Corporate Governance

Committees in India
UNIT-3
 CORPORATE GOVERNANCE
 INTRODUCTION-Corporate governance is concerned with
set of principles, ethics, values, morals, rules regulations, &
procedures etc. Corporate governance establishes a system whereby
directors are entrusted with duties and responsibilities in relation to
the direction of the company’s affairs.
 The term “governance” means control i.e. controlling a company, an
organization etc or a company & corporate governance is governing
or controlling the corporate bodies i.e. ethics, values, principles,
morals. For corporate governance to be good the manager needs to
meet its responsibilities towards its owners (shareholders), creditors,
employees, customers, government and the society at large.
Corporate governance helps in establishing a system where a
director is showered with duties and responsibilities of the affairs of
the company.
 CONT.
 For effective corporate governance, its policies need to be such that
the directors of the company should not abuse their power and
instead should understand their duties and responsibilities towards
the company and should act in the best interests of the company in
the broadest sense.
 The concept of ‘corporate governance’ is not an end; it’s just a
beginning towards growth of company for long term prosperity.
EMERGENCE OF CORPORATE
GOVERNANCE IN INDIA
Corporate governance concept emerged in India after the
second half of 1996 due to economic liberalization and deregulation
of industry and business. With the changing times, there was also
need for greater accountability of companies to their shareholders
and customers. The report of Cadbury Committee on the financial
aspects of corporate Governance in the U.K. has given rise to the
debate of Corporate Governance in India.
Need for corporate governance arises due to separation of
management from the ownership. For a firm success, it needs to
concentrate on both economical and social aspect. It needs to be fair
with producers, shareholders, customers etc. It has various
responsibilities towards employees, customers, communities and at
last towards governance and it needs to serve its responsibilities at
the best at all aspects.
 MEANING OF CORPORATE
GOVERNANCE
Corporate governance is the system of rules, practices and
processes by which a company is directed and controlled. Corporate
governance essentially involves balancing the interests of a company's
many stakeholders, such as shareholders, management, customers, suppliers,
financiers, government and the community. Since corporate governance also
provides the framework for attaining a company's objectives, it encompasses
practically every sphere of management, from action plans and internal
controls to performance measurement and corporate disclosure.
Corporate Governance deals with determining ways to take
effective strategic decisions. It gives ultimate authority and complete
responsibility to the Board of Directors. In today’s market- oriented economy,
the need for corporate governance arises. Also, efficiency as well as
globalization are significant factors urging corporate governance. Corporate
Governance is essential to develop added value to the stakeholders.
 DEFINITION OF CORPORATE
GOVERNANCE

Cadbury Committee[1] ( U.K.), 1992 has defined corporate

governance as such : “Corporate governance is the system by which
companies are directed and controlled. It encompasses the entire
mechanics of the functioning of a company and  attempts  to  put 
in  place  a  system  of  checks  and  balances between the
shareholders, directors, employees, auditor and the management.”

“ Father of Corporate Governance- Bob Tricker”

CORPORATE GOVERNANCE COMMITTEES
IN INDIA AND THEIR RECOMENDATIONS
 CORPORATE GOVERNANCE
COMMITTEES IN INDIA

With the formation of corporate form of organizations, the

frame work of corporate governance got wide recognition and quite
peculiarly it was prevalent in various manifestations throughout the
world. The theme of Corporate Governance has got recognition due to
the constitution and formation of various committees and formulation
of various laws throughout the world.
With respect to India, after the economic initiatives in 1991,
the Govt. of India thought it fit to respond to the developments taking
placing the world over and accordingly the initiatives recommended by
Cadbury Committee Report got prominence. In order to give due
prominence Confederation of Indian Industry (CII), the Associated
Chambers of Commerce and Industry (ASSOCHAM) and, the Securities
and Exchange Board of India (SEBI) constituted committees to
recommend initiatives in Corporate Governance.
 CONT.
 The report of various committees helped a lot to streamline the
corporate throughout the world. Some of the Committees with its
formation is given under the following table-

