is good corporate governance?

Ans. CG is commitment to values and ethical business conduct. It includes

corporate structures, its culture and policies and the manner in which it deals with
its stakeholders. Accordingly, timely and accurate disclosure of information
regarding financial situations, performance, ownership and governance of the
company are an important part of corporate governance.

2) Describe your Board composition. Is the Chairman and the CEO two different

Ans. It is detailed in the Annual Report and the CG Report.

3) Does the Board have an independent and transparent process to evaluate the
performance of all its members?

Ans. No, but minutes of the board meetings are recorded in detail.

4) Are your Directors accountable for their decisions?

Ans. Yes

5) Do the Raymond Ltd. board members get right information and enough time to
discharge their board duties?

Ans : Yes.

6) Do independent directors merely contribute towards satisfying a regulatory


Ans: No, they definitely try to make improvements in the overall functioning of the
company as well as implement corporate governance practice in spirit to make the
company Numero Uno in CG practice.

7) Does the Board have a process of conducting exclusive sessions with its
independent directors?

Ans. Yes

8) Should remuneration of CEOs be significantly linked to company


Ans. Remuneration of CEOs must be significantly linked to company performance.

9) Who monitors effectiveness of corporate governance practices in Raymond

Ans. The Company secretary and CFO

10) How well is Corporate Governance practiced in your company?

Ans. We practise CG rigorously in our Company. We are very soon going to

implement certain new mechanisms in CG.

11) Have you faced any issues relating to CG and how were they resolved?

Ans. No issues so far faced by the company.

12) Do you conduct independent audit for Corporate Governance? If yes, what all
parameters are covered in this audit?

Ans. Refer to CG report provided below.

13) Has your company witnessed any incidents of Insider Trading? What action was
taken on it?
Ans. No, as no such incidents so far occurred in our company

14) Are the stakeholders satisfied with the C.G. application in your company?

Ans. Yes

15) How are the grievances of Share Holders addressed? Are the grievances
resolved in a timely and effective manner?

Ans. There is a separate shareholder’s grievance redressal committee appointed by

the company, who handles the grievances in a timely and effective manner. It
consists of 3 Directors and the Company Secretary.


As the global economic crisis continues to ravage the world, corporate governance is
even more relevant and has a larger role. With recent developments In India,
Corporates have to be more resilient in adopting best practices of Corporate
Governance with an aim to revive stakeholders' faith in the Corporate Sector. The
Principles of Corporate Governance are based essentially on the existing legal and
regulatory arrangements as well as the best prevailing practices followed by Corporates
globally Good Corporate. Governance has become a necessary pre-requisite for any
corporation to manage effectively in the globalised market scenario.
The detailed report on implementation by the Company, of the Corporate Governance
Code as incorporated in Clause 49 of the Listing Agreement with the Stock Exchanges,
is set cut below:


We, at Raymond, believe in ethical business conduct, integrity and commitment to
values. This helps us to enhance and retain the trust of our stakeholders which is the
cornerstone of Corporate Governance. At Raymond we continue to focus our energies
and resources in creating and safeguarding the interest of all car stakeholders. At
Raymond we adopt best global practices as part of the Company's future growth
strategy, which aims at maximizing the interest of the shareholders with those of other
stakeholders - customers, employees, investors, vendors, dealers, financiers, State and
Central Governments and society at large, in order to achieve long-term sustained value
while ensuring accountability in the exercise of corporates' financial, legal and
contractual obligations.
Your Company is fully committed to and continues to follow procedures and practices
in conformity with the Code of Corporate Governance contained in the Listing



The Board of Directors of the Company consists of eminent persons with considerable
professional proficiency and experience in business, industry, finance, management,
legal and marketing. The Board of your Company provides leadership and strategic
guidance that exercises control over the Company.
The Chairman and Managing Director is involved in the day-to-day management of the
Company while the Non-Executive including the Independent Directors bring external
and wider perspective and independence to the decision making The composition of the
Board of Directors, meets with the requirements of Clouse 49 (1) (A) of the Listing
The present strength of the Board of Directors is eight. The composition is as follows:
 1 Promoter, Executive Director
 1 Promoter, Non-Executive Director
 1 Non-Independent, Non-Executive Director
 5 Independent, Non-Executive Directors

None of the Directors on the Board is a member of more than ten Committees and
Chairman of more than five Committees (as specified in Clause 49), across all
companies in which they are Directors.
The composition of the Board of Directors, the number of other Directorship and
Committee positions held by each Director as on March 31, 2009 are as under:

Name of Director Category of Directorship No. of Board Relationship

Directorship In other Committees (other interse
companies Than Raymond Ltd.) Directors
In which Chairman/
Chairman Member
Dr. Vijaypat Promoter, 6 Nil 1 Related to
Singhania, Chairman Non- Shri Gautam
Emeritus Executive Hari
Shri Gautam Hari Promoter, 7 Nil 2 Related to
Singhania, Chaiman Executive Dr. Vijaypat
and Manageing Singhania
Shri B.K. Kedia (upto Independent, 8 Nil 1
May22,2008) Non-
Shri Nana Chudasama Independent, 4 Nil Nil
Shri. B.V. Bhargava Independent, 10 5 4
Shri U.V.Rao Independent, 5 2 2
Shri I.D.Agarwal Independent, 2 Nil 1
Shri Nabankur Gupta Independent, 9 1 2
Shri P.K.Bhandari Non- 10 2 2
- Wholetime Director Independent,
– upto April23,2008 Non-
(wef April
24, 2008)
(*) - excludes Alternate Directorships, Directorships in Indian Private Limited
Companies and Foreign Companies and Membership of Managing Committees of
various bodies.
• Only memberships of Audit Committee and Shareholders'/Investors' Grievances
Committee are considered.
• The column 'Member' includes only membership of Audit committee and
Shareholders'/Investors' Grievances Committee and not the Chairmanship.

