Final - Ethics Project

8/7/2019 Final - Ethics Project

http://slidepdf.com/reader/full/final-ethics-project 1/49

Corporate

Governance ² AnIndian

Experience

Upasana Gupta (15911)

Diwakar Anand (15912)

Skiti Lakhmani (15926)

Ashima Sehgal (15933)

BFIA 3

Shaheed Sukhdev College of

Bu ine tudie



:It is easy to dodge our responsibilities, but we cannot

dodge the consequences of dodging our responsibilities .9

Josiah Charles Stamp(English Economist and President of the Bank of England)

Term Paper for Business Ethics

Submitted byUpasana Gupta (15911)

Diwakar Anand (15912)

Skiti Lakhmani (15926)

Ashima Sehgal (15933)

BFIA III

Corporate Governance ² An Indian Experience



Ack wl g m s

We would like to take this opportunity to thank Ms. Achint Arora, who gave us the opportunity to work

on this project and mentored us through our course of it.

We would also like to express our gratitude towards Mr. Suresh Anand, CA, Sachit Khera, Article,

KPMG and Karan Khera, Article, AS Associates, for enhancing our understanding of our topic, and

helping us gain an insight into the way the corporate world observes corporate governance. In the end,

we would also like thank the library staff who helped us find journals, magazines and books related to

our study.

The project would not have been conceived and executed without your support. Thank you all.



Contents

S.No. Particulars Page1. INTRODUCTION 1

2. CORPORATE GOVERNANCE: INDIAN

PERSPECTIVE

4

3. CII CODE, 1998 6

4. KUMAR MANGALAM BIRLA COMMITTEE REPORT,

1999

10

5. GOT ETHICS? (INFOSYS CASE STUDY) 16

6. NARESH CHANDRA COMMITTEE REPORT, 2002 24

7. NARAYANA MURTHY COMMITTEE REPORT, 2003 28

8. REVISED CLAUSE 49 OF THE LISTING

AGREEMENT

32

9. DR. J J IRANI RECOMMENDATIONS, 2005 40

10. CURRENT SCENARIO 46

11. CONCLUSION 51

12. ANNEXURES



1

Introduction

The subject of corporate governance leapt to global business limelight from relative obscurity after a string

of collapses of high profile companies. Enron, the Houston, Texas based energy giant, and WorldCom, the

telecom behemoth, shocked the business world with the magnitude of their unethical and illegal operations.

Worse, they seemed to indicate only the tip of a dangerous iceberg. While corporate practices in the US

companies came under attack, it appeared that the problem was far more widespread. Large and trusted

companies from Parma at in Italy to the multinational newspaper group Hollinger Inc., revealed significant

and deep-rooted problems in their corporate governance. Even the prestigious New York Stock Exchange

had to remove its director, Dick Grasso, amidst public outcry over excessive compensation. It was clear that

something was amiss in the area of corporate governance all over the world.

And while these high-profile corporate governance failures have brought the subject to the forefront, the

issue has always been central to finance and economics.

Not surprisingly, it is particularly important for developing countries, since it is fundamental to financial and

economic development. Recent research has established that financial development is largely dependent on

investor protection in a country. Effective corporate governance systems promote the development of strong

financial systems, which, in turn, have an unmistakably positive effect on economic growth and poverty

reduction. It also enhances access to external financing by firms, leading to greater investment, as well as

higher growth and employment. Poor corporate governance also hinders the creation and development of

new firms.

Further, good corporate governance lowers of the cost of capital by reducing risk, and creates higher firm

valuation, once again boosting real investments. It also ensures better resource allocation, and the return on

assets (ROA) has been shown to be about twice as high in the countries with the highest level of equityrights protection as in countries with the lowest protection. Finally, good corporate governance can remove

mistrust between different stakeholders, reduce legal costs and improve social and labour relationships and

external economies like environmental protection.

The central issue to corporate governance is the nature of the contract between shareholder representatives

and managers telling the latter what to do with the funds contributed by the former. The shareholders do not

have the expertise or the inclination to run the business, so these must go to management. The efficient limits

to these powers constitute much of the subject of corporate governance. The reality is even more

complicated and biased in favour of management.

In real life, managers wield an enormous amount of power in joint-stock companies and the commonshareholder has very little say in the way his or her money is used in the company. Most shareholders do not

care to attend the General Meetings to elect or change the Board of Directors, and often grant their ³proxies´

to the management. Even those that attend the meeting find it difficult to have a say in the selection of

directors as only the management gets to propose a slate of directors for voting.

Often the CEO himself is the Chairman of the Board of Directors as well. Consequently the supervisory role

of the Board is often severely compromised and the management, who really has the keys to the business,



2

can potentially use corporate resources to further their own self- interests rather than the

interests of the shareholders.

Common areas of management action that may be sub-optimal or contrary to shareholders¶ interests (other

than outright stealing) involve excessive executive compensation, transfer pricing (i.e. transacting with

privately owned companies at other-than- market rates to siphon off funds), managerial entrenchment (i.e.

managers resisting replacement by a superior management) and sub-optimal use of free cash flows (i.e. the

use to which the managers put the retained earnings of the company). In the absence of profitable investment

opportunities, these funds are frequently squandered on questionable empire-building investments and

acquisitions when their best use is to be returned to the shareholders.

Keeping a professional management in line is only one, though perhaps the most important, of the issues in

corporate governance. Essentially corporate governance deals with effective safeguarding of the investors¶

and creditors¶ rights and these rights can be threatened in several other ways. For instance, family businesses

and corporate groups are common in many countries including India. Inter-locking and ³pyramiding´ of

corporate control within these groups make it difficult for outsiders to track the business realities of

individual companies in these behemoths. In addition, managerial control of these businesses are often in the

hands of a small group of people, commonly a family, who either own the majority stake, or maintain

control through the aid of other block holders like financial institutions. Their own interests, even when they

are the majority shareholders, need not coincide with those of the other ± minority ± shareholders. This often

leads to expropriation of minority shareholder value through actions like ³tunneling´ of corporate gains or

funds to other corporate entities within the group. Such violations of minority shareholders¶ rights also

comprise an important issue for corporate governance.

The history of the development of Indian corporate laws has been marked by interesting contrasts. However,

concerns about corporate governance in India were, however, largely triggered by a spate of crises in the

early 90¶s ± the Harshad Mehta stock market scam of 1992 followed by incidents of companies allotting

preferential shares to their promoters at deeply discounted prices as well as those of companies simply

disappearing with investors¶ money.

These concerns about corporate governance stemming from the corporate scandals as well as opening up to

the forces of competition and globalization gave rise to several investigations into the ways to fix the

corporate governance situation in India. One of the first among such endeavors was the CII Code for

Desirable Corporate Governance developed by a committee chaired by Rahul Bajaj. The committee was

formed in 1996 and submitted its code in April 1998. Later SEBI constituted two committees to look into the

issue of corporate governance ± the first chaired by Kumar Mangalam Birla that submitted its report in early

2000 and the second by Narayana Murthy three years later. The SEBI committee recommendations have

had the maximum impact on changing the corporate governance situation in India. The Advisory Group on

Corporate Governance of RBI¶s Standing Committee on International Financial Standards and Codes also

submitted its own recommendations in 2001.

A comparison of the various recommendations reveals the progress in the thinking on the subject of

corporate governance in India over the years. An outline provided by the CII was given concrete shape in the

Birla Committee report of SEBI. SEBI implemented the recommendations of the Birla Committee through

the enactment of Clause 49 of the Listing Agreements. They were applied to companies in the BSE 200 and

S&P C&X Nifty indices, and all newly listed companies, on March 31, 2001; to companies with a paid up

capital of Rs. 10 crore or with a net worth of Rs. 25 crore at any time in the past five years, as of March 31,



3

2002; to other listed companies with a paid up capital of over Rs. 3 crore on March 31,

2003. The Narayana Murthy committee worked on further refining the rules.

The recommendations also show that much of the thrust in Indian corporate governance reform has been on

the role and composition of the board of directors and the disclosure laws. The Birla Committee, however,

paid much-needed attention to the subject of share transfers which is the Achilles¶ heel of shareholders¶ right

in India.

Clearly much more needs to be accomplished in the area of compliance. Besides, in the area of corporate

governance, the spirit of the laws and principles is much more important than the letter. Consequently,

developing a positive culture and atmosphere of corporate governance is essential is obtaining the desired

goals. Corporate governance norms should not become just another legal item to be checked off by managers

at the time of filing regulatory papers.

Corporate Governance:

Indian Perspective

Based on the recommendations of the Committee on Corporate

Governance under the Chairmanship of Wikipedia defines

corporate governance as ³Corporate governance is the set of

processes, customs, policies, laws, and institutions affecting the

way a corporation (or company) is directed, administered or

controlled. Corporate governance also includes the relationships

among the many stakeholders involved and the goals for which the

corporation is governed. ́

SEBI¶s Committee on Corporate Governance defines corporate

governance as 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 & corporate funds in the management of a company."

With corporate Governance becoming the new buzzword in the business arena today the need for a

structured and unambiguous reference for code of corporate governance assumes significant importance.

The evolution of corporate governance norms in India has been in the form of various recommendations and

reports that incorporate changes in the desired norms in the context of time. The Companies Act, 1956 does

provide for certain legislative norms in relation to corporate governance in India, such as Section 198

(overall maximum managerial remuneration), Section 299 (disclosure of interests by director), Section 309

& 269 (remuneration of directors) and certain other section of the Act read along with Clause 49 of the

Listing Agreement which provides for procedure relating to the disclosures, composition of board of

directors, composition of audit committee including the appointment of independent directors and certain

disclosures relating to accounting treatment, related party transaction. And these legislative norms are

Legislative norms are

supported by various

committee reports such as the

CII code, Birla committee,

Murthy committee etc, which

form the skeleton of corporate

governance and disclosure

norms in India



4

supported by various committee reports such as the CII code, Birla committee, Murthy

committee etc. These reports form the skeleton of corporate governance and disclosure norms in India.

Also, despite excellent rules and regulations, scams like Satyam and recently Citibank have rocked the

financial services industry. So where does the problem lie? The problem lies in the fact that at present,

corporate governance is still seen as a notional, voluntary set of ³guidelines´ that define lines of

accountability that segregate the relationship between the company and key corporate

individuals.Regulatory authorities are inadequately staffed and lack sufficient number of skilled people. This

has led to less than credible enforcement. Delays in courts compound this problem.

Thus corporate governance in India still lies between the murky shades of black and white, a clear gray area,

in India. The challenge lies in codifying corporate governance norms in quantifiable, crystal clear terms that

leave no wriggle room. And then follow it up with excellent regulatory mechanism and strict

implementation. Only then can corporate governance be not just a voluntary action by a few but something

that transcends barriers of size, industry, sector etc to become a rule in India¶s emerging corporate sector.



