Corporate Governa Main

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A PROJECT REPORT ON

CORPORATE GOVERNANCE

IN

ELECTRONICS CORPORATION OF INDIA LIMITED


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TABLE OF CONTENTS

1. INTRODUCTION TO THE PROJECT

1.1 Introduction to the project..71.2 Objectives of the study...101.3 Need for the study...101.4 Research Methodology...111.5 Scope of the study...111.6 Limitations of the study..12

2. COMPANY PROFILE2.1 About the company.142.2 History of the company...152.3 Products...182.4 Mission and Objectives of ECIL.242.5 Industry Profile26

3. THEATERICAL BACKGROUND ON CORPORATE

GOVERNANCE

3.1 Introduction293.2 What is Corporate Governance..303.3 What went wrong is recent past.333.4 Concept of Corporate Governance.353.5 Aims of Corporate Governance..363.6 Results of Good Corporate Governance.363.7 Clause 49 of the Listing Agreement...423.8 Committees Related to Corporate Governance..533.9 Case Study Related to Corporate Governance60

4. CORPORATE GOVERNANCE PRACTICES AT ECIL

4.1 Directors Reports.654.2 Accounting Policies..784.3 Auditors Reports..83

5. FINDINGS, CONCLUSIONS AND SUGGESTIONS


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5.1 Findings..895.2 Conclusions905.3 Suggestions.91

Bibliography..93


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CHAPTER-1

INTRODUCTION TO THE PROJECT

1.1 Introduction to the project-Corporate Governance at ECIL1.2 Objectives of the study

1.3 Need for the study

1.4 Research Methodology

1.5 Scope of the study

1.6 Limitations of the study


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INTRODUCTION TO THE PROJECT-CORPORATE GOVERNANCE

AT E.C.I.L

INTRODUCTION TO THE PROJECT

1.1.1 Definition:

In A Board Culture of Corporate Governance, business author Gabrielle O'Donovan

defines corporate governance as 'an internal system encompassing policies, processes and

people, which serves the needs of shareholders and other stakeholders, by directing and

controlling management activities with good business savvy, objectivity, accountability and

integrity. Sound corporate governance is reliant on external marketplace commitment and

legislation, plus a healthy board culture which safeguards policies and processes.

The term "Corporate Governance" describes an incredibly broad, multifaceted concept. It

includes the systems, procedures and structure a corporation uses to convey authority,

responsibility and accountability among stakeholders. Good corporate governance balances

the interests of, and relationships between, a company's employees, owners and customers to

ensure the long-term sustainability and success of a corporate venture.

1.1.2 Laws and Regulations:

One of the primary aspects of corporate governance is company compliance with all

applicable federal and state legal regulations. Corporations must adhere to a set of strict,

comprehensive laws administered by national and local governments. These laws shape the

structure of a corporation's corporate governance before it even begins to operate. All

corporations, for example, are required to hold annual shareholder meetings, report income

and justify its use of assets.

1.1.3 Interests of Stakeholders:


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The stakeholders of a corporation are employees, customers, creditors and owners.

Each of these individuals or organizations have invested assets into the corporation.

Corporate governance describes how a corporation meets the interests of each of these

stakeholders without compromising the overall integrity of the company or neglecting

obligations to other stakeholders.

1.1.4 Ownership:

The owners of a corporation are called shareholders. They are primary stakeholders in

the company. The success of their investment in the corporation is directly dependent on the

success and sustainability of a corporation's actions and decisions. Shareholders meet

annually to elect members of a board of directors who act as their fiduciaries in the context oftheir investment in the company. Shareholders to not play a role in the company's operations

or development. This disconnects" between the owners of a corporation and the company

itself is one of the most critical aspects of corporate governance. Good corporate governance

includes a healthy, transparent relationship between the owners, the board and the company's

operations.

1.1.5 Board of Directors:

The board of directors in a corporation serve as the central body in the corporate

governance structure. Board members oversee the budget and operations of a company. They

are duty-bound to analyze and report this information to shareholders honestly and

accurately. The board appoints high level management officials for the corporation. These

officials have a great deal of authority and responsibility, and can ultimately determine the

success or failure of a company. The board is the primary conductor of corporate governance.

They are the bridge between the owners and employees of a company. They make thestrategic, long-term decisions that shape a corporation's structure and integrity.

1.1.6 Other Stakeholders:

Good corporate governance does more than convey the authority of the shareholders

throughout the corporation. Shareholders are a key stakeholder, but they are not the only

ones. Good corporate governance includes meeting the needs of employees and customers as

well. Shareholders may benefit financially from offering poor compensation to employees or


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management, but the overall integrity of the corporation may not. The board and high-level

management develop strategies to benefit all stakeholders of the company. Creditors and

customers also have an interest, albeit indirect, in the health of a corporation. The concept of

corporate governance includes all of these relationships and interactions between

stakeholders within a corporation.

1.1.7 Other Aspects of Corporate Governance:

As corporate governance develops as an independent field of study and professional

practice, nearly all aspects of a corporation's operations fall under this umbrella term. Human

resources and public relations departments play an increasingly important role in the

governance structure of a corporation. As public and legal expectations of corporationsevolve, so must a corporation's governance structure.

Business ethics are integral to the integrity of a corporate governance structure.

Policies and procedures originating from ethical, responsible decisions maintain the

immediate and long-term health of a corporate enterprise.

1.1.8 Project study:

A project study on Corporate Governance in a leading public sector

ELECTRONIC CORPORATION OF INDIA LIMITED. (Under government of India).

The above study is aimed at analyzing the governance practices prevalent in ECIL.

In this context it is proposed to take project study in reputed public sector undertaking

covering corporate governances aspect and giving suggestions for implementing any. ECIL

is chosen as it is a central public sector unit of long standing having diversified product

portfolio with large scope of supervision having control complications. The project study

aims to analyze, discuss, conclude and suggest measures for further controls.

The project is designed to provide an introduction to the study of CORPORATE

GOVERNANCE in ECIL. An attempt is made to explain about Corporate Governance &

various strategies. Corporate Governance in public sector undertaking assumes lot of

significance. This is more complex, when there are number of divisions & less common

controlling systems.


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It is observed that, some PSUs are equipped with low intensive governance which

leads to drastic changes in the performances and also inferior standard or quality

management. While resulting in low growth rate of the organization. In case of ECIL, there is

large scope of supervision with high tech nature not similar to each other. Corporate

Governance hence is challenging task.

OBJECTIVES OF THE STUDY

To take a project study on corporate governance in a leading public sector

ELECTRONIC CORPORATION OF INDIA LIMITED. The above study is aimed at

analyzing the corporate governance practices prevalent in ECIL.

1. To be followed by critical analysis & assessment of performance at ECIL.

2. To analyze the performance, the focus is on application of standard measurement tool

like performance ratios etc., to trend analysis and structural analysis of the company.

3. To analyze Corporate governance practices at ECIL.

4. To sum up providing conclusions and make suggestions for improvement on

Corporate governance practices at ECIL.

1.3 NEED FOR THE STUDY

The investment in Inventory is very high in most of the under talking engaged in

manufacturing wholesale and retail trade. The amount of investment is sometimes more in

inventory than in other assets.

In India a study of 29 major industries has revealed that the average cost of

materials is 64 paisa and the cost of labor and overheads is 36 paisa of a rupee. About 90% of

working capital is invested in inventories. The main reason attributed for loss making

financial indiscipline in managing the resources particularly in corporate governance for an

organization, the product profitability considering standards and budgets is of paramount

importance needless to say that in this context, corporate governance assumes lot of

significances.


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Corporate governance determines and portrays the following factors like what

to purchase, where to purchase, how to purchase, from where to purchase, where to store etc.

will be critical factor hence it becomes a crucial factors to undergo a detailed analysis to find

an efficient system of inventory. As an attempt has been made to study the corporate

governance with reference to ECIL.

