Corporate

Governance UNIT 3 REGULATIONS AND

COMMITTEES

Objectives

The objectives of this unit are to:

● give an overview of regulatory and institutional developments in

corporate governance;
● list down important recommendations of various international and
national committees on corporate governance
● examine different aspects of corporate governance;
● explain corporate governance regulations applicable to companies in
India; and abroad.

Structure

3.1 Introduction
3.2 Corporate Governance and stakeholders
3.3 Need for Regulatory and Institutional Interference
3.4 International Committees on Corporate Governance
3.5 Corporate Governance Committees in India
3.6 Corporate Governance Regulations in India
3.7 Summary
3.8 Self-Assessment Questions
3.9 References/Further Readings

3.1 INTRODUCTION
The new regulatory framework and institutional developments have increased
the need for good corporate governance is obvious. When multiple
stakeholders are involved in creating a successful corporation, it is important
that wealth created in that process is distributed properly and fairly to these
multiple shareholders. In the absence of good corporate governance, the
wealth is distributed unevenly. For instance, several thousands of
shareholders and employees of Enron have lost their savings when companies
like Enron failed on account of governance issues. Investment in equity is
also risky but investors know that risk is always related with business. If a
company fails on account of competition or change of technology or any
other business related issues, we can expect equity holders bear such risk for
the higher expected reward. On the other hand, if a business fails only on
account of governance issues, then some regulatory intervention is certainly
required to set right occurrence of such events. The need for regulatory
48
intervention is emphasized when business failures on account of governance Regulations and
Committees
issues happen frequently and at large scale. The Mississippi Scheme and
South Sea Bubble were major governance failures which occurred three
centuries back. They were classical examples of how the nexus between few
individuals and those who are in power ruin several thousands of small
shareholders. Though such scandals come up periodically, there was no
comprehensive attempt to regulate corporate governance until the London
Stock Exchange initiated the process in 1991 when UK faced several high-
profile failures like Bank of Credit and Commerce International (BCCI),
Polly Peck and Maxwell.

Though each case is different, the underlying issue is the failure of corporate
governance by those who are managing the company and such failure affects
several millions of shareholders savings. Such major failures happening
around the same time in 1990-91 shaken the confidence of investors in the
UK and London Stock Exchange (LSE) appointed a committee under Sir
Adrian Cadbury, the most respected CEO of Cadbury confectionary empire.
Soon the regulators realized that there are several components of governance
issue and each one of them should be studied in detail to draw necessary
regulations. What followed is appointment of more committees with the task
of assigning one such objective for each of the committees. As the corporate
governance failures started appearing in several countries, there was a sudden
realization for a formal regulation and each country has followed the LSE
model of appointing committees to come out with specific recommendations
suitable for their countries. In this unit, we will discuss some of the
international and national committees on corporate governance and their
recommendations.

3.2 CORPORATE GOVERNANCE AND

STAKEHOLDERS
Corportae governance and corporate ethics are high on the agenda today
because of a spate of scandals.

Rating agencies- CRISIL, ICRA, FITCH, have started rating companies on

corporate governance. Today’s CEOs have four primary duties concerning
the protection of shareholder wealth through the proper utilisation of assets;
the maintenance of wealth and of not frittering it away in unconnected and
non-profitable ventures or through expropriation and safeguarding the
welfare of all the shareholders respectively in the corporate contest. Good
corporate govermance ensures transparency, responsibility, fairness and
accountability to all stakeholders, and ensures the integrity of the market and
its participating institutions. This strategy involves framing corporate value
code of conduct demarcation of responsibility and decision making,
establishing of mechanism for interaction and co-operation among Board of
directors, senior management and auditors.The confidence and trust in
governance, assists the efficacy of a corporation and allows it to access the
49
Corporate market, domestic and overseas, and helps in credible commitments to
Governance
creditors, employees and other stakeholders.

For economic growth good corporate governance has a role in promoting an

efficient channeling of savings to productive investments. Good corporate
governance is not just a matter of prescribing a particular sort of corporation,
it requires a systematic corporate structure which complies with a number of
hard and fast rules. There is need for broad principles. Ethical behaviour is
not an output of codes of ethics, but it is a human activity shaped on a daily
basis by the existing organizational and social frame work for the benefit of
society.

