Chapter

Corporate Governance
CatcMES
Afterstudylng this chapter, you should be able to:
Coporate Govemance
the mainissues in Corporate Govermance
the need land importance of Corporate
0
Examine
Highlightthe.Principles of Corporate Govemance
Govemance
of
ExplainCll Code Corporate Govermance
Eyplain SEBI
Code of Corporate Govermance
O
Corporations(or companies) with limited iability have become very
popularfor.undertaking industrial and commercial activities. Separation
ownership from management and limited liability of members are the
of majorfeatures of a corporate body that necessitate giving a
separate
wO to governance of these organisations. Though limited liability
thought
disinguished,a company from other forms of organisation, for such an
inportantadvantage for member^ and managers not much of accountability
Dted for them initially Traditionally a company is seen as a self.
regulatory body whose board of directors are responsible to the
Aoreholders. A rapid growth in the size of the companies and the
consequent complexities in their structure have, however, challenged this-
nditional perspective all over the world. That is why, corporate governance
hs been a topic of hot discussion in U.K., U.S.A., Japan, India and many
other countries of the world.

8.1CONCEPT ANDSCOPE OF CORPORATE GOVERNANCE

Acorporation or company is an enterprise authorised by law to conduct
business. Governance implies a degree of control to be exercised by key
8.1
 OVERNANCE

VALUESSAND IN
8.2
ETHICS,IN VISSUES cORPORATE GOVERNANCE 8.3
for thefurtherance
corporatthce growthBUSIN
of. intended to ensure
CapOTNC8OVCrnance
eis
stakeholders' representativesinterests. the
stakeholfolldoerwiaccountability intothe Board
Being guided by towardsits
protection of stakeholders'companics will haveto make clear
shareholders' democracy, area of financial decision prnciple
their ofa
Dirdors,
company
corporare
governance,the sn.gInputing of
major issues pracúce
business. In the
In rurningthesharcholders and otherstakeholders to judge
making, it is
poli n Compositionof Board of I
DirectorS emerge :
company's
onthe part of
management hasthe ability to undertake various projects
wheher
high growth potenials. In this context, the Board of Directors are the
determinc corporate purpose and set broad directionsfortheir achievem
)
ui)
i)
ó fBoard
Role
Aydii
of
Committee
Directors

Shareholders Committee.
ensuress how
by the executive
directors. Corporate governance effectively
in building andsthe, concern in corporate governance
management are dischargingtheir functions Board of
areas are discussed
below:
of Direcdors and
stakeholders' confidence.'
Definition of Corporate Governance
satisýng WComposition,of Board of Directors. Several committees
The

i nTndia
pyernance
andabroadthave
corporate
highighted
governance. The of
the role of
Board Directors non-executive
on corporate

of a
In the words of Catherwood, "Corporate governance means that
manner that is iercise
independent
in
percentage of
hrectors
certain a
contain
judgement in non-executive
the evaluation of directors
corporate
company
as pracices,
they can
company manages its
business in a accountable
In a wider interpretation,
and must
management and monitoring of
responsible to the shareholders.
governance includes corporatother
companyaccountability to shareholders and
perlormance
corporate policies and
Cadbury committee- suggested that
prOgTanms.The
the
suppliers, customers and shouldbe selected through a formal process and the
non-executive
stakeholders such as employees, rectors
their nomination. They should be Board as a
community." should decide appointed for a
to the acCountab1lity of the Board.ole termand their reappointmentshould not be automatic.
Corporate governance reters gecihc
corporations raise huge funds from the financal institutions
corporation towards its sakeholders. In order to Plote
Directors of a Manybig
corporate governance shonla authorised to nominate their representatives on the Boards of
and promote the interests of al stakeholders,
processes. Systems inchd, concernedcompany. Kumar. Mangalam Birla Committee recommended
hch
encompass well defined set of systems and the
constituion ofbboard of directors offnominee directors should be done away with for fear of
structural and organisational aspccts like thepractice
Lhat
competencies.rding. But it would be better to streamline the:esystem by removing
their opumum size, composition and qualiticatons, role anddircctors. The rather than discarding the:system altogether. The financial
frequency of change of board members and nominee tdefciencies
should nominate those persons as directors who can work
organisation of different committees by board members such asiution the interest of the company and its stakeholders.
management committee,share transfer committee, executive compensation denendently in
committee, investment committee, audit committee, etc., forms an integral ) Role of Board of Directors. The role played by Board of Directors
part of the system for sound corporate governance. Whle the main boardofa company determines the quality of corporate governance. This is
of the company would deal with major policy decisions and strategic keause of the fact that it is the responsibility of the board to guide the
directions that the company should take, the constitution of thesemanagement and to oversee the operations of the company to subserve
Committees makes focused attention on various aspects of company's he nterests of company's stakeholders. The board is expected to ensure
working. The board along with different committees and chief executivetat the management complies with the legal and ethical standards. It is
ofhcer (CEO) should devise right kinds of mechanisms for organisational0responsible for installing information and control systems which can towards
effectiveness. These may include performance management systemb prt failure of management in discharging its responsibiluty
periodic business reviews, environmental audit. eneroy audit, secretarialus stakeholders of the company.
and legal audit, benchmarking customer satisfaction, benchmarking (i) Audit Committee. Formation of an independentaaudit committee
SnOW SEBLcode of
employees' satisfaction, and so on,? an integralpartof corporate goveFnance. role of audit
considered and
COrporate
governance has laid down the constitution
 GOVERNANCE