5

CII Code, 1998

The CII code is one of the oldest codes on corporate governance in India, written in 1996 and finalized in

1998. It sought to define the term ³corporate governance´ in clear, unambiguous terms. This initiative by CIIflowed from public concerns regarding the protection of investor interest, especially

the small investor; the promotion of transparency within business and industry; the need to move towards

international standards in terms of disclosure of information by the corporate sector and, through all of this,

to develop a high level of public confidence in business and industry.

1. Board of directors:-

³Obviously not all well governed companies do well in

the market place. Nor do the badly governed ones

always sink. But even the best performers risk stumbling

some day if they lack Strong and independent boards of directors´-Business Week, 1996

y The full board should meet a minimum of six

times a year, preferably at an interval of two months,

and each meeting should have agenda items that require

at least half a day¶s discussion

y Any listed companies with a turnover of Rs.100

crores and above should have professionally competent,

independent, nonexecutive directors, who should

constitute at least 30 percent of the board if the Chairman of the company is a non-executive director

or at least 50 percent of the board if the Chairman and Managing Director is the same person.

y No single person should hold directorships in more than 10 listed companies

2. Remuneration of directors:-

y Most non-executive directors receive a sitting fee which cannot exceed Rs.2,000 per meeting. The

Working Group on the Companies Act recommended that this limit should be raised to Rs.5,000.

Although this is better than Rs.2,000, it is hardly sufficient to induce serious effort by the non-

executive directors.

y To secure better effort from non-executive directors, companies should:

y Pay a commission over and above the sitting fees for the use of the professional inputs. The present

commission of 1% of net profits (if the company has a managing director), or 3% (if there is no

managing director) is sufficient.

y Consider offering stock options, so as to relate rewards to performance.

3. Reappointment of directors:-

CII flowed from public concerns

regarding the protection of investor

interest, especiallythe small investor; the promotion of

transparency within business and

industry and the need to move

towards international standards.



6

While re-appointing members of the board, companies should give the attendance

record of the concerned directors. If a director has not been present (absent with or without leave) for 50

percent or more meetings, then this should be explicitly stated in the resolution that is put to vote. As a

general practice, one should not reappoint any director who has not had the time attend even one half of

the meeting.

4. Disclosure Requirements:-

y Key information that must be reported to, and placed before, the board must contain:

y Annual operating plans and budgets, together with up-dated long term plans.

y Capital budgets, manpower and overhead budgets.

y Quarterly results for the company as a whole and its operating divisions or business segments.

y Internal audit reports, including cases of theft and dishonesty of a material nature.

y Show cause, demand and prosecution notices received from revenue authorities which are

considered to be materially important. (Material nature is any exposure that exceeds 1 percent of the

company¶s net worth).

y Fatal or serious accidents, dangerous occurrences, and any effluent or pollution problems.

y Default in payment of interest or non-payment of the principal on any public deposit, and/or to any

secured creditor or financial institution.

y Defaults such as non-payment of inter-corporate deposits by or to the company, or materially

substantial non-payment for goods sold by the company.

y Any issue which involves possible public or p roduct liability claims of a substantial nature,

including any judgement or order which may have either passed strictures on the conduct of the

company, or taken an adverse view regarding another enterprise that can have negative implications

for the company.

y Details of any joint venture or collaboration agreement.

y Transactions that involve substantial payment towards goodwill, brand equity, or intellectual

property.

y Recruitment and remuneration of senior officers just below the board level, including appointment

or removal of the Chief Financial Officer and the Company Secretary.

y Labour problems and their proposed solutions.

y Quarterly details of foreign exchange exposure and the steps taken by management to limit the risks

of adverse exchange rate movement, if material.

5. In relation to audits:-

i. Listed companies with either a turnover of over Rs.100 crores or a paid-up capital of Rs.20 crores

should set up Audit Committees within two years.

ii. Audit Committees should consist of at least three members, all drawn from a company¶s non-

executive directors, who should have adequate knowledge of finance, accounts and basic elements

of company law.

iii. To be effective, the Audit Committees should have clearly defined Terms of Reference and its

members must be willing to spend more time on the company¶s work vis-à-vis other nonexecutive

directors.

iv. Audit Committees should assist the board in fulfilling its functions relating to corporate accounting

and reporting practices, financial and accounting controls, and financial statements and proposals



7

that accompany the public issue of any security²and thus provide effective

supervision of the financial reporting process.

v. Audit Committees should periodically interact with the statutory auditors and the internal auditors to

ascertain the quality and veracity of the company¶s accounts as well as the capability of the auditors

themselves.

vi. For Audit Committees to discharge their fiduciary responsibilities with due diligence, it must be

incumbent upon management to ensure that members of the committee have full access to financial

data of the company, its subsidiary and associated companies, including data on contingent

liabilities, debt exposure, current liabilities, loans and investments.

vii. By the fiscal year 1998-99, listed companies satisfying criterion (1) should have in place a strong

internal audit department, or an external auditor to do internal audits; without this, any Audit

Committee will be toothless

6. Additional Shareholder information:-

i. Under ³Additional Shareholder¶s Information´, listed companies should give data on:

ii. High and low monthly averages of share prices in a major Stock Exchange where the company is

listed for the reporting year.

iii. Greater detail on business segments up to 10% of turnover, giving share in sales revenue, review of

operations, analysis of markets and future prospects.

7. Creditor Rights:-

As creditors are not shareholders, and so long as their dues are being paid in time, they should desist from

demanding a seat on the board of directors.

It would be desirable for FIs as pure creditors to re-write their covenants to eliminate having nominee

directors except:a) in the event of serious and systematic debt default; and

b) in case of the debtor company not providing six-monthly or quarterly operational data to the

concerned FI(s).

8. Credit Rating:-

y If any company goes to more than one credit rating agency, then it must divulge in the prospectus

and issue document the rating of all the agencies that did such an exercise.

y It is not enough to state the ratings. These must be given in a tabular format that shows where the

company stands relative to higher and lower ranking. It makes considerable difference to an investor to know whether the rating agency or agencies placed the company in the top slots, or in the middle,

or in the bottom.



8

Ku ar Man a a Bir a Co ittee

Report, 1999

Need for the report

The CII National Task Force, constituted under the chairmanship of Mr. Rahul Bajaj, presented the draft

guidelines and the code of Corporate Governance for public comments and suggestion in April 1997, on the

basis of which, the Desirable Corporate Governance Code was finalized. CII presented the Code for

information, for understanding and for implementation of Indian business and industry in 1998.

During the process of preparation of this code three aspects

were considered crucial by the committee. Firstly, there is no

unique structure of "corporate governance" in the developed

world; nor is one particular type unambiguously better than

others. That's why mechanical import of the concept is not

possible. Secondly, the Indian companies, banks and financial

institutions (FIs) can no longer afford to ignore better

corporate practices. Lastly, corporate governance goes far

beyond company law. The quantity, quality and frequency of

financial and managerial disclosure, the extent to which the

board of directors exercise their fiduciary responsibilities

towards shareholders, the quality of information thatmanagement share with their boards, and the commitment to run transparent companies that maximize long

term shareholder value cannot be legislated at any level of detail. This committee made 17 recommendations

on different subject of corporate governance.

While this was a huge leap for the country in the area of corporate governance norms, it was clearly

inadequate. Security and Exchange Board of India (SEBI) also constituted a committee under the

chairmanship of Shri Kumar Mangalam Birla to see the matters of corporate governance and recommend

necessary suggestion. The objective of the committee was to view corporate governance from the

perspective of investors and shareholders and to prepare a code to suit the Indian corporate environment, as

corporate governance frameworks are not exportable. For this purpose committee identified three major

constituents viz. shareholders, the board of directors and the management and three key aspects viz.

accountability, transparency and equal treatment for all stakeholders of corporate governance. The

committee made twenty-five recommendations and categorized them as mandatory and non-mandatory.

The Committee therefore agreed that the fundamental objective of corporate governance is the "enhancement

of shareholder value, keeping in view the interests of other stakeholder". This definition harmonises the need

for a company to strike a balance at all times between the need to enhance shareholders¶ wealth whilst not in

any way being detrimental to the interests of the other stakeholders in the company.

The report submitted by the committee was the first formal and comprehensive attempt to evolve a µCode of

Corporate Governance', in the context of conditions prevailing in governance in Indian companies, as well

as the state of capital markets.

While the CII Code was a

huge leap for the country in

the area of corporate

governance norms, it was

rather inadequate.



9

The Committee's terms of the reference were to:

y suggest suitable amendments to the listing agreement executed by the stock exchanges with the

companies and any other measures to improve the standards of corporate governance in the listed

companies, in areas such as continuous disclosure of material information, both financial and non-

financial, manner and frequency of such disclosures, responsibilities of independent and outside

directors;

y draft a code of corporate best practices; and

y Suggest safeguards to be instituted within the companies to deal with insider information and insider

trading.

The primary objective of the committee was to view corporate governance from the perspective of the

investors and shareholders and to prepare a µCode' to suit the Indian corporate environment.

The committee had identified the Shareholders, the Board of Directors and the Management as the three key

constituents of corporate governance and attempted to identify in respect of each of these constituents, their

roles and responsibilities, as also their rights in the context of good corporate governance.

Corporate governance has several claimants ±shareholders and other stakeholders - which include suppliers,

customers, creditors, and the bankers, the employees of the company, the government and the society at

large. The Report had been prepared by the committee, keeping in view primarily the interests of a particular class of stakeholders, namely, the shareholders, who together with the investors form the principal

constituency of SEBI while not ignoring the needs of other stakeholders.

Mandatory and non-mandatory recommendations:-

The committee divided the recommendations into two categories, namely, mandatory and non- mandatory.

The recommendations which were absolutely essential for corporate governance could be defined with

precision and which could be enforced through the amendment of the listing agreement could be classified as

mandatory. Others, which were either desirable or which may have required change of laws were classified

as non-mandatory.

1. Applicability:-

y Applicable to the listed companies, their directors, management, employees and professionals

associated with such companies.

y The ultimate responsibility for putting the recommendations into practice lies directly with the

board of directors and the management of the company.

y Recommendations will apply to all the listed private and public sector companies, in accordance

with the schedule of implementation.

y As for listed entities, which are not companies, but body corporates (e.g. private and public sector

banks, financial institutions, insurance companies etc.) incorporated under other statutes, the

recommendations will apply to the extent that they do not violate their respective statutes, andguidelines or directives issued by the relevant regulatory authorities.