1.4 RESEARCH METHODOLOGY

Any of the systematic and scientific research lies in its methodology giving a clear

idea of the forms of study and procedure adopted in conducting it and starting the purpose

become essential parts of every study. So, in this study the information furnished has been

collected in two ways one is primary source and one is secondary source.

Primary source:

Primary data has been collected by interacting with the guide and other supportive

through direct personnel, oral investigation, seminars, classroom lectures delivered about

Corporate governance in ECIL.

Secondary Data:

Secondary data is collected from Annual reports of the units, other reports of the

unit, House magazines of the units, Internet.

1.5 SCOPE OF THE STUDY

Project covers 2002-2003 to 2008-2009 financial years. Data/ information is collects

for the above financial years.

The project report on corporate governance covers collections of data, analysis of data

interpretations and suggestions. Inventory statements are prepared on the basis of the

financial statements of ECIL.


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1.6 LIMITATIONS OF THE STUDY

As stated elsewhere, ECIL is under a strategic ministry of government of India

dealing with nuclear power, defense etc.

The very nature of the organization places certain limitations on the collection of the

data & analysis thereof.

Its not possible to collect total information.

This has bearing to some extent on the project work.

CHAPTER-2

COMPANY PROFILE


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2.1 About the Company

2.2 History of the Company

2.3 Products

2.4 Mission and Objectives of ECIL

2.5 Industry Profile

COMPANY PROFILE
http://en.wikipedia.org/wiki/Image:Ecil_logo.gif


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2.1 ABOUT THE COMPANY

Let us work up the embers of national pride latest in all of us and

build up our morale so that we can confidently aim high and

achieve greater goals-

Dr. AS Rao Founder C & MD of

ECIL.

Many industries require electronics in their production process. Electronics is

assuming increasing importance in the monitoring & control of production process of many

industries like engineering, chemical & metallurgical industries. In India, the electronics

industry has been taken many strides both in public & private sectors.

In the field of industrial electronics, the government of India has taken initiations in

1960s to set up an industrial unit in public sector in order to produce industrial electronic

systems with indigenous technology to meet the nations requirement in strategic areas.

It has vital role to play in the fields of atomic energy, communication, defense,

education, space technology & entertainment. Because of its dynamic character, its pervasive

nature & its significant impact on science, industry & society, electronics is the vanguard of

the technological process. Technological process & obsolescence are both very rapid in this

field.

An intense promotional effort relating to both production & research development is

an important requisite. Therefore, it is essential to ensure a rapid growth in this field. In this

direction, government of India & its agencies with the aim of developing & promoting

industrial electronics system with indigenous know-how, to attain self-sufficiency in atomic

energy programmers, started ELECTRONICS CORPORATION OF INDIA LIMITED on

11th April, 1967.


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2.2 HISTORY OF THE COMPANY

ECIL was setup under the Department of Atomic Energy in the year 1967 with a

view to generating a strong indigenous capability in the field of professional grade

electronics. The initial accent was on total self-reliance and ECIL was engaged in the Design

Development, Manufacture and Marketing of several products emphasis on three technology

lines viz. Computers, Control Systems and Communications. Over the years, ECIL pioneered

the development of various complex electronics products without any external technological

help and scored several 'firsts' in these fields prominent among them being country's

First Digital Computer

First Solid State TV

First Control & Instrumentation for Nuclear Power Plants

First Earth Station Antenna

The company played a very significant role in the training and growth of high caliber

technical and managerial manpower especially in the fields of Computers and Information

Technology. Though the initial thrust was on meeting the Control & Instrumentation

requirements of the Nuclear Power Program, the expanded scope of self-reliance pursued by

ECIL enabled the company to develop various products to cater to the needs of Defense,

Civil Aviation, Information & Broadcasting, Telecommunications, Insurance, Banking,

Police, and Para-Military Forces, Oil & Gas, Power, Space Education, Health, Agriculture,

Steel and Coal sectors and various user departments in the Government domain. ECIL thus

evolved as a multi-product company serving multiple sectors of Indian economy with

emphasis on import of country substitution and development of products & services that are

of economic and strategic significance to the country.

Electronics Corporation of India Limited (ECIL); a spin of BABA ATOMIC

RESEARCH CENTER (B.A.RC), was incorporated in 1987. The company is under the

administrative control of the Department of Atomic Energy (DAE).

The main objective of ECIL was to support the DAE by manufacturing electronic

instruments & systems, components, control panels & equipment for countrys nuclear


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programme. The emphasis has all along been in self-reliance & indigenization in the chosen

technical fonts, supported by collaboration with global players on selective based over the

past three decades. The company has diversified its operations into other fields, such as,

computers, communication for other sectors such as oil & gas energy, telecom, civil aviation

& defense

Comparing last few years the position of the company, has been increasing. As

per the current information, the company has taken up lots of changes as well as

improvements in their profits.

The year 1996-97 has been another difficult year for the company. Production of Rs.

292.12 Crores & income (gross) of Rs. 356.03 Crores could be achieved during the year as

compared to the production & income of Rs. 320.65 Crores & Rs. 360.55 Crores respectively

for the previous year.

While the company could record profitable results throughout the 8th plan period

(92-97), the same could not be sustained in the year 1997-98, which turned out to be difficult

year both in terms of growth & profitability.

The year 1998-99 has been an exceptionally difficult on for the company due to

various extraneous reasons beyond control. The company was confronted with constraints in

procurement of certain custom-built components from foreign sources which affected

execution of order around Rs. 60 Crores, which were included in the years production

schedule.

Consequently, the company could achieve a production of Rs. 237.86 Crores only

as against a target of Rs. 380 Crores & Rs. 310.53 Crores achieved in the previous year.

Similarly, the income for the year worked out to be Rs. 256.94 Crores as compared to Rs.

347.85 Crores achieved in the previous year. This huge shortfall in unprecedented figures for

production & income in the previous year were Rs. 226.64 Crores respectively.


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The continued commitment to achieve a profitable growth & the associated

step initiated by the company resulted in consolidation of the turnover process, during the

year 2000-01. The performance shows 25% growth over the previous year in both production

& income fronts. The company recorded an impressive growth & crossed of Rs. 500 Crores

mark by achieving a production of Rs. 505.41 Crores, an achievement of 104% against the

target of Rs. 485 Crores.

The financial results for the year indicate a Net Profit of Rs. 1209 Crores, which is

the highest ever posted by the company in its history. The turnaround achievement in 2000-

01 was further strengthened by a 20% growth achieved a turnover for the second year in

succession. Against a target of Rs. 580 Crores, the company achieved a turnover of Rs. 681

Crores. The company made pre-tax profit of Rs. 79.34 Crores compared to 12.09 Crores

achieved in 2000-2001. All the accumulated losses of the company are wiped.

Out of a reserve of Rs. 20.53 Crores is created. The company redeemed all its

loans and is a debt free company, as on 31-03-2002.

During the year, the company registered an impressive growth by reaching a

turnover Rs. 1010 Crores against a target of Rs. 655 Crores, implying growth rate of 48%

over the previous year. The financial results indicate a pre-tax profit of Rs. 80.58 Crores after

making a provision of 01-01-1997 to 31-12-2000, as compared to Rs. 79.34 Crores, during

the year 2001-2002.

2.3 PRODUCTS

The company is organized into the following business divisions & their principal

Products are as follows:


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1. Instrument & System Division (ISD):

Nuclear Industrial & Analytical Instruments, Security System Comprising CCTV,

Fire Alarm & x ray baggage inspection system, electronic energy meters, special

systems for defense, fiber optic based system & card access systems.

2. Servo Systems Division (SSD):

Precision servo systems for applications in defense & railways.

