PROJECT REPORT Corporate Governance

INTRODUCTION
Companies pool capital from a large investor base both in the domestic and in
the international capital markets. In this context, investment is ultimately an act
of faith in the ability of a company’s management. In order to manage the affairs
of a company and to act in the best interests of all at all times, there must be a
system whereby the directors are entrusted with responsibilities and duties in
relation to the direction of the company affairs.
Corporate governance is a system of making Management accountable towards

the stakeholders for effective management of the companies.
Corporate governance is also concerned with the morals, ethics, values,

parameters, conduct and behavior of the company and its management.
The underlying principles of corporate governance revolve around three basic
inter- related segments. These are:
Integrity and Fairness
Transparency and Disclosures
Accountability and Responsibility
According to the Confederation of Indian Industry (CII), corporate governance

deals with laws, procedures, practices and implicit rules that determine the
ability of the company to make managerial decisions vis- à- vis its claimants – in
particular, its shareholders, creditors, customers, the State and employees.
Corporate governance mainly consists of two elements i.e., A long-term
relationship, which has to deal with checks and balances, incentives of managers
and communications between Management and investors. The second element is
a transactional relationship involving matters relating to disclosure and
authority. In other words, 'good corporate governance' is simply 'good
business'.
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Meaning & Definition of Corporate Governance
Meaning: Corporate governance refers to the structures and processes for the
direction and control of companies. Corporate governance concerns the
relationships among the management, Board of Directors, controlling
shareholders, minority shareholders and other stakeholders. Good corporate
governance contributes to sustainable economic development by enhancing the
performance of companies and increasing their access to outside capital.
A means whereby society can be sure that large corporations are well-run
institutions to which investors and lenders can confidently commit their funds.
It is a term that refers broadly to the rules, processes, or laws by which

businesses are operated, regulated, and controlled. The term can refer to internal
factors defined by the officers, stockholders or constitution of a corporation, as
well as to external forces such as customer groups, clients and government
regulations.
Creates safeguards against corruption and mismanagement

while promoting fundamental values of a market economy in democratic
society.Considering the ethical failures in the last several years and the resulting
crisis in confidence...A sincere commitment to creating and sustaining an ethical
business culture in public and private sectors (has never been so important).
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Definition: Definition of Corporate Governance has been given from time to
time by the various authorities
Basic and summarized definition.
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The above definition also reflects that a proper definition of corporate
governance should not just describe directors’ obligations towards shareholders.
Different countries have different ideas as to what constitutes good corporate
governance. Therefore any satisfactory definition, to be applicable to a modern,
global company, must synthesize best practice from the biggest economic
powers into something which can be applied across all major countries. In
essence we believe that good corporate governance consists of a system of
structuring, operating and controlling a company such as to achieve the
following:
a culture based on a foundation of sound business ethics

fulfilling the long-term strategic goal of the owners while taking into
account the expectations of all the key stakeholders, and in particular:
o consider and care for the interests of employees, past, present and
future
o work to maintain excellent relations with both customers and
suppliers
o take account of the needs of the environment and the local
community
Maintaining proper compliance with all the applicable legal and
regulatory requirements under which the company is carrying out its
activities.
We believe that a well-run organization must be structured in such a way that all
the above requirements are catered for and can be seen to be operating
effectively by all the interest groups concerned. We develop this further in our
section on best corporate governance practice. Here we have set out our
assessment of how corporate governance is usually discussed and introduced our
own, which we hope you have found useful. This page serves as a hub to link to
a range of issues related to the definition of corporate governance. For example
we define business ethics and Corporate Social Responsibility, different country
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models and Codes of Conduct.
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CORPORATE GOVERNANCE Rahul Kumar
Agarwal Reg. No. –
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HISTORICAL BACKGROUND
The principles of governance have been in existence for centuries. History

reveals that Kautilya also called Chanakya or Vishnu Gupta who was
Mahaamatya (equivalent to Prime Minister) in Maurya Empire in 300 BC
propounded principles of good governance. In his celebrated treatise on
statecraft “Arthashastra”, he provided principles of governance. He states the
fourfold duty of a king as:
Duties of a King
● Raksha (Protection) Protecting shareholders wealth

● Vriddhi (Enhancement) Enhancing wealth
● Palana (Maintenance) Maintenance of that wealth
● Yogakshema (Safeguard) Safeguarding interests of shareholders
Corporate governance …
And economic developments are intrinsically linked. Effective corporate

governance systems promote the development of strong financial systems-
irrespective of whether they are largely bank-based or market-based – which, in
turn, have an unmistakably positive effect on economic growth and poverty
reduction.
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CORPORATE GOVERNANCE NORMS
Corporate governance are the policies, procedures and rules governing the
relationships between the shareholders, (stakeholders), directors and managers in
a company, as defined by the applicable laws, the corporate charter, the
company’s bylaws, and formal policies.
Primarily it is about managing top management, building in checks and balances

to ensure that the senop’;;
ior executives pursue strategies that are in accordance with the corporate
mission. It consists of a set of processes, customs, policies, laws and institutions
affecting the way of a corporation is directed, administered or controlled.
Corporate governance governs the relationship among the many players
involved (the stakeholders) and the goals for which the corporation is governed.
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CONSTITUENTS OF CORPORATE
GOVERNANCE
The three constituents of Corporate Governance are:
 Board of Directors or Board ;

 Shareholders ; and
 Management
These can further be detailed as:
Roles and powers of the Board

Composition of Board
Legislation
Code of Conduct
Board Independence
Board Skills
Roles and powers of Shareholders
Board Appointments
Board Meetings
Board Induction and training
Monitoring the Board Performance
Management skills and environment
Business and Community Obligations
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Audit Committee
Financial and Operational Reporting
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WHY CORPORATE GOVERNANCE

MATTERS…
 Improving access to capital
Much attention to corporate governance issues in emerging markets among

policymakers and academics has focused on the role governance can play in
improving access for emerging market companies to global portfolio equity.
An increasing volume of empirical evidence indicates that well-governed
companies receive higher market valuations.* However, improving corporate
governance will also increase all other capital flows to companies in
developing countries: from domestic and global capital; equity and debt; and
from public securities markets and private capital sources.
 Improving performance
Equally important and, irrespective of the need to access capital, good

corporate governance brings better performance for IFC clients. Improved
governance structures and processes help ensure quality decision-making,
encourage effective succession planning for senior management and enhance
the long-term prosperity of companies, independent of the type of company
and its sources of finance.
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INDIAN SCENARIO
Year Name of Committee/Body Areas/Aspects Covered
1998 Confederation of Indian Industry Desirable Corporate Governance

(CII) – A Code
1999 Kumar Mangalam Birla Committee Corporate Governance
2002 Naresh Chandra Committee Corporate Audit & Governance
2003 N. R. Narayana Murthy Committee Corporate Governance
2004 J.J. Irani Adoption of Internationally

accepted best practices
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INTERNATIONAL SCENARIO
Year Name of Committee/Body Areas/Aspects Covered
1992 Sir Adrian Cadbury Committee, UK Financial Aspects of Corporate

Governance
1995 Greenbury Committee , UK Directors’ Remuneration
1998 Hampel Committee, UK Combine Code of Best Practices
1999 Blue Ribbon Committee, US Improving the Effectiveness of

Corporate Audit Committees
1999 OECD & CACG Principles of Corporate Governance in

Common wealth
2003 Derek Higgs Committee, UK Review of role of effectiveness of Non-

executive Directors
2003 ASX Corporate Governance Council, Principles of Good Corporate Governance

Australia and Best Practice Recommendations
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An effective regulatory and legal framework is indispensable for the proper and
sustained growth of the company. In rapidly changing national and global
business environment, it has become necessary that regulation of corporate
entities is in tune with the emerging economic trends, encourage good corporate
governance and enable protection of the interests of the investors and other
stakeholders. Further, due to continuous increase in the complexities of
business operation, the forms of corporate organizations are constantly
changing. As a result, there is a need for the law to take into account the
requirements of different kinds of companies that may exist and seek to provide
common principles to which all kinds of companies may refer while devising
their corporate governance structure.
The important legislations for regulating the entire corporate structure and for
dealing with various aspects of governance in companies are Companies Act,
1956 and Companies Bill, 2004. These laws have been introduced and amended,
from time to time, to bring more transparency and accountability in the
provisions of corporate governance. That is, corporate laws have been simplified
so that they are amenable to clear interpretation and provide a framework that
would facilitate faster economic growth.
Secondly, the Securities Contracts (Regulation) Act, 1956, Securities and

