regulatory framework of corporate governance -...
TRANSCRIPT
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Regulatory Framework of Corporate Governance
3.1 Emergence of Corporate Governance:
The seeds of modern corporate governance were sown by the Watergate scandal in the
United States. Detailed investigations was conducted by the U.S. Regulatory and
Legislative body. It was detected that the loopholes in the control mechanism paved way
to several major corporations to make illegal political contributions and to bribe
government officials. This necessitated the development of foreign and corrupt practice
Act 1977. The act contained specific provisions related to establishment, maintenance
and review of systems of internal control. In 1979, the Securities and Exchange
Commission of the U.S.A’s proposals for mandatory reporting on internal financial
controls came to be enforced. The year 1985 has witnessed a series of high profile
business failures in U.S.A., the most notable one among them being the Savings and
Loan collapse. Therefore, the Tread Way Commission was formed. The primary role of
this commission was to identify the main causes of misrepresentations in financial reports
and to recommend ways of reducing such misrepresentations.
The Tread Way Report published in 1987, highlighted the need for a proper control
environment, independent Audit committees and objective Internal Audit Function. It
called for published reports on the effectiveness of internal control. In a way, it
motivated the sponsoring organizations to come forward with an integrated set of internal
control criteria to facilitate companies to improve their control systems. As a result the
Committee of Sponsoring Organization (COSO) was born. In the year 1992, the
committee produced a report that stipulated a control framework which has been
endorsed and refined in the subsequent United Kingdom reports.
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The issue of corporate Governance became particularly significant in the context of
globalization because one special feature of the late 20th century / 21st century,
globalisation, is that in addition to the traditional three elements of the economy namely
physical capital in terms of plant and machinery, technology and labour, the volatile
elements of financial capital invested in the emerging markets and in the third world
countries is an important element of modern globalization and has become particularly
powerful. The significance and the impact of the volatility of the financial capital was
realized when in June 1997, the currency of South East Asian countries started melting
down in countries like Thailand, Indonesia and South korea. It was realized by the
world bank and all investors that it is not enough to have good corporate management but
one should have also good corporate governance because the investors want to be sure
that the decisions taken are ultimately in the interests of all stakeholders. Honesty is the
best policy is a fact that is being rediscovered.
3.2 Corporate Governance Reports across globe
1. Organization for Economic Co-operation and Development:
The Organization for Economic Co- operation and Development (OECD) in its principles
of good governance has identified requisite elements of good corporate governance. The
first requisite is that majority of directors should come from outside the company and
should not have business or personal ties with it. This would imply that shareholder
promoter directors should be in minority in the board. This requisite is not met in public
Sector and Banks where the reverse is true with outside directors being in minority. Even
in the private sector, barring a few professionally managed companies, this condition is
not met. The other conditions are that the board should protect the rights of shareholders
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including minority shareholders, provide timely and accurate disclosure of the company’s
financial performance and effectively monitored management.
2. Greenbury Committee:
Greenbury Committee was set up under the chairmanship of Sir Richard Green Bury in
July 1995. The committee, in its report recommended a code of best practice based on
the fundamental principles of accountability and transparency and linkage of rewards to
performance. The committee also gave recommendations related to Directors’
remuneration. It also recommended setting up of remuneration committee in each
company to solve remuneration related matters. Further, the above report focused on
some points like formation of a Board Remuneration Sub – Committee consisting of non-
executive Directors to settle the remuneration of their executive colleagues, reduction of
notice periods in Executive Service contracts to 12 months, improved disclosure of
directors’ remuneration in annual reports and access to the remuneration committee
chairman at annual general meetings for proper interaction. It also recommended that the
Directors need to delegate responsibility for determining executive remuneration to a
group of people with good knowledge of the company and the same group shall submit a
full report to the shareholders each year explaining the company’s approach regarding
executive remuneration and providing full disclosures of all elements in the remuneration
of individual directors.
3. Cadbury Committee:
It was set up under the chairmanship of Sir Adrain Cadbury in May 1992 by the
Financial Reporting council of London Stock Exchange and accounting profession
(United Kingdom). The committee submitted its report in December 1992 wherein it
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recommended guidelines for the Board of Directors. The Cadbury Code of Best Practices
had 19 recommendations. The guidelines specifically referred to the various components
of the boards as Non – Executive Directors, Executive Directors and Independent
Directors. The recommendations themselves were not mandatory, the companies listed on
London Stock Exchange were asked to explicitly state in their accounts whether or not
the code had been followed. The companies who did not comply were required to explain
the reasons for that. The committee recommended independent judgement for the non-
executive directors, division of responsibility, effective control over company affairs and
regular meetings of the Board of Directors. The majority of directors should be
independent directors because of their attitude of impartiality rewards other stakeholders.
4. The Hample Committee:
It was set up on Corporate Governance under the chairmanship of Sir Ronald Hample in
1998 in UK to review the impact of the Cadbury Code. Hample committee not only
focused on broad governance principles that emphasize on business performance but also
on the accountability of business towards large stakeholders. The committee suggested
that the companies should organize their own governance arrangements and disclose
them to shareholders. For example, if a company wishes to combine the roles of chairman
and Chief executive, it should do so and explain the decision to shareholders. The
committee issued a list of governance principles related to the role of directors, director
remuneration, role of shareholders accountability and audit committee. It also
acknowledged the fact that the importance of Corporate Governance lies in its
contributions both in terms of attaining business prosperity and ensuring accountability of
board.
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5. The Blue Ribbon Committee
The Blue Ribbon Committee was jointly sponsored by the New York Stock Exchange
(NYSE) and National Association of Security Dealers (NASD) for improving the
working of corporate audit committees. The Committee has given certain
recommendations specifically for the Audit Committees. The recommendations are:
1. The members of the Audit Committee should be independent directors and financial
literate.
2. External auditors being the representatives of shareholders should periodically
discuss the quality of company’s accounting principles in relation to General
Accepted Accounting Principles (GAAP) with the audit committees.
3. Statutory auditors should maintain their independence in discharging their
professional responsibilities, and
4. On an annual basis, the committee should review and discuss with the accountants
all significant relationships the accountants have with the corporation to determine
the accountants’ independence.
Blue Ribbon committee has also recommended that Audit committee should have a
formal written charter.
6. The Mevyn King Committee
The Mevyn King Committee was set up in 1994 in South Africa at the instance of the
Institute of Directors of South Africa with support from the South African Chamber of
Business and the Chartered Institute of Secretaries and Administrators. The King
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Committee’s terms of reference were much wider than those of the Cadbary Committee
as is evident from the following term of reference:
(1) To consider and make recommendations on a code of practice on the financial
aspects of corporate governance in South Africa.
(2) To recommend simpler reporting without sacrificing the quality of information.
(3) To lay down guidelines for ethical practices on business enterprises in South Africa.
(4) To keep in view the special circumstances in South Africa concerning entry of
disadvantaged communities into business.