2. Board of directors:-

y The Board of a Company provides leadership and strategic guidance, objective judgement

independent of the management to the Company and exercises control over the Company.

y The Board must fulfil its legal requirements and also must be aware and understanding of its

responsibilities



10

y An effective corporate governance system is one, which allows the Board to

perform these dual functions efficiently

a) Functions of BOD:-

y Directs the Company by formulating and reviewing the Company¶s policies.

y Controls the Company and its management by laying down the code of conduct.

y Is accountable to the shareholders for creating, protecting and enhancing wealth and resources of the Company.

y Is not involved in day to day management of the Company.

b ) Composition:-

y Executive directors are involved in the day to day management of the Companies

y Non executive directors bring external and wider perspective and independence to the decision

making. (Non executive directors may be independent or non-independent.)

y Independent Directors

i. Receive director¶s remuneration

ii. Do not have any other material pecuniary relationship or transactions with the

Company, its promoters, its management etc.,

iii. Emphasis on the calibre of the non executive directors.

c) Mandatory Recommendations:-

y Optimum combination of executive and non-executive directors with not less than 50% of the

board comprising the non executive directors.

y At least one third of the board should comprise of independent directors

y Institutions should appoint nominees on the board of Companies only on a selective basis where

such appointment is considered necessary to protect the interest of the Institution

y The role of the Chairman is to ensure that the board meetings are conducted in an effective

manner. The Chairman¶s role should in principle be different from that of the Chief Executive.

d) N on-mandatory Recommendation:-

y A non executive Chairman should be entitled to maintain a Chairman¶s Office at the Company's

expense and also allowed reimbursement of expenses incurred in the performance of his duties.

3. Audit Committee:-

Oversight of the finance function and monitoring

Relies on the senior financial management and the outside auditors.

a) Mandatory recommendations

y A qualified and independent audit committee should be set up by the board of a Company. This

would go a long way in enhancing the credibility of the financial disclosures of a Company and

promoting transparency

y Audit Committee

o Minimum of 3 members ( non executive directors, majority being independent and with at

least one director having financial and accounting knowledge)

o The chairman of the committee should be an independent director.

o The Chairman should be present at AGM to answer shareholder queries.

o The Company Secretary should act as the Secretary to the Committee



11

y Frequency of meetings and quorum of the Audit committee

o Meet at least thrice a year

o One meeting before finalization and one every 6 months

o Quorum should be either 2 members or 1/3rd of the members of the audit committee

whichever is higher and there should be a minimum of two independent directors. ( this is a

mandatory recommendation

y Powers of the Audit Committee

o Oversight of the company¶s financial reporting process and the disclosure of its financial

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

o Recommending the appointment and removal of external auditor, fixation of audit fee and also

approval for payment for any other services.

o Reviewing with management the annual financial statements before submission to the board,

focussing primarily on:

o Any changes in accounting policies and practices.

o Major accounting entries based on exercise of judgement by management.

o Qualifications in draft audit report.o Significant adjustments arising out of audit.o The going concern assumption.

o Compliance with accounting standards

o Compliance with stock exchange and legal requirements concerning financial statements.o Any related party transactions i.e. transactions of the company of material nature, with promoters

or the management, their subsidiaries or relatives etc. that may have potential conflict with the

interests of company at large.

o Reviewing with the management, external and internal auditors, the adequacy of internal control

systems.

o Reviewing the adequacy of internal audit function, including the structure of the internal audit

department, staffing and seniority of the official heading the department, reporting structure,

coverage and frequency of internal audit.

o Discussion with internal auditors of any significant findings and follow-up thereon.

o Reviewing the findings of any internal investigations by the internal auditors into matters where

there is suspected fraud or irregularity or a failure of internal control systems of a material nature

and reporting the matter to the board.

o Discussion with external auditors before the audit commences, of the nature and scope of audit.

Also post-audit discussion to ascertain any area of concern.

o Reviewing the company¶s financial and risk management policies.

o Looking into the reasons for substantial defaults in the payments to the depositors, debenture

holders, share holders (in case of non-payment of declared dividends) and creditors.

4. Board procedures:-

y The Board meetings should be held at least 4 times in a year with a maximum time gap of 4

months between any two meetings.

y A director should not be a member in more than 10 committees or act as a Chairman of more than

5 committees across all companies in which he is a director.y Every director must inform the Company about the Committee positions he occupies in other

Companies and notify changes as and when they take place.

a) Management

y Management is responsible for ensuring that the principles of corporate governance are adhered to

and enforced.



12

b ) Mandatory recommendation

Disclosures must be made by the management to the Board relating to all material financial

and commercial transactions, where they have personal interest that may have potential

conflict with the interest of the Company at large

5. Shareholders:-

y The GBM provide an opportunity to the shareholders to address their concerns to the Board of

Directors and comment on and demand any explanation on the Annual report or on the overall

functioning of the Company.

a) Mandatory recommendations

y Responsibilities of Shareholders

o Show a greater degree of interest and involvement in the appointment of directors and the

auditors.

o Inform themselves about the new directors.

o Shareholders rightso Right to transfer and registration of shares.

o Obtaining relevant information on the Company on a timely and regular basis

o Participating and voting in shareholder meetings

o Electing members of the Board

o Right to information on takeovers, sale of assets or divisions of the Company and changes in

the Capital structure.

o Half yearly declaration of financial performance including summary of significant events in

the last 6 months should be sent to each household of shareholders.

y A board committee under the chairmanship of a non-executive director should be formed to

specifically look into the redressal of shareholder complaints like transfer of shares, non-receipt of

balance sheet, non receipt of declared dividends etc.



13

³We've always striven hard for respectability, transparency and to create an ethical organisation. There are

certain expectations that we haven't fulfilled. But we're also a very young organisation and in areas like

track record of management, we may be low because we're yet to show longevity.´

- Narayana NR Murthy,

N. R. Narayana Murthy is as well known as a promoter of corporate governance reform and excellent

corporate workplace ethical practices, as he is as the co-founder of Infosys Technologies Ltd. Infosys, which

employs over 58,000 people worldwide, provides consulting and IT services. It is one of the pioneers in

strategic offshore outsourcing of software services. Murthy is a fervent believer in globalization, a major

influence on the thinking of author Tom Friedman (The World Is Flat: A Brief History of the Twenty-first

In os s Case Stud



14

Century) and a leader of India¶s technology revolution. His approach to corporate

governance and workplace values have been no less influential on the most dynamic and successful

technology companies in India.

The Company¶s Vision Is: "To be a globally respected corporation that provides best-of breed business

solutions, leveraging technology, delivered by best-in-class people." And, its Mission is: "To achieve our

objectives in an environment of fairness, honesty, and courtesy towards our clients, employees, vendors and

society at large."

Infosys¶s stresses that its operations are driven by key values that it calls C-LIFE:

1. Customer Delight: A commitment to surpassing our customer expectations.

2. Leadership by Example: A commitment to set standards in our business and transactions and be an

exemplar for the industry and our own teams.

3. Integrity and Transparency: A commitment to be ethical, sincere and open in our dealings.

4. Fairness: A commitment to be objective and transaction-oriented, thereby earning trust and respect.

5. Pursuit of Excellence: A commitment to strive relentlessly, to constantly improve ourselves, our

teams, our services and products so as to become the best.

Corporate Governance is an area of critical importance to Infosys and one where it has sought to be a global

leader. It is seeking to use its model example to promote far higher standards in India and Murthy has been

one of the most vocal and influential advocates of corporate governance reform in his country.

The company states: ³We believe that sound corporate governance is critical to enhance and retain investor

trust. Accordingly, we always seek to ensure that we attain our performance rules with integrity. Our Board

exercises its fiduciary responsibilities in the widest sense of the term. Our disclosures always seek to attain

the best practices in international corporate governance. We also endeavor to enhance long-term shareholder

value and respect minority rights in all our business decisions.´

The Infosys corporate governance philosophy is based on the following principles:

1. Satisfy the spirit of the law and not just the letter of the law.

2. Corporate governance standards should go beyond the law.

3. Be transparent and maintain a high degree of disclosure levels. When in doubt, disclose.

4. Make a clear distinction between personal conveniences and corporate resources.

5. Communicate externally, in a truthful manner, about how the company is run internally.

6. Comply with the laws in all the countries in which the company operates.

7. Have a simple and transparent corporate structure driven solely by business needs.

8. Management is the trustee of the shareholders¶ capital and not the owner.

Infosys stresses that at the core of its corporate governance practice is the Board, which oversees how themanagement serves and protects the long-term interests of all the stakeholders of the company. It states: ³We

believe that an active, well-informed and independent Board is necessary to ensure the highest standards of

corporate governance. Majority of the Board, 9 out of 16, are independent members. Further, we have

compensation, nomination, investor grievance and audit committees, which are comprisedof independent

directors.´

CII Code and Kumar Mangalam Birla Committee Report: An Analysis



15

Infosys has clearly set the highest standards when it comes to adopting sound Corporate Governance

practices among Indian companies. The CII code on ³Desirable Corporate Governance´, introduced in 1996,

was a voluntary code. And Infosys was among the first companies in India to adopt the code and make their

corporate governance practices transparent.

In this section, we are analysing the changes in the corporate governance norms and recommendations

brought about by the Kumar Mangalam Birla Committee Report ( KM BC Report ). For this, we are

evaluating the corporate governance reports, part of Annual Reports, of the years 1998-99 (CII Code) and

1999-2000 (KMBC Report).

Overall, it was observed that Infosys promptly complied with all mandatory recommendations and most

voluntary recommendations as suggested by the KMBC Report.

1. Board of Directors:-

CII Code Compliance KMBC Report Compliance

Any listed company with

a turnover of Rs. 100

crore and higher should

have professionally

competent, independent,

non-executive directors

who should constitute at

least 30% of the board if

the chairman of the

company is a non-

executive director, or at

least 50% of the board if

the chairman and themanaging director is the

same person.

In fiscal 1999, non-

executive directors

constituted 40% of the

board. The board had

divided the responsibility

for the management of

the company between an

executive chairman and

CEO, and a managing

director, president and

COO. The non-executive

directors are independent

and accomplished professionals in the

corporate and academic

worlds.

The committee

recommends that the

board of a company have

an optimum combination

of executive and non-

executive directors with

not less than 50% of the

board comprising the

non-executive directors.

The number of

independent directors

depends on the nature of

the chairman of the board. In case a company

has a non-executive

chairman, at least one-

third of the board should

comprise of independent

directors, and in the case

a company has an

executive chairman, at

least half of board should

be independent

(Mandatoryrecommendation).

As of March 31, 2000,

non-executive directors

constituted 50% of the

board. The board had

divided the responsibility

for the management of

the company between the

chairman and CEO and

the managing director,

president and the COO.

The full board should

meet a minimum of six

times a year, preferably

at a interval of two

months.

The board of directors

met nine times during

the year with a clearly

defined agenda for each

meeting.

The committee

recommends that the

board meetings should

be held at least four

times a year, with a

maximum gap of four

The board of directors

met nine times during

the year 1999-2000.



16

months between any two

meetings.