3.3 NEED FOR REGULATORY AND

INSTITUTIONAL INTERFERENCE
Regulations emerge when an issue goes against the expectation or likely to
go against the expectation. For example, on a road when traffic suddenly
increases, there will be some traffic regulation either in the form of traffic
signal or median divider or restricting certain type of vehicles or posting a
traffic policeman, or converting the road into one-way. The reason is in an
unregulated traffic problem, there is a possibility that someone or a group of
people may cause hindrance in the smooth flow of traffic. Normally, we
expect some guidelines (in this case traffic guidelines or rules) that are placed
initially and regulation follows after that when the traffic level increases
beyond a level. Similarly, in a company form of business, particularly in
large corporations, there are number of stakeholders whose interest might be
affected when certain types of stakeholders initiate actions that are beneficial
to them at the cost of others. Corporate Laws of several countries recognize
such problems and have few provisions that regulate the conduct of
management and promoters. For example, there is a set of provisions under
the Companies Act, 2013 under which minority shareholders can request the
government to take-over the management if the majority shareholders
mismanage the company. The provision for Auditing is another important
institutional arrangement to ensure that there is a proper code of conduct of
financial transactions. While these provisions were adequate in a limited
sense for small and closely held corporations, the changes in business
environment required additional safeguard in the conduct of businesses. In
some of the existing institutional arrangements like auditing is also not found
to be effective in certain cases and some nexus between auditing firms and
management were also observed in major corporate failures.

Regulations also emerge when some companies started practicing best

practices to handle emerging complexities. These best practices are either
voluntary or required to convince some of the institutional investors. When
more and more companies started following these practices, the regulations
emerged to ensure that other companies also follow the same. Regulations
50 sometimes are framed as a consequence of a few major failures to convince
the stakeholders that government is keen to prevent such failures in the Regulations and
Committees
future. Regulations are of several types, at the one extreme, the regulations
are in the form of statutes (like provisions in Companies Act or separate Act
enacted in parliament) or guidelines issued by the regulatory bodies like
SEBI or RBI or amending an existing listing agreement by the stock
exchange requiring listed companies to follow the best practices or guidelines
issued by the industry association. Both content and form of such regulation
are generally recommended by committees set up for the purpose. In the
subsequent sections, we will discuss some of the important committees on
corporate governance.

Activity 1

How corporate governance led failures are different from business failures?
Whether better governance helps in preventing business failures?

…………………………………………………………………………………
…………………………………………………………………………………
…………………………………………………………………………………
…………………………………………………………………………………
…………………………………………………………………………………

3.4 INTERNATIONAL COMMITTEES ON

CORPORATE GOVERNANCE
Several committees have gone through the issues relating to corporate
governance around the world and suggested regulations suitable for their
country. Cadbury Committee was the first committee set up in the U.K. to
address large scale business failures and financial frauds on account of
governance issue. In this section, we will discuss the recommendations of
some of the important committees in U.K, South Africa and USA.

Committees in UK

Cadbury Committee, 1992

The Committee was set up in May 1991 by the financial reporting council,
the London Stock Exchange under the Chairmanship of Sir Adrian Cadbury
to look into financial aspects of corporate governance. The Committee’s
objective was ‘to help raise the standards of corporate governance and the
level of confidence in financial reporting and auditing by setting out clearly
what it sees as the respective responsibilities of those involved and what it
believes is expected of them’. The board of directors' accountability to
shareholders and the society was investigated by the committee. It published
its report and associated code of best practices in December 1992, laying out
the governance mechanisms required to strike a balance between the board of
directors' fundamental power and their necessary responsibility. Openness,
51
Corporate integrity, and accountability were identified as three essential criteria of good
Governance
governance by the committee. The committee made several
recommendations which are as follows:

1) Separation of CEO and Chairman

Concerned with the considerable ‘concentration of power' which arises
where the roles of chairman and chief executive are combined, the
Committee recommended:
There should be a clearly accepted division of responsibilities at the head
of a company, which will ensure a balance of power and authority, such
that no one individual has unfettered powers of decision. Where the
chairman is also the chief executive, it is essential that there should be a
strong and independent element on the board, with a recognized senior
member.
2) Minimum number of non-executive directors
Emphasizing the important role of non-executive directors (NEDs), the
report states:
We recommend that the caliber and number of non-executive directors
on a board should be such that their views will carry significant weight
in the board's decisions. To meet our recommendations on the
composition of sub-committees of the board, all boards will require a
minimum of three non-executive directors, one of whom may be the
chairman of the company provided he or she is not also its executive
head.
3) Audit Committees
The Cadbury Report highlights the importance of the independent audit
when it argues that:
The board should establish an audit committee of at least 3 non-
executive directors with written terms of reference which deal clearly
with its authority and duties.
4) Enhanced role of institutional investors
The Cadbury Report also drew attention to the level of institutional
ownership of UK stocks and welcomed the Report of the Institutional
Shareholders' Committee (1992):
The Institutional Shareholders’ Committee’s advice to its members is to
use their voting rights positively as it is important in the context of
corporate governance. Voting rights can be regarded as an asset and the
use or otherwise of those rights by institutional shareholders is a subject
of legitimate interest to those on whose behalf they invest. We
recommend that institutional investors should disclose their policies on
the use of voting rights.