responsibleto the needs and

corporateleaders
VALUES AND
that audit ETHICS
IN ) jnstance,
pollution of
environment is expectatiolonger
ns
of the 8.5
soGety.
HostileTakeover. As a result of intensenocompetution all over For
the
8.4
haveaspecificis alsoagreed by
percentageof independent non-executive direcor L to lerated.
committee.It
Audit
committee canimprove the commi
quality of
tee. world,
corporate
aregoing.
giants
known
shake-ups."Corporations
for
for corporate restructuring, providing well-paying jobs
down-sizing and also board.
effective. reviewingthe financial have
really
reportingby
periodically
control and reducing statements,
the ina i room
Work with no
jÍb at become
security any level. vastly risky places
disciplineand opport
Itcanprovide communicationlink with external auditors and ake sep
climate of
audit in the Company.
unity for (eu)tExecutive
o Compensation. Hostile takeovers have been witnessed
inseveralcountries. Many people attribute such happenings to
positionofinternal thecomplacency on the part of the managements of taken-over
strengthenthe Committee. The shareholders of: a companies, This also
raises the
question of the
(iv)
Shareholders'
scattered andare not
able to,attend shareholder
usually widely somegrievances against.the company. In order:
compTaMneyung corporategovernance.
Executive Compensation. While the employmentin
ofeffectiveness
Butthey may have shareholders, a shareholders committee ( i ) declining, a
huge inrease in compensation corporatofiotop ns
grievances of should function under the shoud is executives has been observed packages
both in developed as well as
tothe
constituted.Such a
committee
a non-executivedirector. chairmanship Jevel
developing
suffering
countries. This is particularly objected
fromlosses.
to in companies
IMPORTANCE OF CORPORATE GOVERNANCE
AND OF CORPORATE GOVERNANCE
8.3 NEED
Several changes have taken place in the corporate ennvironmen PRINCIPLES
expectaions, and various a. are
stakeholders
4 pillars of corporate governance discussed below:
corporate structure, sincetheiinitiation of The key
relatingto corporation promoted a:
re-thinkingeconomi
Lransparency
government policies means accurate, adequate and timely disclosure of
Various factors which have aboy Transparency to
reformssinIndia. accountability over "the years are as information the stakeholders. Without transparency, it is
corporate governance
and follows: arelevant make any progrss
towards good corporate governance.
Shareholders. The basic idea of the effectivenes provide all the stakeholders with the
(i) Scattered shareholders has come in donhnossible tOcy and disclosurewhether their interests are being taken care
company's accountabilityto its PleadTransparen
number ofsharehelders necessary tojudge
a very large h.normation information-sharing is hindered under the excuse of
Today acompanyhaswho generally indifferent towards times, international standardsin
all over the world,
are shareholdefBut many There is need to move tÍwards
management of the company.
Thus, the idea
statute
of
and to theAride
conidentiality.
disclosure ofiinformation by the corporate sector and through all
to the business. Once acompany
democracy remains confined only voting righ.ermnssof high. level ofpublicconfidencein tofinancial
of Association of the company
which provide them
histo shareholding, it is imperativethat commitment
develop a its
Government departments concerned has public
(ü) Institutional Investors. critical reports about transparency must be total.
submitted
with corporate affairs have often Need for extending 2.Accountability great importance.
violations of the rights of shareholders. corporate governance, accountabilityis of company inust
creditors, consumers In good executive of the
corporate accountability toits employees, emphasised by not only The chairman, board of directors and chief CustometS, workers, society
been shareholders,
and even to the society at large hascommittees and commissions i ulGl their accountability to the have considerable authorityover the use
academicans but also by several Since they should accept
many countries. andthe government.resources, it is natural that they
subscribers ofboth of the company's their decisions and actions.
(ii) Social Responsibility. Institutional investors as. structure of accountability for all
ownership as well as debt capital have afected the 3. Independence
company
directorsofthedecision-
Corporate governance. governance, the board of
whereall
(iv) Restructional. Society's expectations from corporations hav For good corporate non-partisanbody
3and
changed. It expects corporate management to be mort Mas to be an independent, strong
 () L 8.6
knowledge
responsibility
balance
Non-execu
(1v)
importantchanges faientitled
rly In 8.5 spromi
shoul sharehol
et d nentresul
publ Reportingrevi
4.ew
ts ns strat
ts ish ders constitutionfunctimanagement
i o egi c Inanmaking
toachieve
10 same of m) The 2)
companies
person.
o The board 0)
comprehensi v e
1997, CIl up
by various those
initsreporting
adequate
Good and corporale is
the CODE the also
individual the Six in
As "Desirable
single
functioning to
sheet, non-executive times features the
newspapers. rol t maintain objectives
contofAudi based
of boardnon-executive
if the Boardreport
officiaquart
ls erlycorporat
, e
company and tive at
one
year.
tiered,
a key ofConfederation
corporate
and CORPORATE
OF
to
and sta kehol
of
ders .
objectstirvuctes. umanagement
re . on
cash if of shouldboard to the Corporate ofthe of other
directors anyshould the them good Cl>'s Direct o rs the It
hal f-y eargover
ly nance financi
Commial t ee the and business
be governance contains shareholcompani
ders eshoul
Furth(er,organisshoulsatdion,Corporat
company'
flow d ders. It pla
conversant
law given be directors directors
chairman is of
meetcorporate
directors, code of sstakehol e
statement,
and a
the
GovernanceIndian for prudence.
must
time.1
director chairman.
andshould should intervals
at are:provisions
GOVERNANCE share and also matters everyin established that
are
other practices efficient the. in ly intigrity,:
the also
with the the
governance Industries functioning ofthe tyear
of involthFore to
heinstance,
be Corporale vaes systgovernance
em
financial
relevant
be on comprise for the f c
Company
Companies
profit
active. thmanaging
e comprise offull
India--A
in company's details
administration. performance
company. reputation
, ensured
boards twboard
o prevail1ng
bringing
about and
(CII) of to governance VALUES
laws.ratios and have at 30months lies Act people) and
that ensures