3. Communication System Division (CND):

Radio communication systems comprising of HF/VHF/UHF trans-receiver, catering

to the needs of Army, Navy, Air Force & Air Traffic Control, Satellite TV Receiver

only systems for B Sector, Special MW computers & electronic warfare systems.

4. Strategic Electronic Division (SED):

Special Defense Products

5. Telecom Division (TCD):

Telecommunication Equipment like switching products, transmission products, access

products & telecom administration products.

6. Antenna Products Division (APD):

Design, Manufacture & commissioning of various types of antenna system & turkey

SATCOM network projects.

7. Supervision Control & Data Acquisition Division (SCDAD):

The supervisory systems, supervisory control & automatic projects & industrial

control.

8. Business System Division (BSD):


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Computer Hardware products & large networking system.

9. Software Consultancy Division (SCD):

Software Consultancy Services

10. Components Division (CD):

Hybrid Micro-Circuits, Semi-Conductor Components, Ceramic Components,

Potentiometers, Tantalum Capacitors, Thermal Batteries, Printed Circuit Boards.

11. Special Products Division (SPD):

Various Time Fuses & other types for Army & Navy.

12. Control & Automation Divisions (CAD):

Simulators for thermal & nuclear power plant, data acquisition systems, control &

instrumentation equipment for nuclear & thermal power plant, operator information

systems.

13. Customer Support Division (CSD):

Spares & maintenance services for computers.

14. Industrial Control & Consumer Electronics Group (ICG)

15. Computer Education Division (CED)

16. IT Education Services:


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The business groups are supported by corporate facilities like standards & quality

assurance, corporate R&D, personnel & finance and accounts. Over the year,

company has acquired & maintained the following infrastructure facilities:

Standard Collaboration Laboratory:

Antenna Test Range

ASIC/VLSI Design Facility

Wide variety of computing environment

Country wide network for service support

Antenna Spinning Facility

All the businesses of ECIL have obtained ISO 9001 certification for

design & manufacture of thick film resistors & hybrid micro circuits in June 1995.

Control Systems group has achieved ISO 9001 certification for design,

manufacture, supply, installation instrumentation systems in August 1995. Other

business groups have taken steps to apply for ISO 9000 quality system

certification.

Broadly, the present range of ECIL is as follows:

1. Computer & IT

Software Products

Parallel Processing Systems

LAN Solutions

EDP Packages


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Computer Hardware

2. Radio Communication

Micro Wave Components

VHF Radio Equipments

Multi-Access Rural Radio

3. Instruments

Analytical Systems

Integrated Security

Nuclear & Nuclear Industrial Systems

4. Antenna Products

Earth Station Antenna

V-SAT Products

Satellite Earth Station

Line of Sight(LOS) Antenna

5. Fuse Products for Antennas

Fuse Products for defense

Tantalum Capacitors & Potential Meters

Hybrids


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6. Telecom

Telephone Billing Systems

Max Electronic Exchange

Special Tele-Equipment

Message Switching Systems

7. Strategic Electronics

Tank Communication Products

Air-Traffic Control Display Systems

Dependent Surveillance System

8. Electronic Welfare (EW) Products

9. Others

Control & Automation

Process Control DSC Systems

DAS & SCADA

Energy Management Systems

Fiber Optic Communication System for Railway Signaling


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ECIL BRANCHES


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2.4 MISSION AND OBJECTIVES OF ECIL

MISSION

ECILs mission is to consolidate its status as a valued national asset in the area of

strategic electronics with specific focus on atomic energy, defense, security & such critical

sectors of national importance.

In the context of corporate governance, the firm is faced with the problem of meeting

two conflicting needs. To maintain a large size of inventory for efficient & smooth

production & sales operations. To maintain a minimum investment in inventories to

maximize profitability.

Both excessive & inadequate inventories are not desirable. These are two danger

points with in which the firm should operate. The objective of corporate governance should

be to determine & maintain optimum level of investment. The optimum level of inventory

will lie between the two danger points of excessive & inadequate inventories.

The firm should always avoid a situation of over investment or under investment in

inventories. The major dangers of over investment are:

Unnecessary tie-up of the firms funds & loss of profit

Excessive carrying costs

Risk of Liquidity

The excessive level of inventories consumes funds of the firm, which cannot be used

for any other purpose & thus, it involves an opportunity cost. The carrying costs, such

as the cost of storage, handling, insurance, recording & inspection also increase in

proportion to the volume of inventory.

OBJECTIVES:


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To continue services to the countrys needs for the peaceful uses, Atomic Energy,

Special & Strategic requirements of defense & space, electronics security systems &

supports for civil aviation sector.

To establish newer technology products such as container scanning systems &

explosive detectors.

To explore new avenues of business & work for growth in strategic sectors, in

addition to working for realizing technological solutions for the benefit of society in

areas like Agriculture, Education, Health, Power, Transportation, Food, Disaster

Management etc.,

To progressively improve share holders value in the company.

To strengthen the technology base, enhance skill base & ensure succession planning

in the company.

To re-engineer the company to become nationally & internationally competitive, by

paying particular attention to deliver, cost & quality in all its activities.

To consciously work for finding export markets for the companys products.

ACHIEVEMENTS, AWARDS AND FELICITATIONS:

As a recognition of the incredible turn around achieved and for its pioneering contribution

in the field of R&D, the company received a number of awards, most prominent of them are:

PADMA BHUSHAN award (1972) to Ayyagari Sambhashiva Rao, a recognition

given to personalities of great national stature, when he was then chairman and

managing director of ECIL and director of atomic energy commission.

Dr. A. S. Rao has been felicitated as Electronics man of venture in the year 2001.

ECIL received national award for excellence in the electronics in 2003.

SCOPE (Standard Conference of Public Enterprises) award for excellence and

outstanding contribution to public sector management.


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Certificate of merit for excellence in MOU performance, from the ministry of heavy

industries.

2.5 INDUSTRY PROFILE

The ELECTRONIC INDUSTRY is supported by the supply of raw materials from the

petrochemical industry, without which it may grind to a halt. The petrochemical industry is

an aid to many of the end-use product industries. It is one of the major supplier of number of

basic materials which is used by different other industries to manufacture their products. It

has become one of the major sources of growth for the economy.

The fastest growing sector is the it and electronic industry sector. The hardware

components serve as an important support to this stupendous growth. The growth of this

sector heavily depends on the supply of various intermediary products. The electronic

industry will not be able to perform without the components from the petrochemical industry.

The intermediary products assure better electrical insulation and safety, feasibility in

assembling, better design, and a superb capacity of data-storage, and reduction of mass of

components.

It is due to petrochemicals that the electronic industry has grown by leaps and

bounds in the previous decade. the progress in the communication technology is the result of

the improvements in the hardware devices such as radios, television sets, telephones,

computers, CD players, DVD players, digital cameras, mobile phones, laptops, palmtops, etc.

the circuitry of every electronic device is its most vital element. the circuitry mainly consists

of micro processors, integrated circuits, printed circuits, and connectors - all derived from

base materials of petrochemical products. Even the assembly and the housings are made out

of styrene plastics. Many of the cleansers used for cleaning the contact pins and lenses of the

optical drives are based on petrochemical products.

The electronics industry in India took off around 1965 with an orientation towards

space and defense technologies. This was rigidly controlled and initiated by the government.

This was followed by developments in consumer electronics mainly with transistor radios,


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black & white TV, calculators and other audio products. Color televisions soon followed. In

1982-a significant year in the history of television in India - the government allowed

thousands of color TV sets to be imported into the country to coincide with the broadcast of

Asian games in New Delhi. 1985 saw the advent of computers and telephone exchanges,

which were succeeded by digital exchanges in 1988. The period between 1984 and 1990 was

the golden period for electronics during which the industry witnessed continuous and rapid

growth.