The Committee has also given certain recommendations for improving the quality of the
governance of enterprises in South Africa. The recommendations are as follows:
(1) The Boards should be balanced between Executive and Non- Executive Directors
(2) Roles of Chairperson and Chief Executive Officer should be split and in the absence
of split there should be at least two non-executive directors
(3) The Director’s report should incorporate statements on their responsibilities in
respect of financial statements, accounting records, internal audit, adherence to the
code of corporate practice and conduct along with details of non- adherence
(4) Share-holders should properly use the meetings by asking questions on the accounts
for which form should be provided in the annual reports and
(5) Corporate should have effective internal audit committee with written terms of
reference from the board.
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Table no. 3.2 Committees across the globe
Year Name of the Committee Area/Aspects Covered
1992 Sir Adrian Cadbury Committee, UK Financial Aspects of Corporate
Governance
1994 Mervyn E. King’s Committee, South
Africa
Corporate Governance
1995 Green bury Committee, UK Independent Director’s Remuneration
1998 Hampel committee, UK Combined Code of Best Practices
1999 Blue Ribbon Committee , US Improving the Effectiveness of Corporate
Audit Committee
1999 OECD Principles of Corporate Governance
1999 CACG Principles for corporate Governance in
Common Wealth
2003 Derek Higgs Committee , UK Review of role of effectiveness of Non-
executive Directors
2003 ASX Corporate governance council,
Australia
Principles of Good Corporate governance
and Best Practice Recommendations
Source: Corporate Governance in Asia, R.K. Mishra and J.Kiranmai
3.3 Models of Corporate Governance:
In general, there are two corporate systems prevailing in the various countries to be
distinguished. They are as follows:
1. Continental
2. Anglo – Saxon model
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In the continental model (known as insider model), the interests of the management,
employees and banks are integrated. The stakeholders have a long term and intense
relationship with the company: mostly prevailing in continental European countries like
France, Germany and Italy which have relatively small equity markets and hence pay
little attention for protecting minority shareholder rights.
In the Anglo- Saxon model, the corporation is an extension of the shareholder. The
widely spread shareholding and the related conflict of interests between managers and
shareholders lead to the liberal and active market of corporate control. This model
followed in the English Speaking countries like India, U.S.A and U.K., is called as
“Outsider” model also.
From the above discussion, it is thus clear that no two countries share the same code of
corporate governance and every country formulates its own guidelines and principles of
corporate governance according to the environment prevailing in their respective regions
and the country.
Good Governance as Code of best corporate practices, ethics, a strong and responsible
Board of Directors – All these are prerequisites for survival and excellence in today’s
competitive world. These should hence be part of any organization ’s corporate strategy.
The march has already begun, the journey being long, good sense with necessary
commitment should bring about the desired rules and standards for better corporate
governance.
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3.4 Players in Corporate Governance:
Corporate Governance comprises of many players such as Board of Directors, Non-
Executive Directors, Institutional Directors, Audit Committee, Company Secretaries,
Accounting Professionals, Government and other law making agencies, Small investors,
consumers, Vendor and Strategic partners, employees, media etc.
Board of Directors: The Board of Directors is entrusted with the responsibility of overall
direction and management of the affairs of the company. They are bound to comply with
the provisions of the Companies Act 1956 and to perform the general and specific duties
imposed by the Articles of Association. They are responsible for preparing annual
accounts and also maintain proper records as per the requirement of companies Act for
preventing and detecting frauds and irregularities. The need of the hour is to select only
capable Board of Directors so that they may manage and guide the operations of the
company efficiently, effectively, and diligently and protect the interest of stakeholders.
They shall ensure that adequate information, audit and control system exist in the
company and to see that the company complies with legal and ethical standards. The
Head of board of directors is called Chairman, who should have a dynamic outlook,
professional experience, clear vision and leadership qualities..
Non – Executive Directors: The non-executive directors are other than managing
director and functional. The directors are nominated by the government from various
fields. They must have very rich professional experience. Their appointment and
reappointment should not be automatic but based on their previous performance. Today,
in the age of competition and integration with global markets, the Non-Executive
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Directors should, as eyes and ears of the chairman, convey their independent and expert
views to the chairman and maintain balance between the chairman and objectives of the
company. They should try to protect the interest of all stake holders rather than acting as
“Yes man” of the Chairman.
Institutional Director: In changing corporate environment, the role of Institutional
Director’s has changed from mere spectators to big key players. Financial Institution’s
hold major chunk of shares in company, hence their role has become very important in
transparency and accountability .In pursuit of this objective, the Financial Institution’s
have prescribed a 19 point agenda for nominees in companies. These objectives
included long-term dividend policy, depreciation, investment in unlisted companies,
merger and acquisitions, loans and advances, further issues of shares or raising loans for
companies and award of contracts. Institutional Director’s are expected to play a key role
in these areas for good governance. However the list of areas cannot be assumed as final.
Audit committee: It is a sub-committee of the Board of Directors consisting of a
minimum of three independent non-executive directors and is answerable to the Board.
The basic function of an Audit committee is like that of a watchdog. Its role is to ensure
that the auditors of the company perform their duties satisfactorily and to the best interest
of the shareholders. The presence of audit committee would improve the quality of
financial reporting, create a climate of financial discipline and control and increase public
confidence in the credibility and objectivity of financial statements besides providing a
forum to finance director and external and internal auditors to discuss their problems and
issues of concern. Although the concept of Audit Committee is new to India, its role in
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upgrading the standard of corporate governance has since long been well recognized in
the West. For instance, since 1978 the New York Stock Exchange requires all listed
companies to set up audit committees consisting of independent non-executive Directors.
Similarly in the U.K. after the Cadbury committee Report on Corporate Governance, the
setting up of audit committee has become a common feature among large corporations. In
India, the Ministry of Petroleum and Natural Gas has issued guidelines to the entire
public sector oil corporation to set up audit committees in August 1997.Oil and Natural
Gas Corporation (ONGC) was the first to establish audit committee in pursuance of these
guidelines.
Company Secretary (CS): The job of a Company Secretary is to ensure that the
company’s multifarious activities are performed smoothly and conform to the provisions
of law. According to Cadbury committee, “The CS has to play a very important role in
ensuring that Board procedures are not only scrupulously followed but also regularly
reviewed. The Chairman and the Board mostly depend on the Company Secretary for
guidance as to how they should discharge their responsibilities under the stipulated rules
and regulations. All directors should have access to the advice and services of CS and
should recognize that the Chairman is entitle to the strong and positive support of the CS
in ensuring effective functioning of the Board”. The Company Secretary has to play a
major role in Corporate Governance and to submit his professional advise to Board of
Directors.
Accounting Professional (AP): With the changing corporate environment the role of
Accounting Professional is also changing. They provide non-financial trading services
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apart from traditional auditing work. The Working Group on recently amended
Companies Act, 1997 observed, “Integrity of accounting and auditing procedures and the
quality of financial disclosures are fundamental to corporate transparency and longterm
shareholders support”. In the present day, auditor is not only responsible to management
and shareholder but also to all the stakeholders of the company. Therefore the auditors
should also try to bring out even the least matter before the stakeholders of the company
to enable them to add value to every role they play. They should also express their
expert opinion regarding product profitability, strategic planning, transparency etc.
