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SHRI. N.R.NARAYANA MURTHYCOMMITTEE
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What Is Corporate Governance ?
Corporate Governance is the acceptance by
Management ofthe inalienable rights of
shareholders as the true owners ofthe
corporation and oftheir own role astrustees on behalf ofthe share holders.
It is about commitment to values , aboutethical business conduct and making a
distinction between personal and corporate
funds in the management ofa company.
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History Of CG In India
Corporate Governance initiatives in India
began in 1998 with the Desirable Code of
Corporate Governance - A voluntary code
published by CII.
Later it was followed up by the
Kumaramangalam Birla Committee Report
In February , 2000
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Why Shri.N.R.Narayana Murthy
Committee ?
Fair and transparent to shareholders in all transactions
Want of Ethical Leadership Existence
CG cannot be regulated by legislation alone Increased Attention on CG is a result of financial crisis
Investors Expectation To Adopt Good CG practices
SEBIs beliefto improve CG standard in India
There is no single model ofgood CG
If Management is about running businesses , then CG isabout .
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Peoples Question
????? CG costs are high ?????
What SHRI . N. R. Narayana Murthy Says :
It should be noted that the failure to
implement good governance procedures
has a cost beyond regulatory problems .
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Implementation of corporate
governance requirements
The Recommendations were implemented
through Clause 49 of the Listing
Agreements, in a phased manner by SEBI.
They were made applicable to all companies
in the BSE 200 and S&P C&X Niftyindices, and all newly listed companies, as of
March 31, 2001.
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Compliance withthe Codeand SEBIs
experience
The companies haveto submit compliance statuson eight sub-clauses namely:
-->Board ofDirectors
--> Audit Committee
--> Shareholders / Investors GrievanceCommittee
--> Remuneration ofdirectors
-->Board procedures
--> Management
--> Shareholders
--> Report on Corporate Governance
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All companies are required to submit a
quarterly compliance report to the stock
exchanges within 15 days from the end ofa
financial reporting quarter.
The report has to be submitted either by the
Compliance Officer or by the Chief Executive
Officer ofthe company after obtaining dueapprovals
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Rationale for a review ofthe Code
SEBI believedthata needto review theexisting
code on corporate governancearose fromtwo
perspectives :-(a) To evaluatetheadequacy oftheexisting
practices
(b) To further improvetheexisting practices.
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Constitution ofthe Committee
The SEBI Committee on Corporate Governance
(the Committee) was constituted under the
Chairmanship of Shri N. R. Narayana Murthy,
Chairman and Chief Mentor of Infosys
Technologies Limited.
The Committee met thrice on December 7,
2002, January 7, 2003 and February 8, 2003, todeliberate the issues related to corporate
governance and finalize its recommendations
to SEBI.
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Terms of Reference
** To review the performance of corporate
governance
** To determine the role of companies in
responding to rumour and other price
sensitive information circulating in the
market, in order to enhance the
transparency and integrity ofthe market.
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ApproachImportance
How important is the recommendation to the member?
FairnessDoes the recommendation enhance fairness to all
stakeholders, by minimizing asymmetry ofbenefits?
Accountability
Does the recommendation make corporate management more
accountable?Transparency
Does the recommendation enhance transparency?
Ease ofimplementation
Is the recommendation easy to implement?
VerificationIs the recommendation objectively verifiable?
Enforcement
Can the recommendation be effectively enforced?
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Recommendations whose ratings were 7and
above were then aggregated, on eachoftheseven parameters setoutabove.
The recommendations were then sortedin
descending orderof importance.
The top 20 recommendations were presented
to the Committee for their views.
These recommendations were discussedin
detail by the members and will form the basis
of the final recommendations of the
committee.
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Key Issues Discussed
andRecommendations
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Audit committee
Members should be financially literate with atleast oneexpert
Explanation 1 The term financially literate means theability to read and understand basic financial statementsi.e. balance sheet, profit and loss account, and statementof cash flows.
Explanation 2 A member will be considered to haveaccounting or related financial management expertise ifheor she possesses experience in finance or accounting, orrequisite professional certification in accounting, or any
other comparable experience or background which resultsin the individuals financial sophistication, including beingor having been a chiefexecutive officer, chief financialofficer, or other senior officer with financial oversightresponsibilities.