loss for director least

percent
which
finalised
directors
variousannual ensureindependeN
company now and the
AND
with in Code" and that ETHICS
and deincu more 50 and
should India. responstbii is is
acUu percent the qualitative Committees
reports. and
mantagne
provIdes
have is at which operaling \ongier inhe
IN
than
the
of least a shoua placeprop BUSlNy

bewel Th. code ohe

the is l
) (ui) The(6T lwit) (xi ) (ai) (ei) (éx)
estments
Companies to percent.
Snareholding Should,
nominee
Recommending sector
administrative seen and The
stating
compliance Major be In asdivisions
D yi)
accept Government
against management
the
fair
average
those information
disclosed case,Disclosure addi ti o nal information.
and
th
by
eWhile direshoul
cto rs d audi An
t reports.
audit the fees. with.
expossuhreouls Dedtails budgets, The DirectorNos n-exofecGrueOtadniVvEeRNANCE
withdraw
directors, presentation
that Indian
muliple
requred non-financial, of
share Worki
and accept in g ofdefauls, board board stock
further company's accounting n g long-term
and that certificate with norms committee
meetings beenwhnot options
is5 the control stock segments, shoul d
e prices,
declare default percent from the security for must
is comparisons credit for and Group the
reported
set be
intangibles
payments be
have directors
for
deposits, reducing ofalso exchanges GDR levels value draft corporate plans, should be
draft through
allow policies signed ratings comprising their
dividend fixed company
on system
financial should in informed
or of responsible code on up quarterly should
leenvisages
ss fo r issues.
followed added the
for notprofessional
make thshares
e greater audit by
and explaining are recommended
be
Companies disclosure and
theto present
deposi ts or of should
the obtained,theall annual be be
until boards
the number andcommittee
statements
internal standards adopted. and given at reappointed.
divisional of paid
er-corporate
the should total that other funding
for CEO at
home financialreport norms,
Act ,
leastboard. the for inputs
commission
where of preparation, gradually
an d their access
three and operating at
default FI
financial and have should regarding
financial results least besides
not holding thcompanies
eir papers. accounting to or the
significance. performance
onfor
recommended
as to foreign
is be the been non-executive
CFO insist ratings
the the 50
institutions directly. be disclosure all and percent their
made loans individual plans
permit ed under having corporate board followed.
integrity clearly upon should
the monthly financial exchange internal
siting
good. for and has same and 8.7
10 of of
 COVERI
transactions
elationship
o
or with the
whi ch in company, its
ritssubsidiaries,
VALUES AND 8.9
ETHICS IN aDAgCmentor

BUSINES ofjudgementofof directyudgement promotmayersafect, its

8.8 the.
The basic principles of good
governance include clear or. of the board
respCOntrol
onsibilitieandandy
ipdependence

and management. transactions the

aprecise distinction between direction effective financial checks be disclosed in the non-executve directors
Pecuniary

balances in the governance

structure,
valid for business
more or less
2
should

Annual Report ofthe viz-a-viz,the

transparency remains company.
opany

irrespective of the country to which they

belong.
The discussion on corporate governance
raisesthe question
corporationy AuditCommittee

company shallform aqualifed

and
the performance of top management.
Statutory provisions about
the
management to ofafuindianincigal Constitutionwould be as follows:
1.The independent audit commit ee
audit establish the accountability of the the financial:Iaspects of the
However, such accountability is
related to
performance of the corporation is not
shareholwodrerkinsg whose

