Corporate Governance

2.  In December 1995, CII set up a task force to
design a voluntary Code of Corporate
Governance
 The final draft of this Code was widely
circulated in 1997
 In April 1998, the Code was released. It was
called Desirable Corporate Governance: A
Code
 The code was voluntary, contained
detailed provisions, and focused on listed
companies.

3. Kumar Mangalam Birla Committee Report [2000]
 Following CII’s initiative, SEBI set up a committee under Kumar
Mangalam Birla to design a mandatorycum- recommendatory
code for listed companies.
 approved by SEBI in December 2000.
Department of Company Affairs (DCA)[2001-02]
 Following CII and SEBI, DCA modified the Companies Act, 1956
to incorporate specific Corporate Governance provisions
regarding Independent Directors and Audit Committees
Naresh Chandra Committee Report [2002]
 In August 2002, DCA appointed Naresh Chandra Committee to
examine various corporate governance issues.
 The Committee was entrusted to analyse and recommend
changes, to the issues related to the statutory auditor-company
relationship, certification of accounts and financial statements
by the management and directors; and role of independent
directors.

4.  SEBI Committee on Corporate
Governance was constituted under the
Chairmanship of N. R. Narayana Murthy,
to look into: governance issues / review
Clause 49, suggest measures to improve
corporate governance standards.
 The committee laid down some
mandatory and non- mandatory
recommendations.

5. MandatoryNon-Mandatory
 Audit committee
 Related party transactions
 Proceeds from initial public offerings
 Risk Management
 Code of conduct
 Nominee directors
 Compensation to non executive directors
 Whistle blower policy
 Moving to a regime where corporate
financial statements are not qualified
 Instituting a system of training of board
members
 The evaluation of performance of board
members

6. Mandatory
Recommendations

7.  Review of information by audit committees regarding
› Financial statements and draft audit reports, including
quarterly/half yearly information.
› Management discussion and analysis of financial
condition and the results of operations.
› Report relating to compliance with laws and risk
management.
› Management letter/s of internal control weaknesses issued
by statutory/internal auditors and
› Records of related party transactions.
 Financial literacy of members of the audit committee
› All audit committee members should be “financially
literate” and at least one member should have
accounting or related financial management expertise.

8.  A statement of all transactions with related parties including their
bases (methodology) should be placed before the independent
audit committee for formal approval / ratification. If any transaction
is not on an arm’s length basis, management should provide an
explanation to the audit committee justifying the same.
› The ‘arm's length’ is the condition or the fact that the parties to a
transaction are independent and on an equal footing.
 The term “related party” shall have the same meaning as contained
in Accounting Standard 18, Related Party Transactions, issued by the
Institute of Chartered Accountants of India.
 Under AS 18, related party includes:
› Enterprises, directly or indirectly, controlled by one or more other
enterprises;
› Associates or Joint Ventures of an enterprise;
› Individuals who own interest in the voting power of an enterprise
and are in a position to significantly influence the enterprise;
› Key Management Personnel and their relatives;
› Enterprises which share common directors.

9.  Procedures should be in place to inform Board
members about the risk assessment and minimization
procedures. These procedures should be periodically
reviewed to ensure that executive management
controls risk through means of a properly defined
framework.
 Management should place a report before the entire
Board of Directors every quarter documenting the
business risks faced by the company, measures to
address and minimize such risks, and any limitations to
the risk taking capacity of the corporation.
 This document should be formally approved by the
Board.

10.  Companies raising money through an Initial Public
Offering (“IPO”) should disclose to the Audit
Committee, the uses / applications of funds by major
category (capital expenditure, sales and marketing,
working capital, etc), on a quarterly basis.
 On an annual basis, the company shall prepare a
statement of funds utilised for purposes other than
those stated in the offer document/prospectus. This
statement should be certified by the independent
auditors of the company.
 The audit committee should make appropriate
recommendations to the Board to take up steps in
this matter.

11. • Lay down a code of conduct for all
board members and senior
management of the company
• Posted on the company’s website
• Affirm compliance with the code on
an annual basis.
• Annual report- declaration to this
effect- signed off by the CEO
• Best practices

12. • Appointment should be made by
the shareholders
• Nominee of the Government shall
be similarly elected and shall be
subject to the same responsibilities
and liabilities as other directors

13. Compensation
Compensation to non executive
directors to be approved by the
shareholders in general meeting;
 Restrictions placed on grant of
stock option
 Requirement of proper disclosures
of details of compensation.

14. Whistle Blower Policy
• Whistle blower policy to be in
practiced in a company
• The directors of the holding company
are to be in the picture; audit
committee of the holding company
to review financial statements of
subsidiaries etc.

15. Non-Mandatory
Recommendations

16.  Moving to a regime where corporate
financial statements are not qualified
 Instituting a system of training of board
members
 The evaluation of performance of board
members

17. ProsCons
 Strengthening of corporate governance
framework.
 Higher transparency in the functioning of
the company.
 Protection for whistle blower against
termination or unjust treatment.
 Unclear Whistle Blower policy
› Instrumental in breeding indiscipline as most likely the audit
committee would be flooded with frivolous complaints and minor
issues.
› Many complainants might go by their personal likes and dislikes and
thus the possibility of the right of access to the audit committee
being misused would always be there.
 While this panel has suggested that audit committee members should
be non-executive directors, the Naresh Chandra committee that
preceded it suggested that only independent directors should be on
audit committee. The reality is that while all independent directors are
non-executive directors it is not so vice versa.
 It needs to be clarified whether a partner of an audit firm or a solicitor's
firm can be treated as an independent director of a company if his firm
is the auditor or legal advisor of another company in the same group.