The Board meets at least once a quarter to review the quarterly performance and the
financial results. The Board Meetings are generally scheduled well in advance and the
notice of each Board Meeting is given in writing to each Director. All the items or the
Agenda are accompanied by notes giving comprehensive information on the related
subject and in certain matters such as financial/business plans, financial results, detailed
presentations are made. The Agenda and the relevant notes are sent in advance
separately to each Director and only in exceptional cases; the some is tabled of the
meeting The Board is also free to recommend the inclusion of any matter for discussion
in consultation with the Chairman.

The information as specified in Annexure (1) (A) to Clause 49 of the Listing

Agreement is regularly made available to the Board.

To enable the Board to discharge its responsibilities effectively, the members of the
Board are briefed at every Board Meeting, on the overall performance of the Company,
with presentations by Business Heads. Senior Management is invited to offend the
Board Meetings so as to provide additional inputs to the items being discussed by the

The Board's role, functions, responsibility and accountability are clearly refined. In
addition to matters statutorily requiring Board's approval, all major decisions involving
policy formulation, strategy and business plans, annual operating and capita
expenditure budgets, new investments, details of joint ventures, sale of business
unit/division, compliance with statutory/regulatory requirements, major accounting
provisions and write-offs are considered by the Board.

The Minutes of the Board Meetings are circulated in advance to all Directors and
confirmed at subsequent Meeting, The Minutes of Audit Committee and other
Committees of the Board are circulated in advance to all Directors, regularly placed
before the Board and noted by the Board.



Five Board Meetings were held during the Financial Year 2008-09on the following
dates: April 29, 2008, July 31, 2008, October 37, 2008, November 30, 2008 and
January 31, 2009. The gap between two Board Meetings did not exceed four months,
During the Financial year 2008-09 two Circular Resolutions were passed on August 13,
2008 and March 30, 2009 respectively.

The attendance of each Director at Board Meetings and the last Annual General
Meeting (AGM) is as under:

Name of Director No. of Board Attendance at last AGM held on

Meetings attended June 18, 2008
Dr.Vijaypat Singhania 5 No
Shri Gautam Hari Singhania 4 Yes
Shri B.K. Kedia (upto 22 1 No
May, ’08)
Shri Nana Chudasama 5 No
Shri B.V. Bhargava 3 No
Shri U.V. Rao 4 No
Shri I.D. Agarwal 5 Yes
Shri Nabankur Gupta 3 Yes
Shri P.K. Bhandari 5 Yes



The Audit Committee of the Board of Directors of the Company, inter ollo, provides
assurance to the Board on the adequacy of the internal control systems and financial
disclosures. The Terms of Reference of the Audit Committee ore wide enough to cover
the matters specified for Audit Committees under Clause 49 of the Listing Agreement
as well as in Section 292A of the Companies Act, 1956 and inter-alia includes:
a. oversight of the Company's financial reporting process and the disclosure of its
financial information to ensure that the financial statement is correct, sufficient and
b. recommending to the Board, the appointment, re-appointment and, if required, the
replacement or removal of the Statutory Auditors and the fixation of audit fees;
c. approval of payment to Statutory Auditors for any other services rendered by the
Statutory Auditors;
d. reviewing, with the management, the annual financial statement before submission to
the Board for approval, with particular reference to:
i. matters required to be included in the Director's Responsibility Statement
which forms part of the Directors' Report pursuant to Clause 2AA of Section
217 of the Companies Act, 1956;
ii. changes, if any, in accounting policies and practices and reasons for the
iii. major accounting entries involving estimates based on the exercise of
judgment by management;
iv. significant adjustments made in the financial statements arising out of audit
v. compliance with listing and other legal requirements relating to financial
vi. disclosure of any related party transactions;
vii. qualifications in the draft audit report.
e. reviewing with the management, the quarterly financial statements before submission
to the Board for approval;
f. reviewing, with the management, the statement of uses/application of funds raised
through an issue (public Issue, rights issue, preferential issue, etc.), the statement of
funds utilised for purposes other than those stated in the offer document/
prospectus/notice and the report submitted by the monitoring agency monitoring the
utilisation of proceeds of a public or rights issue and making appropriate
recommendations to the Board to take up steps in this matter;
g. reviewing, with the management, performance of statutory and internal auditors,
adequacy of the internal control systems;
h. reviewing the adequacy of internal audit function, if any, including the structure of
the internal audit department, staffing and seniority of the official heading the
department, reporting structure coverage and frequency of internal audit:
i. discussion with Internal auditors any significant findings and follow up thereon:
j. reviewing the findings of any internal investigations by the internal auditors into
matters where there is suspected fraud or irregularity or a failure of internal control
systems of material nature and reporting the matter to the Board;
k. discussion with statutory auditors before audit commences, about the nature and
scope of audit as well as post-audit discussion to ascertain any area of concern:
l. to look into the reasons for substantial defaults in the payment to the depositors,
debenture holders, shareholders (in case of non-payment of declared dividends) and
m. to review the functioning of the Whistle Blower Mechanism, in case the same is
n. carrying out any other function as mentioned in the terms of reference of the Audit
In fulfilling the above role, the Audit Committee has powers to investigate any activity
within its terms of reference, to seek information from employees and to obtain outside
legal and professional advice.

The Audit Committee, while reviewing the Annual Financial Statements also reviewed
the applicability of various Accounting Standards (AS) referred to in sub-section (3C)
of Section 211 of the Companies Act, 1956. Compliance of the Accounting Standards
as applicable to the Company has been ensured in the Financial Statements for the year
ended March 31, 2009.

The Audit Committee comprises of four Directors, all of whom are Non-Executive.
Three Members of the Audit Committee are Non-Executive Independent Directors
while one member is Promoter, Non-Executive. The Audit Committee is constituted in
accordance with the provisions of Clause 49 (11) (A) of the Listing Agreement and
Section 292A of the Companies Act, 1956 All these Directors possess knowledge of
corporate finance, accounts and company low. The Meetings of the Audit Committee
are attended by the Chief Operating Officer, the President Finance, the Director-
Finance, the Statutory Auditors, the Internal Auditors and the Company Secretary. The
Chairman of the Audit Committee, Shri Nabankur Gupta was present at the 83rd
Annual General Meeting of the Company held on June 18, 2008. The quorum for the
Audit Committee Meetings is two non-executive Independent members The Company
Secretary acts as Secretary to the Committee.