S.NO COMMITTEE COUNTRY DATE OF SUBMISSION

1 Cadbury England 1992
2 King committee South of africa 1994 & 2002
3 CII India 1996
4 Hampel England 1998
5 Kumar manglam India 2000
birla
6 Naresh chandra India 2002
7 N. R. Narayana India 2003
Murthy
 CONT.
However with respect to India, the recommendations of Naresh
Chandra Committee, Dr. J. J. Irani Committee constituted by Ministry
of Corporate Affairs, the Kumar Mangalam Birla Committee and N. R.
Narayana Murthy Committee constituted by SEBI are more
prominent. Apart from these committees, there are OECD( Org. for
economic and development) principles and reviews by various other
corporate bodies like FICCI(federation of Indian chambers of
commerce and industry) ,KPMG, ICSI(Institute of company secretaries
of India) etc. on the corporate governance practices in India.
Some of the recommendations of these committees are as
follows:
 1.National Task Force
Chaired by Rahul Bajaj
 In 1996, CII(Confederation on Indian Industry) took a special
initiative on Corporate Governance – the first institutional
initiative in Indian industry.
 The objective was to develop and promote a code for Corporate
Governance to be adopted and followed by Indian companies,
be those in the Private Sector, or the Public Sector, Banks or
Financial Institutions, all of which are corporate entities.
 This initiative by CII flowed from public concerns regarding the
protection of investor interest, especially the small investor, the
promotion of transparency within business and industry; the
need to move towards international standards in terms of
disclosure of information by the corporate sector and, through
all of this, to develop a high level of public confidence in
business and industry.
 Desirable Code Of Corporate
Governance

o No need for German style two-tiered board.

o In case of listed company with turnover exceeding Rs.100 crores,
independent directors should consist of: - (a). 30% if Chairman is
non-executive director (b).50% if Chairman & MD is the same person.
o No single person should hold directorships in more than 10 listed
companies.
o Non-executive directors should be competent and active.
o Commission not exceeding 1% (3%) of net profits for a company with
(out) a MD.
o Attendance record of directors should be made explicit at the time of
reappointment; less than 50% no re-appointment.
o Key information that must be reported to and placed before the
board.
o Listed companies with turnover over Rs.100 crores or paid-up capital
of Rs.20 crores should have an audit committee.
o Credit Rating.
 2. Kumar Mangalam Birla
Committee Report (2000)
 In early 1999, Securities and Exchange Board of India (SEBI)
had set up a committee under Shri Kumar Mangalam Birla,
member SEBI Board, to promote and raise the standards of
good corporate governance. The report submitted by the
committee is the first formal and comprehensive attempt
to evolve a ‘Code of Corporate Governance', in the context
of prevailing conditions of governance in Indian
companies, as well as the state of capital markets.

 The primary objective of the committee was to view

corporate governance from the perspective of the
investors and shareholders and to prepare a ‘Code' to suit
the Indian corporate environment.
 CONT.
 The committee divided the recommendations into two categories-
A. Mandatory Recommendations
Applies To Listed Companies With Paid Up Capital Of Rs.3 Crore And
Above.
Composition Of Board Of Directors – Optimum Combination Of
executive and non-executive director.
Audit Committee – With 3 Independent Directors With One Having
Financial And Accounting Knowledge.
Remuneration Committee.
Management Discussion And Analysis Report Covering Industry
Structure, Opportunities, Threats, Risks, Outlook, Internal Control
System.
Information Sharing With Shareholders.
Board Procedures – At least 4 Meetings of the Board in a Year with
Maximum Gap of 4 Months between 2 Meetings.
 CONT.
B. Non-Mandatory recommendations
Role of chairman
Remuneration Committee Of Board.
Corporate restructuring.
Further Issue Of Capital.
Venturing into new business.
Sale Of Whole Or Substantial Part Of The Undertaking.
Shareholders' Right For Receiving Half Yearly Financial
Performance Postal Ballot Covering Critical Matters Like
Alteration In Memorandum.
 3. Naresh chandra committee report on corporate audit
and
governance (2002)