Government and other law making agencies: Since the introduction of Companies Act
1956, the Government of India enacted many legislations such as Monopolistic and
Restrictive Trade Practices Act (MRTP ACT) 1973, Consumer Protection Act 1986,
Securities Exchange Board of India (SEBI) guidelines regarding Capital markets, insider
trading and prohibition of Fraudulent and unfair trade practices, takeover code etc., to
make corporate sector more accountable. Reserve Bank of India and SEBI have been
modifying their provisions from time to time with changes environment. Though by
enacting laws the level of responsibility and accountability can be increased, the
implementing agencies have to play a major role for implementation of the enacted laws
for good Corporate Governance.
Small Investors: The ownership and management of the company are in different hands.
The number of shareholders is very large and they are spread over all corners of the land.
It is not feasible for them to manage the affairs of the company. Majority of the
shareholders feel satisfied when they receive dividend and they don’t care to see even
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annual reports of the company. But in changing environment they should not be satisfied
with dividend only. They should take interest in reading and analyzing annual reports of
the company. They should not hesitate in demanding additional information from
directors and unite themselves for good Corporate Governance.
Consumers: Consumers who are sometimes shareholders too, decide about the future of
the company and no consumer would like to deal with the company which is not
transparent and consumer friendly. If the company does not redress the grievances of the
consumer, they will be dissatisfied and go for the product of the other company which is
more transparent and consumer oriented. Therefore the company should behave as a
responsible citizen because the company has to sustain the society and the consumers are
an inevitable part of the society.
Vendor and Strategic Partners: No company can think of its progress without the help
of it’s vendor network. It is unlikely that the consumers will accept every product that
the company produces and now in the age of competition vendors are also becoming
selective as consumers. Some good companies are offering shares to their vendors and
strategic partners to make them more responsible. By becoming shareholders they would
work for good Corporate Governance.
Employees: Employees know the correct inside information of the company and they
should not hesitate in pointing out the shortcoming of their superiors. Their responsibility
rises further, if they are also the shareholder of the company. In the wake of new
developments the companies are largely off-loading their shares to their own employees
in order to make them more responsible and also for giving a sense of belongingness and
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security. For good corporate governance, they should not be satisfied with their salary
only and should be alert about the day to day functioning of the company, since their
future is also at stake along with the company.
Media: Media covering corporate news has become very popular in the recent years. The
experts employed by the media keep a close watch on almost each and every activity of
the company and gives an opportunity to the general public including the shareholders to
know about the company affairs. Profit and Loss A/C , P/E ratio , Earning Per Share etc.,
are analyzed by a team of experts involved in the program to be telecasted and their
discussions ,findings and critical analysis if the situation are very useful for the people
directly or indirectly related to the business. These experts give their opinions and
experiences highlighting the different aspects of the company and giving the stakeholders
an insight of the companies. It was Jain T.V. that prevented BSEs takeover by Reliance
industries. It is a good example to show the potency of the media in corporate
governance.
3.5 Principles of corporate Governance:
Contemporary discussions of Corporate Governance tend to refer to principles raised in
three documents released since 1990: The Cadbury Report (U.K., 1992), the Principles of
Corporate Governance (OECD, 1998 and 2004), the Sarbanes – Oxley Act of 2002 (US,
2002). The Cadbury and OECD reports lay down the general principles of proper
governance to be followed by business establishments. The Federal Government in the
United States enacted the Sarbanes – Oxley Act, informally referred to as Sarbox or Sox,
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to bring about legislation on several of the principles recommended in the Cadbury and
OECD reports.
Rights and equitable treatment of shareholders: Organizations should respect the
rights of shareholders and help shareholders to exercise those rights. They can help
shareholders exercise their rights by openly and effectively communicating
information and by encouraging shareholders to participate in general meetings.
Interests of other stakeholders : Organizations should recognize that they have
legal, contractual, social, and market driven obligations to non-shareholder
stakeholders, including employees, investors, creditors, suppliers, local
communities, customers, and policy makers.
Role and responsibilities of the Board: The Board should comprise of personnel
with rich and varied experience, necessary skills and understanding to review and
to face the challenges posed by management performance apart from adequate size
and appropriate levels of independence and commitment.
Integrity and ethical behaviour : The fundamental requirement in choosing
corporate officers and Board members should be the element of integrity. Under no
circumstances it can be compromised. And for the purpose of promoting ethical and
responsible decision – making the organisations should develop a code of conduct
for their directors and executives.
Disclosure and transparency: It shall be the bounden duty of the Organizations to
clarify and make it public the roles and responsibilities of Board and Management.
This measure will provide stakeholders with a level of accountability and also
enable them to brim with confidence about the safety of their investments.
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Necessary procedures to independently verify and safeguard the integrity of the
company's financial reporting should be sincerely and diligently followed. The onus
should be on the organisation for timely and balanced disclosure of material matters
to ensure that all investors have access to factual information in its true sense.
3.6 Brief History of Corporate Governance in India:
The history of corporate governance in India can be divided into the following
stages:
1. Pre-Liberalization: India attained Independence from British rule in 1947. Then the
country was poor. Although the average per- capita annual income was just under
thirty dollars, it still posessed sophisticated laws regarding “listing, trading, and
settlements”. There were already four fully operational stock exchanges.
Subsequent laws, especially the companies Act, 1956 further strengthened the
rights of investors. In the decades that followed India’s independence the country
deviated from its capitalism past and embraced socialism. The 1951 Industries Act
mandated that all industrial units obtain licenses from the central government.
Further, it was clear from the 1956 Industrial Policy resolution that the public
sector would dominate the Indian economy. Due to the absence of Corporate
Governance framework the situation was getting worst and the Government
accountability was minimal. The few private companies that remained on India’s
business landscape, enjoyed free reign with respect to most laws: the government
rarely initiated punitive action, even for non-conformity with basic governance
laws. Thus, Corporate Governance in India was in a dismal condition during early
1990’s.
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2. Post – Liberalization: It augurs well to state that the corporate governance initiative
in India was not triggered by any serious nationwide financial, banking and
economic collapse as witnessed in South East and East Asia. Further, contrary to
most OECD countries, the initiative in India was primarily driven by an industry
association - the Confederation of Indian Industry. In December 1995, a task force
was established by CII and it was assigned to work out a voluntary code of
Corporate Governance. The final draft of this code was widely circulated in 1997
and it was released in April 1998, the code was released. It was called “Desirable
Corporate Governance: A Code”. During 1998 and 2000, over 25 leading
companies including Bajaj Auto, Hindalco, Infosys, Dr. Reddy’s Laboratories,
Nicholas Piramal , Bharat Forge , BSES, HDFC, ICICI and many others voluntarily
followed the Board.
Following CII‘s initiative, the Securities and Exchange Board of India ( SEBI) set up a
committee under the chairmanship of Kumar Mangalam Birla. It was tasked to design a
mandatory – cum – recommendatory code for listed companies. The Birla Committee
Report was approved by SEBI in December 2000. It became mandatory for listed
companies through the listing agreement. It was implemented according to a rollout plan
which is as follows:
• 2000 - 2001: All Group A companies of the BSE or those in the S&P CNX Nifty
index as on 1 Jan. 2000, having more than 80 percent of market capitalization
• 2001 - 2002 : All companies with paid up capital of Rs. 100 million or more or
net worth of Rs.250 million or more.
