You are on page 1of 51


Parvesh Aghi





_ =t is a system of structuring, operating and
controlling a company with a view to achieve
long term strategic goals to satisfy
shareholders, creditors, employees,
customers and suppliers, and complying with
the legal and regulatory requirements, apart
from meeting environmental and local
community needs.


_ |orporate Governance may be defined as
a set of systems, processes and principles
which ensure that a company is governed
in the best interest of all stakeholders.
_ =t is the system by which companies are
directed and controlled.
_ =t is about promoting corporate fairness,
transparency and accountability. =n other
words, 'good corporate governance' is
simply 'good business'.
=t ensures:
_ Adequate disclosures and effective
decision making to achieve corporate
_ Transparency in business transactions;

_ Statutory and legal compliances;

_ Protection of shareholder interests;

_ |ommitment to values and ethical conduct

of business.

_ The aim of "Good |orporate Governance"
is to ensure commitment of the board in
managing the company in a transparent
manner for maximizing long-term value of
the company for its shareholders and all
other partners.
_ The fundamental objective of corporate
governance is to enhance shareholders'
value and protect the interests of other
stakeholders by improving the corporate
performance and accountability.

_ "|orporate governance is maximizing the
shareholder value in a corporation while
ensuring fairness to all stakeholders,
customers, employees, investors, vendors,
the government and the society-at-large.
|orporate governance is about
transparency and raising the trust and
confidence of stakeholders in the way the
company is run.

_ =t is about owners and the managers
operating as the trustees on behalf of every
shareholder - large or small." - Shri N.R.
Narayana Murthy, |hief Mentor, =nfosys


_ A properly structured board capable of
taking independent and objective
decisions is in place at the helm of affairs;

_ The board is balance as regards the

representation of adequate number of non-
executive and independent directors who
will take care of their interests and well-
being of all the stakeholders;

_ The board adopts transparent procedures
and practices and arrives at decisions on
the strength of adequate information;

_ The board has an effective machinery to

subserve the concerns of stakeholders;

_ The board keeps the shareholders

informed of relevant developments
impacting the company;

_ The board effectively and regularly
monitors the functioning of the
management team;

_ The board remains in effective control of

the affairs of the company at all times.



_ =t contributes not only to the efficiency of a

business enterprise, but also, to the growth
and progress of a country's economy.

_ corporations need to access global pools of

capital as well as attract and retain the best
human capital from various parts of the

_ -ell governed companies mitigate µnon-
business¶ risks .
_ =ncrease efficiency of their activities and
minimize risks.
_ Get an easier access to capital markets
and decrease the cost of capital;
_ =ncrease growth rate;
_ Attract strategic investors;
_ Strengthen their reputation and raise the
level of investors and clients' trust
_ ðmpirical evidence and research
conducted in recent years supports the
proposition that it pays to have good |G. =t
was found out that more than 84% of the
global institutional investors are willing to
pay a premium for the shares of a well-
governed company over one considered
poorly governed but with a comparable
financial record



å $  

 |  '
Ú   |
_ Ministry of |orporate Affairs (M|A)
_ Securities and ðxchange Board of
=ndia (SðB=)
_ =|A=
_ =|S=
_ =|-A=
* Aecember 199ÿ: |== sets up task force to
design voluntary code of corporate governance.

* April 1998: |== releases ³Aesirable |orporate

Governance |ode´

* May 1999: SðB= sets up the Kumar Mangalam

Birla |ommittee

* February 2000: |lause 49 introduced pursuant to

KM Birla Report
* 2002: A|A sets up Naresh |handra |ommittee-
Report recommends financial and non-financial
disclosures and independent auditing and board
oversight of management (Araft |ompanies Bill) .

* 2002: Narayana Murthy |ommittee set up by SðB=

to review clause 49
* 2003: |lause 49 modified to reflect some of
Narayana Murthy¶s recommendations
* Aecember, 200ÿ: Aeadline for compliance with
modified |lause 49

_ There are several reports and
recommendations of the =nternational
|ommittees/ Associations, etc. on the
development of appropriate framework for
promoting good corporate governance
standards, codes and practices to be
followed globally. These are:-
_ |adbury |ommittee Report-The Financial
Aspects of |orporate Governance (1992)
_ Sarbanes Oxley Act (2002)
_ Oð|A Principles of |orporate Governance
_ The |ombined |ode,
_ Principles of Good Governance and |ode of
Best Practice, London Stock ðxchange


_ based on SðB= circular dated Oct, 2004,

_ clause 49 of the listing agreements revised
by stock exchanges
_ was to be implemented on or before 31st
march 2004
_ ðxtended upto 31st Aecember, 200ÿ

_ Board of Airectors
_ Audit committee
_ Subsidiary companies
_ Aisclosures
_ |ðO/|FO |ertification
_ Report on |orporate Governance
_ |ompliance

K   *
_ |omposition- ðxecutive & non-executive
_ Not less than ÿ0% to be non-executive
_ Number of independent directors:
when there is non-executive chairman
at least 1/3rd
-hen there is executive chairman
at least ½ of the Board
_ =ndependent director has to be an non-
executive director
a) does not have any material pecuniary relationships or transactions
with the company, its promoters, its senior management etc.