52
The main effects of the Cadbury Report are: First, Cadbury encourages firms Regulations and
Committees
to alter the structure of their boards, separating the roles of CEO and
chairman and setting a minimum limit for the number of NEDs. Secondly,
the Code encourages firms to establish audit committees whose membership
is entirely non-executive. Thirdly, it contributes to the growing pressure on
institutional investors to make positive use of their voting power.

Greenbury Committee: 1995

An important recommendation of the Cadbury Committee is disclosure of

directors' pay and this has become the subject of Greenbury Committee.

This committee's code of best practices was divided into four sections:

1) Remuneration committee.
2) Disclosures.
3) Remuneration policy.
4) Service contracts and compensation:

The Committee argued against statutory control and for strengthening,

accountability by the proper-allocation of responsibility for determining
director's remuneration, the proper reporting to the shareholders and greater
transparency in the process.

Hampel Committee, 1998

The Hampel Committee was constituted in UK in 1995. The task of this

committee was to consolidate the recommendations of the Cadbury Report in
1992 (focusing on financial reporting) and the Greenbury Report in 1995
(focusing on directors' remuneration), and prepare a 'Combined Code' on
corporate governance. The Code, published in 1998, was attached to the
listing rules of the stock exchange with the requirement that in order to be
listed, companies must either declare their adherence to its provisions or
explain any deviation from them.

King Committee of South Africa, 1994

The King Committee on Corporate Governance was formed in 1992, under

the auspices of the Institute of Directors, to consider corporate governance, of
increasing interest around the world, in the context of South Africa. This
coincided with profound social and political transformation at the time with
the dawning of democracy and the re-admission of South Africa into the
community of nations and the world economy. The purpose of the King
Committee is to promote the highest standards of corporate governance in
South Africa. Unlike its counterparts in other countries at the time, the King
Report 1994 went beyond the financial and regulatory aspects of corporate
governance in advocating an integrated approach to good governance in the
interests of a wide range of stakeholders having regard to the fundamental
principles of good financial, social, ethical and environmental practice. In
53
Corporate adopting a participative corporate governance system of enterprise with
Governance
integrity, the King Committee in 1994 successfully formalized the need for
companies to recognize that they no longer act independently from the
societies and the environment in which they operate.

The King Committee discusses seven important areas of corporate

governance and gave its recommendation as a part of the discussion.

1) Board
The board should prepare a charter of its responsibilities, ensure
compliance with all laws, have a formal and transparent procedure for
appointed and remuneration of directors and appraise the performance of
the board, chairperson, chief executive officer and individual directors.
Each board should have an audit and a remuneration committee and
there should be separation of chairperson and CEO as far as possible.
2) Risk Management
The board is responsible for the total process of risk management and its
effectiveness. A board committee in liaison with management is to set
risk strategy policies, determine company’s risk appetite and review the
internal control systems. Management is accountable to the board for
designing, implementing and monitoring the process of risk management
and integrating it into the day-to-day activities of the company.
3) Internal Audit
Companies should have an independent, objective and effective internal
audit function that has the respect and co-operation of both the board and
management. The head of internal audit is to be appointed with the
concurrence of the audit committee and should have ready and regular
access to the chairperson of the company and the chairperson of the audit
committee.
4) Integrated Sustainability Reporting
Stakeholder reporting requires an integrated approach. Every company
should report at least annually on the nature and extent of its social,
transformation, ethical, safety, health and environmental management
policies and practices.
5) Accounting and Auditing
The board should appoint an audit committee that has a majority of
independent non-executive directors. The majority of the members of the
audit committee should be financially literate. The chairperson should be
an independent non-executive director and not the chairperson of the
board. The committee will recommend the appointment of external
auditors, aim for efficient audit processes and review the non-audit
services that may be performed by the auditors.