The Minutes of the Audit Committee Meetings are noted by the Board of Directors at
the subsequent Board Meeting.

The Composition of the Audit committee is as follows:

Name of the Director Position Category
Dr.Vijaypat Singhania Member Promoter, Non-Executive
Shri B.K. Kedia (upto 22 May, ’08) Chairman Independent, Non-executive
Shri B.V. Bhargava Member Independent, Non-executive
Shri U.V. Rao ( chaired the Audit Member Independent, Non-executive
committee meetings held between
May22, 2008 to October 31, 2008)
Shri Nabankur Gupta (w.e.f. October Chairman Independent, Non-executive


The Audit Committee held four meetings during the financial year ended March 31,
2009 and the gap between two meetings did not exceed four months. The Audit
Committee Meetings were held on April 29, 2008, July 31, 2008, October 31, 2008 and
January 30, 2009.

The attendance at the Audit Committee Meetings is as under:

Name of the Director No. of Meetings attended
Dr.Vijaypat Singhania 4
Shri B.K. Kedia (upto 22 May, ’08) 1
Shri B.V. Bhargava 2
Shri U.V. Rao 4
Shri Nabankur Gupta (w.e.f. October 31,2008) 1


The Company has appointed a firm of Chartered Accountants as Internal Auditors to

review the internal control systems of the Company and to report thereon. The report of
the Internal Auditors is reviewed by the Audit Committee.


- Reviewing the overall compensation policy, service agreements and other
employment conditions of Managing/Wholetime Directors.
- Reviewing the performance of the Managing/Wholetime Directors and
recommending to the Board, the quantum annual increments and annual

The Remuneration Committee presently comprises of four Directors, all of whom are
Non-Executive Directors, The Chairman the Committee is an Independent and Non-
Executive Director nominated by the Board.

The composition of the Remuneration Committee is as follows:

Name of the Director Position Category
Dr.Vijaypat Singhania Member Promoter, Non-Executive
Shri B.K. Kedia (upto 22 Member Independent, Non-
May, ’08) executive
Shri B.V. Bhargava Chairman Independent, Non-
Shri Nana Chudasama Member Independent, Non-
Shri Nabankur Gupta Chairman Independent, Non-
(w.e.f. March 30,2009) executive


The Committee did not hold any meeting during the financial veer ended March 31,

A. Remuneration to Non-Executive Directors
The Non-Executive Directors are paid remuneration by way of Commission and Sitting
Fees. In the 83rd Annual General Meeting the shareholders' have approved payment of
commission of Rs.25 lakhs to the Non-Executive Directors of the Company to period
of three years for financial years commencing from April 1, 2008 to March 31, 2011.
Non-Executive Directors are paid sitting fees @ Rs.10,000 for each meeting of the
Board or any Committee thereof attended by them.

The compensation of Non-Executive Directors was approved unanimously by the

None of the Non-Executive Directors has any material pecuniary relationship or
transactions with the Company. Shri P. K.Bhandari was Wholetime Director for a
period from April 1, 2008 to April 23, 2008 Dr. Vijaypath Singhania, Chairman
Emeritus belongs to Promoter Group.

B. Remuneration to Chairman and Managing Director and Wholetime Director

The appointment of Chairman and Managing Director and Wholetime Director is
governed by resolutions passed by the Board of Directors and shareholders of the
Company, which covers the terms of such appointment and remuneration, read with
service rules of the Company. Payment of remuneration to Chairman and Managing
Director and Wholetime Director governed by the respective Agreements executed
between them and the Company, Remuneration paid to Chairman and Managing
Director and Wholetime Director is recommended by the Remuneration Committee,
approved by the Board (in, within the limits set by the shareholders at the Annual
General Meetings, The remuneration package of Chairman and Managing Director and
Wholetime Director comprises of salary, perquisites and allowances, commission and
contributions to Provident c other Retirement Benefit Funds as approved by the
shareholders of the Annual General Meetings. Annual increments are link to
performance and are decided by the Remuneration Committee and recommended to the
Board for approval thereof.

The remuneration policy is directed towards rewarding performance, based on review

of achievements. It is aimed at attract and retaining high caliber talent.
There is no separate provision for payment of severance fees under the resolutions
governing the appointment of Chairman and Managing Director and Wholetime
Presently, the Company does not have a scheme for grant of stock options or
performance linked incentives for its Directors.


ENDED MARCH 31, 2009
Name of Director Sitting Fees(Rs.) No. of shares held
Dr.Vijaypat Singhania 1,40,000 56247
Shri B.K. Kedia (upto 22 20,000 100
May, ’08)
Shri Nana Chudasama 1,70,000 663
Shri B.V. Bhargava 80,000 NIL
Shri U.V. Rao 1,30,000 NIL
Shri I.D. Agarwal 50,000 NIL
Shri Nabankur Gupta 40,000 NIL
Shri P.K. Bhandari 2,10,000 303
# Shri. P K.Bhandari after completion of his term as Wholetime Director on April 23,
2008 became Non-executive Director on the Board of the Company.
No commission is payable to Non-Wholetime Directors for the Financial Year 2008-09
due to absence of profits.


Name of the Salary (Rs.) Benefits (Rs.) Service Contract
Shri Gautam Hari *1,80,00,000 *1,89,31,062 5 years
Singhania (July 1,2004 to June
Chairman and 30,2009)
Managing Director
Shri P. K.Bhandari 6,13,333 56,23,179@ 5 years
Wholetime Director (April 24,2003 to
(upto April 23, April 23, 2008)
* Salary and benefits for February 2009 and March 2009 was provided in the books of
@The amount paid/payable to Shri P K. Bhandari as shown in the benefits column
above includes Rs.3,50,000/- towards gratuity and Rs.48,00,000/- towards leave
encashment on ceasing to be the Wholetime Director of the Company with effect from
April 24, 2008.