)
audit.
The
Tivo
committee shall have
of the committee shallminbeimum three directors as
thirds
independent members.
directors.
Coraudiportead,le
of the corporation. Total audit should be an integral part of members of the audit
governance.management
Therefore, It can be achieved through the establishment of audit and,atleast one
committee shall be
member
shall have inancially literate
management expertise.(The termaccounting or related financal
creating supervisory board o "financifinancial
aly literate" means
committee or through the provisions for so
ensuring transparency and wider the abilityto read and understand basic
new mechanism may be evolved for balancesheet,profitand loss account and
statement stofacash
tementflows).
s i.e.
reporting by the corporation. The Chairman of the
Audit
GOVERNANCE
(ui)
director.
Committee shall be an independent
SEBI CODE OF CORPORATE the
corporate governance among tha The Chairman of Audit Committee shall be
promote and raise the standard ofExchanges, the SEBI appointed , (iv) Annual General Meeting to answer shareholders' present at the
companies listed in Indian Stock under the chairmansh1p of Kuma queries.
Audit Committee may invite such of the executives as it
committee on Corporate Governancerecommendations of this commites () The
considers appropriate (and particularly the head of the finance
the
Manglam Birla. On the basis of corporate governance which Were
guidelines for function)to be present: at the meetings of the commitee, but on
the SEBI issued certain listing agreement between
the
incorporated in clause 49 of the replaced h Company oCcasions it may alsO meet without thej presence ofany executives
However, this clause has now been The of thecompany. The finance d1rector, the head of internal audit
and the stock exchange. 29, 2004.
October
circular dated new
the new clause as per SEBl's having a and a representative of the statutory auditor may be present as
clause 49 is applicable with effect from Jan 1, 2006 to companies invitees for the meetings of the audit committee.
above or networth of Rs. 25 crore,
paid of capital of Rs. 3 crore and committee.
The salient features of the clause 49
are discussed below : (n) The Company Secretary shall act as the secretary to the
ol) The Audit Committee shallmeet at least four times in a year and not
I, Board of Directors more than four months shall elapse between two meetings. The
one third of the total
1. The board of directors of the company shall have an optimum quorum shall be either twO members or
a minimum of
combination of executive and non-executive directors with not less than fify members whichever is more, but there should be
percent of the board of directors comprising of non-executive directors. two independent directors present.
The number of independent directors would depend on whether the The Audit Committee shall
mandatorily review the following
chairman is executive or non-executive. In case of a non-executive
information:
chairman, at least one-thind of board should comprise of independent thefinancal condition and
directors and in case of executive chairman, at least half of board should Management discussion and analysis of
comprise of independent directors. results of operations. (as defined by
partytransactions
The expression 'independent directors' means directors who apart from " Statement of significant related
management
receiving directors' remuneration, do not have any other material pecuniary audit committee) submitted by the
 8.10

IlI.
(ui) Role
thereon.up
Discussing
coverage
() (iv)
()
The " by "
of (ii) (i )
structure
Reviewing the
Revicwing
the " " " before g fixationstatement
"ewinservices.
"Revi role Internal
Audito. Management
of Internal
The the
with statements.
adequacy subsidiaries
Any " "
The management.
Qualifications Major Any RecommendingdisOverseei
closure ng ofAudit
the appointment,statutory
of Compliance
Compliance
concerning
financial
official material Significant
witlh and of the related
party going submission
changes of
the the with
interests accounting audit corrcct,is ofCommittee
audit
frequency
internal adequacy ofthe relatives, concern with audit
its the of
heading
internal internal
nature,
or wiadjustment
th with in in fec the financial letter/Letters
reports
auditors.
management, transactions,
of with i.e., accounting draft
enries management
accounting to commit ee removal
auditors of
theaudit control
of
the stock
assumption. the
board,
ent company's
appointmandsufiicient relating
internal internal company
department, promoters
etc., or arising audit also
information
anydepartment, systems.
exchange and
andfnancial shall
based approval of
external that standards. report. policing
focusing the internal
to
significant audit. audit out and include terms
large.
atmay
transactions of
and
of on
annual credible to internal
reportingfunction,
staffing management,
and have the audit. exercise and removal
for reporing of
findings primarily payment ensure
the remuneration
control VALUES
internalpotential legal practices.financiallofexternal control
of following
and
including requirements that AND
and
structurc
the judgement on proceSs
weaknesses
seniority auditors, for weaknesses. ETHICS
company statements: the
folloW contlict any of
l :
the their auditor, financial and the ,1Ssued
BUSINE
IN

other Chig
by the

Discussion As VI. Procedure

Board V.
Management

and of
the
S
part
andabout
annual in act
maximum
whichdirectoras
The
as
2.

Service
notify theChairman boardexercisable. wellStock
A
.
1.

salary, report
alongwithDetailselementsAll of The the
2. The 1.
remuneration Revi(ea) wi(nixg) (uin)
depositors,the To
:be by shareholders
lo k
RemunerDiatiorencpatoyrmesof G OC
(Vuü)REPORANIEANCE
nt and ofascertaDiinatnsCuUsrreesporingung aReudiVtoIerws ing or
a
Analysis made
following failure
directors' requirement he shall time option inboard into
anyScopeand into
committee
changes is mneeting contracts,
as benefits,
of
the financial the the of the
a the thefixed of dividends)
declared
creditors. the
area
with
ofnot gap details, matters
findings
Reportreport director. disclosures company'
section debenture-holders,
directors. (in ands externalmatter
internal
as more be
shall
of
performance
period component
bonus,
remuneration
reasons
of of
and for notice concern.audit
should positions than
a
four if on
of where
to
of
or every member
Furthermore be over any
non-executive
the theon
for board.
t the
systems
control
any
as when stock auditors,
before
as
five months held period,
- substantial here
internalinvcstigations ;
an and Corporate well
form theydirector
he which andcriteria. options,
addition commnittees of at performance package
remuneration as suspected is
part occupies
take between
more least severance
whether have
to
it accrued pension, governance
directors defaults risk of
of
thereto, should
place. inform than four of management
post-audit the a
the in across any issued fees. all audit
materialfraud
other 10 times and linked the of shall
in
annual a be two
the committees
aall a
etc. directors
of
the
discussion or by
over atincentives, directors case commences,irregularity thc
Management
report es companiesmeetings. year,
mandatory
companicompany discount a
annualthe
decided
be payment
policies.
of
nature
internal
with which shall non- and 8.11
i.es to to
to or a
 COVERNANCE
VALUES AND ETHICS IN cORROR
T A
E