Exchange Board of India Act, 1992 and Depositories Act, 1996 have been
introduced by Securities and Exchange Board of India (SEBI), with a view to
protect the interests of investors in the securities markets as well as to maintain
the standards of corporate governance in the country.
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Companies Laws
The Ministry of Corporate Affairs (MCA) is the main authority for

regulating and promoting efficient, transparent and accountable form of
corporate governance in the Indian corporate sector. It is constantly working
towards improvement in the legislative framework and administrative set up, so
as to enable easy incorporation and exit of the companies, as well as convenient
compliance of regulations with transparency and accountability in corporate
governance. It is primarily concerned with administration of the Companies Act,
1956 and related legislations.
1. The Companies Act, 1956 is the central legislation in India that empowers
the Central Government to regulate the formation, financing, functioning and
winding up of companies. It applies to whole of India and to all types of
companies, whether registered under this Act or an earlier Act. It provides for
the powers and responsibilities of the directors and managers, raising of capital,
holding of company meetings, maintenance and audit of company accounts,
powers of inspection, etc.
The main objectives with which this Act has been introduced are to:- (i) help in
the development of companies on healthy lines; (ii) maintain a minimum
standard of good behaviour and business honesty in company promotion and
management; (iii) protect the interests of the shareholders as well as the
creditors; (iv) ensure fair and true disclosure of the affairs of companies in their
annual published balance sheet and profit and loss accounts; (v) ensure proper
standard of accounting and auditing; (vi) provide fair remuneration to
management and Board of Directors as well as to company's employees; etc.
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The Companies Act, 1956 has elaborate provisions relating to the Governance of
Companies, which deals with management and administration of companies. It
contains special provisions with respect to the accounts and audit, directors’
remuneration, other financial and non- financial disclosures, corporate
democracy, prevention of mismanagement, etc.
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Every company shall in each year, hold in addition to any other meetings, a
general meeting as its annual general meeting and shall specify the meeting as
such in the notices calling it; and not more than fifteen months shall elapse
between the date of one annual general meeting of a company and that of the
next. At each annual general meeting, every company shall appoint an auditor or
auditors to hold office from the conclusion of that meeting until the conclusion
of the next annual general meeting and shall, within seven days of the
appointment, give intimation thereof to every auditor so appointed.
Every auditor of a company shall have a right of access at all times to the books
and accounts and vouchers of the company, whether kept at the head office of
the company or elsewhere, and shall be entitled to require from the officers of
the company such information and explanations as the auditor may think
necessary for the performance of his duties as auditor.
The auditor shall inquire: - (i) whether loans and advances made by the company
on the basis of security have been properly secured and whether the terms on
which they have been made are not prejudicial to the interests of the company
or its members; (ii) whether transactions of the company which are represented
merely by book entries are not prejudicial to the interests of the company; etc.
In the case of every company, a meeting of its Board of directors shall be held at
least once in every three months and at least four such meetings shall be held in
every year. Every director of a company, who is in any way, whether directly or
indirectly, concerned or interested in a contract or arrangement, or proposed
contract or arrangement, entered into or to be entered into, by or on behalf of the
company, shall disclose the nature of his concern or interest at a meeting of the
Board of directors.
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No director of a company shall, as a director, take any part in the discussion of,
or vote on, any contract or arrangement entered into, or to be entered into, by or
on behalf of the company, if he is in any way, whether directly or indirectly,
concerned or interested in the contract or arrangement; nor shall his presence
count for the purpose of forming a quorum at the time of any such discussion or
vote; and if he does vote, his vote shall be void.
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Every company shall keep one or more registers in which shall be entered
separately particulars of all contracts or arrangements, including the following
particulars to the extent they are applicable in each case, namely:- (i) the date
of the contract or arrangement; (ii) the names of the parties thereto; (iii) the
principal terms and conditions thereof; (iv) in the case of a contract or
arrangement to which this Act applies, the date on which it was placed before
the Board; (v) the names of the directors voting for and against the contract or
arrangement and the names of those remaining neutral. Further, every company
shall keep at its registered office a register of its directors, managing director,
managing agent, secretaries and treasurers, manager and secretary.
The remuneration payable to the directors of a company, including any

managing or whole-time director, shall be determined, either by the articles of
the company, or by a resolution or, if the articles so require, by a special
resolution, passed by the company in general meeting; and the remuneration
payable to any such director determined as aforesaid shall be inclusive of the
remuneration payable to such director for services rendered by him in any other
capacity. However, any remuneration for services rendered by any such director
in any other capacity shall not be so included if:- (i) the services rendered are of
a professional nature; and (ii) in the opinion of the Central Government, the
director possesses the requisite qualifications for the practice of the profession.
A director may receive remuneration by way of a fee for each meeting of the
Board, or a committee thereof, attended by him. A director who is neither in the
whole-time employment of the company nor a managing director may be paid
remuneration, either by way of a monthly, quarterly or annual payment with the
approval of the Central Government; or by way of commission if the company
by special resolution authorises such payment. However, the remuneration paid
to such director, or where there is more than one such director, to all of them
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together, shall not exceed:- (i) one per cent of the net profits of the company, if
the company has a managing or whole-time director, a managing agent or
secretaries and treasurers or a manager; (ii) three per cent of the net profits of the
company, in any other case.
Every public company having paid-up capital of not less than five crores of
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rupees shall constitute a committee of the Board knows as 'Audit Committee'

which shall consist of not less than three directors and such number of other
directors as the Board may determine of which two thirds of the total number of
members shall be directors, other than managing or whole-time directors. The
annual report of the company shall disclose the composition of the Audit
Committee. The auditors, the internal auditor, if any, and the director-in-charge
of finance shall attend and participate at meetings of the Audit Committee but
shall not have the right to vote.
The Audit Committee should have discussions with the auditors periodically
about internal control systems, the scope of audit including the observations of
the auditors and review the half-yearly and annual financial statements before
submission to the Board and also ensure compliance of internal control systems.
It shall have authority to investigate into any matter in relation to the items
specified by the Board and for this purpose, shall have full access to information
contained in the records of the company and external professional advice, if
necessary. The recommendations of the Audit Committee on any matter relating
to financial management, including the audit report, shall be binding on the
Board. If the Board does not accept the recommendations of the Audit
Committee, it shall record the reasons thereof and communicate such reasons to
the shareholders.
Besides, a listed public company may, and in the case of resolutions relating to
such business as the Central Government may, by notification, declare to be
conducted only by postal ballot, shall, get any resolution passed by means of a
postal ballot, instead of transacting the business in general meeting of the
company. Where a company decides to pass any resolution by resorting to postal
ballot, it shall send a notice to all the shareholders, along with a draft resolution
explaining the reasons thereof, and requesting them to send their assent or
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dissent in writing on a postal ballot within a period of thirty days from the date
of posting of the letter. If a resolution is assented to by a requisite majority of the
shareholders by means of postal ballot, it shall be deemed to have been duly
passed at a general meeting convened in that behalf. However, if a shareholder
sends his assent or dissent in writing on a postal ballot and thereafter any person
fraudulently defaces or destroys the ballot paper or declaration of identify of the
shareholder, such person shall be punishable with imprisonment for a term
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which may extend to six months or with fine or with both.
2. In the competitive and technology driven business environment, while

corporates require greater autonomy of operation and opportunity for self-
regulation with optimum compliance costs, there is a need to bring about
transparency through better disclosures and greater responsibility on the part of
corporate owners and management for improved compliance. In response to
such changing corporate climate, the Companies Act, 1956 has been amended
from time to time so as to provide more transparency in corporate governance
and protect the interests of small investors, depositors and debenture holders,
etc.
The important step in this direction has been the Companies Bill, 2004, which
has been introduced to provide the comprehensive review of the company law. It
contained important provisions relating to corporate governance, like,
independence of auditors, relationship of auditors with the management of
company, independent directors with a view to improve the corporate
governance practices in the corporate sector. It is subjected to greater flexibility
and self-regulation by companies, better financial and non-financial disclosures,
more efficient enforcement of law, etc.
This amendment to the Companies Act 1956 mainly focused on reforming the
audit process and the board of directors. It mainly aimed at:- (i) laying down the
process of appointment and qualification of auditors, (ii) prohibiting non-audit
services by the auditors; (iii) prescribing compulsory rotation, at least of the
Audit Partner; (iv) requiring certification of annual audited accounts by both
CEO and CFO; etc. For reforming the boards, the bill included that remuneration
of non-executive directors can be fixed only by shareholders and must be
disclosed. A limit on the amount which can be paid would also be laid down. It
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is also envisaged that the directors should be imparted suitable training.
However, among others, an independent director should not have substantial
pecuniary interest in the company’s shares.
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SEBI Laws
An improved corporate governance is the key objective of the regulatory

framework in the securities market. Accordingly, Securities and Exchange
Board of India (SEBI) has made several efforts with a view to evaluate the
adequacy of existing corporate governance practices in the country and further
improve these practices. It is implementing and maintaining the standards of
corporate governance through the use of its legal and regulatory framework,
namely:-
1. Securities Contracts (Regulation) Act, 1956
This Act was enacted to prevent undesirable transactions and to check