In accordance with the resolutions passed by the Board of Directors and the
shareholders of the Company at their respective meetings, appointing/revising the
remuneration payable to the Chairman end Managing Director and to the Wholetime
Director of the Company an application u/s 198, 309 and other applicable provisions of
the Companies Act, 1956, has been made by the Company seeking approval of the
Central Government for the payment of remuneration on the terms, as approved by the
shareholders at the Annual General
Meeting of the Company held on June 23, 2006, due to inadequacy/ absence of profits
for the Financial Year 2008-09. Two special resolutions in this respect are placed
before the shareholders for their approval at the 84th Annual General Meeting.


The Board of Raymond Limited has constituted a Committee of Directors, which inter
alia also functions as "Shareholders' /Investors' Grievances Committee", consisting of
three members, chaired by a Non-Executive, independent Director.
The Committee meets once a month and inter-alia , deals with various matters relating
- transfer/ transmission/ transposition of shares;
- consolidation/splitting of shares/ folios;
- issue of share certificates for lost, sub-divided, consolidated, rematerialised, defaced,
- review of shares dematerialised end all other related matters; and
- investors' grievances and redressal mechanism and recommend measures to improve
the level of investor services,

The Share Department of the Company and the Registrar and Share Transfer Agent,
Link Intime India Private Limited attend to all grievances of the shareholders and
investors received directly or through SEBI, Stock Exchanges, Ministry of Corporate
Affairs, Registrar of Companies etc.

The Minutes of the Shareholders'/Investors' Grievances Committee ore noted by the

Board of Directors at the Board Meetings. Continuous efforts are made to ensure that
grievances are more expeditiously redressed to the complete satisfaction of the
investors Shareholders are requested to furnish their telephone numbers and e-mail
addresses to facilitate prompt action.

The composition of the Committee of Directors is us under
Name of the Director Position Category

Shri Nana Chudasama Chairman Independent, Non-Executive

Snri Gautam Hari Singhania Member Promoter, Executive
Shri P.K. Bhandari Member Non-Independent, Non-Executive
Shri Nana Chudasama acts as Chairman of Shareholders'/Investors' Grievances

The Board has designated Shri Thomas Fernandes, Director - Secretarial & Company
Secretary as the Compliance Officer.


During the year, twelve meetings of the Committee of Directors were held on April 1,
2008, May 2, 2008, June 2, 2008, 1, 2008, August 1, 2008, September 1, 2008, October
1, 2008, November 1, 2008, December 1, 2008, January 6, 2009, February 2, 2009 and
March 2, 2009.

The number of meetings attended by each of the members is as under

Name of the Director No. of meetings attended
Shri Nana Chudasama 12
Snri Gautam Hari Singhania 12
Shri P.K. Bhandari 12


The total number of complaints received and replied to the satisfaction of the
shareholders during the year ended March 31, 2009 was 143. There were no complaints
outstanding as on March 31, 2009. The number of pending share transfers and pending
requests for dematerialisation as on March 31, 2009 were Nil.

Shareholders'/Investors' complaints and other correspondence are normally attended to

within seven working days except where constrained by disputes or legal impediments.
No investor grievances remained unattended/pending for more than thirty days as on
March 31, 2009.


a. Location and time, where last three Annual General Meetings were held is given
Financial Date Location of the Meeting Time
2005-2006 June23, 2006 Regd. Office of the Company at 11 a.m.
2006-2007 June18, 2007 Regd. Office of the Company at 11 a.m.
2007-2008 June18, 2008 Regd. Office of the Company at 11 a.m.

b. Special Resolutions passed at last three Annual General Meetings :

(i) Special resolution for reappointment of Messrs Dalal & Shah, Chartered
Accountants as Statutory Auditors of the Company were passed at the 81st Annual
General Meeting of the Company held on June 23, 2006 which was put to vote by show
of hands and was passed unanimously.
(ii) The payment of commission to Non-Executive Directors for the financial veer
2006-2007 and 2007-2008 were passed at the 82nd Annual General Meeting of the
Company held on June 18, 2007, which was put to vote by show of hands and was
passed unanimously. In the 83rd Annual General Meeting held on June 18, 2008, the
shareholders' have approved payment of commission of Rs.25 lakhs to the Non-
Executive Directors of the Company, by passing a special resolution for a period of
three years for financial years commencing from April 1, 2008 to March 31, 2011.

c. Passing of resolutions by Postal Ballot :

No items were passed by resolutions through Postal Ballot during the Financial Year
2008 - 2009, At the forthcoming Annual General Meeting also, there is no item on the
agenda that needs approval by Postal Ballot.

d. Extra-ordinary General Meeting :

No Extra-ordinary general meeting was hold by the Company during the financial year
ended March 31, 2009.

The Company does not have any material non-listed Indian subsidiary whose turnover
or net worth (i.e. paid-up capital and free reserves) exceeds 20% of the consolidated
turnover or net worth respectively, of the listed holding company and its subsidiaries in
the immediately preceding accounting year.

The Board of Directors has adopted the Code of Business Conduct and Ethics for
Directors and Senior Management. The Code has been communicated to the Directors
and members of the Senior Management. The Code has also been displayed on the
Company's website –

Code of Conduct for Prevention of Insider Trading :The Securities and Exchange
Board of India (SEBI) has over the years introduced various amendments to the Insider
Trading Regulations of 1992 which ordain new action steps by corporates and other
market intermediaries for the purposes of prevention of Insider Trading.

Pursuant to the above requirements of SEBI (Prohibition of Insider Trading)

Regulations, 1992 as amended, the Company has adopted a 'Code of Conduct for
Prevention of Insider Trading' (The Code) with effect from October 1, 2002. The Code
is applicable to all Directors and such Designated Employees who are expected to have
access to unpublished price sensitive information relating to the Company. The
Company Secretary has been appointed as the Compliance Officer for monitoring
adherence to the said Regulations.

a. Disclosure On materially significant related party transactions that may have
potential conflict with the interests of the Company at large.
There are no materially significant related party transactions made by the
Company with its Promoters, Directors or Management their subsidiaries or relatives,
etc. that may have potential conflict with the interests of the Company at large.