54
6) Relations with Shareholders Regulations and
Committees
Companies should enter into constructive engagement with institutional
investors based on mutual understanding of objectives. Companies
should ensure that each item of special business included in the notice of
annual general meeting is accompanied by a full explanation of the
effects of the proposed resolution. The results of all decisions taken at
company meetings should be publicly disseminated promptly on the
conclusion of the meeting to ensure that all shareholders (particularly
those who were unable to attend) are informed.
7) Communication
It is the board’s duty to report a comprehensive, objective, balanced and
understandable assessment of the company’s position to stakeholders.
Reporting should address material matters of significant interest and
concern to all stakeholders.

Blue Ribbon Report, 1999, USA

Blue Ribbon Committee was set up by the Securities and Exchange

Commission (SEC), US, in 1998. In February 1999, the Committee published
the Report on Improving the Effectiveness of Corporate Audit Committees
(the Blue-Ribbon Report). The recommendations of the Blue-Ribbon
Committee were adopted and declared to be mandatory by the NYSE, the
American Stock Exchange (Amex), NASDAQ and the American Institute of
Certified Public Accountants (AICPA). The committee made some
recommendations which are as follows:

• Committee recommends that for the purpose of the audit committee for
listed companies with a market capitalization above $200 million, both
the New York Stock Exchange (NYSE) and the National Association of
Securities Dealers (NASD) adopt the following definition of
independence “Members of the audit committee shall be considered
independent if they have no relationship to the corporation that may
interfere with the exercise of their independence from management and
the corporation”.

• The Audit committee should be comprised solely of independent

directors.

• The listed companies should have an audit committee comprised of a

minimum of three directors, each of whom is financially literate or
becomes financially literate within a reasonable period of time after his
or her appointment to the audit committee, and further that at least one
member of the audit committee have accounting or related financial
management expertise.

• Board of Directors should approve a formal written charter for audit

committee which specifies the scope of responsibilities, structure,
55
Corporate processes, membership requirements of audit committee and these
Governance
should be reassessed annually.

• The audit committee should disclose whether it adopted a formal written

charter and if so, whether it fulfilled the responsibilities mentioned in the
charter and if there was any major amendment made in the charter.

• Listing rules with both NYSE & NASD require that the Audit committee
charter should mention that the boards of directors and audit committee
(representatives of shareholders) have ultimate power to select, evaluate
or replace the outside auditor whenever required.

• Listing rules with both NYSE & NASD also require that the audit
committee should take appropriate actions to ensure the independence of
outside auditor.

• A company’s outside auditor should have an open discussion with the

audit committee regarding the proper and quality applicability of
accounting principles in financial reporting.

• All reporting companies in their annual report should include a letter

confirming that management has reviewed the audited financial
statements, outside auditor has had discussion with audit committee
regarding the quality of accounting principles applied, audit committee
has also discussed the above matter without the presence of management
and outside auditor and, believes that the financial statements are fairly
presented in conformity with Generally Accepted Accounting Principles
(GAAP).

Activity 2

We discussed three important committees on corporate governance

established in UK, South Africa and USA. All these committees stress the
importance of independent board. Examine the Boards of some of our
prominent companies and comment whether they are independent? Are you
able to get adequate information to assess whether the boards are
independent?

…………………………………………………………………………………
…………………………………………………………………………………
…………………………………………………………………………………
…………………………………………………………………………………
…………………………………………………………………………………
…………………………………………………………………………………
…………………………………………………………………………………
…………………………………………………………………………………
…………………………………………………………………………………
56
3.5 CORPORATE GOVERNANCE COMMITTEES Regulations and
Committees
IN INDIA
As seen in several other countries, India also witnessed a couple of securities
market scams and frauds and public confidence turned very low at one point
of time when companies started misusing the economic freedom. A few
committees have been formed to assess the corporate governance status in
India and recommended set of governance code and standards. Some of the
important recommendations of these committees are discussed here.

The Confederation of Indian Industries Code, 1998

In 1996, CII (Confederation of Indian Industries) set up a National Task

Force with Mr. Rahul Bajaj as the Chairman. This Task Force presented the
draft guidelines and the code of Corporate Governance in April 1997 and
finalized the Desirable Corporate Governance Code. This initiative was taken
by keeping in mind the need to move towards international standards in terms
of disclosure of information by the corporate sector to promote transparency
for protection of investor’s interests (especially small investors). Some of the
major guidelines are as follows:

• Any listed companies with a turnover of Rs. l00 crores and above should
have professionally competent, independent, non-executive directors,
who should constitute at least 30 percent of the board if the Chairman of
the company is a non-executive director, or at least 50 percent of the
board if the Chairman and Managing Director is the same person.

• No single person should hold directorships in more than 10 listed

companies.