• 2002 - 2003: All companies with a paid up capital of Rs.30 million or more.
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Following CII and SEBI, the Department of Company Affairs (DCA) modified
the companies Act, 1956 to incorporate specific Corporate Governance provisions
regarding independent directors and audit committee. In 2001-02, steps were
taken to modify certain accounting standards which are as follows:
• Disclosure of Related Party transaction
• Disclosure of significant income revenues, profits and capital employed
• Deferred tax liabilities or assets
• Consolidation of accounts
Initiatives are being taken to (I) account for ESOP s (II) further increase disclosures and
(III) put in place systems that can further strengthen auditor’s independence.
3.7 The current state of Corporate Governance in India:
Corporate Governance reform in India has focused primarily on the role and composition
of the Board of Directors. Each of the three sets of recommendations the CII code
recommendations from 1997, the Kumar Mangalam Birla Committee recommendations
from 2000 and the Murthy Committee recommendations from 2003 were aimed at a
sophisticated understanding of Corporate Governance. The CII code was silent on the
financial literacy levels expected of directors. The Murthy Committee recommended that
companies train their Board members in the business model of the company as well as
the risk profile of the business parameters of the company. The notable recommendation
of the Murthy Committee was that, “the Audit committee be comprised entirely of
financial literate non-executive members with at least one member having knowledge of
accounting or related financial matters”.
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3.8 Corporate Governance Committees in India:
In India, the issue of Corporate Governance came to the fore in the last couple of years. It
was not so in the case of the United States or Europe were the subject of Corporate
Governance was hotly debated over the last decade or two. Obviously, in India, the
discussion mostly revolved around the American and British literature on Corporate
Governance. Therefore, the participants who were involved in the issue of providing
effective Corporate Governance in India deliberated largely on the same type of issues
and offered the same type of solutions. In this way, the Corporate Governance Code
proposed by Confederation of Indian Industry (CII) (Bajaj, 1997) is modeled on the lines
of the Cadbury Committee (Cadbury, 1992) in the United Kingdom. Unlike in the U.S.
and the U.K. were the main issue to be tackled is the conflict between management and
owners, but whereas in India it is to protect the interest of majority shareholders and
minority shareholders.
In India, the need for Corporate Governance arouse because of the alarming level of
scams that occurred since the emergence of the concept of liberalization since 1991, such
as Harshad Mehta scam, Ketan Parekh scam, UTI scam, Vanishing Company scam,
Bhansali scam and so on. Infact, these unruly scams shook the very conscience of the
Indian Economy and the trust of gullible investors. There, is therefore, a need to induct
global standards in to the Indian corporate scenario, so as to reduce the scope of scams to
a bare minimum. The bigger challenge in India, lies not in framing the rules for better
governance but lies in careful scrutiny and proper implementation of those rule by all
consent at all levels. The key to better governance in India, today, lies in a more efficient
and vibrant capital market. If adequate steps are not taken to ensure transparency,
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accountability, integrity and to punish the guilty promptly, then, it is also possible that the
Indian corporate structure may steadily move towards the Anglo - American pattern of
near complete separation of Management and Ownership. Now, that the awareness is
growing at the peak level, both the Industrial Organizations and Chambers of Commerce
are inclined to ensure an improved Corporate Governance. Therefore, the future of
Corporate Governance in India promises to be exceedingly well.
The issue of Corporate Governance is haunting the developing countries, particularly,
since the Asian Crisis. It is largely believed to have been caused by poor governance and
lack of transparency in running the corporate in East Asian countries. There are certain
common features that affect the governance practices in Asian economies.
Concentrated Ownership and preponderance of family control or state controlled seemed
to be the salient features of the corporate sector in most Asian countries. The net result,
therefore, is pyramiding of corporate control, tunneling of corporate gains to other family
owned entities and expropriation of minority shareholder value. Because of these
practices, the legal framework for Corporate Governance in these Asian countries and
India comes under strict scrutiny.
In terms of corporate laws and financial regulations, India has emerged far better than
other East Asian countries. The Companies Act 1956 has been the foundation of
Corporate Governance and Accounting Systems in India. Since liberalization
wide‐ranging changes were brought about in the laws and regulations relating to the
financial markets. The single most important development has been the establishment of
Securities and Exchange Board of India (SEBI) in 1992. SEBI has played a crucial role in
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establishing the basic minimum compliance norms for corporate governance by listed
companies.
1. The CII Initiative:
With the opening of the economy and increased competition under the liberalized regime
concerns were raised regarding corporate governance practices in India. The process of
restructuring of the corporate governance framework and development of a Code of
Corporate Governance was initiated by CII in 1996. A National Task Force was set up
under the Chairmanship of Rahul Bajaj, past President of CII and presently Chairman of
the Bajaj Group. The Task force made a number of recommendations relating to board
constitution, role of non‐executive directors, role of audit committees and others. The
committee submitted its Code in 1998.
2. National Code on Corporate Governance:
In late 1999, government appointed committee under the leadership of kumar Mangalam
Birla released a draft of India’s first National Code on Corporate Governance for listed
companies. With the due approval of the Code by SEBI in early 2000, it was
implemented in stages in the following two years. The Committee made it a point to be
its primary objective to view corporate Governance from the perspective of the
investors and shareholders and to prepare a “Code” conducive to the Corporate
Environment of India. The shareholders, the Board of Directors and the Management
were identified by the committee as the three important constituents of Corporate
Governance and focused mainly on the roles and responsibilities as well as the rights of
each of these constituents as far as the good governance is concerned.
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3. SEBI sets up Kumar Mangalam Birla Committee:
In 1999, SEBI set up a committee under the Chairmanship of Kumar Mangalam Birla, to
suggest suitable recommendations for the Listing Agreement of Companies with their
Stock Exchanges to improve the existing standards of Corporate Governance in the listed
companies. The committee paid much attention to role and composition of the Board of
directors, disclosure laws and share transfers. Recognizing that accountability,
transparency and equal treatment of all stakeholders are the key elements of corporate
governance the Committee evolved a Code of Governance in the context of the prevailing
conditions in the capital market. The Code was accepted in 2000 by SEBI and
incorporated into a new Clause 49, which was inserted into the Listing Agreement of
Companies with their Stock Exchanges.
Clause 49 (2000):
In February 2000, the SEBI revised its Listing Agreement to incorporate the
recommendations of the country’s new Code on Corporate Governance, produced in late
1999 by Birla Committee. These rules comprising a new section, Clause 49, of the
listing Agreements were circulated by SEBI through its circular dated February 21,
2000. It took effect in phases over a period from 2002 to 2003. All the listed
companies with a paid up capital of Rs. 3 crores and above or net worth of Rs. 25 crores
or more at any time during the life of the company as of March 31, 2003 are governed by
these principles.
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4. RBI Advisory Group headed by Dr. R H Patil:
The recommendations of this Group which were submitted to SEBI in 2001, covered
some more Codes and principles of private sector companies including consolidation of
accounts incorporating performance of subsidiaries, criteria of independent directors and
disclosures.