Transactions with related parties as per requirements of Accounting Standard

(AS-18) - 'Related Party Disclosures' are disclosed in Note No. 19 of Schedule 16 to the
Accounts in the Annual Report.

b. Disclosure of Accounting Treatment

In the preparation of the financial statements, the Company has followed the
Accounting Standards referred to in Section 211 (3)(c) of the Companies Act, 1956.
The significant accounting policies which are consistently applied are set out in the
Annexure to Notes to the Accounts.

c. Risk Management
Business risk evaluation and management is an ongoing process within the
Company. During the year under review, a detailed exercise on 'Risk Assessment and
Management' was carried out covering the entire gamut of business operations and the
Board was informed of the same.

d. Details of non-compilance by the Company, penalties, strictures imposed on the

Company by Stock Exchanges or SEBI or any statutory authority, on any matter
related to capital markets, during the last three years.
The Company has complied with all requirements of the Listing Agreements
entered into with the Stock Exchanges as well as the regulations and guidelines of
SEBI. Consequently, there were no strictures or penalties imposed by either SEBI or
Stock Exchanges or any statutory authority for non-compliance of any matter related to
the capital markets during the last three years.

e. Non-mandatory requirements
Adoption of non-mandatory requirements of Clause 49 of the Listing
Agreement are being reviewed by the Board from time to time.


(i) The Board of Directors of the Company approves and takes on record the
quarterly, half yearly and yearly financial results in the Proforma prescribed by Clause
41 of the Listing Agreement within one month of the close of the respective period.
(ii) The approved financial results are forthwith sent to the Listed Stock
Exchanges and are published in a national English newspaper. In addition, the same are
published in local language (Marathi) newspaper, within forty-eight hours of approval
thereof. Presently the same are not sent to the shareholders separately.
(iii) Pursuant to Clause 51 of the Listing Agreement, all data related to quarterly
financial results, shareholding pattern, etc, are hosted on the Electronic Data
Information Filing and Retrieval (EDIFAR) website maintained
by SEBI in association with the National Informatics Centre, within the time frame
prescribed in this regard.
(iv) The Company's financial results and official news releases are displayed on
the Company's website
(v) No formal presentations were made to the institutional investors and
analysts during the year under review.
(vi) Management Discussion and Analysis forms part of the Annual Report,
which is posted to the shareholders of the Company.


Detailed information in this regard is provided in the section 'Shareholder Information'
which forms part of this Annual Report.


The Statutory Auditors have certified that the Company has complied with the
conditions of Corporate Governance as stipulated in Clause 49 of the Listing
Agreement with the Stock Exchanges and the same is annexed to the Directors' Report
and Management Discussion and Analysis.
The Certificate from the Statutory Auditors will be sent to the Listed Stock Exchanges
along with the Annual Reports of the Company.


As provided under Clause 49 of the Listing Agreement with the Stock

exchanges all Board members and Senior Management Personnel have affirmed
compliance with Raymond Limited Code of Business Conduct and Ethics for the year
ended March 31, 2009.
for Raymond Limited

Gautam Hari Singhania

Chairman and Managing Director
Mumbai, April 24, 2009

“We have always striven hard for respectability, transparency and to create an ethical
organisation. There are certain expectations that we have not fulfilled. But we are also a
very young organisation and in areas like track record of management, we may be low
because we are yet to show longevity.”

-- Narayana NR Murthy, Chairman and CEO, Infosys Technologies Limited.


By 2001, Infosys Technologies Limited (Infosys) was one of the best managed
companies in India. Its corporate governance practices seemed to be better than those
of many other companies in India. Because of its good governance practices, Infosys
was the recipient of many awards. In 2001, Infosys was ranked number one among the
most respected companies in India by the Businessworld - IMRB Survey. Infosys was
also ranked second in corporate governance among 495 emerging companies in survey
conducted by Credit Lyonnais Securities Asia (CLSA) Emerging Markets. It was voted
India's best managed company five years in a row (1996-2000) by the Asia Money Poll.
In 2000, Infosys was awarded the "National Award for Excellence in Corporate
Governance" by the Government of India. In 1999, Infosys was selected as one of the
Asia’s leading companies in the Far Eastern Economic Review's REVIEW 2000
Survey. It was ranked first as "the Company that others try to Emulate." The same year,
Infosys was voted India's most admired company by The Economic Times survey of
"India's Most Admired Companies."

What made Infosys one of the most admired companies in India was its corporate
governance practices which it had benchmarked against those of the best managed
companies in the world. Infosys was one of the first companies in India to publish a
compliance report on corporate governance, based on the recommendations of a
committee constituted by the Confederation of Indian Industries (CII). Infosys also
provided all the information required by the Cadbury committee on corporate
governance even though this was not a legal obligation. The Cadbury Committee had
made nineteen recommendations, and by 2001, Infosys had complied with all of them.

Infosys maintained a high degree of transparency while disclosing information to

stakeholders. It had been providing consolidated financial statements under US GAAP
to its global investors and financial statements under Indian GAAP to India
shareholders. Infosys provided details on high and low monthly averages of share
prices in dl the stock exchanges on which the company's shares were listed. It also
indicated the segment wise breakup of revenues.


Infosys was a pioneer in benchmarking its corporate governance policies with the best
in the world. It had complied with most of the recommendations made by CII. With
affect from 2001, the recommendations of the Kumar Mangalam Birla Committee on
Corporate Governance were accepted as mandatory by some companies, including
Infosys. Infosys had already complied with most of these recommendations.
Infosys had an executive chairman and chief executive officer (CEO) and a managing
director, president and chief operating officer (COO). There seemed to be a clear
demarcation of responsibilities and authority between the two. The CEO was
responsible for corporate strategy, brand equity, planning, external contacts,
acquisitions, and board matters. The COO was responsible for all day-to-day
operational issues and achievement of the annual targets in client satisfaction, sales,
Profits, quality, productivity, employee empowerment and employee retention. The
CEO, COO, executive directors and the senior management made periodic
presentations to the board on their targets, responsibilities and performance.