It is observed that the voluntary recommendations of the CII Code were followed, as well the revision by the

KMBC Report was also complied with. The number of non-executive directors was increased from 40% to

50% following the revision. The distribution of the responsibilities was maintained status quo, between the

various positions of responsibility in the organisation structure. Also, although the minimum number of

board meetings was decreased from 6 to 4, the company continued to hold 9 meetings a year. The decrease

may have been prompted by setting up of various committees to monitor each aspect of the company¶s

functioning. But in this respect, the company has displayed that it is not following these recommendations to

satisfy the letter of the recommendation, but the intent.

Another significant difference in the two sets of codes was the CII Code stipulated, ³To secure better effort

from non-executive directors, companies should pay a commission over and above the sitting fees for the use

of professional inputs. The present commission of 1% of net profits (if the company has a managing

director) or 3% (if there is no managing director) is sufficient; Consider offering stock options so as to relate

rewards to performance. An appropriate mix of the two can align a non-executive director towards keeping

an eye on short term profits as well as long term shareholder value.´

In 1998-99, the non-executive directors were eligible for a commission of up to 0.5% of the net profits of the

company, the total amounting to Rs. 24 lakhs. However, no stock options were granted due to regulatory

constraints.

The KMBC Report required the setting up of a formal remuneration committee. ³The committee

recommends that the board should set up a remuneration committee to determine on their behalf, and on the

behalf of the shareholders with agreed terms of reference, the company¶s policy on specific remuneration

packages for executive directors. To avoid conflicts of interest, the remuneration committee should comprise

at least three directors, all of whom shall be non-executive directors, the chairman of the committee being an

independent director.´These recommendations were strictly complied with. All members of the compensation committee,

including its chairman, were independent, non-executive directors of the company.

2. Disclosure of Corporate Governance

The KMB Committee recommended that ³there should be a

separate section on Corporate Governance in the Annual

Reports of companies, with a detailed compliance report on

Corporate Governance. Non-compliance of any mandatory

recommendations with reasons thereof and the extent towhich the non-mandatory recommendations have been

adopted should be specifically highlighted. This will enable the shareholders and the securities market to

assess for themselves the standards of corporate governance followed by a company. (Mandatory

recommendation)´

The remarkable aspect is that Infosys had been following this particular practice since before this

recommendation was made, even though there were no suggestions to this effect in the CII Code. It is proof

that Infosys has upheld high standards of corporate governance, and disclosures. Wherever the norms were

Corporate Governance is an

area of critical importance to

Infosys and one where it has

sought to be a global leader



17

not followed, even though voluntary, it was mentioned explicitly, and there was no

intention to mislead the users of the Report by any omissions.

3. Audit Committee

CII Code ± ³The Audit Committee should consist of at least three members, all drawn from a company¶s

non-executive directors, who should have adequate knowledge of finance, accounts and basic elements of

company law.´

The Audit Committee of the company consisted of four non-executive directors, with Mr. Deepak

Satwalekar (of HDFC Bank) as the chairman. There was no mention of the minimum no. of meetings of the

audit company. But the audit committee met twice in the year and reviewed the reports of the internal

auditors and the statutory auditors.

The recommendations for the Audit Committee by KMBC Report were maintained at membership of the

audit committee to three non-executive directors. The committee also maintained status quo with four

members, and chaired by Mr. Deepak Satwalekar. In addition, the KMBC Report also prescribed the quorum

as either two members or one-third of the members of the audit committee, whichever higher, with atleast

two independent directors. This stipulation was also complied with.

It is mentioned that the CII Code did not prescribe the minimum no. of meetings for the Audit Committee,

but was set at least 3 meetings a year by the KMBC Report. The company failed to observe this

recommendation, and only two meetings were held, as before.

It is significant to note that Infosys consciously expanded the scope of its Audit Committee from:

To provide reasonable assurance of:

a. Safety of assets against unauthorised use and disposition b. Maintenance of proper accounting records and the reliability of financial information used within

the business or for publication, and

c. Internal controls and internal checks within the company

(CII Code)

to:

Reviewing with management and focussing primarily on

a. Any changes in accounting policies and practices

b. Major accounting entries based on exercise of judgement by management

c. Qualifications in draft audit reportd. Significant adjustments arising out of audit

e. Going concern assumption

f. Compliance with accounting standards

g. Compliance with stock exchange and legal requirements concerning financial statements

h. Any related party transactions, i.e. any material transactions with promoters or management.

Conclusion:-



18

Infosys is popularly called the ³high priest of corporate governance´, and not without reason. Through these

recommendations and compliance disclosures, it is evident that the company upheld high standards of

managerial ethics, as well as transparency. It satisfied most of the recommendations of the two codes, with

minor exceptions, which were also adequately disclosed.

However, it was also observed that where the norms which it failed to observe, it maintained the

performance as the previous year. Although this may seem as being rigid, and an argument that the company

failed to observe the new recommendations and was able to satisfy only those which were already in line

with its existing practices, may be given. However, we must note that the time difference between the release

of the report (Nov 1999) and the close of the FY was not substantial to come to the conclusion, as the

contravention might have been temporary and due to lack of sufficient time for implementation.

It is also significant to note here that the company has strong corporate governance practices in place,

embedded into its structure and operations, and it follows not just the recommendations made in India, but

also the Cadbury Report (U.K.) and the Blue Ribbon Report (U.S.A).

The Stakeholder Theory of Business Ethics states, in a nutshell, that a business may be considered ethical f it

takes care of the interests of all its stakeholders- both primary and secondary, for e.g. employees, suppliers,

customers etc.

The Social Contract theory of Business Ethics states that businesses have an ethical obligation towards the

members of a given society. The theory creates and embeds mutual agreement between members of societies

and established businesses. The members of a society permit business to be created in these establishments

for certain specified benefits that enhance the welfare of the societies. These benefits include economic

efficiency, improved decision-making and improving the capacity of acquisition and use of modern

technology and resources.

As is evident, Infosys is a strongly ethical company, as supported by both these theories of business ethics asit satisfies the tenets of both of them to qualify as an ethical company.



19

Naresh Chandra Co ittee

Report, 2002

The Naresh Chandra committee was set up to recommend standards and practices with relation to auditing

processes in India in 2002. The Government of India set up this committee triggered by the huge auditing

scams of Enron, WorldCom, Quest etc. which rocked the global economy in 2001,even leading to shutting

down of auditing giant-Arthur Andersen. These exposed the lacunae in auditing norms especially in areas of

auditor independence, conflicts of interest, corporate responsibility etc. Thus this report is preventive rather

than prescriptive in nature.

1. Auditor-Company Relationship:-

y Prohibition of any direct financial interest in the audit client by the audit firm, its partners or

members of the engagement team as well as their µdirect relatives¶. It applies when an interest of

more than 2 per cent of the share of profit or equity capital of the audit client is under the auditor.

y Prohibition of receiving any loans and/or guaranteesfrom or on behalf of the audit client by the

audit firm, its partners or any member of the engagement team and their µdirect relatives¶

y Prohibition of personal relationships, which would exclude any partner of the audit firm or

member of the engagement team being a µrelative¶ of any of key officers of the client company,

y Prohibition of service or cooling off period, under which any partner or member of the

engagement team of an audit firm who wants to join an audit client, or any key officer of the client

company wanting to join the audit firm, would only be allowed to do so after two years from the time

they were involved in the preparation of accounts and audit of that client.

y Prohibition of undue dependence on an audit client.So that no audit firm is unduly dependent on

an audit client, the fees received from any one client and its subsidiaries and affiliates, all together,

should not exceed 25 per cent of the total revenues of the audit firm. However, to help newer and

smaller audit firms, this requirement will not be applicable

to audit firms for the first five years from the date of

commencement of their activities, and for those whose

total revenues are less than Rs.15 lakhs per year.

y Also, a list of prohibited non-auditing services has

also been provided which include services such as

actuarial, investment banking, internal audit etc.

In the same vein the committee recognizes that it makes

sense for auditing corporations to widen horizons by

engaging in business consulting subject to the some covenants.

The Government of India set

up this committee, triggered

by the huge auditing scams of

Enron, WorldCom, Quest etc.

which rocked the global

economy.



20

2. Rotation of auditors:-

In line with international standards the committee does not legislate in favour of compulsory rotation of

auditors. However it recommends that the partners and at least 50 per cent of the engagement team

(excluding article clerks and trainees) responsible for the audit of either a listed company, or companies

whose paid up capital and free reserves exceeds Rs.10 crore, or companies whose turnover exceeds Rs.50

crore, should be rotated every five years.

3. Disclosure of qualification and subsequent action:-

The committee takes the issue of qualification of report very seriously and recommends the following steps.

y In case of a qualified auditor¶s report, the audit firm may read out the qualifications, with

explanations, to shareholders in the company¶s annual general meeting.

y It should also be mandatory for the audit firm to separately send a copy of the qualified report to the

ROC, the SEBI and the principal stock exchange (for listed companies), about the qualifications, with

a copy of this letter being sent to the management of the company.

4. Certificate of Independence:-

The Committee felt that it will be good practice for the audit firm to annually file a certificate of

independence to the Audit Committee and/or the board of directors of the client company. This will help in

ensuring that the auditors have retained their independence throughout their period of engagement.

5. Regulating the regulators:-

An important question that this committee tries to address is of regulating the regulators. It recommends

setting up of three independent Quality Review Boards (QRB), one each for the ICAI, the ICSI and ICWAI,

to periodically examine and review the quality of audit, secretarial and cost accounting firms, and pass

judgement and comments on the quality and sufficiency of systems, infrastructure and practices.

6. Independent Directors:-

The committee not only defines the number and persons qualifies to be independent director but also feels

that to be really effective, independent directors need to have a substantial voice, by being in a majority. It

was felt that rather than the management or the promoters, the Committee should put its weight behindminority shareholders and other stakeholders such as consumer or creditors. The committee therefore

recommends that independent directors have adequate presence and strength on the Board, especially of the

companies that are listed or, being public companies above a specific size.

Also, the minimum board size of all listed companies, as well as unlisted public limited companies with a

paid-up share capital and free reserves of Rs.10 crore and above or turnover of Rs.50 crore and above should

be seven ² of which at least four should be independent directors.



21

However, this will not apply to:

a) unlisted public companies, which have no more than 50 shareholders and which are without debt of

any kind from the public, banks, or financial institutions, as long as they do not change their

character,

b) Unlisted subsidiaries of listed companies.

7. Question of remuneration:-

The maximum sitting fee permitted by the DCA is Rs.5,000. The committee was repeatedly reminded that

peanuts fetch monkeys. The Committee believes that companies cannot hope to get the best talent unless

they make it worthwhile for professionals to extend their time and expertise. The committee was cautioned

that far too much payment may itself impair independence, just as over -reliance on a single client

compromises the independence of auditors. However, the committee felt that advantages of adequate

remuneration require government to review the position.