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Audit Committees Should Review
Financial statements and draft audit report,including quarterly / half-yearly financialinformation
Management discussion and analysis of
financial condition and results of operations Reports relating to compliance with laws and
to risk management
Management letters / letters ofinternalcontrol weaknesses issued by statutoryInternal auditors
Records of related party transactions.
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Audit Reports and Audit Qualifications
In case a company has followe d a treatmentdifferent from that prescribed in an accountingstandard, management should justify why they
believe such alternative treatment is morerepresentative of the underlying businesstransaction.
Management should also clearly explain thealternative accounting treatment in the footnotesto the financial statements
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RelatedParty Transactions
Records ofall transactions with related parties
including their bases / methodology should be
placed before the Independent auditcommittee at each Board meeting for formal
approval/ratification.
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Risk Management
Management should place a report before the
entire Board ofDirectors every quarter
documenting the business risks faced by thecompany, measures to address and
minimize such risks, and any limitations to the
risk taking capacity ofthe corporation and thisdocument should be formally approved by the
Board.
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Training of Board members
It was also suggested that Board members be
trained in the business model ofthe company
as well as the risk profile ofthe business
parameters ofthe company.
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Proceeds from InitialPublic Offerings
(IPO)
Companies raising money through an InitialPublic Offering (IPO) should disclose to theAudit Committee, the uses / applications of
funds by major category (capital expenditure,sales and marketing, working capital, etc), ona quarterly basis.
This statement should be certified by theindependent auditors ofthe company.
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Code of Conduct
It should be obligatory for the Board ofa
company to lay down the code of conduct
for all Board members and senior
management ofa company.
This code of conduct shall be posted on the
website ofthe company.
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Nominee directors
There shall be no nominee directors.
Where an institution wishes to appoint a director onthe Board, such appointment should be made by the
shareholders. An institutional director, so appointed, shall have the
same responsibilities and shall be subject to the sameliabilities as any other director.
Nominee ofthe Government on public sectorcompanies shall be similarly elected and shall besubject to the same responsibilities and liabilities asother directors.
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Non-Executive Director Compensation
All compensation paid to non-executivedirectors may be fixed by the Board ofDirectors and should be approved by
shareholders in general meeting.
Limits should be set for the maximum
number of stock options that can be grantedto non-executive directors in any financialyear and in aggregate.
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Independent Directors
Apart from receiving director 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 associatedcompanies
Is not related to promoters or management at
the board level or at one level below the Board
Has not been an executive of the company in
the immediately preceding three financial years
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Is not a partner or an executive of the statutoryaudit firm or the internal audit firm that is
associated with the company, and has not beena partner or an executive of any such firm forthe last three years.
Is not a supplier, service provider or customer of
the company. This should include lessor-lesseetype relationships also
Is not a substantial shareholder of the company,i.e. owning two percent or more of the block of
voting shares. Same Remuneration as if paid to a non-
executive director
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Whistle Blower Policy
Personnel who observe an unethical orimproper practice (not necessarily a violation oflaw) should be able to approach the auditcommittee without necessarily informing theirsupervisors.
Companies shall take measures to ensure thatthis right of access is communicated to allemployees through means ofinternal circulars,etc.
The employment and other personnel policiesof the company shall contain provisionsprotecting whistle blowers from unfairtermination and other unfair prejudicialemployment practices.
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The appointment, removal and terms of
remuneration of the chief internal auditor
must be subject to Audit Committee Review.
Such affirmation shall form a part of the
Board report on Corporate Governance that
is required to be prepared and submitted
together with the annual report.
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Subsidiary Companies
The provisions relating to the composition of theBoard of Directors of the holding companyshould be made applicable to the composition
of the Board of Directors ofsubsidiarycompanies.
At least one independent director on the Board
of Directors of the parent company shall be adirector on the Board of Directors of thesubsidiary company.
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Real Time Disclosures
The Committee also noted the issue of rumorverification by stock exchanges. It noted a view thatBoard decisions that were price sensitive should bedisclosed to the markets within 15 minutes. Stockexchanges are currently responsible for rumorverification.
The Committee however believed that this issue
needs to be studied with much greater depth by SEBIand the stock exchanges, and should not be restrictedto a corporate governance perspective alone.