The Ministry of Corporate Affairs had appointed a high level committee

in August 2002 to examine various corporate governance issues. The
committee had been entrusted to analyze and recommend changes, if
necessary, in diverse areas such as:

o The procedure for appointment of auditors and determination of

audit fees;
o Restrictions, if necessary, on non-audit fees.
o Independence of auditing functions.
o Measures required to ensure that the management and companies
actually present 'true and fair' statement of the financial affairs of
companies.
o The need to consider measures such as certification of accounts and
financial statements by the management and directors.
 CONT.
 The committee’s recommendations relate to-
Disqualifications for audit assignments.
List of prohibited non – audit services.
Auditor's disclosure of contingent liabilities.
Management's certification in the event of auditor's replacement.
Auditor's annual certification of independence.
Appointment of auditors.
Defining an independent director.
Percentage of independent directors.
Minimum board size of listed companies
Disclosure on duration of board meetings/committee meetings
Additional disclosure to directors
Independent directors on Audit Committees of listed companies;
Remuneration of non-executive directors
Corporate Serious Fraud Office
 4. N. R. Narayana Murthy
Committee Report (2003)
 With the belief that the efforts to improve corporate governance
standards in India must continue because these standards
themselves were evolving in keeping with the market dynamics, the
Securities and Exchange Board of India (SEBI) had constituted a
Committee on Corporate Governance in 2002 , in order to evaluate
the adequacy of existing corporate governance practices and
further improve these practices. It was set up to review Clause 49,
and suggest measures to improve corporate governance standards.

The SEBI Committee was constituted under the Chairmanship of

Shri N. R. Narayana Murthy, Chairman and Chief Mentor of Infosys
Technologies Limited. The Committee comprised members from
various walks of public and professional life. This included captains
of industry, academicians, public accountants and people from
financial press and industry forums.
 CONT.
The issues discussed by the committee primarily related to
audit committees, audit reports:

 independent directors
 related parties

 risk management
 directorships and director compensation
 codes of conduct and financial disclosures.

 The committee's recommendations in the final report were

selected based on parameters including their relative
importance, fairness, accountability and transparency, ease
of implementation, verifiability and enforceability
 CONT.
 Mandatory Recommendations-
Strengthening the responsibilities of audit committees.
Improving the quality of financial disclosures, including those
related to related party transactions and proceeds from initial
public offerings.
Requiring corporate executive boards to assess and
disclose business risks in the annual reports of companies.
Introducing responsibilities on boards to adopt formal codes
of conduct; the position of nominee directors.
Stock holder approval and improved disclosures relating to
compensation paid to non-executive directors.
 CONT.
 Non-Mandatory recommendations-
Moving to a regime where corporate financial statements are
not qualified.
Instituting a system of training of board members.
Evaluation of performance of board members.
5. Naresh Chandra Committee
Report (2009)
 The Naresh Chandra committee was appointed in August 2002 by the
Department of Company Affairs (DCA) under the Ministry of Finance
and Company Affairs to examine various corporate governance
issues.

 The Committee submitted its report in December 2002.

 It made recommendations in two key aspects of corporate

governance: financial and non-financial disclosures: and independent
auditing and board oversight of management.

 The salient recommendations are as follows:

 Creation of a new post of Intelligence Advisor to assist the NSA and
the National Intelligence Board on matters relating to coordination in
the functioning of intelligence committee.
 CONT.
 Amendment to Prevention of Corruption Act to reassure honest officers,
who take important decisions about defense equipment acquisition, so
that they are not harassed for errors of judgment or decision taken in
good faith.