speculation in the securities by regulating the business of dealing therein. Any
stock exchange, which is desirous of being recognised, may make an application
in the prescribed manner to the Central Government. Every application shall
contain such particulars as may be prescribed, and shall be accompanied by a
copy of the bye-laws of the stock exchange for the regulation and control of
contracts as well as a copy of the rules relating in general to the constitution of
the stock exchange, and in particular to:- (i) the governing body of such stock
exchange, its constitution and powers of management and the manner in which
its business is to be transacted; (ii) the powers and duties of the office bearers of
the stock exchange; (iii) the admission into the stock exchange of various classes
of members, the qualifications for membership, and the exclusion, suspension,
expulsion and re-admission of members there from or there into; (iv) the
procedure for the registration of partnerships as members of the stock exchange,
in cases where the rules provide for such membership; and the nomination and
appointment of authorised representatives and clerks.
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Every recognised stock exchange shall furnish the Central Government with a
copy of the annual report, and such annual report shall contain such particulars
as may be prescribed. It may make rules or amend any rules made by it to
provide for all or any of the following matters, namely:- (i) the restriction of
voting rights to members only in respect of any matter placed before the stock
exchange at any meeting; (ii) the regulation of voting rights in respect of any
matter placed before the stock exchange at any meeting so that each member
may be entitled to have one vote only,
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irrespective of his share of the paid-up equity capital of the stock exchange;
(iii) the restriction on the right of a member to appoint another person as his
proxy to attend and vote at a meeting of the stock exchange; etc.
If, in the opinion of the Central Government, an emergency has arisen and for
the purpose of meeting the emergency, the Central Government considers it
expedient so to do, it may, by notification in the Official Gazette, for reasons to
be set out therein, direct a recognised stock exchange to suspend such of its
business for such period not exceeding seven days and subject to such conditions
as may be specified in the notification, and, if, in the opinion of the Central
Government, the interest of the trade or the public interest requires that the
period should be extended, it may, by like notification extend the said period
from time to time.
Securities Contracts (Regulation) Amendment Act, 2007 has been enacted in

order to further amend the Securities Contracts (Regulation) Act, 1956, with a
view to include securitisation instruments under the definition of 'securities' and
provide for disclosure based regulation for issue of the securitised instruments
and the procedure thereof. This has been done keeping in view that there is
considerable potential in the securities market for the certificates or instruments
under securitisation transactions. Further, replication of the securities markets
framework for these instruments would facilitate trading on stock exchanges
and, in turn, help development of the market in terms of depth and liquidity.
2. Securities and Exchange Board of India Act, 1992
This Act was enacted to protect the interests of investors in securities and to
promote the development of, and to regulate, the securities market and for
matters connected therewith or incidental thereto. For this purpose, the SEBI
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(the Board), by regulation, specify:- (i) the matters relating to issue of capital,
transfer of securities and other matters incidental thereto; and
(b) the manner in which such matters shall be disclosed by the companies.
No stock-broker, sub-broker, share transfer agent, banker to an issue, trustee of

trust deed, registrar to an issue, merchant banker, underwriter, portfolio
manager, investment adviser and such other intermediary who
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may be associated with securities market shall buy, sell or deal in securities
except under, and in accordance with, the conditions of a certificate of
registration obtained from the Board in accordance with the regulations made
under this Act.
No depository, participant, custodian of securities, foreign institutional investor,

credit rating agency, or any other intermediary associated with the securities
market as the Board may by notification in this behalf specify, shall buy or sell
or deal in securities except under and in accordance with the conditions of a
certificate of registration obtained from the Board in accordance with the
regulations made under this Act.
Further, no person shall sponsor or cause to be sponsored or carry on or caused

to be carried on any venture capital funds or collective investment scheme
including mutual funds, unless he obtains a certificate of registration from the
Board in accordance with the regulations.
Every application for registration shall be in such manner and on payment of

such fees as may be determined by regulations. The Board may, by order,
suspend or cancel a certificate of registration in a prescribed manner, as may be
determined by regulations under this Act. However, no order shall be made
unless the person concerned has been given a reasonable opportunity of being
heard.
3. Depositories Act, 1996
This Act was enacted to provide for regulation of depositories in securities and
for matters connected therewith or incidental thereto. It provides for the
introduction of scripless trading system and settlement, which is considered
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necessary for the effective functioning of the securities markets. As per the Act,
the term 'depository' means "a company formed and registered under the
Companies Act, 1956 and which has been granted a certificate of registration
under sub-section (1A) of section 12 of the Securities and Exchange Board of
India Act, 1992".
No depository shall act as a depository unless it obtains a certificate of

commencement of business from the Board (the SEBI). The Board shall grant a
certificate only if it is satisfied that the depository has adequate systems and
safeguards to prevent manipulation of records and
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transactions. However, a certificate shall not be refused unless the depository

concerned has been given a reasonable opportunity of being heard.
A depository shall enter into an agreement with one or more participants as its
agent, in such form as may be specified by the bye-laws. Any person, through a
participant, may enter into an agreement, in such form as may be specified by
the bye-laws, with any depository for availing its services. Any such person shall
surrender the certificate of security, for which he seeks to avail the services of a
depository, to the issuer in such manner as may be specified by the regulations.
The issuer, on receipt of certificate of security, shall cancel the certificate of
security and substitute in its records the name of the depository as a registered
owner in respect of that security and inform the depository accordingly. A
depository shall, on receipt of information, enter the name of the person referred
in its records, as the beneficial owner.
On receipt of intimation from a participant, every depository shall register the

transfer of security in the name of the transferee. If a beneficial owner or a
transferee of any security seeks to have custody of such security, the depository
shall inform the issuer accordingly.
Every person subscribing to securities offered by an issuer shall have the option
either to receive the security certificates or hold securities with a depository.
Where a person opts to hold a security with a depository, the issuer shall
intimate such depository the details of allotment of the security, and on receipt
of such information the depository shall enter in its records the name of the
allottee as the beneficial owner of that security.
A depository shall be deemed to be the registered owner for the purposes of

effecting transfer of ownership of security on behalf of a beneficial owner.
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However, it shall not have any voting rights or any other rights in respect of
securities held by it. The beneficial owner shall be entitled to all the rights and
benefits and be subjected to all the liabilities in respect of his securities held by a
depository.
The Board, on being satisfied that it is necessary in the public interest or in the
interest of investors so to do, may, by order in writing,:- (i) call upon
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any issuer, depository, participant or beneficial owner to furnish in writing such

information relating to the securities held in a depository as it may require; or
(ii) authorise any person to make an enquiry or inspection in relation to the
affairs of the issuer, beneficial owner, depository or participant, who shall
submit a report of such enquiry or inspection to it within such period as may be
specified in the order.
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CLAUSE 49 of LISTING AGREEMENT
I. Board of Directors
(A) Composition of Board

i. The Board of directors of the company shall have an optimum
combination of executive and non-executive directors with not less than
fifty percent of the board of directors comprising of non- executive
directors.
ii. Where the Chairman of the Board is a non-executive director, at least

one-third of the Board should comprise of independent directors and in
case he is an executive director, at least half of the Board should
comprise of independent directors.
Provided that where the non-executive Chairman is a promoter of the

company or is related to any promoter or person occupying
management positions at the Board level or at one level below the
Board, at least one-half of the Board of the company shall consist of
independent directors.
Explanation-For the purpose of the expression “related to any

promoter” referred to in sub-clause (ii):
a. If the promoter is a listed entity, its directors other than the

independent directors, its employees or its nominees shall be deemed to
be related to it;
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b. If the promoter is an unlisted entity, its directors, its employees or its
nominees shall be deemed to be related to it.”
iii. For the purpose of the sub-clause (ii), the expression ‘independent
director’ shall mean a non-executive director of the company who:
a. apart from receiving director’s remuneration, does not have

any material pecuniary relationships or transactions with the
company, its promoters, its directors, its senior
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management or its holding company, its subsidiaries and

associates which may affect independence of the director;\
b. is not related to promoters or persons occupying management
positions at the board level or at one level below the board;
c. has not been an executive of the company in the immediately
preceding three financial years;
d. is not a partner or an executive or was not partner or an
executive during the preceding three years, of any of the
following:
i. the statutory audit firm or the internal audit firm that is associated
with the company, and
ii. the legal firm(s) and consulting firm(s) that have a material
association with the company.
e. is not a material supplier, service provider or customer or a

lessor or lessee of the company, which may affect
independence of the director;
f. is not a substantial shareholder of the company i.e. owning

two percent or more of the block of voting shares.
g. is not less than 21 years of age
Explanation
For the purposes of the sub-clause (iii):
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a. Associate shall mean a company which is an “associate” as defined
in Accounting Standard (AS) 23, “Accounting for Investments in
Associates in Consolidated Financial Statements”, issued by the
Institute of Chartered Accountants of India.
b. “Senior management” shall mean personnel of the company who are

members of its core management team excluding Board of Directors.
Normally, this would comprise all members of
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management one level below the executive directors, including all

functional heads.
c. “Relative” shall mean “relative” as defined in section 2(41) and

section 6 read with Schedule IA of the Companies Act, 1956.
d. Nominee directors appointed by an institution which has invested in

or lent to the company shall be deemed to be independent directors.
Explanation:
“Institution’ for this purpose means a public financial institution as

defined in Section 4A of the Companies Act, 1956 or a “corresponding
new bank” as defined in section 2(d) of the Banking Companies
(Acquisition and Transfer of Undertakings) Act, 1970 or the Banking
Companies (Acquisition and Transfer of Undertakings) Act, 1980 [both
Acts].”
(B) Non executive directors’ compensation and disclosures
All fees/compensation, if any paid to non-executive directors, including

independent directors, shall be fixed by the Board of Directors and shall require
previous approval of shareholders in general meeting. The shareholders’
resolution shall specify the limits for the maximum number of stock options that
can be granted to non-executive directors, including independent directors, in
any financial year and in aggregate.
Provided that the requirement of obtaining prior approval of shareholders in

general meeting shall not apply to payment of sitting fees to non- executive
29
directors, if made within the limits prescribed under the Companies Act, 1956
for payment of sitting fees without approval of the Central Government.
(C) Other provisions as to Board and Committees
i. The board shall meet at least four times a year, with a maximum time
gap of four months between any two meetings. The minimum
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information to be made available to the board is given in