5. N R Narayan Murthy Committee:
In 2002, SEBI constituted another committee under the Chairmanship of N R Narayan
Murthy the then Chief Mentor of Infosys Technologies Ltd., to further streamline the
provisions of Clause 49. Based on the recommendations of the Committee SEBI revised
some sections of the Clause in August 2003 and later once again after further
deliberations in December 2003.
In October 2004, SEBI published a revised Clause 49, relating to corporate governance,
which set forth a schedule for newly listed companies and those already listed to comply
with the revisions. Major changes in the Clause included amendments /additions to
provisions relating definition of independent directors, strengthening the responsibility of
Audit Committees and requiring Boards to adopt a formal Code of Conduct.
Later the date for compliance with these new provisions was extended to December 2005,
since a large number of companies were unprepared to fully implement the changes.
In January 2006, SEBI issued some further clarifications on Clause 49 which included:
1. The maximum time gap between board meetings of listed companies to be
increased from three to four months.
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2. Sitting fees paid to non‐executive directors would not require the previous
approval of shareholders
3. Certifications of internal controls and internal control systems by CEOs and CFOs
would cover financial reporting only.
The revised Clause 49, came into effect on January 13, 2006.
Further amendments were made in some of the provisions of the Clause in July 2007
which dealt with quarterly reporting. SEBI made it optional for companies to either
present an unaudited or audited quarterly result or year to date financial results to Stock
Exchanges within one month from the end of each quarter. If the option is to present
unaudited results then the results will be subject to limited review and the report will
have to be submitted to SEs within two months from the end of the quarter.
Table no. 3.8 Corporate Governance Committees in India
Year Name of the committee/Body Area / Aspect Covered
1998 Confederation of Indian Industry (CII) Desirable Corporate Governance – A
code
1999 Kumar Mangalam Birla Committee Corporate Governance
2002 Naresh Chandra Committee Corporate Audit and Governance
2003 NR Narayana Murthy Committee Corporate Governance
6. Revised Provisions under Clause 49 of the Listing Agreement:
In its final form the Clause 49 of the Listing Agreement covered the following provisions
regarding corporate governance by listed companies.
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1. Mandatory Provisions
I. Board of Directors: Composition of the Board, Definition of Independent
directors and proportion of Independent Directors in the total board strength,
Compensation of non‐executive directors and disclosures, Board meetings,
Information to be made available to the Board, membership of Board level
committees by the directors and Code of Conduct
II. Audit Committee: Its constitution, its meetings, role, powers and review of
information,
III. Subsidiary companies: Number of subsidiaries, review of financial statements of the
subsidiaries by the holding company, transactions of the listed holding company
with the subsidiaries and other related disclosures
IV. Disclosures: These include a series of mandatory disclosures like basis of Related
Party Transactions, Accounting treatment, Risk management, Utilization of
proceeds of public issues, Remuneration of Directors, Management Discussion
and Analysis Report in the company’s Annual Report, setting up of
Shareholders/Investors Grievances committee and other items to be reported to
the shareholders.
V. CEO/CFO Certification: This certification relates to the review of financial
statements and cash flow statements by the CFO, compliance with existing
accounting standards, laws and regulations, responsibility for maintaining internal
controls, etc.
VI. Separate Section in the Company’s Annual Report on Corporate Governance
VII. Compliance certificate from Auditors or practicing Company Secretaries
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2. Non‐mandatory Requirements:
These included provisions regarding the following:
I. Tenure of Independent directors
II. Constitution of the Remuneration Committee
III. Declaration of Half‐yearly Financial Performance including summary of significant
events to be sent to shareholders’ residences
IV. Progression towards a regime of Unqualified Financial Statements
V. Training of Board members in the business model and risk profile of business
parameters of the company including their responsibilities.
VI. Evaluation of Non‐executive Board members
VII. Whistle Blower Policy
To curb the recurrence of accounting scandals like the one at Satyam Computers, a panel
of experts was set up at SEBI. This panel recommended:
i) Rotation of Audit Partners
ii) Selection of CFO by the company’s Audit Committee
iii) Standardization of disclosure of earnings
iv) Streamlining the submission of financial results.
SEBI has amended the listing agreement to include the above recommendations. Since
then SEBI issued several circulars relating to amendments regarding applicability and
enforcement of corporate governance provisions..(www.sebi.gov.in)
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3.9 Corporate Governance Voluntary Guidelines ‐2009:
During India Corporate Week in December 2009, the Ministry of Corporate Affairs
brought out a set of Voluntary Guidelines for improvement of corporate governance
practices by the listed companies. The objective of the guidelines was to encourage the
use of better governance practices through voluntary adoption. The Guidelines issued a
series of recommendations elaborating the various mandatory and non‐mandatory
provisions of Clause 49 of the Listing Agreement and suggested that the companies could
adopt them on a voluntary basis in order to further improve their governance practices.
The major recommendations referred to:
I. Board of Directors: Appointment of Directors, Separation of offices of Chairman
and CEO, Nomination Committee and maximum limit of directorships in public
limited and private companies that are either holding or subsidiary companies of
public companies.
II. Independent Directors: Attributes of Independent Directors and their certification
of Independence, Tenure of Independent Directors (not more than six years).
III. Remuneration of Directors: Guiding principles relating to Remuneration of
Directors including Non‐Executive and Independent Directors suggested which
should link corporate and individual performance. Incentive schemes to be
designed around appropriate performance benchmarks with rewards for
materially improved company performance. Suitable balance between fixed and
variable remuneration. Performance related component of remuneration to form
significant proportion of the package. Remuneration policy for Board members
and key executives to be announced
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IV. Remuneration of Non‐Executive and Independent Directors: Non‐executive
Directors to be paid a fixed contractual remuneration subject to an appropriate
ceiling and an appropriate percent of net profits of the company. Uniform
remuneration for all Non‐Executive Directors. Independent Directors to be paid
adequate sitting fees depending on criteria of Net worth and Turnover. No stock
options for Independent Directors so as not to compromise their independence.
V. Responsibilities of Remuneration Committee and Procedures relating to Annual
Evaluation of Performance of Directors.
VI. Training of Directors: Through suitable methods to enrich their skills.
VII. Risk Management: Board to affirm and report the framework and oversee the
system every six months.
VIII. Board Evaluation: Performance of Directors and Committees thereof to be
evaluated.
IX. Audit Committee of the Board: More elaborations on the Powers, Role and
Responsibilities of the Audit Committee
X. Appointment of Internal Auditors: Internal auditor should not be an employee of
the company to ensure credibility and independence of the audit process.
XI. Certification of Independence from Auditors: Affirmation of arm’s length
relationship with the auditors
XII. Rotation of Audit Partners and Audit Firms: Audit partners every three years and
Audit Firm every five years.
XIII. Secretarial Audit.
XIV. Institution of Mechanism for Whistle Blowing.
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These guidelines are expected to serve as a benchmark for the corporate sector and would
also help the sector in achieving the highest governance standards. Adoption of the
guidelines would also translate into much higher level of stakeholder confidence which is
crucial to ensure long term sustainability and value generation by businesses. These
guidelines were very detailed and not all companies are known to have fully adopted
these guidelines.