 A permanent Chairman of the Chiefs of Staff Committee .

 Expediting the creation of new instruments for counter-terrorism, such as

the National Intelligence Grid and National Counter Terrorism Centre.

 Deputation of officers from services up to director's level in Ministry of

Defense.

 Measures to augment the flow of foreign language experts into the

intelligence and security agencies, which face a severe shortage of trained
linguists.
PRESENT SCENARIO-COMPANIES
ACT,2013

 CA,2013 introduces significant changes to the composition of the

boards of directors.
 CA,2013 for the first time codifies the duties of directors.
 SEBI amends the Listing Agreement (with prospective effect from
October 01, 2014) to align it with CA,2013.
 The Government of India has recently notified Companies Act,2013
("CA 2013"), which replaces the erstwhile Companies Act, 1956
(“CA 1956").
KEY CHANGES INTRODUCED BY
COMPANIES ACT,2013
 . BOARD COMPOSITION
 CA 2013 has introduced significant changes in the composition of the board
of directors of a company. The key changes introduced are set out below:
 NUMBER OF DIRECTORS: The following key changes have been introduced
regarding composition of the board:
 A one person company shall have a minimum of 1 (one) director;
 CA 1956 permitted a company to determine the maximum number of
directors on its board by way of its articles of association. CA 2013, however,
specifically provides that a company may have a maximum of 15 (fifteen)
directors.
 CA 1956 required public companies to obtain Central Government's approval
for increasing the number of its directors above the limit prescribed in its
articles or if such increase would lead to the total number of directors on the
board exceeding 12 (twelve) directors. CA 2013 however, permits every
company to appoint directors above the prescribed limit of 15 (fifteen) by
authorizing such increase through a special resolution
 CONT.
Key takeaway: Allowing companies to increase the maximum number of
directors on their boards by way of a special resolution would ensure
greater flexibility to companies.

CA 2013 requires companies to have the following classes of directors:

 CONT.
 RESIDENT DIRECTOR:
CA 2013 introduces the requirement of appointing a resident
director, i.e., a person who has stayed in India for a total period of
not less than 182 (one hundred and eighty two) days in the previous
calendar year.
 Key Takeaway : The requirement to have a resident director on the
board of companies has been viewed as a move to ensure that
boards of Indian companies do not comprise entirely of non-resident
directors. This provision has caused significant difficulties to
companies, since it has been brought into force with immediate
effect, requiring companies to restructure their boards immediately
to ensure compliance with CA 2013.
 INDEPENDENT DIRECTOR:
CA 1956 did not require companies to appoint an independent
director on its board. Provisions related to independent directors
were set out in Clause 49 of the Listing Agreement ("Listing
Agreement").
 CONT.
 INDEPENDENT DIRECTOR:
CA 1956 did not require companies to appoint an independent
director on its board. Provisions related to independent directors
were set out in Clause 49 of the Listing Agreement ("Listing
Agreement").

Number of independent directors: As per the Listing Agreement, only

listed companies were required to appoint independent directors.
The number of independent directors on the board of a listed
company was required to be equal to :
(i) one third of the board, where the chairman of the board is a non-
executive director; or
 (ii) one half of the board, where the chairman is an executive
director.
 CONT.
 However, under CA 2013, the following companies are required to
appoint independent directors:
i. Public listed company: At least one third of the board to be
comprised of independent directors; and
ii. Certain specified companies that meet the criteria listed below
are required to have at least 2 (two) independent directors:
 Public companies which have paid up share capital of INR
100,000,000 (Rupees one hundred million only);
 Public companies which have a turnover of 1,000,000,000
(Rupees one billion only); and
 Public companies which have, in the aggregate, outstanding
loans, debentures and deposits exceeding INR 500,000,000
(Rupees five hundred million only)
 CONT.
A Qualification criteria:
i. CA 2013 prescribes detailed qualifications for the appointment of
an independent director on the board of a company. Some
important qualifications include:
 he / she should be a person of integrity, relevant expertise
and experience;
 he / she is not or was not a promoter of, or related to the
promoter or director of the company or its holding, subsidiary
or associate company;
 he / she has or had no pecuniary relationship with the
company, its holding, subsidiary or associate company, or
their promoters, or directors during the 2 (two) immediately
preceding financial years or during the current financial year
 CONT.
B Duties of Independent directors: 