8. Corporate Serious Fraud Office:-

Corporate frauds are so intricate that they can only be unravelled by a multi-disciplinary task force. The

Committee, therefore, suggest setting up a Corporate Serious Fraud Office (CSFO), without, at this stage,

taking away the powers of investigation and prosecution from existing agencies, in the Department of

Company Affairs with specialists inducted on the basis of transfer/deputation and on special term contracts

.This should be in the form of a multi-disciplinary team that not only uncovers the fraud, but is able to direct

and supervise prosecutions under various economic legislations through appropriate agencies

9. Competitive position:-

The profession of accountancy in India is dominated by small firms. This has not only opened them to

threats of competition from larger better organised international firms, but has also limited their ability tofund top class human resource development. The Committee felt that, in the long run, Indian audit firms will

have to consolidate and grow if they are to compete, especially in non-statutory functions, internationally.

The Government should consider amending the Partnership Act to provide for partnerships with limited

liability, especially for professions which do not allow their members to provide services as a corporate

body.



22

Narayana Murthy Co ittee

Report, 2003

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

Narayana Murthy, Chairman and Chief Mentor of Infosys Technologies Limited. The committee, to the likes

of most committees was successful in discussing, recommending and drafting a code, pertaining to the

mentioned laid down points; elucidated as follows:

I. Audit Committees - Review of information by audit committees:-

Mandatory Recommendations:-

Audit committees of publicly listed companies should be required to review the following information

mandatorily:

i. Financial statements and draft audit report, including quarterly / half-yearly financial information;

ii. Management discussion and analysis of financial condition and results of operations;

iii. Reports relating to compliance with laws and to risk management;

iv. Management letters / letters of internal control weaknesses issued by statutory/ internal auditors;

and

v. Records of related party transactions.

II. Financial literacy of members of the audit committee:-

Mandatory Recommendations:-

All audit committee members should be "financially literate" and at least one member should have

accounting or related financial management expertise.

III. Audit Reports and Audit Qualifications:-

The Committee has made the following two recommendations:

Mandatory Recommendation:-

A. Disclosure of accounting treatment: - In case a company has followed a treatment different from

that prescribed in an accounting standard, management should justify why they believe such

alternative treatment is more representative of the underlying business transaction. Management

should also clearly explain the alternative accounting treatment in the footnotes to the financial

statements.



23

B . Audit qualifications: - Companies should be encouraged to move towards a

regime of unqualified financial statements. This recommendation should be reviewed at an

appropriate juncture to determine whether the financial reporting climate is conducive towards a

system of filing only unqualified financial statements.

IV. Related Party Transactions:-


A statement of all transactions with related parties including their bases should be placed before the

independent audit committee for formal approval / ratification. If any transaction is not on an arm's length

basis, management should provide an explanation to the audit committee justifying the same.

V. Risk Management - Board disclosures:-


Procedures should be in place to inform Board members about the risk assessment and minimization

procedures. These procedures should be periodically reviewed to ensure that executive management controls

risk through means of a properly defined framework.

Management should place a report before the entire Board of Directors every quarter documenting the

business risks faced by the company, measures to address and minimize such risks, and any limitations to the

risk taking capacity of the corporation. This document should be formally approved by the Board.

Training of Board members:-

The Committee noted that there is a real necessity for Board members to understand the components of the

business model and the accompanying risk parameters. However, the Committee also noted that Board

members can always ask for information relating to the business model of the company. It also observed that

the process of Board review of business risks will be a mandatory recommendation of the Committee.

Therefore, training of Board members could be made recommendatory.

Non-mandatory Recommendation:-

Companies should be encouraged to train their 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.

VI. Proceeds from Initial Public Offerings ("IPO") - Use of proceeds:-


Companies raising money through an Initial Public Offering ("IPO") should disclose to the Audit

Committee, the uses / applications of funds by major category (capital expenditure, sales and marketing,



24

working capital, etc), on a quarterly basis. On an annual basis, the company shall prepare

a statement of funds utilised for purposes other than those stated in the offer document/prospectus. This

statement should be certified by the independent auditors of the company. The audit committee should make

appropriate recommendations to the Board to take up steps in this matter.

VII. Code of Conduct - Written code for executive management:-


It should be obligatory for the Board of a company to lay down the code of conduct for all Board members

and senior management of a company. This code of conduct shall be posted on the website of the company.

All Board members and senior management personnel shall affirm compliance with the code on an annual

basis. The annual report of the company shall contain a declaration to this effect signed off by the CEO and

COO.

Explanation - For this purpose, the term "senior management" shall mean personnel of the company who are

members of its management / operating council (i.e. core management team excluding Board of Directors).

Normally, this would comprise all members of management one level below the executive directors.



25

Revised C ause 49 of the

Listin A ree ent

Based on the recommendations of the Committee on Corporate Governance under the Chairmanship of Shri

Kumar Mangalam Birla, the SEBI had specified principles of Corporate Governance and introduced a new

clause 49 in the Listing agreement of the Stock Exchanges in the year 2000. These principles of Corporate

Governance were made applicable in a phased manner and all the listed companies with the paid up capital

of Rs 3 crores and above or net worth of Rs 25 crores or more at any time in the history of the company,

were covered as of March 31, 2003.

Application of Revised Clause 49:-

The revised clause 49 is applicable to the listed companies, in accordance with the schedule of

implementation given above. However, for other listed entities, which are not companies, but body corporate

(e.g. private and public sector banks, financial institutions, insurance companies etc.) incorporated under

other statutes, the revised clause will apply to the extent that it does not violate their respective statutes, and

guidelines or directives issued by the relevant regulatory authorities. The revised clause is not applicable to

the Mutual Fund Schemes.

Obligations on Stock Exchanges:-

The Stock Exchanges are put under obligation to ensure that all the provisions of Corporate Governance

have been complied with by the company seeking listing for the first time, before granting any new listing.

For this purpose, it would be satisfactory compliance if these companies set up the Boards and constitutecommittees such as Audit Committee, shareholders/ investors grievances committee, etc. before seeking

listing. The stock exchanges have been empowered to grant a reasonable time to comply with these

conditions if they are satisfied that genuine legal issues exists which will delay such compliance. In such

cases while granting listing, the stock exchanges are required to obtain a suitable undertaking from the

company. In case of the company failing to comply with this requirement without any genuine reason, the

application money shall be kept in an escrow account till the conditions are complied with. The Stock

Exchanges have also been required to set up a separate monitoring cell with identified personnel to monitor

the compliance with the provisions of the Corporate Governance, and to obtain the quarterly compliance

report from the companies which are required to comply with the requirements of Corporate Governance.

The stock exchanges are required to submit a consolidated compliance report to SEBI within 30 days of the

end of each quarter.

HIGHLIGHTS OF THE NEW AMENDMENTS:-

1 . W idening the Definition of Independent Director:-



26

Under the revised clause 49, the definition of the expression µindependent director¶ has

been expanded. The expression µindependent director¶ mean non-executive director of the company who ²

i. apart from receiving director¶s remuneration, does not have any material pecuniary relationships or

transactions with the company, its promoters, its senior management or its holding company, its

subsidiaries and associated companies;

ii. is not related to promoters or management at the board level or at one level below the board;

iii. has not been an executive of the company in the immediately preceding three financial years;

iv. is not a partner or an executive of the statutory audit firm or the internal audit firm that is associated

with the company, and has not been a partner or an executive of any such firm for the last three

years. This will also apply to legal firm(s) and consulting firm(s) that have a material association

with the entity.

v. is not a supplier, service provider or customer of the company. This should include lessor-lessee

type relationships also; and

vi. is not a substantial shareholder of the company, i.e. owning two percent or more of the block of

voting shares.

It has been clarified that the Institutional Directors on the boards of companies are independent directors

whether the institution is an investing institution or a lending institution.

2 . Compensation to N on Executive Directors and Disclosure thereof:-

As per earlier clause 49, the compensation to be paid to non-executive directors was fixed by the Board of

Directors, whereas the revised clause requires all compensation paid to non-executive directors to be fixed

by the Board of Directors and to be approved by shareholders in general meeting. There is also provision for

setting up of limits for the maximum number of stock options that can be granted to non-executive directors

in any financial year and in aggregate. The stock options granted to the non-executive directors to be vested

after a period of at least one year from the date of retirement of such non-executive directors.

Placing the independent directors and non-executive directors on equal footing, the revised clause provides

that the considerations as regards compensation paid to an independent director shall be the same as those

applied to a non-executive director. The companies have been put under an obligation to publish their

compensation philosophy and statement of entitled compensation in respect of non-executive directors in its

annual report. Alternatively, this may be put up on the company¶s website and a reference thereto in the

annual report. The company is also required to disclose on an annual basis, details of shares held by non-

executive directors, including on an ³if-converted´ basis.

The revised clause also requires non-executive directors to disclose prior to their appointment their stock

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

are proposed to be appointed as directors,. These details are required to be accompanied with their notice of appointment.

3 . P eriodical Review b y Independent Director:-

The revised clause 49 requires the Independent Director to periodically review legal compliance reports

prepared by the company and any steps taken by the company to cure any taint.The revised clause specifies



27

that no defence shall be permitted that the independent director was unaware of

this responsibility in case of any proceedings against him in connection with the aff airs of the

company.

4 . Code of Cond uct:-

The revised clause 49 requires the Board of a company to lay down the code of conduct for all Board

members and senior management of a company and the same to be posted on the website of the company.

Accordingly, all Board members and senior management personnel have been put under an obligation to

affirm compliance with the code on an annual basis and a declaration to this effect signed by the CEO and

COO is to be given in the Annual Report of the Company.

It has been clarified that the term senior management will include personnel of the company who are

members of its management / operating council (i.e. core management team excluding Board of Directors).

Normally, this would comprise all members of management one level below the executive directors.

5 . N on±Executive Directors ± N ot to hold office for more than N ine Years:-

Revised clause 49 limits the term of the office of the non-executive director and provides that a person shall

be eligible for the office of non-executive director so long as the term of office does not exceed nine years in

three terms of three years each, running continuously.

6 . Audit Committee:-

Two explanations have been added in the revised clause 49. The first explanation defines the term

³financially literate´ to mean the ability to read and understand basic financial statements i.e. balance sheet,

profit and loss account, and statement of cash flows. It has also been clarified that a member is considered tohave accounting or related financial management expertise if he or she possesses experience in finance or

accounting, or requisite professional certification in accounting, or any other comparable experience or

background which results in the individual¶s financial sophistication, including being or having been a Chief

Executive Officer(CEO), Chief Financial Officer(CFO), or other senior officer with financial oversight

responsibilities.

7 . Review of information b y Audit Committee:-

The Audit Committee is required to mandatorily review financial statements and draft audit report, including

quarterly / half-yearly financial information, management discussion and analysis of financial condition andresults of operations, reports relating to compliance with laws and to risk management, management letters/

letters of internal control weaknesses issued b y statutory / internal auditors, and records of related party

transactions.

The appointment, removal and terms of remuneration of the Chief Internal Auditor shall be subject to review

by the Audit Committee.