Details of material
8.12
This renortshould
incdude discussion on the BUSINEs (i) are not
in the indinormal
vidual course
transacçons with related
8.13

the shareholders. the company'scompetitive

matters within the limits set by developments.
(a) Industry
structureand
position ol wing which
beforethe
Details
audit
committee;
of material individual
which are not on an
of

transact
business, shall be parties
ions basis
with related
placed
Opportunitiesand threats. performance.
(ii) others, arm' s length paries or
(0) product-wise beforethe audit committee, should
together With the placed be
Segment-wiseor justificationfor the same.
(C)
(d) Outlook. Treatment
Disclosureof Accountingdifferent:Wherethatin the preparation of
management's
(e) Risks and
concerns.
adequacy. treatment from has financial
Standard has been followed, the fact been prescribed in an
a
control systems and their statements

)(g)Internal
Discussion on financial performance with respect to operationa Accounting shall be discloscd in the
statements, together with the
(h)performance.
financial management's explanation ofas to
believes such alternative treatment is more
Material development in Human Resource/Industrial Relatuons
employed. why
trueit fair
and
representative
view of the underlying business transaction in the
the
front, incuding number of
people governancereport. corporate
Board Disclosures-Risk Management: The company shall lay down
VIl. Shareholders proceduresto inform the board men.bers about the risk assessment and
director or
director,
1. Inthe the appointment of a new
shareholders
case of must be provided with reappointment
the following
o
ota
information: minimization procedures. These proceduresshall be periodically reviewed
that executive management controls risk through means of a
director; ensure
of the properly defined network.
(a) A brief resume
to
expertisein specific
functional area; and
Proceedsfrom Prublic,Issues,
(6) Nature of his also Rights. Issues and Preferential Isues: When money
companies in which the person holdsboar
the issue, it shall odisclose to the audit committee the uses/
(c) Names of of the raisedthrough an
directorship and the membersh1p of committees
appication offunds by major category (capital expenditure, sales,their
is and
2. Information like quarterly results, presentation made by company
of
web-site, or shall besent in
such a form so as
to beting, working capital, etc.) on a quarterly basis as a part
shall be put on company's which the company is listedtoo put on its OWn of financial results. Further, on an annual basis, the
enable the stock exchange on quarterly declaration
a statement of funds utilized for purposes other
web-site. company shall prepare
chairmanship of non-executive statedin the offer documentprospectus/notice and place it before
3. A board committee under the than those
director shall be formed to specifically look into the redressing of the audit committee. Such disclosure shall be made only till such time the
complaints like transfer of shares, non-receipt spent. This statement
shareholders and investors
dividends, etc. This Committee full money raised through the issue has been fully
of balance sheet, non-receipt of declared company. The audit
shall be designated as Shareholders/ Investors Grievance Committee', shall be certified by the statutory auditors of the the Board to take
recommendations to
committee shall make appropriate
4. To expedite the process of share transfer, the board of thecompany
shall delegate the power of share transfer to an officer or a committee or to steps in this matter.
the registrar and share transfer agents. The delegated authority shall attend IX. Report on Corporate Governance
to share transfer formalities at least once in a fortnight. Corporate Governance in the annual
There shall be a separate section on
VIII. Disclosures compliance report on Corporate
reports of the company, with a detailed
mandatory requirements, i.e., which
Basis of Related Party Transactions : 0vernance. Non-compliance of any thereof and theextentto which
0) Astatement in summary form of transactions with related parties spart ofthe listing agreement with reasons should bespecficaly
in the ordinary course of business shall be placed periodically the non-mandatory requiremnents have been adopted
before the audit committee;
highlighted.
 cORPORATE
COVERNANCE
VALUES.SAND
ETHICS IN Sarbanes-Oxley Bill, popularly, called SOX in 8.15
.14
BUSINES changes in virtually USA. This Act brought
andparticularlyin the areas of.auditorevery
fundametal
area of Conflict
. Compliance
acertificate
fromthe auditors of is
responsibility,enhanced
corporate of interest,with
indipendence.
governance
shallobtain he financial disclosures
The company
regardingcompliance
is sent annexe the
clauseand
this annually
conditions offcorporate governance
of certificate withthe Directors
as
to alltheshareholders ofthe company,. The same certuhcale
c
to
ipmp
ulaaln
ey
Report, whidch
s
forwillu/defaultby managers and auditors. Needless and