Annexure– I A.
ii. A director shall not 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 notify changes
as and when they take place.
Explanation:
1. For the purpose of considering the limit of the committees on which a
director can serve, all public limited companies, whether listed or not,
shall be included and all other companies including private limited
companies, foreign companies and companies under Section 25 of the
Companies Act shall be excluded.
2. For the purpose of reckoning the limit under this sub-clause,

Chairmanship/membership of the Audit Committee and the
Shareholders’ Grievance Committee alone shall be considered.
iii. The Board shall periodically review compliance reports of all laws
applicable to the company, prepared by the company as well as steps
taken by the company to rectify instances of non- compliances.
iv. An independent director who resigns or is removed from the Board of

the Company shall be replaced by a new independent director within a
period of not more than 180 days from the day of such resignation or
removal, as the case may be:
31
Provided that where the company fulfils the requirement of
independent directors in its Board even without filling the vacancy
created by such resignation or removal, as the case may be, the
requirement of replacement by a new independent director within the
period of 180 days shall not apply
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(D) Code of Conduct
i. The Board shall lay down a code of conduct for all Board members and senior
management of the company. The code of conduct shall be posted on the
website of the company.
ii. All Board members and senior management personnel shall affirm compliance
with the code on an annual basis. The Annual Report of the company shall
contain a declaration to this effect signed by the CEO.
Explanation:
For this purpose, the term “senior management” shall mean personnel of the
company who are members of its core management team excluding Board of
Directors. Normally, this would comprise all members of management one
level below the executive directors, including all functional heads.
II. Audit Committee
(A) Qualified and Independent Audit Committee
A qualified and independent audit committee shall be set up, giving the
terms of reference subject to the following:
i. The audit committee shall have minimum three directors as members.

Two-thirds of the members of audit committee shall be independent
directors.
33
ii. All members of audit committee shall be financially literate and at least
one member shall have accounting or related financial management
expertise.
Explanation 1: The term “financially literate” means the ability to read and
understand basic financial statements i.e. balance sheet, profit and loss account,
and statement of cash flows.
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Explanation 2: A member will be considered to have accounting or related

financial management expertise if he or she possesses experience in finance or
accounting, or requisite professional certification in accounting, or any other
comparable experience or background which results in the individual’s financial
sophistication, including being or having been a chief executive officer, chief
financial officer or other senior officer with financial oversight responsibilities.
iii. The Chairman of the Audit Committee shall be an independent director;

iv. The Chairman of the Audit Committee shall be present at Annual General
Meeting to answer shareholder queries;
v. The audit committee may invite 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. The finance
director, head of internal audit and a representative of the statutory auditor
may be present as invitees for the meetings of the audit committee;
vi. The Company Secretary shall act as the secretary to the committee.
(B) Meeting of Audit Committee
The audit committee should meet at least four times in a year and not more
than four months shall elapse between two meetings. The quorum shall be either
two members or one third of the members of the audit committee whichever is
greater, but there should be a minimum of two independent members present.
(C) Powers of Audit Committee
35
The audit committee shall have powers, which should include the following:
1. To investigate any activity within its terms of reference.

2. To seek information from any employee.
3. To obtain outside legal or other professional advice.
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4. To secure attendance of outsiders with relevant expertise, if it considers

necessary.
(D) Role of Audit Committee
The role of the audit committee shall 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 credible.
2. Recommending to the Board, the appointment, re-appointment and, if
required, the replacement or removal of the statutory auditor and the
fixation of audit fees.
3. Approval of payment to statutory auditors for any other services rendered
by the statutory auditors.
4. Reviewing, with the management, the annual financial statements before
submission to the board for approval, with particular reference to:
a. Matters required to be included in the Director’s Responsibility

Statement to be included in the Board’s report in terms of clause
(2AA) of section 217 of the Companies Act, 1956
b. Changes, if any, in accounting policies and practices and reasons for
the same
c. Major accounting entries involving estimates based on
the exercise of judgment by management
d. Significant adjustments made in the financial statements arising out of
audit findings
e. Compliance with listing and other legal requirements relating to
37
financial statements
f. Disclosure of any related party transactions
g. Qualifications in the draft audit report.
5. Reviewing, with the management, the quarterly financial statements before

submission to the board for approval
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5A. 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 utilized 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.
6. Reviewing, with the management, performance of statutory and internal

auditors, adequacy of the internal control systems.
7. 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.
8. Discussion with internal auditors any significant findings and follow up

there on.
9. Reviewing the findings of any internal investigations by the internal

auditors into matters where there is suspected fraud or irregularity or a
failure of internal control systems of a material nature and reporting the
matter to the board.
10. Discussion with statutory auditors before the audit commences, about the
nature and scope of audit as well as post-audit discussion to ascertain any
area of concern.
11. To look into the reasons for substantial defaults in the payment to the
30
depositors, debenture holders, shareholders (in case of non payment of
declared dividends) and creditors.
12. To review the functioning of the Whistle Blower mechanism, in case the
same is existing.
12A. Approval of appointment of CFO (i.e., the whole-time Finance Director

or any other person heading the finance function or
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discharging that function) after assessing the qualifications, experience &

background, etc. of the candidate.
13. Carrying out any other function as is mentioned in the terms of reference of
the Audit Committee.
Explanation (i): The term "related party transactions" shall have the same
meaning as contained in the Accounting Standard 18, Related Party
Transactions, issued by The Institute of Chartered Accountants of India.
Explanation (ii): If the company has set up an audit committee pursuant to
provision of the Companies Act, the said audit committee shall have such
additional functions / features as is contained in this clause.
(E) Review of information by Audit Committee
The Audit Committee shall mandatorily review the following information:

1. Management discussion and analysis of financial condition and results of
operations;
2. Statement of significant related party transactions (as defined by the audit
committee), submitted by management;
3. Management letters / letters of internal control weaknesses issued by the
statutory auditors;
4. Internal audit reports relating to internal control weaknesses; and
5. The appointment, removal and terms of remuneration of the Chief internal
auditor shall be subject to review by the Audit Committee
III. Subsidiary Companies
i. At least one independent director on the Board of Directors of the holding

32
company shall be a director on the Board of Directors of a material non listed
Indian subsidiary company.
ii. The Audit Committee of the listed holding company shall also review the
financial statements, in particular, the investments made by the unlisted
subsidiary company.
iii. The minutes of the Board meetings of the unlisted subsidiary company shall be
placed at the Board meeting of the listed holding company. The
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management should periodically bring to the attention of the Board of