28

8 . Disclosure of Accounting Treatment:-

The revised clause 49 requires that in case a company has followed a treatment different from that prescribed

in an Accounting Standards, the management of such company shall justify why they believe such

alternative treatment is more representative of the underlined business transactions. Management is also

required to clearly explain the alternative accounting treatment in the footnote of financial statements.

9 . W histle Blower P olicy:-

Companies have been required to formulate an Internal Policy on access to Audit Committees. Personnel

who observe any unethical or improper practice (not necessarily a violation of law) can approach the Audit

Committee without necessarily informing their supervisors.

Companies are also required to take measures to ensure that this right of access is communicated to all

employees through means of internal circulars, etc. The employment and other personnel policies of the

company should also contain provisions protecting ³whistle blowers´ from unfair termination and other

unfair or prejudicial employment practices.

Companies have also been required to affirm that it has not denied any personnel access to the Audit

Committee of the company (in respect of matters involving alleged misconduct) and that it has provided

protection to ³whistle blowers´ from unfair termination and other unfair or prejudicial employment

practices. Such affirmation should form part of the Board¶s report on Corporate Governance that is required

to be prepared and submitted together with the annual report.

10 . S ubsidiary Companies:-

The revised clause 49 provides that the provisions relating to the composition of the Board of Directors of the holding company are also applicable to the composition of the Board of Directors of subsidiary

companies. The clause further requires that at least one independent director on the Board of Directors of the

holding company should be a director on the Board of Directors of the subsidiary company.

The Audit Committee of the holding company has been empowered to review the financial statements, in

particular the investments made by the subsidiary company and the minutes of the Board meetings of the

subsidiary company to be placed for review at the Board meeting of the holding company. It is further

required that the Board¶s report of the holding company should state that they have reviewed the affairs of

the subsidiary company also.

11 . Disclosure of contingent liabilities :-

The revised clause 49 requires the management to provide a clear description in plain English of each

material contingent liability and its risks, which shall be accompanied by the auditor¶s clearly worded

comments on the management¶s view. This section is required to be highlighted in the significant

accounting policies and notes on accounts, as well as, in the auditor¶s report, where necessary.



29

12 . Additional Disclosures:-

The revised Clause 49 of the Listing Agreement requires the following additional disclosures:

i. Basis of related party transactions:- A statement of all transactions with related parties shall be

placed before the Audit Committee for formal approval/ratification. If any transaction is not on an

arm¶s length basis, management is required to justify the same to the Audit Committee.

ii. Board Disclosures ±Risk management:-The Board members should be informed about the risk

assessment and minimization procedures. These procedures shall be periodically reviewed to ensure

that executive management controls risk through means of a properly defined framework.

Management shall place a quarterly report certified by the compliance officer of the company,

before the entire Board of Directors documenting the business risks faced by the company, measures

to address and minimize such risks, and any limitations to the risk taking capacity of the corporation.

This document shall be formally approved by the Board.

iii. Proceeds from Initial Public O fferings (IP O s):- When money is raised through an Initial Public

Offering (IPO), 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 basis as a

part of their quarterly declaration of financial results. Further, on an annual basis, the company shall

prepare a statement of funds utilized for purposes other than those stated in the offer

document/prospectus. This statement shall be certified by the independent auditors of the company.

The Audit Committee shall make appropriate recommendations to the Board to take up steps in this

matter.

13 . Certification b y CEO/C F O:-

CEO (either the Executive Chairman or the Managing Director) and the CFO (Whole-Time Finance Director

or other person discharging this function) of the company has been put under an obligation to certify that, to

the best of their knowledge and belief, they have reviewed the balance sheet and profit and loss account andall its schedules and notes on accounts, the cash flow statements as well as the Directors¶ Report and these

statements do not contain any materially untrue statement, omits any material fact or do they contain

statements that might be misleading. Further they are required to certify that these statements together

present a true and fair view of the company, and are in compliance with the existing accounting standards

and/or applicable laws/regulations.

The revised clause requires them to be responsible for establishing and maintaining internal controls, to

evaluate the effectiveness of internal control systems of the company, and to disclose to the auditors and the

Audit Committee, deficiencies in the design or operation of internal controls, if any. They are also required

to disclose to the auditors as well as the Audit Committee, instances of significant fraud, if any, that involves

management or employees having a significant role in the company¶s internal control systems, whether or

not there were significant changes in internal control and / or of accounting policies during the year.

14 . Report on Corporate Governance:-

The companies have been required to submit a quarterly compliance report in the prescribed format to the

stock exchanges within 15 days from the close of the quarter. The report has to be submitted either by the

Compliance Officer or the Chief Executive Officer of the company after obtaining due approvals.



30

15 . Company S ecretary in P ractice to Issue Certificate of Compliance:-

This is a landmark amendment authorizing Company Secretaries in Practice among other professionals to

issue certificate of compliance of clause 49. The revised clause requires the company to obtain a certificate

from either the auditors or practicing company secretaries regarding compliance of conditions of corporate

governance and annex the certificate with the directors¶ report, which is sent annually to all the shareholders

of the company. The same certificate is also required to be sent to the Stock Exchanges along with the

annual returns filed by the company.

16 . Additional disclosure in the Report on Corporate Governance:-

The following additional items are required to be disclosed in the suggested list of Items to be included In

the Report on Corporate Governance in the Annual Report of Companies.

i. Disclosure of accounting treatment, if different, from that prescribed in Accounting Standards with

explanation.

ii. Whistle Blower policy and affirmation that no personnel has been denied access to the audit

committee.

17 . Additional Disclosures under N on-Mandatory Requirements

The following additional disclosures are required to be made under the non-mandatory requirements:

i. Audit qualifications: - Company may move towards a regime of unqualified financial statements.

ii. Training of Board M embers: - Company shall 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.iii. M echanism for evaluating Non-Executive Board M embers:-The performance evaluation of non-

executive directors should be done by a peer group comprising the entire Board of Directors,

excluding the director being evaluated; and Peer Group evaluation should be the mechanism to

determine whether to extend / continue the terms of appointment of non-executive directors.



31

Dr. J J Irani

Reco endations, 2005

Need for the recommendation

The existing Companies Act, 1956 is a voluminous document with 781 sections. It also contains provisions

that cover aspects which are essentially procedural in nature. In

certain areas, it prescribes quantitative limits which are now

irrelevant on account of changes that have taken place over a

period of time. This format has also resulted in the law

becoming very rigid since any change requires an amendment

of the law through the parliamentary process. Therefore, the law

has failed to take into account the changes in the national andinternational economic scenario speedily. As a result, in some

quarters, it is being regarded as outdated.

However, this need not be the case since many essential features

of corporate governance which are already recognized in the

Companies Act, 1956 need to be retained and articulated

further. What is required is that along with the changes in the

substantive law, wherever required, a review of procedural

aspects may also be undertaken so as to enable greater degree of self-regulation and easy compliance.

Therefore, This would enable the law to remain dynamic and to adapt to the changes in business

environment.1

I. Independent Directors:-

The Concept and Numbers of Independent Directors:-

The committee is of the opinion that since the Board is entrusted with a duty to balance the interests of the

stakeholders of the company, the existence of Independent directors on the Board of a Company would

improve corporate governance. Hence, it becomes a stipulation for public companies or companies with a

significant public interest.

The whole idea behind the concept is to bring an element of objectivity to the Board process towards the

general interests of the company and thereby to the benefit of minority interests and smaller shareholders.

Independence, therefore, is not to be viewed merely as independence from Promoter Interests but from the

point of view of vulnerable stakeholders who cannot otherwise get their voice heard.2Thus, it is imperativefor Law to recognize the principle of independent directors and spell out their role, qualifications and

liability. At the same time, care should be taken to bring distinguished prescription as per the different

categories of companies.

Major Recommendations:-

1J.J IRANI recommendations Report-Law and Adaption to Changing circumstances

2J.J IRANI recommendations Report-Ministry Of Corporate Affairs

It is recommended that the

Company Law may be so

drafted that while essential

principles are retained in thesubstantive law, procedural

and quantitative aspects are

shifted to the rules.



32

1. A committee with a minimum of one third of the total number of directors as

independent directors, irrespective of whether the Chairman is executive or non-executive,

independent or not. This extends to companies listed on the exchange and accepting public deposits.

2. Nominee directors appointed by Banks/Financial Institutions (FIs) or in pursuance of any agreement

or government appointees representing Government shareholding should not constitute as

Independent Directors as they represented specific interest.

Differentiation from Clause-49:-

1. Independent Directors Should constitute

a) 50% where there is an executive chairman

b) 33% where the chairman is non-executive

2. Nominee directors appointed by Banks/Financial Institutions (FIs) were considered as independent

3. Not mandatory for a subsidiary company to co-opt an independent director of the holding company

as an independent director on its board.

II. Definition of Independent Director/ Attributes of Independent Directors:-


The Committee insisted on a definition of Independent Director to be provided in law.

The expression µindependent director¶ should mean a non-executive director of the company who:-

a) Apart from receiving director¶s remuneration, does not have, and none of his relatives or

firms/companies controlled by him have, any material pecuniary relationships or transactions with

the company, its promoters, its directors, its senior management or its holding company, its

subsidiaries and associate companies which may affect independence of the director. For this

purpose ³control´ should be defined in law;

b) is not a relative of the above mentioned;

c) is not a supplier to the company;

d) is not a the statutory audit firm or the internal audit firm, the legal firm(s) and consulting firm(s) that

have a material association with the company, its holding and subsidiary companies;


THE J.J Irani committee has recommended a one year cooling off period against a 3 year cooling off in the

Clause-49.

III. Audit Committee for Accounting and Financial matters:-


The Committee recommends that:-

a) Majority of the Directors to be independent directors;



33

b) Chairman of the Committee also to be independent;

c) one of the members should possess good financial oversight;

d) The appointment of auditor is made on the same lines as under the provisions of the Companies act,

1956.

Other recommendations:-

y CEO and CFO should certify all internal controls mandated by the audit committee. A separate

statement on the assessment should also be provided in the director¶s report.

y The law should also provide for an active role for the shareholders¶ associations in ensuring high

quality of financial reporting.


1. The audit committee shall have minimum three directors as members. Two-thirds of the members of

audit committee shall be independent directors.

2. There is no stipulation regarding the no of meetings in a year for the audit committee

IV. Shareholders¶ Rights:-


C . S takeholders¶ Relationship Committee:

i. Compulsory formation of a Stake Holders Relationship Committee to monitor the redressal of

their grievances provided that the combined base of

a) Shareholder,

b) deposit holder,

c) debenture holder

Is thousand or more.

ii. A Non-Executive director should chair the Committee.

D . Meetings of Directors:-

y The Committee opines that law should assist the use of technology to carry out statutory processes

efficiently.

y Use of electronic means (Teleconferencing and video conferencing included) to carry out meetings

should be allowed; and

y Directors who participate through electronic means should be counted for attendance and form part

of Quorum.