• Non-executive directors should be active participants on boards, not just

passive advisors. They should have clearly defined responsibilities and
have knowledge regarding financial statements and various company
laws.

• Companies should offer commissions and stock options to non-executive

directors so that they make better efforts.

• Companies should not re-appoint directors who have not been able to
attend 50% or more meetings.

• All key information that must be reported to, and placed before, the
board.

• Listed companies with either a turnover of over Rs.100 crores or a paid-

up capital of Rs.20 crores should set up Audit Committees within two
years consisting of three members (drawn from company’s non-
executive directors) and this Audit Committees should assist the board in
fulfilling its functions relating to accounting and reporting practices.
57
Corporate Kumar Mangalam Birla Committee, 1999
Governance
The Securities and Exchange Board of India (SEBI) appointed the committee
on corporate governance on May 7, 1999 under the chairmanship of Shri
Kumar Mangalam Birla, member of SEBI Board to promote and raise the
standards of corporate governance. The Birla committee’s recommendations
consist of mandatory recommendations and non-mandatory recommendations.
These were applicable to all listed companies with paid-up share capital of
Rs.3 cr. and above. A few important recommendations of the committee are
listed below:

• The number of independent directors should be at least one-third in case

the company has a non-executive chairman and at least half of the board
in case the company has an executive chairman.

• A qualified and independent audit committee should be set up to enhance

the credibility of the financial disclosures and to promote transparency.
And the committee should have a minimum of three members, all being
non-executive directors with a majority being independent and at least
one director having financial and accounting knowledge.

• The remuneration of non-executive directors should be decided by board

of directors and it should be fully disclosed in the section on corporate
governance of the annual report.

• The board meeting should be held at least four times a year with a
maximum time gap of four months between any two meetings all the
information regarding major issues of the company should be placed
before the board.

• The management should disclose to the board all the information

regarding the transactions where, they might have possibility of conflict
of interest with the company.

• A board committee under the chairmanship of a non-executive director is

to be formed to specifically look into the redressing of shareholder
complaints.

SEBI accepted the key recommendations of the Birla Committee, which were
incorporated into Clause 49 of the Listing Agreement of the Stock
Exchanges.

Naresh Chandra Committee Report, 2002

On 21 August 2002, the Department of Company Affairs (DCA) under the

Ministry of Finance and Company Affairs appointed this High Level
Committee to examine various corporate governance issues. Among others,
this Committee has been entrusted to analyze and recommend changes, if
necessary, in diverse areas such as:

58
● the statutory auditor-company relationship, so as to further strengthen the Regulations and
Committees
professional nature of this interface;
● the need, if any, for rotation of statutory audit firms or partners;
● the procedure for appointment of auditors and determination of audit
fees;
● restrictions, if necessary, on non-audit fees;
● independence of auditing functions;
● measures required to ensure that the management and companies
actually present ‘true and fair’ statement of the financial affairs of
companies;
● the need to consider measures such as certification of accounts and
financial statements by the management and directors;
● the necessity of having a transparent system of random scrutiny of
audited accounts;
● adequacy of regulation of chartered accountants, company secretaries
and other similar statutory oversight functionaries;
● advantages, if any, of setting up an independent regulator similar to the
Public Company Accounting Oversight Board in the SOX Act, and if so,
its constitution; and
● the role of independent directors, and how their independence and
effectiveness can be ensured.

Narayana Murthy Committee, 2003

In setting up Narayana Murthy Committee, SEBI stated that efforts to

improve corporate governance standards in India must continue. SEBI
formed a committee on corporate governance, comprising representatives
from the stock exchanges, chambers of commerce, investor associations and
professional bodies under the Chairmanship of Mr. Narayana Murthy. The
terms of reference of the Committee are (a) To review the performance of
corporate governance; and (b) to determine the role of companies in
responding to rumor and other price sensitive information circulating in the
market, in order to enhance the transparency and integrity of the market. The
key recommendations of the committee are listed below:

• All audit committee members should be ‘‘financially literate’’ and at

least one member should have accounting or related financial
management expertise.

• Audit committees of publicly listed companies should be required to

review all the material information such as financial statements,
management discussion of financial condition, reports related to
compliance with laws and risk management, related party transactions
etc.
59
Corporate • Management should also clearly explain the alternative accounting
Governance
treatment (if any) in the footnotes to the financial statements.

• Companies should be encouraged to move towards a regime of

unqualified financial statements.

• Companies should be encouraged to train their Board members in the

business model of the company as well as the risk profile of the business
parameters of the company, their responsibilities as directors, and the
best ways to discharge them.