Directors of the listed holding company, a statement of all significant
transactions and arrangements entered into by the unlisted subsidiary
company.
Explanation 1: The term “material non-listed Indian subsidiary” shall mean an

unlisted subsidiary, incorporated in India, 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.
Explanation 2: The term “significant transaction or arrangement” shall mean

any individual transaction or arrangement that exceeds or is likely to exceed
10% of the total revenues or total expenses or total assets or total liabilities, as
the case may be, of the material unlisted subsidiary for the immediately
preceding accounting year.
Explanation 3: Where a listed holding company has a listed subsidiary which is

itself a holding company, the above provisions shall apply to the listed
subsidiary insofar as its subsidiaries are concerned.
IV. Disclosures
(A) Basis of related party transactions
i. A statement in summary form of transactions with related parties in

the ordinary course of business shall be placed periodically before the
audit committee.
34
ii. Details of material individual transactions with related parties which
are not in the normal course of business shall be placed before the audit
committee.
iii. Details of material individual transactions with related parties or others,

which are not on an arm’s length basis should be placed before the
audit committee, together with Management’s justification for the
same..
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(B) Disclosure of Accounting Treatment
Where in the preparation of financial statements, a treatment different from

that prescribed in an Accounting Standard has been followed, the fact shall
be disclosed in the financial statements, together with the management’s
explanation as to why it believes such alternative treatment is more
representative of the true and fair view of the underlying business transaction
in the Corporate Governance Report.
(C) Board Disclosures – Risk management
The company shall lay down procedures to inform Board members about
the risk assessment and minimization procedures. These procedures shall be
periodically reviewed to ensure that executive management controls risk
through means of a properly defined framework.
(D) Proceeds from public issues, rights issues, preferential issues etc.
When money is raised through an issue (public issues, rights issues,

preferential issues etc.), it shall disclose to the Audit Committee, the uses /
applications of funds by major category (capital expenditure, sales and
marketing, working capital, etc), on a quarterly basis as a part of their
quarterly declaration of financial results. Further, on an annual basis, the
company shall prepare a statement of funds utilized for purposes other than
those stated in the offer document/prospectus/notice and place it before the
audit committee. Such disclosure shall be made only till such time that the
full money raised through the issue has been fully spent. This statement shall
36
be certified by the statutory auditors of the company. Furthermore, where the
company has appointed a monitoring agency to monitor the utilisation of
proceeds of a public or rights issue, it shall place before the Audit
Committee the monitoring report of such agency, upon receipt, without any
delay. The audit committee shall make appropriate recommendations to the
Board to take up steps in this matter.
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(E) Remuneration of Directors
i. All pecuniary relationship or transactions of the non-executive directors

vis-à-vis the company shall be disclosed in the Annual Report.
ii. Further the following disclosures on the remuneration of directors shall
be made in the section on the corporate governance of the Annual
Report:
a. All elements of remuneration package of individual directors
summarized under major groups, such as salary, benefits, bonuses,
stock options, pension etc.
b. Details of fixed component and performance linked incentives,
along with the performance criteria.
c. Service contracts, notice period, severance fees.
d. Stock option details, if any – and whether issued at a discount as
well as the period over which accrued and over which exercisable.
iii. The company shall publish its criteria of making payments to non-
executive directors in its annual report. Alternatively, this may be put
up on the company’s website and reference drawn thereto in the annual
report.
iv. The company shall disclose the number of shares and convertible
instruments held by non-executive directors in the annual report.
v. Non-executive directors shall be required to disclose their shareholding
(both own or held by / for other persons on a beneficial basis) in the
listed company in which they are proposed to be appointed as
directors, prior to their appointment. These details should be disclosed
in the notice to the general meeting called for appointment of such
director
38
(F) Management
i. As part of the directors’ report or as an addition thereto, a Management

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

1. Industry structure and developments.
2. Opportunities and Threats.
3. Segment–wise or product-wise performance.
4. Outlook
5. Risks and concerns.
6. Internal control systems and their adequacy.
7. Discussion on financial performance with respect to operational
performance.
8. Material developments in Human Resources /
Industrial Relations front, including number of people employed.
ii. Senior management shall make disclosures to the board relating to all
material financial and commercial transactions, where they have
personal interest, that may have a potential conflict with the interest of
the company at large (for e.g. dealing in company shares, commercial
dealings with bodies, which have shareholding of management and
their relatives etc.)
Explanation: For this purpose, the term "senior management" shall mean
personnel of the company who are members of its. core management team
excluding the Board of Directors). This would also include all members of
management one level below the executive directors including all functional
heads.
(G) Shareholders
i. In case of the appointment of a new director or re-appointment of a
director the shareholders must be provided with the following
information:
40
a. A brief resume of the director;
b. Nature of his expertise in specific functional areas;
c. Names of companies in which the person also holds the
directorship and the membership of Committees of the Board; and
d. Shareholding of non-executive directors as stated in Clause 49
(IV) (E) (v) above
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ia. Disclosure of relationships between directors inter-se shall be made in

the Annual Report, notice of appointment of a director, prospectus and
letter of offer for issuances and any related filings made to the stock
exchanges where the company is listed.
ii. Quarterly results and presentations made by the company to analysts
shall be put on company’s web-site, or shall be sent in such a form so
as to enable the stock exchange on which the company is listed to put it
on its own web-site.
iii. A board committee under the chairmanship of a non-executive director
shall be formed to specifically look into the redressal of shareholder
and investors complaints like transfer of shares, non- receipt of balance
sheet, non-receipt of declared dividends etc. This Committee shall be
designated as ‘Shareholders/Investors Grievance Committee’.
iv. To expedite the process of share transfers, the Board of the company
shall delegate the power of share transfer to an officer or a committee
or to the registrar and share transfer agents. The delegated authority
shall attend to share transfer formalities at least once in a fortnight.
V. CEO/CFO certification
The CEO, i.e. the Managing Director or Manager appointed in terms of the
Companies Act, 1956 and the CFO i.e. the whole-time Finance Director or any
other person heading the finance function discharging that function shall certify
to the Board that:
a. They have reviewed financial statements and the cash flow statement for the
year and that to the best of their knowledge and belief :
42
i. these statements do not contain any materially untrue statement or
omit any material fact or contain statements that might be misleading;
ii. these statements together present a true and fair view of the company’s
affairs and are in compliance with existing accounting standards,
applicable laws and regulations.
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b. There are, to the best of their knowledge and belief, no transactions entered
into by the company during the year which are fraudulent, illegal or
violation of the company’s code of conduct.
c. They accept responsibility for establishing and maintaining internal controls

for financial reporting and that they have evaluated the effectiveness of
internal control systems of the company pertaining to financial reporting and
they have disclosed to the auditors and the Audit Committee, deficiencies in
the design or operation of such internal controls, if any, of which they are
aware and the steps they have taken or propose to take to rectify these
deficiencies.
d. They have indicated to the auditors and the Audit committee
i. significant changes in internal control over financial reporting during the

year;
ii. significant changes in accounting policies during the year and that the
same have been disclosed in the notes to the financial statements; and
iii. instances of significant fraud of which they have become aware and the
involvement therein, if any, of the management or an employee having a
significant role in the company’s internal control system over financial
reporting.
VI. Report on Corporate Governance

44
i. There shall be a separate section on Corporate Governance in the
Annual Reports of company, with a detailed compliance report on
Corporate Governance. Non-compliance of any mandatory requirement
of this clause with reasons thereof and the extent to which the non-
mandatory requirements have been adopted should be specifically
highlighted. The suggested list of items to be included in this report is
given in Annexure- I C and list of non- mandatory requirements is
given in Annexure – I D.
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ii. The companies shall submit a quarterly compliance report to the stock
exchanges within 15 days from the close of quarter as per the format
given in Annexure I B. The report shall be signed either by the
Compliance Officer or the Chief Executive Officer of the company
VII. Compliance
1. The company shall obtain a certificate from either the auditors or practicing
company secretaries regarding compliance of conditions of corporate
governance as stipulated in this clause and annex the certificate with the
directors’ report, which is sent annually to all the shareholders of the
company. The same certificate shall also be sent to the Stock Exchanges
along with the annual report filed by the company.
2. The non-mandatory requirements given in Annexure – I D may be
implemented as per the discretion of the company. However, the disclosures
of the compliance with mandatory requirements and adoption (and
compliance) / non-adoption of the non-mandatory requirements shall be
made in the section on corporate governance of the Annual Report.
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Scandal at Satyam: Truth, Lies and Corporate

Governance
When terrorists attacked Mumbai last November,

the media called it "India's 9/11." That tragedy has
been succeeded by another that has been dubbed
"India's Enron." In one of the the biggest frauds in
India's corporate history, B. Ramalinga Raju,
founder and CEO of Satyam Computers, India's
fourth-largest IT services firm, announced on
January 7 that his company had been falsifying its
accounts for years, overstating revenues and
inflating profits by $1 billion. Ironically, Satyam
means "truth" in Sanskrit, but Raju's admission --
accompanied by his resignation -- shows the
company had been feeding investors, shareholders, clients and employees a
steady diet of asatyam (or untruth), at least regarding its financial performance.
(Editor's note: Satyam is a corporate sponsor of India Knolwedge@Wharton.)
Raju's departure was followed by the resignation of Srinivas Vadlamani,

