CG in India_revised

1© 2010 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

Evolving Corporate Governance Regulations in IndiaMarch 2010

GOVERNANCE, RISK AND COMPLIANCE SERVICES

KPMG IN INDIA


Aspect of governance UK Australia US India

Majority Independent directors Mandatory Mandatory Mandatory 50 percent only if

CEO is board chair

Board Performance evaluation Comply or explain Comply or explain Mandatory Recommended

Nomination committees Comply or explain Mandatory Mandatory

Executive sessions of independent directors

Comply or explain - Mandatory

Segregation of CEO and Board chairComply or explain

Lead independent directorComply or explain Recommended

Board access to independent Professional advise

Comply or explain Mandatory

Disclosure of Board/ committee Charters

Comply or explain Mandatory Mandatory

Whistleblowing Recommended Recommended Mandatory Recommended

Sustainability reporting Recommended Recommended Mandatory

India has better regulations than other Asian countries, but falls short of the developed economies in a number of governance areas

A snapshot comparison of Indian and global governance regulations


Raising the bar on Corporate Governance

The Ministry of Corporate Affairs intends to fix this gap through a two-pronged approach for improving corporate governance in India Inc.

Clause 49 Corporate Governance Voluntary Guidelines (CGVG),

2009

Proposed Companies Bill, 2009 (New)

Mandatory

Rules based (mandatory and non-mandatory provisions)

Limited in scope(Covers minimum requirements on Corporate Governance)

Enhanced powers to shareholders

Enhanced disclosures

Voluntary in nature (initial trial period of one year)

Framework of best practices; “Comply or Explain”

More comprehensive; covers a number of additional areas and disclosures

Going forward, with the increasing regulatory pressures, the focus will be on the quality of disclosures and how companies are explaining their chosen governance approach and practices

Existing regulations Tightening regulations Focus on practices and disclosures

Two-pronged approach

Source: Ministry of Corporate Affairs


Key Corporate Governance requirements proposed within the Companies Bill, 2009

Statutory recognition of Audit Committee, Remuneration Committee and Stakeholders’ Committee with majority representation by non-executive directors1

Acceptance of deposits from public would be prohibited2

Definition of ‘Key Managerial Personnel’ (KMP) – KMPs subject to specific requirements relating to disclosure of interest and insider trading3

Provisions for initiation of Class Action Suits by investors4

Related Party Transactions - Wider definitions, scope of transactions and approval by shareholders5

Shareholder approval of executive compensation and Remuneration Committee’s approval of compensation policies6

Need for additional disclosures in Director’s Report7

Criminal penalties / liability for insider trading8

Valuations to be undertaken by ‘Registered Valuers’ to ensure arm’s length basis in certain type of transactions9

Strengthening of provisions to ensure independence of auditors including restriction on rendering certain type of services10



Key requirements envisioned within the voluntary guidelines (1 of 2)

• Formal letter of appointment specifying roles and responsibilities of Non-executive Directors (NEDs)

• Clear demarcation of the roles and responsibilities of the Chairman of the Board and that of the Managing Director/Chief Executive Officer (CEO)

• A Nomination Committee comprising a majority of Independent Directors, including its Chairman should drive the selection of NEDs

• Limits on outside directorships

• An individual may not remain as an independent director in a company for more than six years

• Empowerment of NEDs – Access to information, resources, company personnel and external advice

• Company has a choice of fixed and variable remuneration• Restriction on stock options

Strengthening regulations

Offices of Chairman and CEO

Nomination Committee

Number of directorships

Tenure of Independent Directors

Enabling powers for Independent Directors

Remuneration of NEDs/IDs



Key requirements envisioned within the voluntary guidelines (2 of 2)

• Risk oversight – collective responsibility of the Board and Audit Committee including the risk policies

• A formal evaluation of the Board’s performance and that of its committees and individual directors

• Ensuring adequacy of internal control systems is a Board responsibility

• Explicit oversight and approval of audit plans

• Audit partner - to be rotated once in every three years• Audit firm - to be rotated once in every five years

• External internal auditor to promote greater independence and objectivity

• Institute mechanism for whistle blowing

Risk Management

Performance Evaluation

Compliance

Audit Committee and Auditor

Rotation of Audit Partners and Audit

Firms

Appointment of Internal Auditor

Whistle blowing policy



Besides key requirements, there is the expectation of more robust disclosures (1 of 2)

How will the guidelines impact disclosures?

Overall disclosures(disclose to what extent a company has adopted the guidelines and underlying

reasons for non-adoption or partial implementation of certain guidelines)

Specific additional disclosures within individual provisions

Additional disclosures within individual provisions of voluntary guidelines, 2009

• Should be disclosed to shareholders and posted on the company’s website, as well as on the stock exchange where the securities of the company are listed

Letter of Appointment

• Disclosure of guidelines followed and roles and responsibilities in the Annual ReportNomination Committee

• Disclosure of policies to shareholders for their approval• ‘Certificate of Independence’ should also be posted on the company’s website, as well as on the

website of the stock exchange

Independence of Independent Directors



Besides key requirements, there is the expectation of more robust disclosures (2 of 2)

Remuneration Policy • Disclosure of principles, criteria and the basis of remuneration policy to shareholders and their comments, if any, to be considered suitably

Remuneration of Directors

• Performance benchmarks should be disclosed to the members annually• Remuneration Policy for the members of the Board and Key Executives should be disclosed

Compensation structure of NEDs

• The structure of remuneration for NEDs should be disclosed to the shareholders in the Annual Report of the company

Risk Management• Disclosure of critical risk management framework across the company• Disclosure of those elements of risk, that the Board feels, may threaten the existence of the company

Performance Evaluation • Disclosure of how the evaluation of the Board, its committees and its individuals has been conducted

Compliance • Disclosure about the effectiveness of the company’s internal controls system

Related Party Transactions • Disclosure in the prescribed format of details of all the related party transactions in the Board’s report



In summary…

The Ministry of Corporate Affairs intends to harmonize the provisions of the voluntary guidelines within the provisions of the Companies Bill, 2009 by end of the year

What does it mean for India Inc.?

Companies need to answer the following questions:

Assess how early implementation will impact stakeholder relations and communications?1

Assess how adoption of these guidelines will help improve corporate performance and accountability?2

Your preparedness for disclosures – are you ready for a greater level of scrutiny by regulators?3

kpmg.com/in

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Kolkata

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Thank You

The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date

it is received or that it will continue to be accurate in the future. No one should act on such

information without appropriate professional advice after a thorough examination of the particular situation.

©

2010 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG and the KPMG logo are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity.

Ganesh RamamurthyDirector, Governance, Risk and Compliance Servicese-Mail: [email protected]: +91 (22) 3090 1979Mobile: +91 9769105084

mailto:[email protected]

CG in India_revised

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