3.10 National Voluntary Guidelines for Social, Environmental and Economic
Responsibilities of Business – July, 2011:
These form a refinement over the earlier ‘Corporate Social Responsibility Voluntary
Guidelines, 2009 and are designed for all businesses irrespective of size, sector or
location. The Guidelines have nine basic principles:
I. Businesses should conduct and govern themselves with Ethics, Transparency and
Accountability
II. Businesses should provide goods and services that are safe and contribute to
sustainability throughout their life cycles
III. Businesses should promote the wellbeing of all employees
IV. Businesses should respect the interests of and be responsible towards all
stakeholders, especially those disadvantaged, vulnerable and marginalized
V. Businesses should respect and promote human rights
VI. Businesses should respect, protect and make efforts to restore the environment
VII. Businesses when influencing public and regulatory policy should do so in a
responsible manner
VIII. Businesses should support inclusive growth and equitable development
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IX. Businesses should engage with and provide value to their customers and consumers
in a responsible manner
3.11 The Companies Act 1956:
The Companies Act, 1956 provides the legal framework for corporate entities in India.
The Act has made provisions for some aspects of corporate governance which include
number, role, powers, duties and liabilities of directors and restrictions placed on them.
Other provisions include number and frequency of board meetings, rights of
minority shareholders, maintenance of books of accounts and development of accounting
standards, audit obligations and report of auditors. Since 1956, as many as 24
amendments have been made in the Act providing statutory provisions relating to
corporate governance.
Several major amendments had been proposed in the Companies (Amendment Bill) 2003.
But their consideration has been held back in anticipation of a comprehensive review of
the Company Law through a Consultative process.
In view of the changes in the national and international economic environment and the
expansion and growth of our economy the Central Govt. had decided to repeal the
Companies Act 1956 and enact a new legislation to provide for renewed provisions to
enable an accelerated growth of the economy.
As a first step of the review a Concept Paper on Company law was drawn and put up on
the electronic media for opinions and suggestions from all interested parties. The need
was to bring about harmony between SEBI’s Clause 49 provisions and those of corporate
governance in the Company’s Act.
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J. J. Irani Committee:
As a number of suggestions were received from various bodies on the Concept Paper, it
was felt that these proposals should be evaluated by an expert committee. Hence in
December 2004, a Committee was constituted under the chairmanship of Dr. J J Irani the
then Director of Tata Sons. The objectives of the Committee were to address the changes
in the national and international scenario facing listed companies, enable internationally
accepted best practices and provide adequate flexibility for timely evolution of legal
reforms in response to the changing business models. The report of the Committee was
submitted in May, 2005.
3.12 The Companies Bill, 2008:
On October 23, 2008, the Minister for Corporate Affairs, introduced the new Companies
Bill, 2008 into the parliament. It was subsequently referred to the Department related
Parliamentary Standing Committee on Finance for examination and report. The Bill
sought to enable the corporate sector in India to operate in a regulatory environment of
best international practices that foster entrepreneurship, investment and growth. A
number of other improvements were proposed in the new bill including board meetings to
be conducted through video conferencing and recognizing votes cast through e‐mail.
Before the report could be submitted by the parliamentary committee the Loksabha was
dissolved and the Bill lapsed. It was later reintroduced without any change in August,
2009. It was again referred to the Parliamentary Standing Committee on Finance for
examination and report. The Committee gave its Report on Aug. 31, 2010. During the
period Central Government had received several suggestions from various stakeholders
for amendments in the Bill. The Parliamentary Committee had also made a large number
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of recommendations in its Report. In view of the large number of amendments proposed
in the Companies Bill, the Central Government decided to withdraw the Companies Bill
2009 and introduce a fresh Bill the companies Amendment Bill 2011, incorporating all
the recommendations.
3.13 The Companies Amendment Bill, 2011:
After over six years, since the J. J. Irani Committee Report was submitted, the Companies
Amendment Bill was tabled in the Parliament on Dec. 14, 2011. The Bill was vetted by
Parliament’s Standing Committee on Finance headed by former finance minister,
Yashwant Sinha.
The amendments in the Bill are aimed at strengthening governance in companies and
enhancing transparency. The new Bill seeks to ensure greater board independence, higher
levels of accountability through additional disclosure norms, facilitate raising of capital,
protection of minority shareholders and setting up of a CSR Committee.
In brief the following amendments have been recommended:
I. Corporate Social Responsibility expenditure to be two percent of profit of last three
years, a mandatory recommendation of CSR committee.
II. Independent Directors to be appointed from a notified data bank containing names,
addresses and qualifications of persons who are eligible. They can be appointed for
two consecutive terms of five years each. A cooling off period of three years to be
maintained before reappointment.
III. A Code of Conduct for Independent directors
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IV. Independent Directors to give a declaration of independence every year. V. No
stock option for independent directors.
VI. An individual auditor can be appointed for one term of five years and an audit firm
for two terms of five years. A cooling off period of five years before reappointment.
Auditors are not to provide non‐audit services
VII. An audit partner and his team may be changed every year by the company.
VIII. Incoming Audit Firm and Outgoing Audit Firm should not have common partners.
IX. An auditor should not hold any securities in the company or its subsidiaries or have
any business interest with the company or be indebted to it or have a relative who is
a director in the company.
X. Secretarial Audit – a practicing company secretary to report to the Board that the
company has complied with all the requirements under the Companies Act as well
as other laws applicable to the company.
XI. Companies to provide an exit option to minority shareholders who may disagree
with the firm’s decision to acquire a firm do a corporate or loan restructuring or
diversify into unrelated business area. Apart from reducing the number of sections
drastically the Bill has also prescribed 33 new concepts and definitions. We have
briefly discussed below the proposed amendments pertaining to Corporate
Governance.
I. Preliminary: Certain new definitions have been introduced. They refer to One
Person Company, An Associate Company, Small Company, Employee Stock Option,
Promoter, Related Party, Turnover, Chief Executive Officer, Chief Financial Officer and
Global Depository Receipt.
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II. Matters relating to Incorporation of a Company Declaration by the Director:
The major amendment within the list of amendments, is that of the declaration by a
Director. The Director’s declaration need to be in a prescribed form. It should state that
the subscribers have paid the value of shares agreed to be paid by them. It should also
contain a confirmation that the company has filed a verification of its Registered Office
with the Registrar.
Exit Option for Minority Shareholders: It stipulates that a company which retains
certain unutilized amount from the fund raised from the public through a prospectus
shall not change its objects without passing a resolution and complying with other
requirements pronounced in the advertisement. Further, the company has to take every
step to give a reasonable opportunity to dissenting shareholders and other investors to
exit, if they are not satisfied with the company’s diversification plans, acquisition of
another firm, or restructuring plan of a corporate or loan or proposals for transfer or
sale of the existing business.
This provision attempts to impose checks and balances on companies wherein promoters
with majority of the shareholding tend to ignore the interest of minority shareholders,
while taking major corporate decisions. Thus, the amendment encourages the minority
shareholders to voiceferously express their views on the companies’ business plans, at
such times, when they move to exploit their presently available freedom and flexibility to
buy, sell or merge and demerge the business establishments.