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These wouldincludeevents suchas :-
(a) A change in the control oftheCompany
(b) A companys acquisition / disposal ofa
significant amount ofassets(c) Bankruptcy or receivership
(d) A change in the companys independent
auditors(e) The resignation ofa director.
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Recommendations of the Naresh
Chandra Committee
Management should provide a clear description in plainEnglish of each material contingent liability and its risks,which should be accompanied by the auditors clearlyworded comments on the managements view.
This section should be highlighted in the significantaccounting policies and notes on accounts, as well as, inthe auditors report, where necessary.
This is importantbecause investors and shareholdersshould obtain a clear view of a companys contingentliabilities as these may be significant risk factors thatcould adversely affect the companys future financialcondition and results of operations.
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CEO / CFO Certification
Reviewed the balance sheet and profit and lossaccount
Statements together present a true and fair view ofthe company
Responsible for establishing and maintaining internalcontrol
Disclosed to the auditors as well as the AuditCommittee, instances of significant fraud
Indicated to the auditors, the Audit Committee and in
the notes on accounts, whether or not there weresignificant changes in internal control and / or ofaccounting policies during the year.
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Removal ofIndependent Directors
It was suggested that companies should inform SEBI /stock exchanges within five business days of the removal/ resignation of an independent director, along with astatement certified by the managing director / director /company secretary about the circumstances of suchremoval / resignation (specifically whether there was anydisagreement with the independent director that causedsuch removal / resignation).
Any independent director sought to be removed or whohas resigned because of a disagreement withmanagement should have the opportunity to be heard ingeneral meeting.
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Term of Office ofNon-Executive
Directors
Persons should be eligible for the office of non-
executive director so long as the term of office
did not exceed nine years (in three terms of
three years each, running continuously).
The Committee recommends that the age limitfor directors to retire should be decided by
companies themselves.
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Disgorgement of Profits
It was suggested that CEOs / COOs / CFOs
should disgorge equity or incentive based
compensation, or profits arising from trading
in company stock, if a restatement of
financial statements is required or if there is
any corporate misconduct leading to a
financial liability.
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Corporate Governance Ratings
It was suggested that corporate governancepractices followed by companies should
be rated using rating models.
It was also suggested that companies should
be rated based on parameters of wealthgeneration, maintenance and sharing, as wellas on CG.
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SIGNED BY
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Shri N R Narayana Murthy, Chairman & Chief Mentor,Infosys Technologies Limited - Chairman oftheCommittee
Shri Y H Malegam, Managing Partner, S B Billimoria &Co.
Shri Ravi Narain, Managing Director, NSE
Shri A C Muthiah, President, FICCI
Shri R K Somany, President, ASSOCHAM Shri Ashok Soota, President, CII
Shri M K Doogar, Representative, PHDCCI
Shri Sumit Mazumder, President, BCCI
Shri Kamlesh S. Vikamsey, Member Central Council,ICAI
Shri S Gangopadhyay, President, ICSI
Shri T. R. Ramaswami, CEO, AMBI
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Dr. Manoj Vaish, Executive Director, BSE
Shri A K Narayan, President, Tamil Nadu InvestorsAssociation
Shri Nitin Shingala, Investors Grievances Forum Prof. Manubhai Shah, Managing Trustee, CERC
Shri Omkar Goswami, Chief Economist, CII
Ms Sucheta Dalal, Consulting Editor, Financial Express
Shri R Gopalakrishnan, Executive Director, Tata Sons Ltd. Shri D M Satwalekar, M D & CEO, HDFC Standard Life
Insurance
Shri M K Chouhan, Chairman, Mahendra & YoungKnowledge Foundation
Ms. D N Raval, Executive Director, SEBI
Shri Pratip Kar, Executive Director , SEBI
Shri P K Bindlish, General Manager, SEBI, Member Secretary
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Conclusion
The Committee believes that Its
recommendations raise the standards ofcorporate governance In Indian firms andmake them attractive for domestic and globalcapital.
These recommendations will also form thebase for further evolution of the structure ofcorporate governance in consonance with therapidly changing economic and industrialenvironment of the country in the upcomingyears too.
- SHRI . N.R. NARAYANA MURTHY
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