faiure
:
corporate

legislaive
enacctmentwas passedin the
to say

background
andtheauditing lacunae. The Enron Debacleof large
that aforesaid
scvere penalities
scalefollowed by
of 2001,
Crossingfinancial
in
along with the largeUScompaniessuch as World.com, Quest, Global and the
Stock Exchanges annual
shall also be sent to
flled by the company.
the
returms rollapseoftheaudit frm Anderson, are too familier to be ignored.
Aftera good deal of deliberations and inter-action with the trade
XI. CEO/CFO Certification and professional bodies, tthe
The new clause 49 provides for certification by the Chief Executive assoCiations
recommendationsfor changes, inter alia,,in
Committee made
the Companies very significant
Assignments. TheAct.Committee
They are ;
Officer (CEO) i.e., Managing Director and whole-time. Finance Director
financial (1) Disqualification for Audit
Financial Officer (CFO) of the statements to be recommendeda list of disqualifications such as :
or the Chief the company.
Directors of
submitted to the Board of ) Prohibition of any direct financial interest in the audit client by
NARESH CHANDRA COMMITTEE
the audit firm, its partners or members of the engagement team
'direct relation':
Companies aflairs in the Ministry off Finance and aswell as their
The Department of High Level Committee, populartly
Company Affairs appointed a to examine various Corporate known
Prohibition of receiving any loan and/or gurantee from or behalf
Committee, govrnance (i) client:
as Naresh Chandra such as (a) the ofthe audit
change in the diversse areas
issues and to
recommend
(i) Prohibition
of any business relationship with the audit client;
relationship so as to further strenghten the
statutory auditor-companyinterface, (b) the need, if any, for for rotaion at Prohibition of any personall relationship. This world esclude any
professional nature of the (iv) partner of the audit firm or member of the engagement team
statutory audit irms or partners, (c)
the procedure for appointment of
reatrictions, if necessary on key officers of the client company,
auditors and determination of audit fees, (d) being a relative of any of the
functions, () measures ie. whole-time director, CEO, CFO, company Secretory, Senior
non-audit fees, (e) independence of auditing
companies actually present
required to ensure that the management and comapnies, (g) the need Manger belonging to the top two mangerial.
'true and fair' statement of the financial affairs ofaccounts and finandal (w) Prohibition of service or cooling off period. Any partner of
certification of who wants to
to consider measures such as member of the engagement team of an
audit firm
a
statements by management and directors, (h) the necessity of having officer of the cient company
trasparent system of random scrutiny of audited accounts, (i) adequancy join an audit client or any key
will be allowed to do after
of regulation of chartered accountants, company secretaries and other wanting to join the audit frm. They
from the respective dates of
similar oversight functionaries, () advantages, if any, of setting up an the colling off period of two years
independent regulator similar to the Public Company Accountingtheoversight involvements;
Board in the SOX Act, and if so, its constitution, and (k) role of independence on an audit cleint. This is
independent directors and how their independence and elfectiveness can (u) Prohibition of undue to the audit client. Such
afee should
measured with reference firm from any
be ensured.
exceed 25% of the total revenues of the audit
not
At the outset, the Committee recognized the fact that while the listed affiliates.
one client and its subsidaries and an
compnies in India need to folow very stringent guidelines on corporte
not be provided by an audit firmto
governance, which rank among some of the best in the world, there is a The following services shall
wide gap between prescription and practice. Another development which audit client :
seems to have influenced the thinking of the Committee is the passage ol
 8.16
to to fair". Sought
the be Committee shareholders Companies
Replacement. qualified with should necessary. comm1ttee.
audit
appointed,
Audit (5)
a
where
comments ashoul
acconting nd d probi bited In(ii) (vn) (i) Actuarial ()services;
(v) (un) (ü) ()
Auditor's (4) (3) its 2)
ion Outsourced Brokerma, nagemineclntudiFinganciIanlternalAcrecorcodunts ing
the copy
Committee havewil s Management' s report Auditor' bes
policies on risprks.oviAudi
de tor's services case audit
ValuatManagement
management' inAct mandatory
of
the
the caseshould The the the This a clients; or
services financialdealer, iaccountnfserosrvmicesationservaudiicfesitn;ancial and
Annual to cl e ar
audit an
letter Disclosure
the a
managementnd
should listed fi rm
or to Committee
verify auditor, be ROC, for Disclosure
notes staf
Cerification
the firm
Certification
sent
the description undertakes functions
above, invest1ment
and for bo k
Board
reasons
that amended tothe
he audit
of on be related statements
of
must
submit
while
the recommendedmanagement SEBI
fobeing
r
tQualifications
firm
accounts fol
view
Contingent
l o wed in of
shoul cludistsanifserognvices;
fairnesssinprovi
d
it
any audi
the
t
adviser
and to
systems keeping:
Directors explanatory
of to and and plain information
company; flows it. t
Independence. such
require in to as by serviopice nion. client:be systems services
of
certificate a eligible
a the
the send English
highighted wel th e done investmnent
banking
or
design cient;
the
of repalcement. that Principal and as
the statement aspecial for Event separately
of
inauditor's of Liabilities. other
than tor audit
relating VALUES
thConsequent
e wi th
client of re-appointment, section company. the each. the temporary of preparing and
financial
ndependent
Before Stock-Exchange, auditor's clearlyn r's implementaion of AND
of to
company isresolution 225 a the material
approl a the ETHICS
th
"trueand The Auditor's copy Management audit
agreeng Action, significant acconng
IN
Audit of of report wordedliability Or servicey, BUSINESs

3 of e
th the It
Oftheerore aSe the
to or

ist
oth erwise) the apla and ot() emOval the
should free al CoEvOernment, arot
Ogra m e, Kned he
management ordeficiencies They
empls oyeesinstances
company'
(0)
company.
informationcontrols
(u)
They laws misleading;
/regulations;
applicable
compl iance These might be
financial
statements
These
ormit
anthe
d Th ey
)
()
Ma na g
the n
or
g )
li
be and
sted b
heoa
,
rd. iducary ,I poun
Appointment
l 6)
Audit
of tha , t
lhe
e ngth
cle t thar Agualied fromaudit GOVERNANCE
have