This is a minority investor friendly move but may prove to be cumbersome for the
companies. The minority investors who wish to exit would not be simply selling their
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shares in the open market but could demand a specific option more on the lines of a
buyback or a delisting offer. Companies going through financial pressures and intending
to sell their assets to raise funds may not be able to offer exit options to dissenting
minority shareholders. Again if this is done the prevailing norm of 25 percent public
holding of equity for listed companies may be difficult to comply with given the exit
options.
III. Prospectus and Allotment of Securities: Under the Companies Act, 1956, only
shares and debentures were covered. Whereas, the amended Bill makes provision for all
types of securities. The provisions related to public offer, private placement or related to
bonus or rights issue are provided in the Bill.
IV. Share Capital and Debentures: Certain provisions have been included which relate
to further issue of shares for increasing the subscribed paid up capital, voting power of
preference shareholders, issue of bonus shares, buyback of shares, offer of shares to
employees by way of ESOPs, etc. The scope of the section relating to transfer and
transmission of securities has also been widened to include all types of securities.
All these provisions will help the regulators in monitoring the entire paid up share capital
of the company and also assess the number of shares held by various categories of
shareholders and their voting power.
V. Management and Administration Additional Information to be provided in the
Annual Returns: The annual returns of the company have been elaborated to include
additional information like particulars of its holdings and subsidiary and associate
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companies. It should also include changes in the number of shares held by promoters and
top ten shareholders of the company and matters relating to certification of compliances,
disclosures, remuneration of directors and key managerial personnel.
In case of companies with prescribed paid up capital and turnover, certification of annual
return by a practicing company secretary has been made mandatory. These provisions
will bring in greater transparency relating to shareholding by promoters and majority
shareholders. Disclosures relating to key financial outflows of the company would help in
monitoring them more effectively.
VI. Accounts of Companies Scope of Directors’ Report Widened: The Bill recognizes
that books of accounts may be kept in electronic form. Balance Sheet and Profit & Loss
Account have been defined collectively as Financial Statements. Along with financial
statements, consolidated financial statements of all subsidiaries and associate companies
shall be prepared and laid before the AGM.
This disclosure of consolidated financial statements will bring to light all transactions
done by the listed company with its subsidiaries and give an opportunity to minority
shareholders to question suspect dealings with the associate companies.
The scope of the Directors’ Report has been widened to include additional information
like number of board meetings, policy of the company relating to appointment of
directors and their remuneration, explanation or comments by the board on every
qualification, reservation or remark or disclaimer made by the company secretary in the
Secretarial Audit Report, particulars relating to loans, guarantees, investments, etc. The
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Directors’ Responsibility Statement in case of a listed company should include additional
statement relating to internal financial controls and Compliance of all applicable laws.
These provisions have placed greater responsibility on the directors in the areas of loans
and investments, appointment of directors and their remunerations, explanations with
regard to audit qualifications, and commitment on internal controls and compliance with
all types of regulations. Directors’ Report and Directors’ Responsibility Statement being
part of the published annual report will make all the shareholders aware of the decisions
taken by the board in these key areas of governance and any shortcoming can be
challenged by the shareholders and investors.
Corporate Social Responsibility: A company is also responsible for its activities to the
society at large. For this purpose, a company has to constitute a committee called
Corporate Social Responsibility Committee. This social responsibility lies on every
company possessing a net worth of Rs. 500 crore or more or a turnover of Rs. 1,000
crore or more or a net profit of Rs. 5.0 crore. The Committee shall consist of three or
more Directors of whom at least one shall be an Independent Director. The Directors
shall be from among the members of the Board. It shall be the responsibility of the Board
to honour the recommendations of the Corporate Social Responsibility Committee.
The Board of every such company must ensure that in every financial year the company
spends at least two percent of the average net profit of the company made during the
three immediately preceding financial years in pursuance of the CSR policy. Failure to
discharge this responsibility, it shall be reported with reasons thereof in the Directors’
report.
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This move to make CSR compulsory for certain high net worth companies will ensure
that this function of giving back to the Society is taken more seriously and made
sustainable by the promoters and directors of the company . Earlier it was treated as a
mere compulsion with some funds channelized in this direction. With the passing of the
Bill there will be a commitment to ensure that a certain percentage of profits flow into
CSR activities every year. This is an excellent provision in the direction of inclusive
growth and social sector reforms.
VII. Audit and Auditors Rotation of Auditors and Audit firms: The Bill provides for
compulsory rotation of individual auditors every five years and of audit firm every ten
years for listed and certain other class of companies. A transition period of three years
has been provided to comply with this provision.
Prescription of Auditing Standards: Central Govt. will prescribe the auditing standards
as recommended by the Institute of Chartered Accountants in consultation with the
National Financial Reporting Authority.
Responsibilities of Auditors: Auditors have to comply with auditing standards. Certain
new provisions for disqualification of auditors have also been prescribed.
Partner or partners of the audit firm and the firm shall be jointly and severally
responsible for the liability, whether civil or criminal as provided in the Act or any other
law. If any fraudulent practice civil or criminal, by the auditors is proved the Audit
partner/partners and the firm are punishable.
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The prescriptions for Auditors and their compulsory rotation every five years together
with compliance to auditing standards recommended by Institute of Chartered
Accountants of India, will ensure complete transparency in the internal working of
companies in order to avoid any future Satyam like scams.
VIII. Appointment and Qualification of Directors: Appointment of Independent
Directors (IDs): One of the major criticisms of the current policy of appointment of
Independent Directors is that the promoters exert tremendous influence in determining
and appointing Independent Directors. This issue has been addressed by making it
mandatory for all listed and certain other class of companies to constitute a Nomination
and Remuneration Committee consisting of three or more Non‐ Executive Directors of
which not less than half should be Independent Directors. The Committee has to consider
candidates for appointments as IDs and recommend them to the Board. The Bill also
proposes the formation of a Databank of IDs from which suitable persons may be
selected.
This is expected to bring in greater objectivity in to the process of nomination of IDs and
preclude the influence of promoters on them. The Bill prescribes that at least one‐third of
the directors on the Board should be IDs.
This is a departure from the prevailing norms wherein half the directors had to be
independent in case the company has an Executive Chairman or he is related to the
promoter of the company. This represents a dilution from the existing position. The Bill
also provides for at least one woman director on the Board.
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The definition of an ID has been considerably tightened: The definition now includes
positive attributes of independence namely that the Director should be a person of
integrity and possess relevant expertise and experience in the opinion of the Board.
Central govt. is also vested with powers to prescribe qualifications of IDs. Every ID is
required to declare that he or she meets the criteria of independence. Participation of
minority shareholders in the appointment of IDs has been kept non‐mandatory.
Directorship in not more than 20 companies: The number of companies in which a
person can be a director has been increased from 15 to 20. However, a director should not
be a member in more than 10 Committees or act as Chairman of more than five
Committees of all the 20 companies in which he is a Director.
Role and Functions: Section IV of the Bill lays down the code which sets out the role
functions and duties of the IDs and also those relating to their appointment, resignation
and evaluation. These prescriptions make the role of the IDs quite onerous and could
enhance the level of monitoring of the listed companies which is so crucial for good
governance practices.
Liability of Independent Director: The Bill limits the liability of the Independent
Director only in respect of acts of omission or commission by a company which had
occurred with his knowledge, attributable through Board processes and with his consent
or connivance or where he had not acted diligently.