• On an annual basis, the company shall prepare a statement of funds

utilized for purposes other than those stated in the offer document/
prospectus. This statement should be certified by the independent
auditors of the company. The audit committee should make appropriate
recommendations to the Board to take up steps in this matter.

• It should be obligatory for the Board of a company to lay down the code
of conduct for all Board members and senior management of a company
and it shall be posted on the website of the company. The annual report
of the company shall contain a declaration to affirm the compliance
signed off by the CEO and COO.

• All compensation paid to non-executive directors may be fixed by the

Board of Directors and should be approved by shareholders in general
meeting.

• Companies should publish their compensation philosophy and statement

of entitled compensation in respect of non-executive directors in their
annual report.

• Companies should publish their compensation philosophy and statement

of entitled compensation in respect of non-executive directors in their
annual report.

• Personnel who observe an unethical or improper practice (not necessarily

a violation of law) should be able to approach the audit committee
without necessarily informing their supervisors and these ‘‘whistle
blowers’’ should be protected from unfair termination and other unfair
prejudicial employment practices and such affirmation stating that they
have provided protection to ‘‘whistle blowers’’ shall form a part of the
Board report on Corporate Governance in the annual report.

J. J. Irani Committee (2005)

In 2004, the Ministry of Corporate Affairs constituted a committee under the

chairmanship of Dr. J. J. Irani to give suggestions and feedback for amending
the Companies Act, 1956. It was a 13-members committee. The committee
submitted its report on May 31, 2005. The major recommendations were
concerned around classification and registration of companies, management
60
and board governance, related party transactions, minority interests, investors Regulations and
Committees
education and protection, accounts and audit, merger and amalgamation,
restructuring and liquidation, and offences and penalties.

Based on the recommendations of these committees from time to time,

Clause 49 of the listing agreement was modified and updated. Similarly,
where necessary relevant provisions related to corporate governance was
incorporated into the Companies Act, 1956.

Kotak Committee (2018)

Several recommendations were proposed in a Report given on 5 October

2017 by the SEBI Committee on Corporate Governance formed on 2 June
2017 under the Chairmanship of Mr. Uday Kotak (Kotak Committee). Key
Recommendations of the Kotak Committee approved by SEBI are 1)
Increasing Transparency -Enhanced Disclosure Requirement. 2) Disclosure
of Utilization of Funds from Qualified Institutional Placement (QIP)
/Preferential Issues. 3) Disclosures of Auditor Credentials, Audit Fee,
Reasons for Resignation of Auditors. 4) Disclosure of Expertise/Skills of
Directors. 5) Enhanced Disclosure of Related Party Transactions (RPT). 6)
Mandatory Disclosure of Consolidated Quarterly Results with effect from
Financial Year 2019-2020. 7) Separation of the office of the chairperson of
the board and CEO/MD 8) Augmenting board strength and diversity. 9)
Capping the Maximum Number of Directorships. 10) Expanded Eligibility
Criteria for Independent Directors. 11) Enhanced Role of committees.

Activity 3

Almost all committees on corporate governance in India stressed the

importance of audit committee. What is the value addition that audit
committees bring to the shareholders?

…………………………………………………………………………………
…………………………………………………………………………………
…………………………………………………………………………………
…………………………………………………………………………………
…………………………………………………………………………………

3.6 CORPORATE GOVERNANCE

REGULATIONS IN INDIA
Corporate governance becomes the most debated topic after the sudden
outbreak of a series of scams such as Enron and World.com across the world
due to which the Sarbanes Oxley Act 2002 was enacted in the USA. After the
Satyam scam India felt the need to revamp its Companies Act 1956.
Companies Act 2013 introduced several governance measures to stop these
scams and save the interest of various stakeholders. To correspond and be
61
Corporate consistent with the relevance of corporate governance provisions under the
Governance
Companies Act, in 2014, SEBI revised Clause 49 of the Listing Agreement.
In 2015, SEBI enacted another new regulation, the listing obligations and
disclosure requirements (LODR), to make more stringent disclosure
standards, greater public shareholder participation, and proactive engagement
for listed companies.

Companies Act 2013

The Companies Bill, vetted twice by the Parliamentary Panel, was passed by
the Lok Sabha on December 18, 2012 and by the Rajya Sabha on August 8,
2013. On receiving the assent of the Hon’ble President of India on August
29, 2013, it was notified on August 30, 2013 as the Companies Act, 2013
(Act 18 of 2013) consisting of 470 Sections and 7 Schedules.