significant diclosed
internal having in
of
are statements
which
responsible
is with and
al have statement
any s
a
effect
its
that reviewed
schedules
Di r :
ecto
reserves compani
r) companies CFO
es
with
certificatioeXceeds
reference
n Certification independence
reasons, externeaslponsrevbieiwlity,
firm ()
relationshnoit p
the
of
the
has togetafnihrdmer
the periodically have material might director, may reaudigartdoiAuditors.
rnsg.ass1gnment.
employees adesingn to been for
operational
thtogether
e do
the
and companieasnd
by
ther the
beeiCommittee
engaged
control existing fact not beand Financet(either
he CEOthe public exempted
Rs iromalong with
significantfraud, teh
establishing
designed
made represent misleading:
contain
nor
balance
CFO
10. the
appointment
The inthe with
auditors
or notes of
with auditof!
limitedAnnualappointment, any
systems,having any,
if
accounting
state do (whole-time
sheet
crores
the the cient
consulting
operation known of
they any accounts,on
or annual
should non-auait
fraud,
involving
a and to
the true a contain
ensure and
material and turnover Audited thiS of
Committee
company.
siginifsiicgantnificant control
ofthe
ifinternal Audit maintaining
company and
standards
proit
Executive
Director
the
re-appointment
requirement. audit
firmdiscuss
srevices
that untrue Accounts. and the independent It
any,
management systems al fair statements the landoss of
Rs remuneration.
whose should should
recommendannual To and
role
changesinvolving contcommittee and statement flow
cash Director 50. discharge
material and picture
in rols, ofinternal are
account crores paid In
work
be are also
/ in of that the and the and 8.17
inthe or the or or up not be
 GOVERNANCE
VALUES ANAND
ETHICS IN TheCommitteerecommed that the above criteria should be made
8.19
and/:acounting policies during listed companies and
8.18
internal
control
returntothe company that he
all
lor
andfree unisted
surplus of Rspublic limited companies
they will
reviewand equity bases compensation
par tof yeanyar h wrnover ofR
Mpliable
sharecapital
Rs 50crores and above with etect from l10. crores
the financial
and aboveyearor
which
up
puad
incentive or errors'ás decided by the Audit was
or such
inflaea
pih
a
The Committee also
recommends
accountof

support,Auditing the
Auditors,
threeindependent
There. should be
Quality Review Boards Cowimthmitle ,
established,
(ORB) One each sardof
2003.
adequate presence and
beginaing
musthave
Independent
directors should not be
that
strength independent
on
less
the Board. The
than to50%unlisted
legala
dircctors
(8) CdirectorS. However, this requirement will not apply of the
Piourcly examine o e n a g eo more than 50
and1CWAI 0 accounting companieswhich have no
he 1CAL the ICSI cost firms
secretarialand sutfhciency of systems,pass /and any kind, shareholders
from the public, banks or finanial and which

infrjausddtgreetunaeldsnu
nublicoutdebt of
qualityof audit, gaulity and changetheir character. istitutions,
commentson the they not
with do
and compositionof the Committee and other p e
as
practices. The in its report. a olons MinimumBoard Size of Listed Companies. The
and by the
Committee
of baord of all Committee
alsodealtwith ordering. an
(10) thatthe minimum Size listed companies and
independent
(9)Independent
company, the
Directors.
committeehas
In
recommended that he is a dinon-eirseecatuotrive
directors' remunration, does
ol
recommeds

unlsted
publiclimited
ofRs 10.
crores
companies with a paid up share capital
andabove or turnover of Rs 50 crores and above
and free
apart from receiving tansactions not have reserves
(seven), of
which 4 (four) should be independent directors.
director who, or with the be 7

