SIMS – MBA Batch of 2009-11

CORPORATE GOVERNANCE

Session 5

Evolution of CG in India

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Evolution of CG in India

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 Evolution in India
• Only country in Asia where industry provided the initial
impetus, rather than Govt. for CG Reform.
• Driven by a desire to make Indian business more
competitive and respected on the world stage, the CII
published a voluntary Code of Corporate Governance in
1998
• SEBI set up Kumar Mangalam Birla Committee, whose
recommendations in Dec 1999 formed the basis for
Clause 49 of the Listing Agreement.
• SEBI revised Clause 49 in late 2004 based on Review by
Narayana Murthy Committee (2003); revisions came
into effect on January 1, 2006. (Next slide)
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 What is Clause 49
• SEBI monitors and regulates corporate governance of
listed companies in India through Clause 49. This clause
is incorporated in the listing agreement of stock
exchanges with companies and it is compulsory for them
to comply with its provisions.

• Issued the Clause in February ’00. Amended in late 2004

to be effective April, 2005, extended to Jan 2006
• Applicable to all Group A companies of the Exchange, as
also others with minimum paid-up capital of Rs 3 crore
or net worth of Rs 25 crore.
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Kumaramanglam Committee
Report
(Abbreviated as KM)

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 KM - Key Mandatory in Detail - 1
• Board of Directors: At least 30% independent if
Chairman is non-executive, 50% otherwise
• All pecuniary relationship or transactions of the
non-executive directors viz-a-viz. the company
should be disclosed in the Annual Report.
• Audit Committee will be set up with qualified
and independent directors as members
(Minimum 3) Its Chairman will answer
shareholders in AGM.
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KM - Key Mandatory in Detail - 2
An Audit Committee will oversee entire
financial reporting process, with powers:
• to investigate any activity within its terms of
reference.
• to seek information from any employee.
• to obtain outside legal or other professional
advice.
• to secure attendance of outsiders with
relevant expertise, if necessary.
It will meet at least thrice a year
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KM - Key Mandatory in Detail - 3
• Remuneration of Directors to be decided by the
Board, including for non-executive Directors, and
will be disclosed fully
• No director will be a member in more than 10
committees or act as Chairman of more than five
committees across all companies in which he is a
director.
• A Management Discussion and Analysis report
should form part of the Annual Report to the
shareholders.

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 KM - Key Mandatory in Detail - 4
• There shall be a separate section on CG in the
annual reports of company, with a detailed
compliance report on CG.
• Company shall obtain a certificate from the
auditors of the company regarding compliance of
conditions of CG as stipulated, annexe the
certificate with the directors’ report, which is sent
annually to all the shareholders of the company.
• The same certificate shall also be sent to the Stock
Exchanges along with the annual returns filed by
the company.
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Narayana Murthy Committee
Report
(Abbreviated as NR)

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 Salient Approach Statements of
N R Committee (2003) - 1
• Committee was appointed to review the progress on
practice of CG
• The approach of the Committee was “ Evidence
suggests that companies that do not employ
meaningful governance procedures can pay a
significant risk premium when competing for scarce
capital in the public markets. In fact, recently, stock
market analysts have acquired an increased
appreciation for the correlation between
governance and returns.”
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 Salient Approach Statements of
N R Committee (2003) - 2
CG is beyond the realm of law. It stems from the
culture and mindset of management, and cannot be
regulated by legislation alone. CG deals with
conducting affairs of a company such that there is
fairness to all stakeholders and that its actions
benefit the greatest no. of stakeholders. It is about
openness, integrity & accountability. What
legislation can and should do, is to lay down a
common framework – the “form” to ensure
standards. The “substance” will ultimately
determine the credibility and integrity of the process.
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NR - Key Mandatory in Detail - 1
Audit committees should be required to review the
following information mandatorily:
• Financial statements and draft audit report,
including Qrtly/ ½ yearly financial information;
• Management discussion and analysis of financial
condition and results of operations;
• Reports relating to compliance with laws and to
risk management;
• Management letters / letters of internal control
weaknesses issued by statutory/internal
auditors; and
• Records of related-party (defined) transactions
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NR - Key Mandatory in Detail - 2
• All audit committee members should be
“financially literate” and at least one member
should have accounting or related financial
management expertise.
• In case a company has followed a treatment
different from that prescribed in an
accounting standard, management should
justify why they believe such alternative
treatment is more representative of the
underlying business transaction.

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NR - Key Mandatory in Detail - 3
• A statement of all transactions with related
parties including their bases should be placed
before the independent audit committee for
formal ratification.
• Procedures should be in place to inform Board
members about the risk assessment and
minimization procedures. These procedures
should be periodically reviewed to ensure that
executive management controls risk through
means of a properly defined framework.
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 NR - Key Mandatory in Detail - 4
• 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. This code of conduct shall be posted
on the website of the company. All Board
members and senior management personnel
shall affirm compliance with the code on an
annual basis. The annual report of the company
shall contain a declaration to this effect signed
off by the CEO and COO.

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NR - Key Mandatory in Detail - 5
• There shall be no nominee directors.
Where an institution wishes to appoint a
director on the Board, such appointment
should be made by the shareholders. An
institutional director, so appointed, shall
have the same responsibilities and shall
be subject to the same liabilities as any
other director.

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NR - Key Mandatory in Detail - 6
• 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. Alternatively, this may be put up on
the company’s website and reference
drawn thereto in the annual report.
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NR - Key Mandatory in Detail - 7
• The term “independent director” adopted is the
same as was defined elaborately by an earlier
Naresh Chandra Committee based on an
internationally accepted definition.
• (We will discuss the concept of Independent
Director in more details later)
• 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.

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NR - Key Mandatory in Detail - 8
• The provisions relating to the composition of
the Board of Directors of the holding
company should be made applicable to the
composition of the Board of Directors of
subsidiary companies.
• At least one independent director on the
Board of the parent company shall be a
director on the Board of Directors of the
subsidiary company.
• The Audit Committee of the parent company
shall also review the financial statements.
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 More Recent Events
• Amendment to Companies Act
under consideration – Bill with
parliament
• This will synchronize with
Clause 49 and with international
developments
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