In 2009, the board had fourteen directors. There was an appropriate mix of executive
and non-executive directors to maintain the independence of the board, and to separate
the board functions of governance and management. The Board consists of 14
members, five of whom are executive or whole-time directors, one is non-executive
and eight are independent directors. Infosys believed that the one thing that could help
them to improve corporate governance was to bring international professionals on
corporate boards. This was reflected in the composition of the board. The board
members were expected to possess the expertise, skills and experience required to
manage and guide a high growth, hi-tech software company.

Expertise in strategy, technology, finance, and human resources was essential.

Generally, they were between 50 and 65 years of age and were not related to an
executive director or an independent director. They were not serving in any executive
or independent position in any company in direct competition with Infosys. The board
members were expected to rigorously prepare for, attend, and participate in all board
and relevant committee meetings. Each board member was expected to ensure that
other existing and planned future commitments did not interfere with the member's
responsibility as a director of Infosys.

The executive directors were not allowed to serve on the board of any other
company/body unless the said entity was an industrial body whose interests were
relevant to the business of the software industry, or government bodies that had a
relevance to the software industry, or bodies whose objective was the upliftment of
society. The non-executive directors were not expected to serve on the boards of
competing companies.
Composition of the Board, and directorships held as at March 31, 2010
Source. Annual Report, 2009-10.
Notes : There are no inter-se relationships between our Board members.

Normally, the board meetings were scheduled at least a month in advance. Most of the
meetings were held at the company's registered office at Electronics City, Bangalore,
India. The chairman of the board and the company secretary drafted the agenda for
each board meeting and distributed it in advance to the board members. Every board
member was free to suggest the inclusion of any item on the agenda. Normally, the
board met once a quarter to review the quarterly results and other issues. The board
also met on the occasion of the annual shareholders' meeting. If the need arose,
additional meetings were held. The non-executive directors had to attend at least four
board meetings in a year. The board had access to any information that it wanted about
the company.

In 2009, the board had three committees - the nominations committee, the
compensation committee and the audit committee. To ensure independence of the
board, the members of the nominations committee, the compensation committee and
the audit committee were all non-executive directors.

The nominations committee had four non-executive directors who looked after the
issue of retirement of existing members and their re-appointment, on the basis of their
performance. The nominations committee constantly evaluated the contribution of the
members of the board and recommended to shareholders their re-appointment. The
executive directors were appointed by the shareholders for a maximum period of five
years, but were eligible for re-appointment upon completion of their term. The
nominations committee adopted a retirement policy for the members of the board under
which the maximum age of retirement of executive directors, including the CEO, was
60 years, which was the age of superannuation for the employees of the company.
Their continuation as members of the board upon superannuation / retirement was
determined by the nominations committee.

The compensation committee had three non-executive directors. The compensation

committee looked after issues relating to compensation and benefits for board
members. It determined and recommended to the board, the compensation payable to
the members of the board. The compensation of the executive directors consisted of a
fixed component that was paid monthly, and a variable component, which was paid
quarterly, based on performance. The annual compensation of the executive directors
was approved by the compensation committee within the parameters set by the
shareholders at the shareholders meetings. The shareholders determined the
compensation of the executive directors for the entire period of their term.

The compensation of the non-executive directors was approved at a meeting of the full
board. The components were a fixed amount, and a variable amount based on their
attendance of the board and committee meetings.
Cash compensation paid to directors in fiscal 2010 (in Rs. Crores)

The total compensation payable to all the non-executive directors together was limited
to a fixed sum per year determined by the board.

None of the directors gained financially from any other contract of significance which
the company or any of its subsidiary undertakings was party to the audit committee was
responsible for effective supervision of the financial reporting process, ensuring
financial and accounting controls and compliance with the financial policies of the
company. The committee periodically interacted with the statutory auditors and the
internal auditors to ascertain the quality of the company's transactions, to review the
manner in which they were performing their responsibilities and to discuss auditing,
internal control and financial reporting issues. The committee provided overall
direction on the risk management policies and also indicated the areas that internal and
management audits should focus on. The committee had full access to financial data.
The committee reviewed the annual and half yearly financial statements before they
were submitted to the board. The committee also monitored proposed changes in the
accounting policy, reviewed the internal audit functions and discussed the accounting
implications of major transactions. As per the recommendations of the Kumar
Managalam Committee, Infosys included a separate section on corporate governance in
its annual report, which disclosed the remuneration paid to directors in all forms,
including salary, benefits, bonuses, stock options. The annual report also carried a
compliance certificate from the auditors.

Infosys also laid emphasis on succession planning and management development. The
chairman reviewed succession planning and management development with the board
from time to time. The Chairman and CEO also managed all interaction with the
investors, media, and the government. Where necessary, he took advice and help from
the managing director, president, and COO as well as the CFO. The managing director
and COO managed all interactions with the clients, taking the advice and the help of
the CEO. Both the CEO and the COO handled employee communication.


Some analysis felt that Infosys' corporate governance practices offered many lessons to
corporate India. Infosys showed that increasing shareholder wealth and safeguarding
the interests of other stakeholders was not incompatible. Analysts felt that given the
strong code of ethics and equitability that Infosys had laid down for its employees,
upholding moral standards was not the domain of the board-level directors. But, being
committed to enhancing shareholder value, Infosys gave its non-executive directors the
mandate to pass judgment on the efficacy of its business plans. Every non-executive
director not only played an active role in decision making, but also led or served at least
one of the three (Nomination, Compensation and Audit) committees.

Commenting on the strengths and weaknesses of Infosys' corporate governance,

Nandan M Nilekani, Managing Director, Chief Operating Officer arid President of
Infosys said, “The strengths are that we have been very successful in creating a value
based system with a very strong focus on ethics, and strong division between personal
and professional funds etc. That has translated into brand equity and shareholder value
etc. Obviously, we can do things better. We believe that we can never stand still; we
will keep looking at global best practices, what the world is saying on this front. We
keep trying to improve the way we manage to be on par with it."