b) not related to promoters/ management at board level or at one level

below the board

c) was not an executive of the company in the immediate three financial


d) -as not a partner or an executive of audit firm/ legal firms or

consulting firms for last three years.

e) not a supplier, service provider customer or lessor- lessee.

f) not a substantial shareholder of the company holding over 2% of the

share capital. 26
_ |ompensation/ stock options to independent directors to
be approved by the board and prior approval of the
shareholders is required

_ Aisclosure on annual basis regarding the shares held by

non-executive directors

_ non-executive directors to disclose their stock holding(

both held by them or on beneficial basis) prior to their


_ shall not exceed nine years comprising of

three terms of three years each running

_ The board shall meet at least four times a
year , with a maximum time gap of three
months between any two meetings.
_ A director shall not be a member in more
than 10 committees or act as |hairman of
more than five committees.

_ a code of conduct shall be prepared for board
members and senior management which shall be
posted on the website.

_ board members/ senior management to affirm

compliance of the code and the annual report
should contain such a declaration signed by


_ Board to make periodical review of compliance

report of all laws applicable to the company and

_ Steps taken by the company to rectify instances of


è %*|!,,
_ The audit committee shall have minimum three
directors as members . Two thirds of the
members of audit committee shall be
independent directors

_ All members of the audit committee shall be

financially literate with one member having
accounting/ financial management expertise.

_ The audit committee shall meet at least 4 times

in a year. 32
_ oversight of the company¶s financial reporting
processes and the disclosure of its financial
information to ensure that the financial statement
is correct, sufficient and credible.
_ recommending the appointment and removal of
external auditor, fixation of audit fee and also
approval for payment for any other services.
_ Review annual as well as quarterly financial
statements with the management before
submitting the same to BOA
_ discussion with external auditors before the
audit commences about nature and scope of
audit as well as post audit discussion to
ascertain any area of concern.
_ reviewing the company¶s financial and risk
management policies.
_ to look into the reasons for substantial defaults
in the payment to the depositors, debenture
holders, shareholders(in case of non payment of
declared dividends) and creditors.
_ Aiscussion with internal auditors any significant
finding and follow up thereon 34
_ financial statement / audit report / quarterly /
half- yearly financial information.
_ MAA and results of operation
_ legal compliance and risk management
_ observations of statutory / internal auditors.
_ appointment / removal of chief internal auditor.
_ record of significant related party transactions

_ to investigate any activity within its terms of
_ to seek information from any employee
_ to obtain outside legal or other professional
_ to secure attendance of outsiders with relevant
expertise, if it considers necessary.

£ %*Ú|!,)
_ one independent director of holding company to be
on the board of non-listed subsidiary company.
_ audit committee of the holding company shall review
financial statements / investments of subsidiary
_ board minutes of subsidiary company shall be placed
for review by the board of holding company.

_ directors report of the holding company shall confirm

that the affairs of the subsidiary companies have
been reviewed
_ Management shall disclose justifying the
different accounting treatment than the
accounting standards .


_ Summary of related party transactions, their

basis bifurcating transactions in normal course
of business and individual transactions not in
normal course of business and
_ Aetails and management¶s justification for any
material transaction not on arms length basis


_ The company shall disclose the uses and

application of funds arising out of public
issues , right issues , preferential issues etc.

_ Any deviation of funds from the purposes

stated in offer document/prospectus/notice to
be reported to audit committee along with

_ Risk management procedure to be laid down
for the management and to be reviewed
_ A quarterly report certified by |ompliance
Officer on business risk and measures to
minimise risks an limitations to the risk taking
capacity of the company
_ This document shall be formally approved by
the Board.
_ All the elements of remuneration of individual
directors shall be disclosed in annual report.

_ The company shall disclose the number of

shares and convertible instruments held by
directors in annual report.

_ All the presentations and quarterly results
made by the company to the analysts shall
be put on company¶s website .
_ A committee shall be formed to look into the
complaints of shareholders like transfer of
shares ,non receipt of balance sheet,
dividend etc .


_ By senior management of all material financial

and commercial transactions, where they have
personal interest

ÿ |Ú-|!|!(|-!
That they have reviewed the financial
statements and cash low statement for the
year and:
_ These do not contain any materially untrue statement
or omit any material fact
_ There were no fraudulent, illegal transactions violative
of the co¶s |ode of |onduct
_ They accept responsibility for establishing and
maintaining internal controls and have evaluated their

6 Ú)!Ú!|!Ú)!Ú!Ú|

_ a compliance report within 1ÿ days from the

close of the quarter in the revised format.

_ the report contains the entire provisions of

the new corporate governance clause.
_ a separate cell is being set up by the stock
exchanges to monitor the compliance of the

_ The company has to obtain a certificate from
the auditors or practicing company
secretaries regarding compliance of
corporate governance.

 1 ,  .2   
_ Remuneration committee
_ Audit qualifications
_ Training of board of directors
_ -histle Blower Policy

_ company to have an internal policy on access to audit
committee by employees on unethical and improper

_ the policy to be communicated to employees and

included in the HR manual.

_ company shall affirm that it has not denied any

personal access to audit committee and has provided
protection to whistle blowers from unfair termination
_ the affirmation shall from part of the board report on
corporate governance. 49