PROJECT MADE BY TYBMSSTUDENT.JOYOSON MATHAI – ROLL NO.30
Report of the Kumar MangalamBirla Committee on CorporateGovernance.
PREFACE.The concept of corporate governance has been attracting public attention for quite some time in India. The topic is no longer confined to the halls of academia and is increasingly finding acceptance for its relevance and underlying importance in the industry and capital markets.Stock Exchanges, Intermediaries, Financial institutions, Mutual Funds and concerned professionals who may have access to inside information. This is being dealt with in a comprehensive manner, by a separate group appointed by SEBI, under the Chairmanship of Shri Kumar Mangalam Birla.
Kumar Mangalam Birla Committee.In early 1999, Securities and Exchange Board of India (SEBI) had set up a committee under Shri Kumar Mangalam Birla, member SEBI Board, to promote and raise the standards of good corporate governance.The report submitted by the committee is the first formal and comprehensive attempt to evolve a ‘Code of Corporate Governance, in the context of prevailing conditions of governance in Indian companies, as well as the state of capital markets.
The Term “Committee”.The Committees terms of the reference were to:suggest suitable amendments to the listingagreement executed by the stock exchanges withthe companies and any other measures to improvethe standards of corporate governance in the listedcompanies, in areas such as continuous disclosureof material information, both financial and non-financial, manner and frequency of such disclosures,responsibilities of independent and outside directors;draft a code of corporate best practices; andsuggest safeguards to be instituted within thecompanies to deal with insider information andinsider trading.
Corporate Governance – The Objective.1. Corporate governance has several claimants –shareholders and other stakeholders - which include suppliers, customers, creditors, the bankers, the employees of the company, the government and the society at large. This Report on Corporate Governance has been prepared by the Committee for SEBI, keeping in view primarily the interests of a particular class of stakeholders, namely, the shareholders, who together with the investors form the principal constituency of SEBI while not ignoring the needs of other stakeholders.2. The Committee therefore agreed that the fundamental objective of corporate governance is the "enhancement of shareholder value, keeping in view the interests of other stakeholder". This definition harmonises the need for a company to strike a balance at all times between the need to enhance shareholders’ wealth whilst not in any way being detrimental to the interests of the other stakeholders in the company.
3 . In the opinion of the Committee, the imperative forcorporate governance lies not merely in drafting a code ofcorporate governance, but in practising it. Even now, somecompanies are following exemplary practices, without theexistence of formal guidelines on this subject. Structures andrules are important because they provide a framework, whichwill encourage and enforce good governance; but alone,these cannot raise the standards of corporate governance.What counts is the way in which these are put to use. TheCommittee is thus of the firm view, that the best resultswould be achieved when the companies begin to treat thecode not as a mere structure, but as a way of life.4. It follows that the real onus of achieving the desired levelof corporate governance, lies in the proactive initiativestaken by the companies themselves and not in the externalmeasures like breadth and depth of a code or stringency ofenforcement of norms. The extent of discipline, transparencyand fairness, and the willingness shown by the companiesthemselves in implementing the Code, will be the crucialfactor in achieving the desired confidence of shareholdersand other stakeholders and fulfilling the goals of the company
The Recommendations of the Committee. This Report is the first formal and comprehensive attempt to evolve a Code of Corporate Governance, in the context of prevailing conditions of governance in Indian companies, as well as the state of capital markets.While making the recommendations the Committee has been mindful that any code of Corporate Governance must be dynamic, evolving and should change with changing context and times. It would therefore be necessary that this code also is reviewed from time to time, keeping pace with the changing expectations of the investors, shareholders, and other stakeholders and with increasing sophistication achieved in capital markets.
Applicability of the Recommendations.Mandatory and non mandatoryrecommendations.The committee divided the recommendations into two categories, namely, mandatory and non- mandatory.The recommendations which are absolutely essential for corporate governance can be defined with precision and which can be enforced through the amendment of the listing agreement could be classified as mandatory.
MandatoryRecommendations:Applies To Listed Companies With Paid Up Capital Of Rs. 3 Crore And Above.Composition Of Board Of Directors – Optimum Combination Of Executive & Non-Executive Directors .Audit Committee – With 3 Independent Directors With One Having Financial And Accounting Knowledge.Remuneration Committee.