Satyam's chief financial officer, and the appointment of Ram Mynampati as the
interim CEO. In a press conference held in Hyderabad on January 8, Mynampati
told reporters that the company's cash position was "not encouraging" and that
"our only aim at this time is to ensure that the business continues." A day later,
media reports noted that Raju and his brother Rama (also a Satyam co-founder)
had been arrested -- and the government of India disbanded Satyam's board.
40
Though control of the company will pass into the hands of a new board, the
government stopped short of a bailout -- it has not offered Satyam any funds.
Meanwhile, a team of auditors from the Securities and Exchange Board of India
(SEBI), which regulates Indian public companies, has begun an investigation
into the fraud. Since Satyam's stocks or American Depository Receipts (ADRs)
are listed on the Bombay Stock Exchange as well as the New York Stock
Exchange, international regulators could swing into action if they believe
U.S. laws have been broken. At least two U.S. law firms have filed class-
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action lawsuits against Satyam, but given the company's precarious finances, it
is unclear how much money investors will be able to recover.
According to experts from Wharton and elsewhere, the Satyam debacle will
have an enormous impact on India's business scene over the coming months.
The possible disappearance of a top IT services and outsourcing giant will
reshape India's IT landscape. Satyam could possibly be sold -- in fact, it had
engaged Merrill Lynch to explore "strategic options," but the investment bank
has withdrawn following the disclosure about the fraud. It is widely believed
that rivals such as HCL, Wipro and TCS could cherry pick the best clients and
employees, effectively hollowing out Satyam. Another possible impact could be
on the trend of outsourcing to India, since India's IT firms handle sensitive
financial information for some of the world's largest enterprises. The most
significant questions, however, will be asked about corporate governance in
India, and whether other companies could follow Satyam's Raju in revealing
skeletons in their own closets.
'Riding a Tiger'
Raju was compelled to admit to the fraud following an aborted attempt to have
Satyam invest $1.6 billion in Maytas Properties and Maytas Infrastructure
("Maytas" is Satyam spelled backwards) -- two firms promoted and controlled
by his family members. On December 16, Satyam's board cleared the
investment, sparking a negative reaction by investors, who pummeled its stock
on the New York Stock Exchange and Nasdaq. The board hurriedly reconvened
the same day and called off the proposed investment.
The matter didn't die there, as Raju may have hoped. In the next 48 hours,
resignations streamed in from Satyam's non-executive director and Harvard
42
professor of business administration Krishna Palepu and three independent
directors -- Mangalam Srinivasan, a management consultant and advisor to
Harvard's Kennedy School of Government; Vinod Dham, called the "father of
the Pentium chip" and now executive managing director of NEA Indo-US
Ventures in Santa Clara, Calif.; and M. Rammohan Rao, the dean of the Indian
School of Business in Hyderabad (ISB). Rao had chaired both December 16
board meetings. On January 8, he resigned his position as the ISB dean. In a
letter to the ISB community, he explained: "Unfortunately,
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yesterday's shocking revelations, of which I had absolutely no prior knowledge,

mean that we are far from seeing the end of the controversy surrounding Satyam
Computers. My continued concern and preoccupation with the evolving situation
are impacting my role as dean of ISB at a critical time for the school. Given that
my term with ISB anyway ends in a few months, I think that this is an
appropriate time for me to step down."
Resigning as Satyam's chairman and CEO, Raju said in a letter addressed to his
board, the stock exchanges and the market regulator Securities & Exchange
Board of India (SEBI) that Satyam's profits were inflated over several years to
"unmanageable proportions" and that it was forced to carry more assets and
resources than its real operations justified. He took sole responsibility for those
acts. "It was like riding a tiger, not knowing how to get off without being
eaten," he said. "The aborted Maytas acquisition was the last attempt to fill the
fictitious assets with real ones."
Specifically, Raju acknowledged that Satyam's balance sheet included Rs. 7,136
crore (nearly $1.5 billion) in non-existent cash and bank balances, accrued
interest and misstatements. It had also inflated its 2008 second quarter revenues
by Rs. 588 crore ($122 million) to Rs. 2,700 crore ($563 million), and actual
operating margins were less than a tenth of the stated Rs. 649 crore ($135
million).
Satyam's auditor PricewaterhouseCoopers issued a terse statement: "Over the

last two days, there have been media reports with regard to alleged irregularities
in the accounts of Satyam.... Price Waterhouse are the statutory auditors of
Satyam. The audits were conducted by Price Waterhouse in accordance with
applicable auditing standards and were supported by appropriate audit evidence.
Given our obligations for client confidentiality, it is not possible for us to
44
comment upon the alleged irregularities. Price Waterhouse will fully meet its
obligations to cooperate with the regulators and others."
Impact on 'Brand India'
The outrage over Raju's admission of systematic accounting fraud has broadened
to wider concern about the potential damage to India's appeal for foreign
investors and the IT services industry in particular. Immediately
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following Raju's confession, Satyam's shareholders took a direct hit as the

company's share price crashed 77% to Rs. 30 (approximately 60 cents), a far cry
from its 52-week high of Rs. 544 ($11.35) last May.
"If there were one or two more such accounting scandals in the next six months,
it would make international investors more wary," says Wharton management
professor Michael Useem. "One example would put people on guard; several
examples would be enough to tell big investment money managers that they
have to be especially careful working in that environment."
Jitendra Singh, a Wharton management professor who is currently dean of the

Nanyang Business School in Singapore, believes Satyam is an "outlier" and that
there is no reason to think that "problems of this kind may be much more
extensive than one company or a handful of companies." However, he adds,
"foreign investors will look a little more askance at accounting data from India.
And that may not be a bad thing."
Useem also warns against overreacting. "Don't assume other firms are guilty,"
he says. But he considers the situation to be an "alerting call" for investors to
check where their money is, and for auditors and independent directors in all
major firms to take a look at the books.
Corporate India has tried to contain the damage so far. Rajeev Chandrasekhar,
president of the Federation of Indian Chambers of Commerce and Industry,
called upon regulators "to move quickly to demonstrate that this is an
exceptional case among corporations, and that investors need not worry about
Indian corporate governance and accounting standards." Suresh Surana, founder
of RSM Astute Consulting Group, said in a statement that the Satyam
development is "a major eye opener and will bring into renewed and critical
46
focus the role of independent directors, auditors, company management, [the]
CFO and other key persons involved."
"When you have companies that are ostensibly growing their top lines at 30%,
40% or 50%, it is possible to paper over things," Singh says. "Satyam was doing
it by boosting sales and profits; Bernie Madoff was doing it by boosting rates of
return. When growth rates slow down, you are unable to
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hide the financial reality of how much cash you actually have. It is possible that
during this slowdown period, more scandals will come to light." (U.S. financier
Madoff last month admitted to running a $50 billion Ponzi scheme to keep his
hedge fund afloat.)
Singh adds that companies with "the bluest of blue-chip reputations [such as]
Infosys and TCS" could actually gain in the current environment, because of a
potential "flight to quality" among client companies. "The third-tier and weaker
companies will probably undergo a lot more scrutiny," he says.
According to Ravi Aron, senior fellow at the Mack Center for Technological
Innovation at Wharton, the Satyam fallout could affect India's IT offshoring and
outsourcing firms in several ways. An immediate impact could be skepticism on
the part of clients about whether Indian IT firms can be entrusted with sensitive
financial information. "Clients could begin to ask, 'How much do I know about
this IT company and its governance?'" says Aron. "Is the IT service provider
doing anything that could jeopardize the client's compliance with FASB,
Sarbanes Oxley, Basel II or other financial regulations?"
Aron recommends that before other IT companies get blackballed because of

Satyam's problems, "they should act swiftly to demonstrate that their own
operations are squeaky clean." Indian IT companies have always had
exceptionally high standards of accounting, and they should ensure that they do
not face any spillover effect, he adds. This has already begun to happen. On the
day that Raju came clean, N. R. Narayana Murthy, chief mentor at Infosys, was
on Indian television -- distancing Infosys and the rest of the IT industry from
Satyam's practices. Similarly, Vineet Nayar, CEO of HCL, e-mailed a personal
letter to the company's clients and associates. Describing Satyam's disclosures as
"unfortunate," the letter added that Nayar would "reaffirm our commitment that
48
we [will] focus on creating value for our customers with the same passion that
we have demonstrated in the past while maintaining the highest ethical and
governance standards."
Mauro Guillen, a Wharton management professor who has studied corporate

governance in emerging economies, believes that Indian business
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has an advantage in arguing that the problem is limited to Satyam and is not
systemic. "India is not perceived like Russia -- it is neither everyone's darling
nor the plague," he says. "This works to the country's advantage because it
deflects the blame of such occurrences to the way governance works in
emerging economies rather than to India. What regulators in India need to do in
response to Satyam is to find out quickly if other companies have been doing
similar things. The proper response is to deal with and defuse the problem as
soon as possible."
Guillen notes that what makes Satyam's case unusual is that it had listed its
ADRs on the NYSE. "Companies in emerging economies have trouble raising
capital at low costs. The literature shows that is the reason they want to list in
the U.S., where they accept a higher level of governance in order to raise capital
at a lower cost. The fact that Satyam listed its ADRs in the U.S. but still had
such serious governance problems makes this case particularly disturbing."
Guillen adds, though, that India has several well-regarded IT companies. "If one
or two of them don't make the grade, it should not shake investor confidence. It
shows that investing in emerging markets is risky. Investors always balance risks
and rewards. If the IT sector in India continues to remain competitive, the
Satyam episode will just be a footnote in India's business story. If the sector
becomes uncompetitive, then that would create a serious problem."
Saikat Chaudhuri, a management professor at Wharton, believes the Satyam

episode reveals that the pressure on companies to maintain their financial
performance is immense. "Satyam always wanted to keep up with the Big Three
of Indian IT companies -- TCS, Infosys and Wipro," he notes. "At a time when
the IT industry was booming and companies were growing rapidly, it was easy
for Satyam to argue that the company was doing well and that it had good
50
governance." The involvement of the board, Chaudhuri adds, was at the
"strategic level; in companies like Satyam, it is the owner/promoter/founder who
runs the show. It has to do with the ownership structure." In Chaudhuri's view,
auditors such as PricewaterhouseCoopers, who signed off on the bogus accounts
at Satyam, have a lot more to answer for than the board of directors. "This is a
serious lapse on their part. They should have probed."
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Chaudhuri's advice to other Indian IT firms is to distance themselves from the