Current scenario

In recent years the electronic industry is growing at a brisk pace. It is currently worth

$10 billion but according to estimates, has the potential to reach $ 40 billion by 2010. The

largest segment is the consumer electronics segment. While is largest export segment is of

components.


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CHAPTER-3

THEORETICAL BACKGROUND ON CORPORATE

GOVERNANCE

3.1 Introduction

3.2 What is Corporate Governance

3.3 What went wrong in Recent Past

3.4 Concept of Corporate Governance

3.5 Aims of Corporate Governance

3.6 Results of Good Corporate Governance

3.7 Clause 49 of the Listing Agreement

3.8 Committees Related to Corporate Governance

3.9 Case Study Related to Corporate Governance


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THEORITICAL BACKGROUD

Introduction:

Good Corporate Governance practices are important to encourage investment in a country.

Companies in global economy, where access to capital markets is in the interest of economy,

assume greater significance. While the report of Kumar Mangalam Birla committee on

Corporate Governance opined that a strong Corporate Governance was a prerequisite for the

growth of capital market and was an important instrument of investor protection, studies of

various companies the world over revealed that markets and investors did take notice of well

governed companies, responded positively to them and rewarded such companies with higher

valuations as reflected in stock prices. Good Corporate Governance leads to the efficiency of

a business enterprise, to the creation of wealth of stakeholders and to the countries economy.

The need is for the entire corporate world to follow the principles of Corporate Governance.

There is to need to monitor the functioning of Corporates for guarding the

interest of investors and creditors. With increasing awareness and access to information,

investors do not solely depend upon regulators to protect them. They are conscious of their

rights and strive to maximize their wealth, so does a company. The key differences, with

everything else being common, will be the ability to create self driven, self-accessed, self-

regulated organization with a conscience. This is ultimately all about Corporate Governance

in India and elsewhere.

Also the Satyam scandal has allowed us to look at the fundamental aspects of

Corporate Governanceon whose behalf the company is governed, and how we can

distribute power to ensure the longevity and effectiveness of the institution


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What is Corporate Governance?

Corporate Governance is the system by which companies are directed and

controlled

Cadbury Report (UK), 1992

to do with Power and Accountability: who exercises power, on behalf of whom,

how the exercise of power is controlled.

Sir Adrian Cadbury, in Reflections on Corporate Governance, Ernest Sykes Memorial

Lecture, 1993

A Canadian Definition :

the process and structure to direct and manage the business and affairs of the

corporation with the objective of enhancing shareholder value, which includes

ensuring the financial viability of the business.

Where were the Directors? Guidelines for Improved Corporate Governance in

Canada, TSE, 1994

An OECD Definition:

Corporate governance involves a set of relationships between a companys

management, its board, its shareholders and other stakeholders also the structure

through which objectives of the company are set, and the means of attaining those

objectives and monitoring performance are determined.

Preamble to the OECD Principles of Corporate Governance, 2004


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An Indian Definition:

fundamental objective of corporate governance is the enhancement of the long-

term shareholder value while at the same time protecting the interests of other

stakeholders.

SEBI (Kumar Mangalam Birla) Report on Corporate Governance, January,

2000

A Gandhian Definition:

Trusteeship obligations inherent in company operations, where assets and resources

are pooled and entrusted to the managers for optimal utilization in the stakeholders

interests.

Some Further Definitions:

Corporate governance is essentially about leadership:

Leadership for efficiency;

Leadership for probity;

Leadership with responsibility; and

Leadership which is transparent and which is accountable.

And according to me:

Corporate Governance is:


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has become more pronounced in the present scenario, and has indeed exceeded the axiom of

wealth maximization.

Corporate G

What went wrong in the recent past?

Environment

Loss of moral fibre of corporations

Business environment characterized by need to compete with the new economy

Boards

Fundamental weaknesses in business models sought to be compensated by adoption

of aggressive accounting practices


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Concept of Corporate Governance:

The concept of corporate governance cannot be completed without acknowledging the

contribution of the most celebrated scholar of ancient India, Kautilya. One of the worlds most

compete manuscript on the science of governance was penned by Kautilya in the third

century BC. Kautilyas discussions on administrations and management are strikingly

modern and scientific covering almost all facets of governance. According to him, an ideal

king is one for whom Praja sukhe, sukhamragyam, Prajanan ca hite hitam, Naatman priyam

hitam ragyan Prajanan tu piyam hitam, i.e., in the happiness and well-being of the subjects

lies the well-being of the king, in the welfare of the subjects is the welfare of the king, what is

desirable and beneficial to the subjects and not his personal desires and ambitions is desirable

and beneficial for the king. He further elaborates that a king has fourfold duty as Raksha or

protection, vridhi or enhancement, palana or maintenance, yogakshema or safeguard. It is the

duty of the king to protect the wealth of the state and its subjects. If we for a moment assume

todays business CEO or corporate board as king and the shareholders as the subject, it brings

out the quintessence of corporate governance as public good should be ahead of private good

and companys resources should not be used for personal gains .The four duties in corporate

parlance would imply protection of shareholders wealth enhancement of wealth by proper

utilization of assets, maintaining the wealth (without appropriating it otherwise)and

safeguarding the interests of all stakeholders.

Aims of Corporate Governance


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Fulfilling long-term strategic goals of owners

Taking care of the interests oh employees

A consideration of the environment and local community

Maintaining excellent relations with customers and suppliers

Proper compliance with all the applicable legal and regulatory requirements.

Following extracts fro Kumar Mangalam Birlas report on corporate governance brings

out the cardinal principle of corporate governance-Strong corporate governance is

indispensable to resilient and vibrant capital markets and is an important instrument of

investor protection .It is the blood that flow within the veins of transparent corporate

disclosure and high quality accounting practices. It is the muscle that moves a viable and

accessible financial reporting structure.

Results of Good Corporate Governance

Enhancing the value for stakeholders.

A well-understood corporate vision/mission statement.

A broad-based board, comprising of directors with professional and expert acumen

with independent dispositions.

Establishment of relevant committees of the board, with their roles clearly defined, to

oversee functions of the company in critical areas.

Setting standards for good corporate practices to-

1. Ensure a transparent and fair relationship between the stakeholders and the company,

2. Institute a comprehensive management evaluation system;


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3. Proactively eliminate investor complaints and evolve for redressal of the grievances (of

the customers, investors and borrowers),and,

4. Institute systems and processes to ensure compliance with the statuses and laws

concerning the company.

A clearly enunciated code of conduct for dealing with the stakeholders.

Effective systems of internal control, monitoring and reporting mechanisms.

Communication to the shareholder to ensure a high degree of transparency.

The board to establish appropriate policies and monitor the performance at all levels

organization including self-evaluation.

Components of Corporate Governance

The main constituents of Corporate Governance are the shareholders, the board of directorsand the management. The Board of Directors is responsible for the governance of thecompany. The board members set the strategic objectives, frame financial as well as other

policies and oversee the implementation thereof, control the financial aspects and present thedirectors report on the activities and the progress of the company to the shareholders towhom they are accountable. The boards actions are subject to applicable laws, rules andregulations. The shareholders role in enabling good governance is to identify and elect thedirectors as well as auditors of the company and satisfy themselves as well as the auditors ofthe company and satisfy themselves that an appropriate governance structure is in place. The

responsibilities of the senior management include ensuring that control systems are in place

Board ofBoard of

DirectorsDirectors

ShareholdersShareholders

ManagementManagement


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to achieve the objectives laid down by the Board and help the board to discharge itsresponsibilities to the shareholders effectively.

Is Corporate Governance a Business Ethic?