The New Companies Act, 2013, is in line with some of the best practices
followed globally and brings a renewed focus on improved corporate
governance by way of better structure, more rigorous checks and balances
and greater independence of all key members including boards and auditors.
Under this law, various provisions were made under at least 11 heads viz.
Composition of the Board, Woman Director, Independent Directors,
Directors Training and Evaluation, Audit Committee, Nomination and
Remuneration Committee, Subsidiary Companies, Internal Audit, SFIO, Risk
Management Committee and Compliance to provide a rock-solid framework
for Corporate Governance.

Some of the provisions on Corporate Governance under The Act are:

● “Every listed public company shall have at least one-third of the total
number of directors as independent directors and the Central
Government may prescribe the minimum number of independent
directors in case of any class or classes of public companies.”

● The independent directors may be appointed for a term up to 5

consecutive years.

● The Act prescribes size for the board to be maximum fifteen directors,
and appointment of more than 15 directors requires approval of
shareholders in General Meeting.

● It lays down the requirement to have at least one woman director on

board.

● The Act requires at least one executive to be resident in India; he must

have remained in the nation for 182 days in the previous year.

● The companies shall constitute the Nomination and Remuneration

Committee consisting of three or more non-executive directors out of
which not less than one-half shall be independent directors. It lays down
the role and responsibilities of members of the committee. However, it
62
 does not prescribe that the chairman shall be an independent Director Regulations and
Committees
and does not provide for frequency and quorum for meetings of the audit
committee or nomination and remuneration committee.

● It provides that a disclosure to be made in the board report with a

statement indicating development and implementation of a risk
management policy for the company, without any requirement for
constitution of risk management committee.
● The Companies Act, 2013 provides that person can act as a director or
alternate director in maximum twenty companies but not more than ten
public companies. It provides for the maximum number of companies in
which a person can be a director but does not provide any limit for
committee membership.
● As per Section 203 of the Companies Act, 2013, an individual shall not
be appointed or re-appointed as the Chairperson and Managing
Director in the same company except under certain circumstances.
● Every company shall hold a minimum number of four meetings of its
Board of Directors every year in such a manner that not more than one
hundred and twenty days shall intervene between two consecutive
meetings of the Board. The quorum for a meeting of the Board of
Directors of a company shall be one-third of its total strength or two
directors, whichever is higher.
● It has restricted the term for auditors in listed companies, stating that an
individual and audit firm cannot be appointed or reappointed as auditor
for more than one term of five consecutive years and two terms of five
consecutive years respectively.

Listing Obligations and Disclosure Requirements Regulations (2015)

The primary legislation governing companies in India is the Companies Act,

2013. In addition, for listed entities, with a view to consolidate and
streamline the provisions of listing agreements for different segments of the
capital market and to align the provision relating to listed entities with the
Companies Act, 2013, SEBI has notified the SEBI (Listing Obligations and
Disclosure Requirements) Regulations, 2015 on September 2, 2015, to make
corporate governance norms stringent process and replacing Clause 49 of the
Listing Agreement. These Regulations have been structured to provide ease
of reference by consolidating into one single document across various types
of securities listed on the Stock exchanges. The entire Regulations have come
into force from 1st December, 2015.

The LODR regulations identify corporate governance principles (in line with
OECD principles). In the event of the absence of specific requirements or
ambiguity, these principles would serve as a guide to the listed entities.
Based on recommendations of Kotak committee the regulations were
significantly revised and updated in 2018.
63
Corporate Some of the provisions of corporate governance specified in “Regulation 17
Governance
to 27” of the “Securities and Exchange Board of India (Listing Obligations
and Disclosure Requirements), Regulations, 2015 are:

● The board should have minimum six directors.