Satyam fallout through prompt action. "Honesty and transparency will alleviate
investor concerns," he says. "I don't believe the sector will come crashing down.
Perhaps Indian IT companies will face more scrutiny in the coming months; they
may have to answer a few more questions, but India Inc. will pull through."
NASSCOM, the National Association of Software and Services Companies,
could play a role in helping communicate that "the Satyam episode, though it
shocked everyone, is an isolated instance," he adds.
WorldCom and Tyco, Again
Useem says that if one were to take an inference from recent high-profile
scandals outside of India, "there would be a redoubled effort [in India] on the
part of investors and independent directors at other companies to ensure that
nothing like what happened at Satyam happens under their noses."
Useem draws a parallel between what occurred at Satyam with the scandals at
WorldCom and Tyco, rather than at Enron. "At WorldCom, the CFO and the
CEO were knowingly misstating the accounting and financials of the firm; at
Tyco, the CEO and the CFO were knowingly taking money from the company
for personal purposes," he says. "Satyam's disaster has a parallel to these acts of
malfeasance."
Useem recalls the CEO and promoter of a Chinese solar panel company who
"wanted his company to be extremely well governed" and therefore listed it on
the New York Stock Exchange. "He wanted a great board of directors and thus
listed the company fully on the NYSE -- not as an ADR -- for the sole purpose ...
of forcing himself to be disciplined in the governance policies his company
pursues."
52
If it survives, Satyam may be able to redeem itself with new management and
governance codes, Useem says. He recalls working as a consultant a couple of
years ago with Tyco, where the company's new CEO Ed Breen systematically
went about cleaning up after the departure of disgraced CEO Dennis Kozlowski,
instituting strong corporate governance practices. Tyco is
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one of the best examples of a corporate governance turnaround, Useem notes.
Singh adds that the Satyam scandal doesn't necessarily warrant more regulation.
"There is no need to strengthen corporate governance regulations [in India]," he
says. "The issue is really more one of leadership at the board level. The tone
gets set by the chairman of the board; it's much more a matter of culture within
the board room, of the group dynamics within the board."
Truth in Numbers
Notwithstanding Raju's confession, the Satyam episode has brought into sharp
relief the role and efficacy of independent directors. SEBI requires Indian
publicly held companies to ensure that independent directors make up at least
half their board strength.
The knowledge available to independent directors and even audit committee

members is inherently limited to prevent willful withholding of crucial
information, Singh notes. "The reality is, at the end of the day, even as an audit
committee member or as an independent director, I would have to rely on what
the management was presenting to me," he says, drawing upon his experience as
an independent director and audit committee member at Fedders, a publicly held
company in the U.S. that filed for bankruptcy last year. "It is the auditors' job to
see if the numbers presented are accurate."
Singh says he drew "a level of confidence" from the accounting rigor and
governance mechanisms at Infosys, where he was an independent director from
2000 to 2003. He recalls how T.V. Mohandas Pai, the company's then- chief
financial officer (now a director overseeing human resources) "would take so
much time going into accounting details."
54
Even if outside directors were unaware of the true state of Satyam's finances,
some red flags should have been obvious. According to Aron, Satyam is one of
the world's largest implementers of SAP systems. In an effort to compete against
Satyam, HCL recently acquired Axon, an SAP consulting firm, at a cost of $800
million. (Editor's note: See interview with HCL CEO Vineet Nayar) Aron notes
that any Satyam director should have
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been puzzled that the company was proposing to invest $1.6 billion in real estate
at a time when a competitor as formidable as HCL was gunning for one of its
most lucrative markets. "IT is a highly capital-intensive business, especially in
India," says Aron. "What on earth would compel Satyam to invest $1.6 billion in
real estate at a time when competition with HCL was about to grow more
intense? That is what the directors should have been asking." Instead, he adds,
like the dog that didn't bark in the Sherlock Holmes story, the matter was
allowed to slide.
How effective independent directors can be is mainly a factor of the "dynamics

inside the board room once the doors are closed," according to Singh. "There is
an attitude in some Indian companies that the board members actually work for
the people who have brought them onto the board. This is a completely
misguided attitude. It looks like this may have been a problem at Satyam The
real strength of a healthy board is when a
consensus gets overturned by a dissenting view."
Even if the proposed investment in the two Maytas firms appeared to be ethical
on first sight, Singh notes that he would have expected the independent directors
to be extra careful. "Given the fact that there is a family connection involved, as
an independent board member I would be looking very hard at whether this is
the right decision for the company," he says. "Also, quite aside from issues of
governance, everything we know about unrelated diversification [deals] from
management literature is that, as a general matter, they are not a good idea; they
don't seem to make strategic sense."
Independent Defectors
Useem wonders if the Satyam directors who resigned actually did the right
56
thing. "The leadership dictum is that you need to stay the course, stay in the
game, face the problem and solve the problem," he says. "Did the four directors
who resigned have an option of banding together, staying on the board and
changing governance?" Useem adds that "it is often very hard to stay the course.
I am empathetic with people who have difficulty [making that decision]."
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Media reports quoted former independent director Srinivasan as saying she

accepted "moral responsibility" for failing to cast a dissenting vote on the
Maytas proposal. Some of the other directors who resigned have cited
difficulties in attending frequent board meetings. Useem says it can indeed prove
challenging for independent directors to go through reams of documents and
attend frequent board meetings that companies in distress typically have.
In a written response to Knowledge@Wharton, Palepu, Satyam's former non-

executive director, stated that he was not present at the board meetings where the
Maytas investment proposals were discussed. "As a result, under Indian law, I
was not eligible to vote on the proposals," he said. Palepu earned nearly Rs. 1
crore (about $200,000) from Satyam in 2007, according to regulatory filings,
most of it for rendering "professional services." He declined comment, but those
services were essentially leadership development and consulting for Satyam's
top management, according to Archana Muthappa, the company's head of media
relations.
SEBI and India's registrar of companies have launched an investigation into

Satyam. Citing the Indian Securities Contract Regulation Act of 1956, a report in
The Economic Times says SEBI is empowered to award penalties of up to Rs. 25
crore and imprisonment of up to 10 years to directors and management
executives "for violating the listing agreement by making false and inaccurate
disclosures in the company's quarterly and annual results."
Singh says it is important to remember who the ultimate victims are in cases
like Satyam. "This is a real tragedy; the people who will be left holding the bag
will be the shareholders."
Even as Raju is widely blamed for unleashing "India's Enron," Chaudhuri points
58
to a major difference between Enron and Satyam. "At Enron, the CEO
stonewalled, while whistle-blowers came out with the truth," he says. "At
Satyam, there were no whistle-blowers. The CEO blew the whistle on himself."
In that sense, Raju did -- ultimately -- tell the truth and perhaps live up to the
"Satyam" name. Unfortunately for him, the company, and India's IT industry, by
then it was much too late.
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BENEFITS AND LIMITATIONS
The concept of corporate governance has been attracting public attention for
quite some time. It has been finding wide acceptance for its relevance and
importance to the industry and economy. It contributes not only to the efficiency
of a business enterprise, but also, to the growth and progress of a country's
economy. Progressively, firms have voluntarily put in place systems of good
corporate governance for the following reasons:
 Several studies in India and abroad have indicated that markets and
investors take notice of well managed companies and respond positively
to them. Such companies have a system of good corporate governance in
place, which allows sufficient freedom to the board and management to
take decisions towards the progress of their companies and to innovate,
while remaining within the framework of effective accountability.
 In today's globalised world, corporations need to access global pools of
capital as well as attract and retain the best human capital from various
parts of the world. Under such a scenario, unless a corporation embraces
and demonstrates ethical conduct, it will not be able to succeed.
 The credibility offered by good corporate governance procedures also
helps maintain the confidence of investors – both foreign and domestic –
to attract more long-term capital. This will ultimately induce more stable
sources of financing.
 A corporation is a congregation of various stakeholders, like customers,
employees, investors, vendor partners, government and society. Its
growth requires the cooperation of all the stakeholders. Hence it
imperative for a corporation to be fair and transparent to all its
stakeholders in all its transactions by adhering to the best corporate
governance practices.
50
 Good Corporate Governance standards add considerable value to the
operational performance of a company by:
1. improving strategic thinking at the top through induction of