E . Director Information on A ppointment:-

The committee has suggested that every company should disclose particulars of the directors

appointed in the public domain through statutory filing of information by the board of directors.

Differentiation from Clause-49:

1. Compulsory formation of a Stake Holders Relationship/Investors grievance Committee was

recommended by the committee



34

2. Only disclosures on website were allowed

V. Disclosure Requirements:-


A. Related party transactions:

1. The committee had in mind two options to regulate the related party transaction

i. Government Approval-based regime;

ii. Shareholder Approval and Disclosure-based regime

Based on the international standards, the later approach was considered appropriate.

B . Board remuneration:-

The committee recommended a remuneration policy based on company wishes in ored to ensure the

retention of talented and motivated directors. However it should be transparent and based on principles that

ensure fairness, reasonableness and accountability.

Differentiation from Clause-49:

The managerial remuneration is currently subjected to Government approvals, both in terms of remuneration

for each class and the overall remuneration permissible. On the other hand, the committee has emphasized

more on disclosures (both on quantity and quality) rather than providing limits/ceilings.

Other requirements:-

A. Chief financial officer

y The Committee was of the view that the concept of appointment of CFO should be recognized under

the Act. He should also be made responsible for preparation and submission of financial statements

to the Board along with Managing Director, CEO, CFO, and the Company Secretary.

y The law should also provide for an active role for the shareholders¶ associations in ensuring high

quality of financial reporting.

B . P

rovision of N

on- Au

dit S

ervices:

The committee wanted to raise the prohibition on the auditors to provide the non audit services subject to a

prescribed threshold of materiality. However, all non audit services must be approved b y the audit

committee.

C . P rotection to W histle Blowers:



35

Law should recognize the ³Whistle Blower Concept´ by enabling protection to

individuals who expose offences by companies, particularly those involving fraud. Such

protection should extend to normal terms and conditions of service and from harassment. Further, if such

employees are themselves implicated, their cooperation should lead to mitigation of penalties to which they

may otherwise be liable. In regard to the potentially insolvent companies, it is essential that self regulatory

measures be required to be taken by a company to protect the interests of various stakeholders, preserve

assets and adopt such other measures as may be necessary to contain insolvency. This would enable Whistle

Blowing on impending insolvency.3

Current Scenario

Regulation:-

Companies Act, 1956: Principle legislation providing the formal structure for corporate governance.

Other legislations:

y Monopolies and Restrictive Trade Practices Act, 1969 (which is replaced by the Competition

Act 2002)

y Foreign Exchange Regulation Act,1973 (which has now been replaced by Foreign Exchange

Management Act,1999)y Industries (Development and Regulation) Act, 1951 and other legislations

Board of Directors:-

3Committee definition of the whistle blower concept :J.J IRANI (recommendations)Report, 2004



36

y The Desirable Corporate Governance Code by CII (1998) for the first time

introduced the concept of independent directors for listed companies and compensation paid to

them.

y The Kumar Mangalam Birla Committee (2000) then suggested that for a company with an

executive Chairman, at least half of the board should be independent directors, else at least one-

third.

y The Revised Clause 49 based on the report by the Narayana Murthy Committee further elaborates

the definition of Independent Directors.

y The Revised Clause 49 now also states that all compensation paid to non ±executive directors,

including independent directors shall be fixed by the Board and shall require prior approval of

shareholders in the General meeting and that limit shall be placed on stock options granted to non

executive directors.

y The Board is also required to draft a µCode of Conduct¶ and affirm compliance to the same

annually.

Audit Committee:-

y In India, section 292A of the Companies Act 1956 requires every company with paid up capital

above Rs. Five crore to have an Audit Committee which shall consist of not less than three

directors and such number of other directors as the Board may determine of which two thirds of the

total number of members shall be directors, other than managing or whole-time directors.

y The Desirable Corporate Governance Code by CII (1998) also recommended listed companies with

either a turnover of over Rs.100 crores or a paid-up capital of Rs.20 crores to set up Audit

Committees within two years.

y In furtherance to the same the Kumar Mangalam Birla Committee, Naresh Chandra Committee and

the Narayana Murthy Committee recommended constitution, composition for audit committee to

include independent directors and also formulated the responsibilities, powers and functions of the

Audit Committee.

y The Audit Committee and its Chairman are also entrusted with the ethics and compliance

mechanisms of an organization, including review of functioning of the whistleblower mechanism,

where it exists.

Subsidiary Companies:-

The Narayana Murthy Committee recommended making provisions relating to the composition of the Board

of Directors of the holding company to be made applicable to the composition of the Board of Directors of

subsidiary companies and to have at least one independent director on the Board of Directors of the holding

company on the Board of Directors of the subsidiary company, were incorporated in the Revised Clause 49

of the Listing Agreement. Besides the Audit Committee of the holding Company is to review the financial

statements, in particular investments made by the subsidiary and disclosures about materially significant

transactions ensures that potential conflicts of interests with those of the company may be taken care of.



37

A. Role of Institutional Investors:-

If a company wants institutional investor participation, it will have to convincingly raise the quality of

corporate governance practices. Indian companies thus need to adopt the best practices such as the OECD

Corporate Governance Principles (revised in 2004) that serve as a global benchmark. In countries like India

where corporate ownership still continues to be highly concentrated, it is important that all shareholders

including domestic and foreign institutional investors are treated equitably.

B. Shareholders' Grievance Committee

y As one of its mandatory recommendations, the Kumar Mangalam Birla Committee propounded the

need to form board committee under the chairmanship of a non-executive director to specifically

look into the redressing of shareholder complaints like transfer of shares, non-receipt of balance

sheet, non-receipt of declared dividends etc.

y The Revised Clause 49 now mandates the formation of such a committee in light of the

recommendations of these committees and any defaults by the company in payments to

shareholders.

a) Risk Management

y The Kumar Mangalam Birla Committee report included mandatory Management Discussion &

Analysis segment of annual report that includes discussion of industry structure and

development, opportunities, threats, outlook, risks etc. as well as financial and operational

performance and managerial developments in Human Resource /Industrial Relations front.

y Risk Management was propounded for the first time by the Narayana Murthy Committee Report

by which it required that the company shall lay down procedures to inform Board members

about the risk assessment and minimization procedures. These procedures shall be periodically

reviewed to ensure that executive management controls risk through means of a properly defined

framework. This is incorporated in the Revised Clause 49 as a part of internal disclosures to the

Board.

b ) Ethics

y Every organization whether it is a company, club or a fraternal order, has expectations of how

its members should act among each other and with those outside its organization. A code of

conduct creates a set of rules that become a standard for all those who participate in the group

and exists for the express purpose of demonstrating professional behaviour by the members of

the organization.

y The Naresh Chandra Committee for the first time recommended that companies should have an

internal code of conduct. The Report by Narayana Murthy Committee further recommended

that a company should have a mechanism (whistle blower) to report on any unethical or improper practice or violation of code of conduct observed and that Audit Committee would be

entrusted with the role of reviewing functioning of the mechanism.

y The Revised Clause 49 incorporated these recommendations further mandating directors of

every listed company to lay down a Code of Conduct and post the code on their company¶s

website. The Board members and all senior management personnel are required to affirm



38

compliance with the code annually and include a declaration to this effect

by the CEO in the Annual Report.

y The recommendation of Narayana Murthy Committee to make Audit Committee responsible

for reviewing the functioning of the whistle blower mechanism, where it exists, is incorporated

in the Revised Clause 49.

c) Executive Remuneration

y Though the Revised Clause 49 does not mandate formation of a Remuneration Committee,

Section 309(1) of the Companies Act, 1956 requires that the remuneration payable both to the

executive as well as non-executive directors be determined by the board in accordance with and

subject to the provisions of section 198 either by the articles of the company or by resolution or

if the articles so require, by a special resolution, passed by the company in a general meeting.

Further, Schedule VI of the Act requires disclosure of Director's remuneration and computation

of net profits for that purpose.

y The Desirable Corporate Governance Code by CII (1998) also mandated the disclosure of each

director¶s remuneration and commission as a part of Director¶s Report.

y The Kumar Mangalam Committee then in its report included a non-mandatory requirement to

constitute a Remuneration Committee to determine on their behalf and on behalf of the

shareholders with agreed terms of reference, the company¶s policy on specific remuneration

packages for executive directors including pension rights and any compensation payment.

y The Naresh Chandra Committee further recommended on remuneration of Independent

directors.

y Presently, under Revised Clause 49, all fees/compensation, if any paid to non-executive

directors, including independent directors, are to be fixed by the Board of Directors and require

previous approval of shareholders in general meeting. The shareholders¶ resolution is to 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 in aggregate.

d) CEO/C F O Certification

y Internal control is a process, effected by an entity¶s board of directors, management and other

personnel, designed to provide reasonable assurance regarding the achievement of objectives in

the following categories:

o Effectiveness and efficiency of operations,

o Reliability of financial reporting, and

o Compliance with applicable laws and regulations.

y The Naresh Chandra Committee for the first time required the signing officers, to declare that

they are responsible for establishing and maintaining internal controls which have been

designed to ensure that all material information is periodically made known to them; and have

evaluated the effectiveness of internal control systems of the company. Also, that they have

disclosed to the auditors as well as the Audit Committee deficiencies in the design or operation



39

of internal controls, if any, and what they have done or propose to do to

rectify these deficiencies.

y The Revised Clause 49 requires the CEO and CFO to certify to the board the annual financial

statements in the prescribed format and the establishment of internal control systems and

processes in the company. CEOs and CFOs are, thus, accountable for putting in place robust

risk management and internal control systems for their organization¶s business processes.

Conc usion

y With a rampant increase in corporate scandals and thus the ensuing interest in corporate governance,

a plethora of corporate governance norms and standards have emerged across the globe. The

Sarbanes-Oxley legislation in the USA, the Cadbury Committee recommendations for European

companies and the OECD principles of corporate governance have set the benchmark for global

standards on corporate governance. India has been no exception to this rule. The Satyam scam, the

UTI scam, DSQ Software scam are evidences that justify the need for corporate governance in India.

According to a live-mint report, more than 87% of the companies were hit by a financial fraud from

2008-10 suggesting lack of transparency. Thus, several committee¶s and groups have looked into

this issue that undoubtedly deserves all the attention it can get.

y The continuous focus on stakeholder protection in India has led to the development of norms and

standards for the listed companies. But at the same time, bringing the private companies that form

the major part of the Indian corporate entities into a well knitted system of corporate governance has

remained unaddressed. The sheer importance of this problem can be understood from the fact that

only 1500 companies out of more than 50 thousand companies in India are only listed. The agency

problem is likely to be less marked there as ownership and control are generally not separated.

Minority shareholder exploitation, however, can very well be an important issue in many cases.