Infosys believed in commitment to values, ethical conduct of business and making a

clear distinction between personal and corporate funds. The founders only took salaries
and dividends and derived no other financial benefits from the Company. Infosys
believed that to attract the world's best companies to be its clients, attract the world’s
best employees to work for it, and attract the world’s best investors, it had to set a
global standard in corporate governance. It remained to be seen whether other Indian
companies could emulate Infosys form of corporate governance.


The Reliance group, founded by Late Shri. Dhirubhai Ambani in 1932, is India’s
largest private sector enterprise with businesses in various sectors.

Dhirubhai Ambani created history with the Reliance Textile Industries’ IPO in 1977
which was oversubscribed 7 times.

The Company has adopted the Reliance Anil Dhirubhai Ambani Group – Corporate
Governance Policies and Code of Conduct which has set out the systems, processes
and policies conforming to international standards. As per clause 49 of the Listing
Agreement, a separate section on Corporate Governance forms part of the Annual

A certificate from the Auditors of the Company regarding compliance with the
conditions of Corporate Governance as stipulated under clause 49 of the Listing
Agreement is reproduced herein below.

Auditors’ Certificate on compliance with the conditions of Corporate Governance

under Clause 49 of the Listing Agreement(s)

To the Members of Reliance Power Limited

We have examined the compliance of the conditions of Corporate Governance by

Reliance Power Limited (‘the Company’) for the year ended March 31, 2009, as
stipulated in Clause 49 of the Listing Agreement of the Company with the Stock
Exchanges in India.

The compliance of conditions of Corporate Governance is the responsibility of the

Management. Our examination was carried out in accordance with the Guidance Note
on Certification of Corporate Governance (as stipulated in clause 49 of the Listing
Agreement), issued by Institute of Chartered Accountants of India and was limited to
procedures and implementation thereof, adopted by the Company for ensuring the
compliance of the conditions of Corporate Governance. It is neither an audit nor an
expression of opinion on the financial statements of the Company.

In our opinion and to the best of our information and according to the explanations
given to us, we certify that the Company has complied with the conditions of Corporate
Governance as stipulated in the above mentioned Listing Agreements.

We further state that such compliance is neither an assurance as to the future viability
of the Company nor the efficiency or effectiveness with which the management has
conducted the affairs of the Company.

For Price WaterHouse Chaturvedi & Shah

Chartered Accountants Chartered Accountants
Partha Ghosh C D Lala
Partner Partner
Membership No.: 55913 Membership No. : 35671
Date : April 23, 2009 Date : April 23, 2009
Place : Mumbai Place : Mumbai

Non Conformity of SEBI guidelines relating to IPO :

Rajkot Saher v. SEBI, Reliance Power Limited

Facts: The promoters of Reliance Power Limited ("RPL") acquired shares at face value
through a High Court sanctioned merger 6 months prior to the IPO and by paying for
partly-paid shares issued previously to AAA Projects Ventures, i.e., the entity that
merged with RPL.

The appellants filed proceedings before SAT to prevent the IPO of RPL primarily
because public shareholders were offered 10.1 per cent stake for Rs. 102 billion,
whereas the promoters acquired 89.9 per cent stake in RPL by paying Rs. 34.4 billion
in the same year. In effect, the promoters acquired 9 times the public shareholders'
stake at one-third the price (during the course of the same year).

The SEBI (DIP) Guidelines require that –

(i) shares acquired by the “promoters during the preceding one year [to an IPO], at a
price lower than the price at which they were offered to public, shall not be eligible for
computation of promoters’ minimum contribution of 20% unless such acquisition is in
pursuance of a scheme of merger or amalgamation approved by a High Court” (Clause

(ii) the promoters’ contribution in a public issue by an unlisted company shall not be
less than 20% of the post issue capital (Clause 4.1.1).

Therefore, the High Court sanction permitted the promoters to factor-in the shares
allotted through the merger for calculating of the "minimum promoters’ contribution"
prior to the IPO.

The appellants contended that

(a) the High Court was “kept in the dark” about the reason behind the merger during
the High Court proceedings;

(b) the partly paid-up shares should be considered as acquired only when they were
fully paid-up and not considered as part of promoters contribution. Moreover, the price
of these shares should match the price offered to the public shareholders, i.e., Rs. 450
per share;

(c) the post-issue capital should also include the share premium paid by the
shareholders and not be limited to the face value of the shares. This would require the
promoters to contribute 20 per cent of the face value plus the share premium of Rs.

Decision: SAT held that:

(a) “The share premium account cannot be taken as a part of the ‘post issue capital’
because the provisions of the Companies Act make a clear distinction between the

(b) “The provisions of sections 87 (1)(b) and 110 (2) of the Act clearly show that the
holders of the partly paid equity shares of a company are its legal members. These
shares were also fully paid by the promoters before 15.1.2008, the issue opening date
and this met with the requirements of clause 4.9 of the guidelines. In these
circumstances, we cannot agree with the appellants that the partly paid up shares should
be considered ineligible under clause 4.6.2 of the guidelines.”

(c) “There is no material before us to say that the order of the High Court was obtained
by fraud and, in any case, we cannot go behind the order and hold that it was obtained
by keeping the High Court in the dark”.

(d) “The case of the appellants is that the innocent public shareholders were cheated by
RPL. We cannot accept this. RPL had furnished all the relevant and detailed
information in the Red Herring Prospectus as required by law…..On the basis of the
information furnished in the prospectus, the public shareholders had taken an informed
commercial decision when they applied for shares in the IPO. In these circumstances,
we fail to understand as to how RPL can be faulted after it had furnished information as
required by law in the Red Herring Prospectus”.
SEBI norms to tackle issue of unlisted subsidiaries
Reliance Infocomm and Reliance Communication Infrastructure, in the eye of a storm
over parent Reliance Industries’ investments worth Rs 12,000 crore — have managed
to avoid shareholders’ scrutiny so far. But they may not be able to dodge corporate
governance standards any longer.