 Neither the Listing Agreement nor the CA 1956 prescribed the scope
of duties of independent directors. CA 2013 includes a guide to
professional conduct for independent directors, which crystallizes
the role of independent directors by prescribing facilitative roles,
such as offering independent judgment on issues of strategy,
performance and key appointments, and taking an objective view on
performance evaluation of the board. Independent directors are
additionally required to satisfy themselves on the integrity of
financial information, to balance the conflicting interests of all
stakeholders and, in particular, to protect the rights of the minority
shareholders. The SEBI Circular however, states that the board is
required to lay down a code of conduct which would incorporate the
duties of independent directors as set out in CA 2013.
 CONT.
C Liability of Independent Directors:


Under CA 1956, independent directors were not

considered to be "officers in default" and consequently
were not liable for the actions of the board. CA 2013
however, provides that the liability of independent
directors would be limited to acts of omission or
commission by a company which occurred with their
knowledge, attributable through board processes, and with
their consent and connivance or where they acted
diligently.
 CONT.
D Position of Nominee Directors

i. While the Listing Agreement stated that the nominee

directors appointed by an institution that has invested
in or lent to the company are deemed to be
independent directors, CA 2013 states that a nominee
director cannot be an independent director.
ii. CA 2013 defines nominee director as a director
nominated by any financial institution in pursuance of
the provisions of any law for the time being in force,
or of any agreement, or appointed by the Government
or any other person to represent its interests.
 CONT.
II. COMMITTEES OF THE BOARD

CA 2013 envisages 4 (four) types of committees to be constituted by

the board:
 CONT.
 III. BOARD MEETINGS AND PROCESSES
 The key changes introduced by CA 2013 with respect to board
meetings and processes are as under:
 First board meeting of a company to be held within 30 (thirty)
days of incorporation;
 Notice of minimum 7 (seven) days must be given for each
board meeting. Notice for board meetings may be given by
electronic means. However, board meetings may be called at
shorter notice to transact "urgent business" provided such
meetings are either attended by at least 1 (one) independent
director or decisions taken at such meetings on subsequent
circulation are ratified by at least 1 (one) independent director.
RELIANCE INDUSTRIES- CORPORATE
GOVERNANCE REPORT
BEST CORPORATE GOVERNANCE PRACTICES
RIL maintains the highest standards of Corporate Governance. It is the
Company’s constant endeavour to adopt the best Corporate Governance
practices keeping in view the international codes of Corporate
Governance and practices of well-known global companies. Some of the
best implemented global governance norms include the following:
 The Company has a designated Lead Independent Director with a
defined role.
 All securities related filings with Stock Exchanges are reviewed every
quarter by the Stakeholders’ Relationship Committee.
 The Company has independent Board Committees for matters related to
Corporate Governance and stakeholders’ interface and nomination of
Board members.
 The Company’s internal audit is also conducted by independent
auditors.
.
 CONCLUSION
Corporate governance is essentially a soft issue, whose essence cannot be
captured by quantitative and structural factors alone, one of the challenges
making corporate governance norms mandatory is the need to differentiate
between form and content.
For instance how do we determine whether companies actually internalize the
desired corporate governance norms or whether they look at corporate
governance as a check-the-box exercise to be observed more in letter than in
spirit.
Currently, corporate governance in India is at crossroads; while corporate
governance codes have been drafted with a deep understanding of the
governance around the world, there is still a need to develop more appropriate
solutions that would address India-specific challenges more efficiently.