subsicompany,
pecuniary relationship i stould this willnot applyto unlisted public companies which have no
any material senior mangement or its hholding company, its
promoters, its
associated and associated
companies. Such a director : dary 50
DOre
shareholders and which are without debt of any kind from the
and However,
financial institutions as along as they not change their
mangement at the board level, o public,banks or of listed companies. The committee
Dare characterand unlisted subsidiaries
promoters or
() is not related to (spouse and dependent
one level below the board recommendsthat duration of. Board/ committee meetings should be
children or siblings); Aso
the company in thelast three ves dicdosed.
(ü) has not been an executive of cannot
partner or an executive of the statutory auditing firm aN Teleconferecing and Video Conferencing. If a director
proceedinge of
(in) is not a
to partiapate in the board
the internal audit firm that are associated with the company and but
physicaly presentvideowantsS
partner or an executive of anysuch Frm f e eleconference or conference should constitute proof of his or her
nas not been a a should be treated as presence in the
last three years. This will also applyto legal firms and consuling participation. Accordingly, this
firms that have a material association with the company; minutes of all such meetings should be signed and
meting's. However,
(iv) is not asignifcant supplier, vendor or customer of the company onfirmed by the directors who
has/have attented the meeting through
(v) is not asubstantial shareholder of thecompany i.e., owning twoideo conferencing
percent or more of the block of voting shares; Exclusively ofIndependent Directors.
(12) Audit Committee should
(en) for
has more
not beenthanadrectot,
three
independent or otherwise,of the companyhdapply to all listed and unlistedcrores
publicandcompanies w
more or turnover of
terms of
three years (not exceeding ue reserves of Rs 10
years in any case); up share capital and free to unlisted public
Rs 50 crores and more. However, this will not apply which have no
(vii) any employee, executive director or nominee ofany and
bank, finaca Companies which have no more than 50 shareholders from
institution, corporations or trustees of debentures and which are without debt of any kind
holders, who is normally called 'nominee director' willbonomore than banks
Dtie public, or financial and
50 shareholders istitutions as long as they do not change their
exculded form the pool of directors. Such a director will notharacter and unlisted subsudiaries of listed companies. The role and
feature either in the numerator or the
denominator.
 8.20
possibly
IEPF.
comeexcellence functions
should
in
institutions Independent
Factories
etc.
Companies from toTime adequate and should adequacy committee,
Committee'
of Views s serve listed theAudit
framing
specifically
relating
independent makin g beon internal recommended
(15) crimical has (14) resolvedsitting (13) whether any The tCommi he
as
the
t ee The bethat
Committee,
in
the to Training to
di s
auditorsqual i also
f i c at i o n, of
disclosure Auditclearly
have of directors
Act, Act, come
Exempting and compani
stock betweenes fe
Remuneration such certify internal including, commi t e charter
e' s an
programmespromience exempt
and
Negotiable civil insertto doesoptions
Industrial director, should th e musCommi
t t ee laidAudit
regular of the
of not should the be meetings twhet he financial
h er control should by werecertify
dates Committee out
Independent should non-executive Non-executive
liabilities.provisions a,subject reviewed,
atand management of company among discharged action in
training
and incuding Dispute
instruments be s why ems, tb.e als o whether anshould
d an
present, one Non-executive revealed statements the syst
for also to
permitted the give taken trequency Audit
B beAct An in resonable although Commiwith t ee others, and disclose is
programmers
other their percent
matrriaslks.y out percept
a
Committee
suppose
withAuditions theon
Directors.indemnified illustrative directorsDirectorsthe need and significant report report in to
and Act, definition by the the the
what The ofthe
preparatory proposed Providend
any
commission caps. DCA ideally Directors. the or COurse to
meeings.
the and
formrevision. shareholders. qual
presence
i f i c at
Commii
meot ns. t ee tasksthiteial the extent namesdischargeintoVALUES
for DCA Electricity ofindependent
lists The to it wi th
of
shareholders. charter:,
independent the ofchapter pay should ris ks ot AND
work. centrshoulde Fund these Certian present The the lhe cach of
costs onspecial issues ofaccepted
performe
and years, members
of
ETHICS
The year. ol
Chairman
However statutem.
of net statutory
bemanagemen the
Funding for
of Act, Acts certian
Supply Liabilites. provisaion fee matter a statement
eventthe in
funciong
compay a
IN
corporencour itigatot ESI diarerecton
profits or BUSINESS

cou directo
to
Acs : and
AdAathe any .encies.
he and
i
ndesi gnated haspeci
t andaon l thein progTamme.the of
progress of8. 1.
Exchange
Briefly WiteSecurities
BoardDiscuss
6. gOvernance. *
the Date Deine the
Discuss
3. 2.
corporate
business
Explain
involved world? day
Define 1. oncerned
npointments
prosecutions n ot
DCA Corporate Dan er.
Offi(16) ce diecbecomi
tor alerngduring dan
As iretor Al
explain
explanatory and
an
Confederation the
the salientcCorporate
corporate
the in the departments team under
to
There onl y
with
tThheetre raining shoiunlditConsalyeari,derinindgependeCnOtVERNANCE
provisions meaning
sector
corporate
concept andleader:should
. covers
contracts. termThis should the assuming
be course
|
the features governance. specialists
inductedbasi s disqualified such
note Indian
of
ofgovernance in
of
and
governance.
India.
'corporate
of tunctioning
and The
various the (CSFO).
be
a
fraud,
Serious
requirementnstitutions
Fraud
. be
a
independent before
director
enough
that directors

on Industriesthe the rationale agencies. task

economic appraisal'system 'trainee
(Cll). Why Cabinet
the Code :of and underundergo should
corporate need India of Code and
has of force but
training director.
should
of of discuss of
governance' this
Secretary should programmes Section programmes
corporate it is on 274 responsibilities
legislations also be
of Corporate Corporate
(SEBI). gained constituted
office the required
gOvernance corporate the
sO and able be may An
principles governance and much directly
should a be untrained training
Governance co-ordinate muli-disciplinary to (1) might
in Governance
might
governance discuss Questions
attention
Review for direct
through
transfer/deputation
ofThis introdued to (g) as
to
India. each judge not of attend
of with should the within not an
laid as good the case and independent
be independent be at
in suggesteo reference mai n in the appropriate
oversee supervise be
in Companies
the available available
one least
India. down corporate
the
work under set phased a
quality
issues present team year, one 8.21
by the a up in
the Dy to of
 i
governance The
Economic
he
Hindu,
IN
TA.
for
ETHICS
the code

AND
are Corporate Here".Thoughts
the
What
VALUES be
be
? promoting
isSrikant,
should
? goverance Capitalism
Some
governance

what Governance:
in
Corporate
opinion, Governance.
Investors:
Government
corporate
1997. 1997.
12,
Feb.,
Discuss.
of your : CEO "Corporate
of evolution following
Committee. 29,
of In
importance Corporate
? Directors
Independent
(C) at Oct.,
role? governance "Look
organisations Vishakhapatnam,
thethe the Mumbai,
V.,
to be on of
Audit S.,
theContributed Principles
P. V.
notes
can Corporate
is ot L.
Times,
What hatIndian Role lyer, lbid.
3.
Write
(a) (6)
8.229. 2.
10. 11. 1.