Yes, Corporate governance is about ethical conduct in business. Business ethics areconcerned with the core values and principles that enable a person to choose between rightand wrong and, therefore, select from alternative courses of action. However, ethicaldilemmas may arise from conflicting interests of the parties involved. Managers have to, thus,make decisions based on a set principles influenced by the values, context and culture of theorganization. Ethical leadership is desirable for business as the organization is seen toconduct its business in line with the expectations of all concerned stakeholders.

Independent directors of the company, i.e., board, are pivotal to the implementation ofcorporate governance code and achievement of its desired results.

Independent directors are expected to take active interest in taking part in the companysboard functions including policy formulation and strategic business decisions.The board should function through committees, comprising of most of the directors, who

are independent.These committees could be:

Audit committee

Remuneration committee

Nomination committee

Shareholders committee

Other committees specific to companys needs.

Audit committees exercise responsibility in three important areas:1. Financial reporting2. Corporate Governance3. Corporate control

In financial reporting ,the responsibility of audit committee should be to provide assurance tothe board about financial disclosures made by the management to reasonably portray thecompanys financial health, results of operations, true and fair view of state of affairs and

profitability, and the companys future plans and long-term commitments. The role of auditcommittees in corporate relevant laws and regulations, is conducting its affairs ethically, andis maintaining effective control against any conflict of interest and malafide practices .In

corporate control, the audit committees responsibility should include an understanding of thecompanys key financial reporting, areas and the system of internal control and fiscalmanagement.

Regulatory Framework

Legal and regulatory framework of corporate governance mainly covers the legal regime asstipulated in the Securities and Exchange Board of India (SEBI)guidelines and CompaniesAct (1956) covering various Indian Codes and Recommendations of committees.

Corporate Governance extends its jurisdiction beyond corporate laws. Its fundamentalobjective is not only to merely fulfill the requirements of law but also to ensure commitment


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of the board in managing the company in a transparent manner for maximizing long-termshareholder value.

It should be noted that effectiveness of any corporate governance system cannot belegislated by law alone. While several laws exist to take care of most of the investorgrievances, the implementation and inadequacy of penal provisions have left a lot to be

desired and this is an area which requires significant improvement.The real onus of achieving the desired level of corporate governance, therefore, lies in

the proactive initiatives taken by the companies and their board internally and not by way ofexternal measures.

In the Indian context, there is no single apex a regulatory body which can be said tobe the regulation of corporate, but there exists a coordination mechanism among variousfunctional regulators.

For example, in India, we have different regulators for the following:

Corporates (MCA)

Capital Market and Stock Exchanges (SEBI)

Money Market and Banking (RBI)

InsuranceLife and Non-Life (IRDA)

Communication (TRAI)

Foreign business (FIBP)

Imports and Exports (FEMA, DGFT)

Professions (Professional Institutes such as ICAI, ICSI, ICWAI, etc.).

CCG & C

Corporat

Drive

R


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Global Trends

Behind any corporate success or corporate failure lies the reason to it in the form of corporategovernance. Good governance in any corporate the world over is the interplay of legalrequirements, the ethics, effectiveness, board relationships and group dynamics. CorporateGovernance is common to one and all, be it India, China, Africa, or the other advancedcountries such as the US or the UK. In the corporate sector, governance has been extrapolatedto cover issues such as corporate sustainability, social and financial inclusion, socialresponsibilities or even social inclusion, etc .In fact, every such issue hinges on goodgovernance, be it any part of the world. Since India and its economy are no longer isolatedconstitute an important part of the global economy, it is high time that Indian Companies alsomarched towards global best practices. While operations, capital and risk management,technological innovations and customer satisfaction shall be the drivers of growth, it is going

to be corporate governance which shall lead Indian Corporate to match best businesspractices on the globe.

Comparison of Board structure Indian top 50 Vs U.S. top 50 Key Findings

Parameter India (Nifty Fifty companies) US (top 50 out of NYSE 100index)

Ownership pattern

Board size

Board independence

Executive directors in

board

Chairman and CEO

Lead independent director

48% of Indian companies havelargest shareholder holdingover 50%

Largest board size 17. smallest 5

44% of the top 50companies have morethan 12 directors

58% of companieshave a board majority

of independentdirectors

12% have less than1/3rd of their directorsindependent

In 35 companies 50% of thedirectors or more areexecutive directors

60% have separate Chairman

and CEO

Largest shareholder holds lessthan 10% in all cases

Largest board size 18.smallest 10

66% of the top 50companies have morethan 12 directors

All companies have a boardmajority of independentdirectors

Boards of 49 companies out of50 have less than 25%executive directors

Only 20% have separate

Chairman and CEO


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Board committees

3 companies have leadindependent directors

All companies have

audit committees 54% have fullyindependent AuditCommittees

33 companies haveremunerationcommittees of these14 fully independentand 16 have majorityindependentcommittees

9 companies havenominationcommittees 6 arefully independent and3 have majorityindependentcommittees

20 companies have leadindependent directors

All companies have fullyindependent auditremuneration and nominationcommittees

Management vs. GovernanceMany people often mistakes the two terms to be synonymous. Even well-managedcorporations could be badly governed and lead to corporate failure. While governance has tocome fro the topmost layer-the-board-the management functions one layer beneath the board,the executive or top management. The well-governed model will come from more new ideas,more adaptable decision making and better accountability. Companies in India will have toshift from best managed companies to best governed companies where the boards role will

be to foster effective decisions and reverse failed policies.

Board EmpowermentEffective board empowerment is missing on Indian corporate boards. This emanates from thecomposition itself which in most public sector units is government controlled. In contrast,

private sector company boards are more effective, efficient contributing, responsive andempowered. This gets reflected in quality qualification of director, selection process,contributions made and even the sitting fees paid to them. While private sector boards could

be said to be assets in many public sector cases in India, one finds many boards devoid ofgood people. Each board is a mix of all variants which dilutes the quality.

The mis-governance in the recent example of Punjab and Sindh Bank is a glaring case before

us. towards global best practices, Indian companies are expected to move in the direction ofboard empowerment so that boards can be effective. One should not have any reservation

Source: Crisil Report on Corporate Governance


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about empowering outside directors, but this is the only way to take out the best from them;of course with a defined code of conduct in place-which we behave. There have been severalinstances where independent directors participate more effectively in the board meetings andCEOs in such entities do not find their powers diminished. The practice of empowering the

boards is followed in companies such as Dayton Hudson Corporation, Monsanto, and General

Motors, etc. One need to be reminded that corporate governance, at its core, is not aboutpower, but about ensuring that decisions are made effectively.

Greater emphasis on

leadership by example

What is the Curr

CLAUSE 49 OF THE LISTING AGREEMENT

Clause 49 of the listing agreement

SEBI revise Clause 49 of the Listing Agreement pertaining to corporate governance videcircular date October 29th, 2004, which superseded all other earlier circulars issued by SEBIon this subject. All existing listed companies were required to comply with the provisions ofthe new clause by 31st December 2005.

The major provisions included in the new Clause 49 are:

The board will lay down a code of conduct for all board members and senior

management of the company to compulsorily follow.

The CEO an CFO will certify the financial statements and cash flow statements of the

company.


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If while preparing financial statements, the company follows a treatment that is

different from that prescribed in the accounting standards, it must disclose this in the

financial statements, and the management should also provide an explanation for

doing so in the corporate governance report of the annual report.

The company will have to lay down procedures for informing the board members

about the risk management and minimization procedures.

Where money is raised through public issues etc., the company will have to disclose

the uses/ applications of funds according to major categories ( capital expenditure,

working capital, marketing costs etc) as part of quarterly disclosure of financial

statements.

Further, on an annual basis, the company will prepare a statement of funds utilized forpurposes other than those specified in the offer document/ prospectus and place it before the

audit committee.The company will have to publish its criteria for making its payments to non-executivedirectors in its annual report. Clause 49 contains both mandatory and non mandatoryrequirements.