A code of conduct should

create value and not be

reduced to a compliance

protocol.



40

y Development of norms and guidelines is an important step towards improving corporate governance

among Indian companies. However, the lack of implementation has been a major concern especially

with respect to averaged Indian companies. The greed and the influencing power of the entities like

stock markets, analysts, financial institutions, promoters and majority shareholders has also made

the implementation process difficult in the higher-end companies

y Even the most prudent norms can be hoodwinked in a system plagued with widespread corruption.

Hence, a code of conduct should create value and not be reduced to a compliance protocol. But this,

of course is an idealistic situation, in an un-ideal world. They say, follow the spirit of law, not the

letter. And that is the end which leads to a beginning of every new code.

Annexure



41

Annexure I

Narayana Murthy panel report on corporate governance Is whistle blower policy

practical?

Rabindra Nath Sinha KOLKATA, April 7

THE whistle blower policy recommended in the recent report of SEBI's committee on corporate governance

and Clause 49 of the Listing Agreement, which was headed by Mr N.R. Narayana Murthy, Chairman and

chief mentor of Infosys Technologies, seems to have evoked the sharpest response from veteran company

secretaries, who have studied the key suggestions in detail.

In fact, judging by what they have to say, it is apparent that this particular recommendation, which is

intended to curb unethical and improper practices in corporates, is being singled out by company law

experts as simply impractical.

What is `whistle blower' policy? It is an internal policy on access to audit committees. What is the

committee's recommendation? Personnel who come to know about unethical or improper practices, whichmay not necessarily be a violation of law, should be able to approach the company's audit committee

"without necessarily informing their supervisors".

The committee wants corporates to take steps to see that this right of access is communicated to all

employees through internal circulars. Further, a company's employment and personnel policy should

provide a mechanism to protect whistle blowers from "unfair termination and other unfair, prejudicial

employment practices."

Senior company secretaries Business Line spoke to said that this recommendation, if implemented, would

be instrumental in breeding indiscipline as most likely the audit committee would be flooded with frivolous

complaints and minor issues. Many complainants might go by their personal likes and dislikes and thus the

possibility of the right of access to the audit committee being misused would always be there.

They noted that the committee had not said anything on providing evidence in support of a complaint,

disclosure of the identity of the complainant and the maximum number of complaints that an employeecould make in a year.

Elimination of unethical or improper practices is the responsibility of respective corporate promoters and

management, for which they have to put in place systems for efficient administration and transparent

transactions. Much also depends on the environment in which corporates operate and the policies that

govern their operations. A whistle blower policy can't be a foolproof safeguard against unethical and

improper practices, they contend.

The recommendation regarding composition of an audit committee has given rise to confusion. While this

panel has suggested that audit committee members should be non-executive directors, the Naresh



42

Chandra c

¡ ¡

¢

£ £

ee that preceded it s ¤

¥ ¥

ested that only independent directors should be on audit

committee ¦ The reality is that while all independent directors are non-e§

ecutive directors it is not so vice

versa.

Re¥

arding contingent liabilities ̈ it has been suggested that management's views thereon and auditor's

comments on management's views should be given in the annual report.

According to senior company secretaries ̈ there are instances where contingent liability cannot be

ascertained, such as, labour disputes, court cases etc. As the description suggests, it's all contingent uponfuture developments and, therefore, it can't be proper for a management to pass a judgement about the

ris © involved. Ideally, a management should only give the bac © ground of a contingent liability.

The Narayana Murthy panel is for restricting the tenure of non-e§

ecutive directors to three terms of three

years each, running continuously. The Naresh Chandra panel said that after a nine year-term the director

would not be considered independent, but surely the concerned person would be able to continue as a

non-e§

ecutive director.

Company secretaries make two points If the intention is to follow the Naresh Chandra committee's

suggestion, the Narayana Murthy panel's recommendation should be redrafted. Representatives of a

promoter remain on the board of a company as non-independent directors. The recommendation now

made rules out continuation of promoter-directors on the board beyond nine years at a stretch.

It needs to be clarified whether a partner of an audit firm or a solicitor's firm can be treated as an

independent director of a company if his firm is the auditor or legal advisor of another company in the same group.

On analysts and media role

THE Narayana Murthy committee on corporate governance also discussed reports brought out from time

to time by security analysts and the media, specially the financial press.

As for reports of security analysts, the committee has desired SEBI to make rules for:

* Disclosure whether the company that is being written about is a client of the analyst's employer or an

associate of the analyst's employer, and the nature of services rendered to such company, if any

* Disclosure whether the analyst or the analyst's employer or an associate of the analyst's employer hold

or held (in the 12 months immediately preceding the date of the report) or intend to hold any debt or

equity instrument in the issuer company that is the sub ject matter of the report of the analyst.

Regarding scrutiny of the media, particularly the financial press, it has observed the committee considered

views e

§

pressed by members.The Press Council of India has prescribed a code of conduct for the financial media. However, verif ying

adherence to the code is difficult. A detailed review by SEBI on the sub ject is desirable, keeping in mind

issues such as transparency and disclosures, conflicts of interest, etc. before making any rule. SEBI should

consider having a discussion with the representatives of the media,specially the financial press.



43

Annexure II

Mu

li, Ravi plan to push f o co po at governance norms

The succession plan, decided earlier, included N Ravi taking over as editor-in-chief after Rams retirementand Malini Parthasarathy taking over as editor of The Hindu

Vidhya Sivaramakrishnan

Chennai: The internal tussle in the family that publishesThe Hi ndu shows no signs of abating, with two

family members telling Mi nt that they plan to push for the retirement of the newspapers editor-in-chief N.

Ram and escalate some matters to the Company Law Board.

In telephone conversations, N. Murali, who has recently been re-designated as senior managing director,

and N. Ravi, who was supposed to take over as editor-in-chief of the group, said they would begin to push

for corporate governance norms in the firm.

Murali said there are three issues that he would focus on in the immediate future. One would be

retirement norms for family member directors and, therefore, the imminent retirement of Ram as agreed

by him in September 2009 and implementation of the succession framework as decided upon by board

members earlier. The succession plan included N. Ravi taking over as editor-in-chief after Rams retirement

and Malini Parthasarathy taking over as editor of The Hi ndu.

Fighting for rights: Senior managing director N. Murali says he would focus on retirement rules for family

member directors, entry norms for the younger generation and corporate governance issues for the firm.

Ar joon Manohar / Mint

The other two issues would be setting up of entry norms for the younger generation into the family

business and overall corporate governance issues, and fight for his rights as he was recently replaced by

another board member K. Bala ji.

I have been looking after all non-editorial areas of the company over many years and now my substantial

powers and responsibilities have been purportedly removed. And I have been given the position of senior

managing director, which is virtually a dummy position, said Murali. Therefore, I will fight for my powers,

including considering the option of going to the Company Law Board.

Events came to a head following an article published in The Ind ian Express on Thursday that spoke about an

internal tussle in the family due to Rams unwillingness to retire this year. Ram has threatened to initiate

defamatory proceedings against the senior editors and e

ecutives of The Ind ian Express.

It is unclear if he has initiated the proceedings, yet.

An email questionnaire sent to Ram was unanswered till late Friday evening.



44

Discussions on corporate governance have been on for over two years now, said Ravi. But nothing has

moved so far. But now, it has gone out of hand and it is time to put it (corporate governance norms) in

place.

According to Ravi, he, along with Murali, had prepared a document that outlined broad corporate

governance norms and circulated it among the board members on 18 February and the details were yet to

be filled in. He said other board members wanted time to study the proposals.

Annexure III

The previous survey, carried out in 2008, had only 47% complaining on this count. At least 75% of Indian firms said

instances of fraud had increased over the past two years

Khushboo Narayan

Mumbai: With white-collar crime almost doubling from last year, financial fraud by insiders remains the single

greatest f ear of Indian companies, according to the results of a survey by audit and consulting firm KPMG. The results

were released on Tuesday.

Of the 1,000 companies covered in the survey, 87% said they had incurred losses of at least Rs10 lakh due to fraud in

2009.

The previous survey, carried out in 2008, had only 47% complaining on this count. At least 75% of Indian firms said

instances of fraud had increased over the past two years.

A lack of ob jective and independent internal audits, inadequate oversight of senior managements activities by the

audit committee, and weak regulatory environment were pinpointed as culprits for the spike in financial statement

frauds.

The 10th biennial India Fraud Survey Report 2010 reveals that 81% of the companies surveyed f eel that financial

statement fraud is the biggest threat in India, with at least 60% of them saying inadequate enforcement of regulations

has increased such fraud.

The findings of the report suggest that weak internal control systems, eroding ethical values and lack of legal action

against fraudsters create an environment conducive to such crimes.

The survey, conducted by KPMGs forensic wing in India, covered leading Indian firms from the public and private

sectors. The respondents included chairman and managing directors, chief o perating officers, chief financial officers,

internal auditors, heads of investigation divisions and other senior management officials.

Indian companies, according to the study, remain highly vulnerable to fraud in the absence of inadequate internal

control framework that can identif y and deal with such crimes. The report suggests that 41% of Indian firms do not

have fraud risk management systems.

The KPMG report shows that 45% of the firms have e

perienced fraudulent activities in the past two years, with

financial services and consumer markets showing the highest levels of risk.

But more than the lack of monitoring systems, what is prevalent and disturbing is the reluctance of companies toreport incidence of frauds. According to the survey, only 35% of the companies initiated legal action against a

perpetrator of fraud. A ma jority of the frauds had been investigated internally.

That, however, may be changing. Deepankar Sanwalka, head (forensic services), KPMG, said that following the scam

at Sat

am Computer Services Ltd, in which founder and chairman B. Ramalinga Ra ju admitted to showing non-

e

istent income over the years of Rs7,136 crore, the trend in fraud detection has changed.

Companies are more open to discuss and take action against fraudsters. Increasingly, fraud risk mitigation

mechanism are being discussed in management meetings, he said.



The frauds covered in the survey include anti-corruption compliance. Almost 42% of the companies strongly believed

bribery is acceptable behaviour in India while 38% said it is an integral f eature of the practices in their industry.

According to the World Bank, bribes paid annually amount to more than $1 trillion (Rs44.5 trillion) globally.

India scores poorly on corruption and bribe payments in the list of organizations such as Transparency International,

which ranks countries based on corruption and propensity to demand bribes.

Indias corruption perception inde

score in 2009 was 3.4 on a scale of 0-10, with 10 being the least corrupt.

In 2008, it was one of the bottom four on the global bribe payers inde

, with a score of 6.8.The way to a cleaner balance sheet, however, may be harder than e

pected. As Rohit Maha jan, e

ecutive director

(advisory), forensic services, KPMG, told Mi nt, Indian firms lack (a) holistic approach to frauds. Focusing on financial

fraud will not help control white-collar crimes.

Final - Ethics Project

Documents

Transcript of Final - Ethics Project