Subsidiaries of Indian corporates will have to follow corporate governance norms, as

per an order by market regulator Securities and Exchange Board of India (Sebi).

Effective April 1, 2005, Sebi said in an order dated October 29, 2004, all listed
companies’ subsidiaries must have at least one independent director from the holding
company’s board of directors on the board of a ‘material non-listed’ Indian subsidiary

Following a report prepared by Infosys Chief Mentor N.R. Narayana Murthy, Sebi said
the audit committee of the listed holding company will review all the financial
statements, in particular, the investments made by the unlisted subsidiary company.
This order is mandatory for all Indian listed companies.

RIL has 45 per cent (direct and indirect) stake in Reliance Infocomm and RCIL.
Mukesh Ambani and associates hold the balance stake. But even if the 2003-04
balance-sheet of Reliance Industries is taken into account, no financial details of
Reliance Infocomm has been provided to RIL’s 35-lakh shareholders. RCIL owns 65
per cent (direct) in Reliance Infocomm.

The Sebi order plugs a loophole, which Reliance Industries exploited by not giving any
details on the investments made in Infocomm.

As of now, there is no independent director of Reliance Industries on the board of both

RCIL and Reliance Info. There’s no audit committee of RIL to review the financial
statements of these two companies. There are no minutes of the board meetings of
Reliance Info and RCIL.

Price manipulation and insider trading :

- that was the first reaction of many market watchers when Reliance suddenly
announced its decision to sell its 10.05 per cent stake in Larsen & Toubro on November
18, 2001.

Until a few weeks leading to the sale by Reliance, the L&T scrip price was languishing
so badly on the bourses that an investor called Ravindra Mehta complained to the
Securities and Exchange Board of India. His letter (dated October 22, 2001), said
shareholder value had eroded because L&T's management was 'dilly-dallying' over the
demerger of its cement division.
Within a matter of days, the share price was electrified. The stock rose from under Rs
150 and was at Rs 208.50 when Reliance announced it sale on November 18. Yet,
Grasim paid Reliance a hefty Rs 306 for its 10.05 per cent stake or 2.5 crore shares.
Was there insider trading? Who knew about the deal? Who profited from the
information and who was buying the shares before the sale?

The answer is -- Reliance Industries. As this column will show, the SEBI investigation
(documents relating to which is available with this columnist) so far seems to establish
a clear case of insider trading based on information collated from the bourses, from
Reliance and Grasim.

This investigation followed a complaint by Kirit Somaiya, a member of Parliament who

wrote to SEBI on January 7, 2002 alleging that Reliance had first increased its holding
in L&T from 6.62 per cent to 10.05 per cent and then sold the shares to Grasim at Rs
306 and accused the group of fraudulent practices and insider trading.

SEBI's investigators confirm all that and worse. They now need to wrap it up with
specific questions and corroborating information such as telephone records to prove
their case. Kumar Mangalam Birla wrote SEBI's corporate governance report, he
probably owed it to Grasim's shareholders to conduct such due diligence, instead of
paying a premium on a ramped up price for shares that had been hurriedly purchased in
the market to be dumped on him. But Grasim's shareholders are not asking Birla any
questions either.

Whichever way one looks at it, the deal probably for the first time provides ample
evidence of price manipulation as well as insider dealing by a large business house. It
now remains to be seen how SEBI rules on the issue. In an interview to a business
newspaper, SEBI chairman D R Mehta recently lamented that corporate houses have
become very powerful and exert a lot of pressure on the regulator.


From above discussion it is clear that Reliance is not following SEBI’s guidelines and
guidelines given by different reports on CG. One feels that it is re-writing the rules of
Corporate Governance to suit its own convenience. Government has now looking at
taking action against RIL. The action raises important issues about corporate
governance and the responsibility of senior management towards the company as well
as its shareholders.

Corporate governance, a system that helps firms control and direct operations, is in the
spotlight as key parts of the governance framework such as audit and finance functions
have failed to check the promoter-driven agendas. A well-balanced board of directors,
proactive shareholders and swift action against malpractices could restore market

Future outlook

My study and interview indicates that a majority of BSE Sensex companies are
perceived to be above average in terms of corporate governance practices. It is now
necessary that corporate governance norms must be redefined in light of the Satyam
episode. While the corporate governance framework in the country is seen at par with
other developed markets, the same has to be implemented in 'letter as well as spirit'.

While things have improved substantially over the last five years, experts believe that
more needs to be done, which will further improve disclosure levels and make
managements accountable, transparent.

My field work in Raymond Ltd. indicates that the company follows the principles of
corporate governance in a major way and aim to be at par with industry leaders in
corporate governance in the near future.

At the retail shareholder level, one could look at a company's past track record
(including significant events that reflect management excesses), qualitative and
quantitative disclosures (vis-a-vis peers) and consistency in delivering on promises.
Experts believe that more rigorous vetting is needed when small and medium
companies are considered for investment.

Case study relating to Infosys Technologies Ltd. shows benchmark in corporate

governance practice.

Eventhough our compliance norms are the best in the world, we fail miserably on
prosecution whereas in markets such as the US, action is swift and the penalties severe.
In this is seen in the case study on Reliance Industries Ltd.

Hence, there is a greater need to increase awareness among entrepreneurs about the
various aspects of corporate governance. There are some of the areas that need special
attention, namely:-

 Quality of audit, which is at the root of effective corporate governance;

 Role of Board of Directors as well as accountability of the CEOs and CFOs;
 Quality and effectiveness of the legal, administrative and regulatory framework;

1. Business Ethics and Corporate Governance – ICFAI publication

2. Annual Report (2008-09) – Raymond Ltd.
3. Annual Report (2008-09) – Infosys Technologies Ltd.
4. Annual Report (2008-09) – Reliance Industries Ltd.
5. Business World Issue
6. Business Standard