Mandatory requirements refer primarily to:

1. Board of Directors with respect to their composition, independence, procedures, code

of conduct and disclosures;

2. Audit Committee and its composition, powers, role and responsibilities;

3. Subsidiary Companies to ensure their better control and supervision;

4. Disclosures in the context of related party transctions, risk management and

minimization procedures, utilization of proceeds from Initial Public Offerings,

inverstor education and protection;

5. CEO/CFO certification regarding the correction of the financial statement and

compliance with prescribed Accounting Standards

6. Separate report on corporate Governance in the annual reports with respects to

compliance of mandatory and non mandatory requirements; and

7. Compliance certificate obtained either from the auditors or practicing company

Secretaries

Non mandatory requirements refer to those requirements which are not compulsory and canbe adopted at the discretion of the company.

These include requirements:1. Regarding the maximum tenure of the independent directors,


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2. Formation of a remuneration committee for determining the remuneration packages

for executives directors,

3. Moving towards a regime of unqualified financial statements,

4. Training of board members,

5. Evaluation of non executive board members, and

6. Establishing a mechanism for employees to report unethical behavior to the

management under a Whistle Blower Policy.

CLAUSE 49 MANDATORY REQUIREMENTS

I. BOARD OF DIRECTORS

A. Composition of Board:

1. The Board of directors of the company shall have an optimum combination of

executive and non-executive directors with not less than fifty percent of the

board of directors comprising of non- executive directors .

2. Where the Chairman of the Board is non- executive directors, at least one third

of the Board should comprise of independent directors and in case he is an

executive directors, at least half of the Board should comprise of independent

directors.

3. For the purpose of sub clause (ii) the expression independent director shall

mean a non executive director of the company who:

a. Apart from receiving directors remuneration , does not have any material

pecuniary relationships or transactions with the company, its promoters, its

directors its senior management or its holding company, its subsidiaries

and associated which many affects independence of the director.

b. Is not related to promoters or persons occupying managements positions at

the board level or at one level below the board;

c. It not been executive or was not partner or an executive during the

preceding three years, of any of the following:

d. Is not a partner or an executive or was not partner or an executive during

the preceding three years, of any of the following:

i. The statutory audit firm or the internal audit firm that is associated

with the company, and ;


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ii. The legal firm(s) and consulting firm(s) that have a material

association with the company

e. Is not a material supplier, service provider or customer or a lessor or lessee

of the company, which may affect independence of the directors; and

f. is not a substantial shareholder of the company i.e owning two percent or

more of the block of voting shares.

4. Nominee directors appointed by an institution which has invested in or lent to

the company shall be deemed to be independent directors. However if the Dr.

J.J. irani Committee recommendations on the proposed new company law are

accepted, then directors, nominated by financial institutions and the

government will not be considered independent.

B. Non executive directors compensation and disclosures: all fees/ compensationand disclosures: all fees/ compensation , if any paid to non executive directors,

including independent directors, shall be fixed by the Board of Directors and shall

require previous approval of shareholders in general meeting. The shareholders

resolution shall specify the limits for the maximum number of stock options that

can be granted to non- executive directors, including independent directors, in any

financial year and aggregate. However as per SEBI amendment made vide

circular SEBI/ CFD/DIL/CG dated 12/1/06 sitting fees paid to non-executive

directors as authorized by the Companies Act 1956, would not require the

previous approval of shareholders.

C. Other provisions as to Board and Committees:

1. The board shall meet at least four times a year, with a maximum time gap of

three months between any two meetings. However SEBI has amended the

clause 40 of the listing agreement vide circular SEBI/CFD/DIL/CG dated 12-

1-06 as per which the maximum gap between two board meetings has been

increased again to 4 months.

2. A director shall not be a member in more than 10 Audit and / or Shareholders

grievance Committee or act as chairman of more than five Audit ShareholdersGrievance committee across all companies in which he is a director.

Furthermore it should e mandatory annual requirement for every director to

inform the company about the committee positions he occupies in other

companies and notify changes as and when they take place.

D. Code of conduct:

1. The Board shall lay down a code of conduct for all Board members and senior

management of the company. The code of conduct shall be posted the website

of the company,


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2. 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 declaration to this effect signed by CEO.

II. AUDIT COMMITTEE.

A. Qualified and Independent Audit Committee: A qualified and independent audit

committee shall be set up, giving the terms of reference subject to the following:

1. The audit committee shall have minimum three directors as members.

Two thirds of the members fo audit committee shall be independent

directors.

2. All members of audit committee shall be financially literate an at least one

member shall have accounting or related financial management expertise.

3. The chairman of the Audit Committee shall be an independent director.

4. The chairman of the Audit Committee shall be present at annual General

Meeting to answer shareholder queries;

5. The audit committee may invite such of the executives, as it considers

appropriate (and particularly the head of the finance function) to the

present at the meetings of the committee. The finance director, head of

internal audit and representative of the statutory auditor may be present as

invitees for the meeting of the audit committee;

6. The Company Secretary shall act as the secretary to the committee.

B. Meeting of Audit Committee: the audit committee should meet at least four times

in a year and not more than four months shall elapse between two meetings. The

quorum shall be either tow members or one third of the members of the audit

committee whichever is greater, but there should be minimum of two independent

members present.

C. Powers of Audit Committee: the audit committee shall have powers:

1. To investigate any activity within the terms of reference;

2. To seek information from any employee;

3. To obtain outside legal or other professional advice;

4. To secure attendance of outsiders with relevant experts, if any.


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D. Role of audit committee: the role for the audit committee shall include the

following:

1. Oversight of the companys financial reporting process and the disclosure of

its financial information to ensure that the financial statement is correct,sufficient and credible.

2. Recommending to the Board, the appointment reappointment and if required

the replacement or removal of the statutory auditor and the fixation of audit

fees.

3. Approval of payment too statutory auditors for any other services rendered by

the statutory auditors.

4. Reviewing, with the management the quarterly and annual financial statementsbefore submission to the board for approval with reference to Directors

Responsibility statement under section 217 (2AA)k, significant adjustments

made in financial statements, compliance with listing requirements, disclosure

of any related pending transaction etc.

5. Reviewing with the management performance of statutory and internal auditor

and adequacy of the internal control systems.

6. Discussion with internal auditors regarding any significant findings including

suspected frauds or irregularities and follow up thereon.

7. Reviewing the findings of any internal investigation by the internal auditors

into matters where there is suspected fraud or irregularity or a failure of

internal control system of a material nature and reporting the matter to the

board.

8. Discussion with statutory auditors before the audit commence, about the

nature and scope of audit as well as post- audit discussion to ascertain any area

of concern.

9. To look into the reason fo substantial defaults in the payments to thedepositors, debenture holders, shareholders (in case of nonpayment of

declared dividends) and creditors.

10. To review the functioning of the Whistle Blower mechanism, in case the same

is existing.

11. Carrying out any other function as it mentioned in the terms of reference of the

Audit Committee.

III. SUBSIDARY COMPANIES


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1. At least one independent director on the Board of Director of the holding

company shal be a director on the Board of Directors of a material non listed

Indian subsidiary company.

2. The audit committee of the listed holding company shall also review the financialstatements, in particular, the investment made by the unlisted subsidiary company.

3. The minutes of the Board meeting of the unlisted subsidiary company shall be

placed at the Board meeting of the listed holding company, the management

should periodically bring to the attention of the Board of Directors of the listed

holding company, a statement of all significant transaction and arrangements

entered into by the unlisted subsidiary company.

IV. DISCLOSURES

A. Basis of related party transactions:

1. A statement in summary form of transactions with related parties shall be

placed periodically before the audit committee.

2. Details of material individual transactions with related parties which are not in

the normal course of business shall be placed before the audit committee.