● at least half of the total directors of the board of a listed entity are to be
independent Directors if the Chairperson is executive/related to the
promoter, and in other cases, at least one-third of the board should be
independent directors.
● The eligibility criterion for independent director has been expanded with
effect from 1 October 2018. It excludes persons who constitute the
“promoter group” and directors of board inter-locks.
● Maximum number of listed entity directorships is restricted to seven
listed entities The person who is serving as a whole-time director /
managing director in any listed entity, shall serve as an independent
director in not more than three listed entities. Separate disclosure of the
names of the listed entities where the person is a director and the
category of directorship is also required.
● Quorum for every meeting of the board of directors of the listed entity
should be 1/3 of its total strength or three directors, whichever is higher,
including at least one independent director, for top 2000 listed entities by
market capitalization.
● SEBI (LODR) Regulations, 2015 state that “a director shall not be a
member in more than ten committees or act as chairperson of more than
five committees across all listed entities in which he is a director”.
● The skills / expertise / competencies possessed by board members should
be disclosed.
● In addition of the requirement of at least one woman director there
should be at least one independent woman director for top 1000 listed
entities by market capitalization.
● Disclosure of detailed reasons for resignation of the Independent
Directors and resignation of auditors before the expiry of their tenure to
the stock exchanges and in company’s “Corporate Governance Report”.
● The listed entity is required to obtain shareholders’ approval under a
special resolution in order to appoint a person as non-executive director
or continue the directorship of any person who has attained the age of 75
years for the relevant term.
● SEBI requires setting up of Audit Committee, Nomination and
Remuneration Committee and Risk Management Committee.
● The Nomination & Remuneration Committee (NRC) is composed of “at
least 3 directors, where all members should be non-executive directors
with at least fifty percent independent directors and chairman should also
64
 be independent. Also, NRC should hold at least one meeting during the Regulations and
Committees
year with quorum of 1/3 of total number of members or 2 directors,
whichever is higher, including at least one independent director in
attendance”
● Mandatory formation of Risk Management Committee in top 1000 listed
entities by market capitalization which must hold at least one meeting in
a year.

The corporate governance in India is strengthened through continuous

changes to make stronger governance standards for Indian corporate. The
efforts towards consolidating corporate governance norms into the
Companies Act represent this trend. The enactment of more stringent
regulations by SEBI has massive impact on governance practices for large
public listed companies. It has introduced extensive disclosures with the
objective to raise the financial reporting standards which are required for
building investors’ confidence in the Indian corporate sector. The stricter
regulations are also essential to enhance directors’ attentiveness in the way
decisions are taken by the company to ensure that long term growth.

Activity 4

Examine the corporate Governance report of one public and one private
sector bank. Have the provisions discussed above been complied with?

…………………………………………………………………………………
…………………………………………………………………………………
…………………………………………………………………………………
…………………………………………………………………………………
…………………………………………………………………………………
…………………………………………………………………………………
…………………………………………………………………………………

3.7 SUMMARY
Major corporate failures reflected a break-down in the governance structure
of corporates. Loss of millions of dollars of investors’ money highlighted the
urgency of regulating governance. Several committees were set up across the
globe to examine how to improve the governance standards. Though it would
be difficult to achieve perfection in governance issues unless all those who
are connected with the company decided to follow highest ethical standards,
the effort was to minimize the scope for misgovernance. These committees
which examined the issue identified three important aspects in governance
are - Board, Audit and Disclosure. Hence, the recommendations of these
committees and subsequent regulations have mainly addressed the issue of
how to improve the effectiveness of board, quality of audit and transparency
in disclosure. 65
Corporate
Governance 3.8 SELF-ASSESSMENT QUESTIONS
1) What is the role of Board in corporate form of business? How the Board
can be made effective as per the recommendations of various
committees?
2) Audit committees are interface between auditor and the Board. What are
the functions of Audit Committee and how they discharge this interface
function effectively?
3) What are the committees related to Board? What value addition they
bring for improving the corporate governance?
4) Summarize important recommendations of Cadbury Committee and
Kumara Mangalam Birla Committee.
5) Narayana Murthy Committee has made a few recommendations which
were not observed in other committees’ recommendations. What are they
and how they would improve the governance standards?
6) What is the role of institutional investors in improving the corporate
governance?
7) Why many committees have recommended separation of CEO and
Chairman of the Board to improve governance?
8) Corporate governance in initial stages were more of improving the
quality of governance but recent committees are recommending punitive
measures for governance failures — Do you agree that governance can
be improved through such punishment?

3.9 REFERENCES / FURTHER READINGS

Alkhafaji, Abbass F(1989)., A Stakeholder Approach to Corporate
Governance: Managing in a Dynamic Environment, Quorum Books, New
York,.
Bavly Dan, A. (1999), Corporate Governance and Accountability, Quorum
Books, London,.
Fernando, A.C. (2006), Corporate Governance: Principles, Policies and
Practices, Pearson Education, Delhi,.
National Foundation for Corporate Governance - http://www.nfcgindia.org
retrieved on 5th April, 2022.
Singh, S. (2005), Corporate Governance: Global Concepts and Practices,
Excel Books, New Delhi,.
Sharma, S. (2020) Efficacy of Corporate Governance Practices on Innovation
and Firm Performance, Doctoral Thesis, University of Delhi,.

66