Board Procedures – Atleast 4 Meetings Of The Board In A Year With Maximum Gap Of 4 Months Between 2 Meetings. To Review Operational Plans, Capital Budgets, Quarterly Results, Minutes Of Committees Meeting.Director Shall Not Be A Member Of More Than 10 Committee And Shall Not Act As Chairman Of More Than 5 Committees Across All Companies Management Discussion And Analysis Report Covering Industry Structure, Opportunities, Threats, Risks, Outlook, Internal Control System Information Sharing With Shareholders
Non-MandatoryRecommendations: Role Of Chairman Remuneration Committee Of Board Shareholders Right For Receiving Half Yearly Financial PerformancePostal Ballot Covering Critical Matters Like Alteration In Memorandum Etc Sale Of Whole Or Substantial Part Of The Undertaking Corporate Restructuring Further Issue Of Capital Venturing Into New Businesses
Names of the Members of the committee Shri KumarMangalam Birla, Chairman, Aditya Birla groupChairman of the Committee1. Shri Rohit Bhagat, Country Head, Boston Consulting Group2. Dr. J Bhagwati, Jt. Secretary, Ministry of Finance.3. Shri Samir Biswas, Regional Director, Western Region, Department of CompanyAffairs, Government of India4. Shri S.P. Chhajed, President of Institute of Chartered Accountants of India5. Shri Virender Ganda, Ex-President of Institute of Company Secretaries of India6. Dr. Sumantra Ghoshal, Professor of Strategic Management, London Business School7. Shri Vijay Kalantri, President, All India Association of Industries8. Shri Pratip Kar, Executive Director, SEBI — Member Secretary9.Shri Y. H. Malegam, Managing Partner, S.B. Billimoria & Co10.Shri N. R. Narayana Murthy, Chairman and Managing Director, Infosys TechnologiesLtd.11.Shri A K Narayanan, President of Tamil Nadu Investor Association12.Shri Kamal Parekh, Ex-President, Calcutta Stock Exchange (Shri J M Chaudhary –President Calcutta Stock Exchange13.Dr. R. H. Patil, Managing Director, National Stock Exchange Ltd.14.Shri Anand Rathi, President of the Stock Exchange, Mumbai15.Ms D.N. Raval, Executive Director, SEBI16.Shri Rajesh Shah, Former President of Confederation of Indian Industries.17.Shri L K Singhvi, Sr. Executive Director, SEBI18.Shri S. S. Sodhi, Executive Director, Delhi Stock Exchange
Suggested List Of Items To Be Included InThe Report On Corporate Governance InThe Annual Report Of Companies1. A brief statement on company’s philosophy on code of governance.2. Board of Directors.3. Audit Committee.4. Remuneration Committee report.5. Shareholders Committee6. General Body meetings.7. Disclosures.8. Means of communication..9. General Shareholder information
Clause 49:As per the committee, the recommendations should be made applicable to the listed companies, their directors, management, employees and professionals associated with such companies, in accordance with the time table proposed in the schedule given later in this section.The recommendations will apply to all the listed private and public sector companies, in accordance with the schedule of implementation.The Committee recognizes that compliance with the recommendations would involve restructuring the existing boards of companies. It also recognizes that some companies, especially the smaller ones, may have difficulty in immediately complying with these conditions.The recommendations were implemented through Clause 49 of the Listing Agreements, in a phased manner by SEBI.
Clause 49 of the Listing Agreement to the Indian stock exchange.Clause 49 of the Listing Agreement to the Indian stock exchange comes into effect from 31 December 2005. It has been formulated for the improvement of corporate governance in all listed companies.In corporate hierarchy two types of managements are envisaged: i) companies managed by Board of Directors; and ii) those by a Managing Director, whole-time director or manager subject to the control and guidance of the Board of Directors. As per Clause 49, for a company with an Executive Chairman, at least 50 per cent of the board should comprise independent directors. In the case of a company with a non- executive Chairman, at least one-third of the board should be independent directors.It would be necessary for chief executives and chief financial officers to establish and maintain internal controls and implement remediation and risk mitigation towards deficiencies in internal controls, among others.
Clause VI (ii) of Clause 49 requires all companies to submit a quarterly compliance report to stock exchange in the prescribed form. The clause also requires that there be a separate section on corporate governance in the annual report with a detailed compliance report.A company is also required to obtain a certificate either from auditors or practising company secretaries regarding compliance of conditions as stipulated, and annex the same to the directors report. The clause mandates composition of an audit committee; one of the directors is required to be "financially literate". It is mandatory for all listed companies to comply with the clause by 31 December 2005. The term ‘Clause 49’ refers to clause number 49 of the Listing Agreement between a company and the stock exchanges on which it is listed (the Listing Agreement is identical for all Indian stock exchanges, including the NSE and BSE). This clause is a recent addition to the Listing Agreement and was inserted as late as 2000 consequent to the recommendations of the Kumarmangalam Birla Committee on Corporate Governance constituted by the Securities Exchange Board of India (SEBI) in 1999.
CONCLUSION: There are several corporate governance structures available in the developed world but there is no one structure, which can be singled out as being better than the others. There is no "one size fits all" structure for corporate governance. The Committee’s recommendations are not therefore based on any one model but are designed for the Indian environment.Corporate governance extends beyond corporate law. The Committee believes that its recommendations will go a long way in raising the standards of corporate governance in Indian firms and make them attractive destinations for local and global capital. These recommendations will also form the base for further evolution of the structure of corporate governance in consonance with the rapidly changing economic and industrial environment of the country in the new millenium.