B. Disclosure of Accounting Treatment: where in the preparation of financial

statements, a treatment different from that prescribed in an Accounting Standard

has been followed, the fact shall be disclosed in the financial statements, together

with the managements explanation as to why it believes such alternative

treatment is more representative of the true and fair view of the underlying

business transaction in the Corporate Governance Report.

C. Board Disclosure- Risk Management: the company shall lay down procedures toinform Board members about the risk assessment and minimization procedures.

D. Proceeds from public issues, rights issues , preferential issues etc. : When money

is raised through an issue (public issues rights issues, preferential issues etc.), it

shall disclose to the Audit committee, the uses/ applications of funds by major

category (capital expenditure,, sales and marketing, working capital, etc.), on a

quarterly and annual basis.

E. Remuneration of Directors :


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1. All pecuniary relationship or transactions of the non- executive directors vis--

vis the company shall be disclosed in the Annual Report.

2. Further, certain prescribed disclosures on the remuneration of directors shall

be made in the section on the corporation governance of the Annual Report;

3. The company shall disclose the number of shares and convertible instruments

held by non-executive directors in the annual report.

4. Non executive directors shall be required to disclose their shareholding (both

own or held by/ for other persons on a (beneficial basis) in the listed company

in which they proposed to be appointed as directors, prior to their

appointment. These details should be disclosed in the notice to the general

meeting called for appointment of such directors.

F. Management: As part of the directors report or as an addition there to a

Management Discussion and Analysis report, the following should form part of

the Annual Report to the shareholders. This includes discussion on:

1. Industry structure and developments.

2. Opportunities and threats.

3. Segment wise or product wise performance

4. Outlook

5. Risks and concerns.

6. Internal control systems and their adequacy

7. Discussion on financial performance with respect to operational performance.

8. Material developments in Human resources/ industrial Relations front

including number of people employed.

G. Shareholders:

1. In case of the appointment of a new directors or reappointment of a director

the shareholders must be provided with the following information:

a. A brief resume of the director

b. Nature of his expertise in specific functional areas;

c. Names of companies in which the persons also holds directorship and the

membership Committees of the Board; and


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d. Shareholding of non executive directors.

2. A board committee under the chairmanship of a non- executive director shall

be formed to specifically look into the redressal of shareholder and investor

complaints like transfer of shares, non receipt of declared dividends etc. thiscommittee shall be designated as Shareholders/Investors Grievance

Committee.

3. To expedite the process of share transfer, Board of the company shall delegate

the power of share transfer to an officer or a committee or to the registrar and

share transfer agents. There delegated authority shall attend to share transfer

formalities and least once in a fortnight.

V. CEO/CFO CERTIFICATION

Through the amendment made by SEBI vide circular SEBI /CFD/DIL CG DATED12-1-06, in Clause 49 of the Listing Agreement, certification of intedrnal controls and

internalcontrol systemCFO/CEO would be for the purpose of financial reporting. Thus the CEO, i.e. theManaging Direcctor or Manager appointed in terms of the Companies Act, 1956 andthe CFO i.e. the whole time Finance Director or any other Person heading thefinance function discharging that function shall certify to the Board that:

1. They have reviewed financial statements and the cash flow statement for the year

and that to the best of their knowledge and belief:

i. These statements do not contain any materially untrue statement or omit

any material fact or contain statements that might be misleading;

ii. These statements together present a true and fair view of the companys

affairs and are in compliance within existing accounting standards,

applicable laws and regulations.

2. There are, to the best of their knowledge and belief, no transactions entered into

by the company during the year which fraudulent, illegal or violative of the

companys code of conduct.


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NON MANDATORY REQUIREMENTS

1. The Board : A non executive Chairman man be entitled to maintain a

chairmans office at the companys expense and also allowed reimbursement of

expenses incurred in performance of his duties Independent

directors may have a tenure not exceeding,, in the aggregate, a period of nine

years, on the Board of a company.

2. Remuneration Committee:

i. The board may set up a remuneration committee comprising of at least

three directors all of whom shall be non-executive director, with the

chairman being an independent director, t determine on their behalf and on

behalf of the shareholders with agreed terms to reference, the companys

policy remuneration packages for executive directors including pensionrights and may compensation payment

ii. The chairman of the remuneration committee could be present at the

Annual General Meeting to answer the shareholders queries

3. Shareholder Rights: A half yearly declaration of financial performance including

summary of the significant events in last six months, may be sent to each

household of shareholders,

4. Audit qualifications: Company many move towards a regime of unqualified

financial statements,

5. Training of Board Members : A company may train its 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. It should be noted that originally training and updating of

knowledge of directors was a mandatory requirements of the Murthy Committee.

But in the face of strong opposition from the industry it was made non mandatory

6. Mechanism for evaluation non executive Board Members: the performance

evaluation of non executive directors could be done by a per group comprising

the entire Board of Directors, excluding the director being evaluated and Peer

Group evaluation cold be the mechanism to determine whether the extend/

continue the terms of appointment of non-executive directors.

7. Whistle Blower Policy: the concept behind introducing a Whistle Blower Policy

is that there are many employees at various levels in an organization who feel that

something is going wrong- eg. Corruption, violation of law, wastages, unethical

practices etc. they feel helpless and frustrated as they are unable to do anythingsince they have no access to top management. They either remain silent or leave


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the job. Sometimes they may write anonymous letters to various inside and

outside authorities, leak news to newspapers or may even act as informants to

Government/ statutory agencies. It is felt that such employees should be allowed

to talk about their concerns internally, so that management can take timely action

before it is too late. This termed as blowing the whistle.

Therefore Clause 49 provides that the company may establish a mechanism foremployees to report to the management concern about unethical behavior, actual orsuspected fraud or violation of the companys code of conduct or ethics policy. Themechanism could also provide for adequate safeguards against victimisation ofemployees who avail of the mechanism and also provide for direct access to theChairman of the Audit committee in exceptional cases. Once established, theexistence of the mechanism may be appropriately communicated within theorganization.

STEPS IMPLEMENTED BY COMPANIES ACT WITH REGARD TO

CORPORATE GOVERNANCE

The Ministry of Company Affairs appointed various committees on the subject ofcorporate governance which lead to the amendment of the companies Act in 2000.These amendments aimed at increasing transparency and accountabilities of the Boardof Directors in the management of the company, thereby ensuring good corporate

governance. The dealt with the following:

1. COMPLIANCE WITH ACCOUNTING STANDARDS SECTION 210A

As per this subsection inserted by the Companies Act, 1999 every profit and lossaccount and balance sheet of the company shall comply with the accountingstandards. The compliance of Indian Accounting standards was made mandatoryand the provisions for setting up of National Committee on accounting standardswere incorporated in the Act.

2. INVESTORS EDUCATION AND PROTECTION FUND SECTION 205C

This section was inserted by the Companies Act 1999which provides that thecentral government shall establish a fund called the Investor Education and

protection Fund and amount credited to the fund relate to unpaid dividend, unpaidmatured deposits, unpaid matured Debenture, unpaid application money received

by the companies for allotment of securities and due for refund and interestaccrued on above amounts.

3. DIRECTORS RESPONSIBILITY STATEMENT- SECTION 217(2AA)

Subsection (2AA)added by the Companies Act, 2000 provides that the Boards

report shall also include a Directors Responsibility statement with respect to thefollowing matters:


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a. Whether accounting standards had been followed in the preparation of annual

accounts and reasons for material departures, if any;

b. Whether appropriate accounting policies have been applied and on consistent

basis;

c. Whether directors had made judgments and estimate that are reasonable

prudent so as to give a true and fair view of the state of affair and profit and

loss of the company;

d. Whether the directors had prepared the annual accounts on a going concern

basis.

e. Whether directors had taken proper and sufficient care for the maintenance of

adequate accounting records for safeguarding the assets of the company.