independent directors who bring in experience and new ideas;
2. rationalizing the management and constant monitoring of risk that
a firm faces globally;
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3. limiting the liability of top management and directors by carefully

articulating the decision making process;
4. assuring the integrity of financial reports, etc.
It also has a long term reputational effects among key stakeholders, both
internally and externally.
 Also, the instances of financial crisis have brought the subject of

corporate governance to the surface. They have shifted the emphasis on
compliance with substance, rather than form, and brought to sharper
focus the need for intellectual honesty and integrity. This is because
financial and non-financial disclosures made by any firm are only as
good and honest as the people behind them.
 Good governance system, demonstrated by adoption of good corporate
governance practices, builds confidence amongst stakeholders as well as
prospective stakeholders. Investors are willing to pay higher prices to
the corporates demonstrating strict adherence to internally accepted
norms of corporate governance.
 Effective governance reduces perceived risks, consequently reduces cost
of capital and enables board of directors to take quick and better
decisions which ultimately improves bottom line of the corporates.
 Adoption of good corporate governance practices provides long term
sustenance and strengthens stakeholders' relationship.
 A good corporate citizen becomes an icon and enjoy a position of
respects.
 Potential stakeholders aspire to enter into relationships with enterprises who
 Adoption of good corporate governance practices provides stability and
growth to the enterprise.
52
Effectiveness of corporate governance system cannot merely be legislated by
law neither can any system of corporate governance be static. As competition
increases, the environment in which firms operate also changes and in such a
dynamic environment the systems of corporate governance also need to evolve.
Failure to implement good governance procedures has a cost in terms of a
significant risk premium when competing for scarce capital in today's public
markets.
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CORPORATE GOVERNANCE PROVISIONS AS PER COMPANIS ACT, 2013.
Companies Bill, 2012, takes giant strides in privileging corporate governance.

Directors face severe restrictions, auditors will be rotated, independent directors
(IDs) have been strengthened, more powers are vested in shareholders, private
companies lose many exemptions and transparency gets a boost. Extensive
controls on loans and investments are another limb of governance. Greater
involvement by shareholders will replace government approvals, a welcome
move. Loans to all parties not only corporates will be covered in the loan limits
and investments by companies.
Contracts with related parties will require prior approval by the board and, in
some cases, by shareholders. By a unique provision, shareholders interested in
the matter cannot vote on these general meeting resolutions. Small shareholders
are ensured board participation by one director representing them. Related-party
contracts must be justified and fully disclosed in the Director's Report. These
approvals will, however, not be required if the transactions are on arm's-length
basis. The directors, promoters, key management personnel and top 10
shareholders in listed companies must report any share purchase or sale within
15 days to the registrar.
All listed or notified classes of companies must have at least one-third directors
as IDs. Any director's associated party cannot do business with the company
except on an arm's length basis. Directors will be responsible only for acts of
omission or commission or negligence if they do not act on information that
should come to their knowledge as board members. They must oversee the
welfare of all stakeholders. No conflict of interest is allowed between the
company and another organization with which they are connected; or hold office
beyond two terms of three years each followed by rest of one term. All board
54
resolutions must be approved by at least one ID. If a third of the directors so
notify, resolutions moved by circulation have to be considered by the board.
The Bill provides additional matters to be resolved upon only at board meetings,
viz, (a) issue of securities, (b) granting of loans or guarantees, etc,
(c) diversification of company's business, (d) approval of any merger or
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reconstruction, (e) taking a substantial stake in another company, (f) related-

party transaction, or (g) other prescribed matters. For many matters,
shareholders' Special Resolution is now needed, not just ordinary resolution, viz,
selling or leasing out undertakings, borrowing money or to remit or give time for
debt repayment by a director. Even private companies cannot give a loan to a
director or associated parties except by shareholders' prior Special Resolution
approval.
Working directors and senior management staff have been prohibited from
entering into any call or put option on securities of the company, subsidiary or
associates. Insider trading in any company will fetch penalties. The
Remuneration Committee, headed by an ID, shall decide a remuneration policy,
having fixed and variable pay, and pay relationship between directors and
senior management, and to be disclosed to shareholders.
Audit committee responsibility has been expanded to include monitoring of

auditors' independence, their performance evaluation, approval of modification
of related-party transactions, scrutiny of loans and investments, valuation of
assets and evaluation of internal controls and risk management. They have to
establish a vigil mechanism and protection for any whistle-blower. The members
must be able to understand financial statements and have a majority of IDs.
Large companies must mandatorily have professional internal auditors.
Firms of auditors of listed and specified classes of companies must have a rest
period after two consecutive terms of five years each. Their continuation can be
reviewed at every AGM. During their tenure, partner and team are to be rotated.
A sole proprietary firm has to retire at the end of five years. The auditor will not
be eligible for appointment, if he is providing other services to the company, its
subsidiary or associates. In this scenario, we will surely see a concentration of
56
large audits amongst the Big Four audit firms as per the trend in the developed
world.
The responsibility of auditors and penalty for negligence/wrongdoing has gone

up, including criminal liability on the entire firm for even one partner's collusion
in a fraud. This measure will be counterproductive by keeping good talent
away. Disciplinary process is to be transferred from ICAI to a
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statutory board.
For private companies, many exemptions have been withdrawn. All loans to
working directors and other parties, related-party transactions, a business
diversification or capital raising, etc, will need board or general body approval.
Disclosure requirements to shareholders have been enhanced.
58
59

PROJECT REPORT Corporate Governance

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PROJECT REPORT Corporate Governance

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INTRODUCTION

Corporate governance is a system of making Management accountable towards

Corporate governance is also concerned with the morals, ethics, values,

According to the Confederation of Indian Industry (CII), corporate governance

It is a term that refers broadly to the rules, processes, or laws by which

Creates safeguards against corruption and mismanagement

a culture based on a foundation of sound business ethics

The principles of governance have been in existence for centuries. History

● Raksha (Protection) Protecting shareholders wealth

And economic developments are intrinsically linked. Effective corporate

CORPORATE GOVERNANCE NORMS

Primarily it is about managing top management, building in checks and balances

The three constituents of Corporate Governance are:

 Board of Directors or Board ;

These can further be detailed as:

Roles and powers of the Board

WHY CORPORATE GOVERNANCE

 Improving access to capital

Much attention to corporate governance issues in emerging markets among

Equally important and, irrespective of the need to access capital, good

Year Name of Committee/Body Areas/Aspects Covered

1998 Confederation of Indian Industry Desirable Corporate Governance

1999 Kumar Mangalam Birla Committee Corporate Governance

2002 Naresh Chandra Committee Corporate Audit & Governance

2003 N. R. Narayana Murthy Committee Corporate Governance

2004 J.J. Irani Adoption of Internationally

Year Name of Committee/Body Areas/Aspects Covered

1992 Sir Adrian Cadbury Committee, UK Financial Aspects of Corporate

1995 Greenbury Committee , UK Directors’ Remuneration

1998 Hampel Committee, UK Combine Code of Best Practices

1999 Blue Ribbon Committee, US Improving the Effectiveness of

1999 OECD & CACG Principles of Corporate Governance in

2003 Derek Higgs Committee, UK Review of role of effectiveness of Non-

2003 ASX Corporate Governance Council, Principles of Good Corporate Governance

Secondly, the Securities Contracts (Regulation) Act, 1956, Securities and

The Ministry of Corporate Affairs (MCA) is the main authority for

The remuneration payable to the directors of a company, including any

rupees shall constitute a committee of the Board knows as 'Audit Committee'

which may extend to six months or with fine or with both.

2. In the competitive and technology driven business environment, while

An improved corporate governance is the key objective of the regulatory

1. Securities Contracts (Regulation) Act, 1956

This Act was enacted to prevent undesirable transactions and to check

Securities Contracts (Regulation) Amendment Act, 2007 has been enacted in

2. Securities and Exchange Board of India Act, 1992

No stock-broker, sub-broker, share transfer agent, banker to an issue, trustee of

No depository, participant, custodian of securities, foreign institutional investor,

Further, no person shall sponsor or cause to be sponsored or carry on or caused

Every application for registration shall be in such manner and on payment of

3. Depositories Act, 1996

No depository shall act as a depository unless it obtains a certificate of

transactions. However, a certificate shall not be refused unless the depository

On receipt of intimation from a participant, every depository shall register the

A depository shall be deemed to be the registered owner for the purposes of

any issuer, depository, participant or beneficial owner to furnish in writing such

CLAUSE 49 of LISTING AGREEMENT

(A) Composition of Board

ii. Where the Chairman of the Board is a non-executive director, at least

Provided that where the non-executive Chairman is a promoter of the

Explanation-For the purpose of the expression “related to any

a. If the promoter is a listed entity, its directors other than the

a. apart from receiving director’s remuneration, does not have

management or its holding company, its subsidiaries and