Remuneration: An Independent Director is entitled only to fees for attending meetings
of the Boards and possibly commissions up to within certain limits. This is a departure
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from the earlier norms. Bill expressly disallows Independent Directors from obtaining
stock options. Companies may find it difficult to get Directors of the requisite caliber
unless they are appropriately remunerated.
Tenure: To ensure that IDs maintain their independence, the term of their tenure has
been prescribed. The initial term is prescribed as five years following which further
appointment would require a special shareholder resolution. The total tenure shall not
exceed two consecutive terms.
All the provisions relating to Independent Directors, their appointment procedures, their
liabilities, tenure, role and functions are in the right direction and place greater
responsibilities on the Independent Directors which was very vital for ensuring greater
board independence. Limiting the liabilities of Independent Directors to acts which have
occurred with his knowledge or in his presence, provides a safeguard mechanism for the
Independent Director who need not be held liable for all Board decisions, even those
taken without his presence.
Mandatory constitution of Nomination and Remuneration Committee, Stakeholders
Relationship Committee and CSR Committee means that the Independent Directors and
Non‐executive Directors would be more involved in the operations of the company and
would have to take greater interest in the appointment of Directors and key management
personnel . They will also have to be more engaged with all the stakeholders and resolve
grievances of all security holders.
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IX. Meetings of Board and its powers:
The Board meetings should be held at least four times a year. There shall be a maximum
time gap of four months between any two meetings. At every such meeting it shall be
ensured that minimum information is provided to the Board.
Audit Committee: Composition of the Audit Committee shall comprise of a minimum
three Directors, majority of them being Independent Directors. At least one of the
minimum number of prescribed Directors should have the ability to read and understand
financial statements.
Vigilance Mechanism: Every listed company and such other class of companies shall
have a vigilance mechanism in the prescribed manner.
Stakeholders Relationship Committee: Every company which has more than 1000
shareholders, debenture holders or deposit holders shall constitute a Stakeholders
Relationship committee consisting of a Chairman who is a Non‐Executive Director and
such others as may be decided by the Board.
Disclosure of Interest by a Director: This has been made mandatory and not
discretionary as it was there in the Companies Act of 1956. Even in case of a Private
Company an interested director cannot vote or take part in the discussions relating to any
matter in which he is interested.
Investments by a company: A Company, unless otherwise prescribed, shall not make
investments through more than two layers of investment companies subject to certain
exemptions.
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Related Party Transactions: Approval of Central Government is not required for
entering into any related party transactions. Similarly, approval of Central Government is
not required for appointment of any director, or any other person to any office or place of
profit in the company or its subsidiary. Certain new Related Party Transactions are
provided in the Bill which requires approval of the Board.
The Bill provides for certain new matters which are to be transacted by the Directors at
their Board meetings only.
Insider Trading: The Act already had a provision relating to prohibition on forward
dealing in securities of the company by a director or key management personnel. The Bill
now provides the provisions for prohibiting insider trading in the company. All these
provisions are aimed at strengthening the supervision mechanism of the company by the
regulators, strengthening the powers of the Board especially the IDs and above all
prohibiting fraudulent transactions with related parties for which the Board is made
responsible.
X. Appointment and Remuneration of Managerial Personnel: Managing
Director/Whole Time Director/Manager: These appointments have to be approved by a
General Meeting by special resolution instead of ordinary resolution. The Bill provides
for provision related to Secretarial Audit in certain prescribed companies and also
prescribes the functions of the Company Secretary. This ensures greater involvement of
shareholders in key appointments on the Board and management.
XI. Inspection, Inquiry and Investigation: Central Govt. will set up a Serious Fraud
Investigation Office (SFIO) for investigation of frauds relating to a company. The affairs
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of a Related Company can also be investigated by the inspector. Whenever a fraud is
reported the Central Govt. is empowered to file an application before the Tribunal. The
remedies available are to appropriate disgorgement of such assets, property or cash apart
from holding such director, key management personnel, officer or other person
personally responsible without any limitation of liability. Further, when a complaint is
lodged or an enquiry is initiated against the company the SIFO can initiate necessary
action based on such complaint.
4.4 Corporate Governance Rating:
Rating of practices of Corporate Governance and Value Creation for its Stakeholders is
being carried out by leading Rating Agencies like CRISIL. This type of rating helps the
companies greatly as an unbiased evaluation of the company’s corporate governance
practices is carried out by an outside and reputed agency and an appropriate Rating
Certificate is given. The Company can use this certificate for raising finance from the
market as well as from foreign investors. This results in greater resources and better
resource allocation and enhanced investor confidence in the company leading to better
valuation. The basis for rating a company for its corporate governance practices is the
company’s compliance with SEBI Revised Clause 49 of the Listing Agreement with the
Stock Exchanges and also the manner in which the various forms are fulfilled.
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Summary:
Chapter Three describes the regulatory framework for Corporate Governance. Though,
there may be similarities, it has not come to light that any two countries have the history
of sharing the same code of Corporate Governance. It is a fact, that every country
formulates its own guidelines and principles of corporate governance depending upon the
nature of the business transactions prevalent in those regions. There are various codes of
corporate governance which have been formulated from time to time, to make its
violation difficult. The study is focused on the compliance of Revised Clause 49 of the
Listing Agreement guidelines of Corporate Governance issued by Securities Exchange
Board of India. It came into effect vide circular dated 29 October 2004. These guidelines
are in tune with the stipulations of Sarbanes Oxley Act (SOX) Act of U.S.A. and Basel II
of Europe.
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Notes and References
1. Cadbury Adrain, “Report on the Financial Aspects of Corporate
Governance,” 1992, p.137.
2. Datta , S., “Role of Corporate Governance, ” Chartered Secretary, Vol.
XXVIII, No. 9, September 1998, pp. 849 - 51.
3. Daryal, V., and Sehgal, V.K., Corporate Governance in India --- A
Challenge Before Different Players, Edited book by Singh, D., and Garg, S.,
First Edition, wheeler Publishing, New Delhi, 2000, pp. 46-47.
4. Gopalswamy, N., “Corporate Governance : The New Paradigm,” Wheeler
Publishing, New Delhi, 2002, pp. 64-65.
5. Ghosh , T. P., “The Role of Chartered Accountants -- The three pillars of
Wisdom,” The chartered Accountant, August 2000, pp. 13-20.
6. Israni, S.D., “It’s Time for Better Governance,” The Economic Times, 9
December 2000, p.5.
7. Lobwo, Samir, Kr., “Corporate Governance: Role of the Board of Directors,”
The Management Accountant, Vol.35, No. 10, October 2000, pp. 770 – 73 .
8. Mayer Cohn , “ Financial systems and Corporate Governance : A Review
of International Evidence,” Journal of institutional and Theoretical
Economics, Vol. 154, No.1, 1998, pp . 45 – 55.
9. Monte, D. S., “Corporate Governance -- Role of Professionals,” Chartered
secretary, May 1997, pp.520 –21
10. Naughton, T., “ Corporate Governance : An International Perspective,” The
ICFAI Journal of Corporate Governance, Vol.II, No.3, July 2003, P.90.
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