4. NUMBER OF DIRECTORSHIPA- SECTION 275

As per this section of Companies Act, 2000 a person cannot hold office at sametime as director in more than fifteen companies.

5. AUDIT COMMITTEES SECTION 292A

This section of the companies Act, 2000 provides for the constitution of auditcommittees by every public company having a paid- up capital of Rs. 5 crores ormore. Audit Committee is to consist of at least 3 directors. Two of the membersof the Audit Committee shall be directors other than managing or whole timedirector. Recommendation of the Audit Committee on any matter related tofinancial management including audit report shall be binding on the Board.

6. PROHIBITION ON INVITIN OR ACCEPTING PUBLIC DPOSIT

The Companies Act, 2000 has prohibited companies to invite/accept deposit frompublic.

7. SMALL DEPOSITOR- SECTIONS 58AA AND 58AAA

The Companies Act, 2000 had added two new sections, viz, section a 58AA and58AAA, for the protection of small depositors. These provisions are designed to

protect depositors who have invested upto Rs. 20, 000 in a financial year in acompany.

8. CORPORATE IDENTITY NUMBER

Registrar of Companies is to allot a Corporate Identity Number to each company

registered on or after November 1, 2000 (Valid circular No.)12/2000 dated 25-10-2000)


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9. POWERS TO SEBI SECTION 22A

This section added Companies Act, 2000 empowers SEBI to administer theprovisions contained in section 44 to 48, 59 to 84, 10, 109, 110, 112, 113, 116,

117, 118, 119, 120, 121, 122, 206, 206A and 207 so far as they relate to issue andtransfer ofsecurities and non payment of dividend. However, SEBIS power inthis regard is limited to listed companies.

10. DISQUALIFICATION OF A DIRECTOR- SETION 274 CLAUSE (G)

Clause (g) of Section 2i7i4, added by the companies Act, 200 disqualifies a personwho is already director of a public company which (a) has not filed the annualaccounts and annual returns for any continuous three financial years commencingon and after the first day ofApril 1999; or (b) has failed or repay its deposit or interest thereon on due date or

redeem its debentures on due date or pay dividend and such failure to continuesfor one year or more, however, the aforesaid disqualification will last for fiveyears only.

11. SECRETARIAL AUDIT SECTION383A

12. Secretarial Audit Section 383A was amended to provide for secretarial audit with

respect to companies having a paid up share capital of Rs. 10 lakhs or more but

less than, present Rs. 2 crores. As per the Companies Act, 2000 a whole time

company secretary has to file with ROC a certificate as to whether the company

has complied with all the provisions of the Act. A copy of this certificate shallalso be attached with the report of Board of Directors.

Thus, the importance of codification of good Corporate governance practices havingmandatory force cannot be mitigates. But in order to ensure implementation and compliancein true spirit, Corporate Governance practices need to be legislated by one regular or body soas to avert duplicity, confusion and uncertainty.

COMMITTEES RELATED TO CORPORATE GOVERNANCE IN INDIA

I) Kumar Mangalam Birla Committee Report [2000]:

Following CIIs initiative, SEBI set up a committee under Kumar Mangalam Birla to design

a mandatory-cum-recommendatory code for listed companies. The Birla Committee Report

was approved by SEBI in December 2000.

Mandatory and non mandatory recommendations


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The Committee debated the question of voluntary versus mandatory compliance of its

recommendations. The Committee was of the firm view that mandatory compliance of the

recommendations at least in respect of the essential recommendations would be most

appropriate in the Indian context for the present. The Committee also noted that in most of

the countries where standards of corporate governance are high, the stock exchanges have

enforced some form of compliance through their listing agreements.

The Committee felt that some of the recommendations are absolutely essential for the

framework of corporate governance and virtually form its core, while others could be

considered as desirable. Besides, some of the recommendations may also need change of

statute, such as the Companies Act, for their enforcement. In the case of others, enforcement

would be possible by amending the Securities Contracts (Regulation) Rules, 1957 and by

amending the listing agreement of the stock exchanges under the direction of SEBI. The

latter, would be less time consuming and would ensure speedier implementation of corporate

governance. The Committee therefore felt that the recommendations should be divided into

mandatory and non- mandatory categories and those recommendations which are absolutely

essential for corporate governance, can be defined with precision and which can be enforced

through the amendment of the listing agreement could be classified as mandatory. Others,

which are either desirable or which may require change of laws, may, for the time being, be

classified as non-mandatory

II) Naresh Chandra Committee Report [2002:]

In August 2002, DCA appointed Naresh Chandra Committee to examine various corporate

governance issues. The Committee was entrusted to analyse and recommend changes, to the

issues related to the statutory auditor-company relationship, certification


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of accounts and financial statements by the management and directors; and role of

independent

directors.

Corporate governance is the acceptance by management of the inalienable rights of

shareholders as the true owners of the corporation and of their own role as trustees

on behalf of the shareholders. It is about commitment to values, about ethical

business conduct and about making a distinction between personal and corporate

funds in the management of a company.

It was the belief of the Securities and Exchange Board of India (SEBI) that efforts to

improve corporate governance standards in India must continue. This is because

these standards themselves were evolving in keeping with market dynamics.

Accordingly, the Committee on Corporate Governance (the Committee) was

constituted by SEBI, to evaluate the adequacy of existing corporate governance

practices and further improve these practices. The Committee comprised members

from various walks of public and professional life. This includes captains of industry,

academicians, public accountants and people from financial press and from industry

forums.

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 Committees

This report contains 30 pages and two enclosures

Enclosures consist of 10 pages

recommendations in the final report were selected based on parameters including

their relative importance, fairness, accountability, transparency, ease of

implementation, verifiability and enforceability.


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The key mandatory recommendations focus on 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; and stock holder approval and

improved disclosures relating to compensation paid to non-executive directors.

Non-mandatory recommendations include moving to a regime where corporate

financial statements are not qualified; instituting a system of training of board

members; and the evaluation of performance of board members.

The Committee believes that these recommendations codify certain standards of

good governance into specific requirements, since certain corporate responsibilities

are too important to be left to loose concepts of fiduciary responsibility. When

implemented through SEBIs regulatory framework, they will strengthen existing

governance practices and also provide a strong incentive to avoid corporate failures.

Some people have legitimately asked whether the costs of governance reforms are

too high. In this context, it should be noted that the failure to implement good

governance procedures has a cost beyond mere regulatory problems. Companies that

do not employ meaningful governance procedures will have to pay a significant risk

premium when competing for scarce capital in todays public markets.


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III) Narayana Murthy Committee Report [2003]:

SEBI Committee on Corporate Governance was constituted under the Chairmanship of N. R.

Narayana Murthy, to look into:

governance issues / review Clause 49,suggest measures to improve corporate

governance standards.

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.

The terms of reference of the committee were to:

review the performance of corporate governance; and

determine the role of companies in responding to rumour and other price sensitive

information circulating in the market, in order to enhance the transparency and integrity of

the market.

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.


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The committee's recommendations in the final report were selected based on parameters

including their relative importance, fairness, accountability, transparency, ease of

implementation, verifiability and enforceability.

The key mandatory recommendations focused on:

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; and

Stock holder approval and improved disclosures relating to compensation paid to non-

executive directors.

Non-mandatory recommendations included:

Moving to a regime where corporate financial statements are not qualified;

Instituting a system of training of board members; and

Evaluation of performance of board members.

As per the committee, these recommendations codify certain standards of 'good governance'

into specific requirements, since certain corporate responsibilities are too important to be left

to loose concepts of fiduciary responsibility. Their implementation through SEBI's regulatory

framework will strengthen existing governance practices and also provide a strong incentive

to avoid corporate failures.

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Corporate Governa Main

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