The document summarizes the key recommendations from the Narayana Murthy Committee Report on Corporate Governance in India from 2003. The committee was formed by SEBI under Murthy's chairmanship to review corporate governance standards and disclosure requirements. The committee recommended several mandatory requirements, such as strengthening audit committees, requiring approval of related party transactions, and establishing whistleblower policies. It also recommended non-mandatory best practices around moving to unqualified financial statements, training board members, and evaluating board performance. The recommendations aimed to improve transparency, accountability and investor protection in Indian markets.

1.  PRESENTED BY GROUP
7

2. Brief Background
1. Kumar Mangalam Birla Committee Report [2000]
 Following CII’s initiative, SEBI set up a committee under
Kumar Mangalam Birla to design a mandatory cum-
recommendatory code for listed companies.
 Approved by SEBI in December 2000.
2. 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
3.Naresh Chandra Committee Report [2002]
 In August 2002, DCA appointed Naresh Chandra Committee
to examine various corporate governance issues.
 Entrusted to analyze 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.

3. NARAYAN MURTHY REPORT ON
CORPORATE GOVERNANACE
 The SEBI Committee on Corporate Governance was
constituted under the Chairmanship of Shri N. R. Narayana
Murthy, Chairman and Chief Mentor of Infosys Technologies
Limited to:
i. review Clause 49
ii. suggest measures to improve corporate governance
standards.
iii. determine the role of companies in responding to rumour
and other price sensitive information circulating in the
market in order to enhance the transparency and integrity of
the market.
 The Committee met thrice on December 7, 2002, January 7,
2003 and February 8, 2003, to deliberate the issues related to
corporate governance and finalize its recommendations to
SEBI.
 The committee laid down some mandatory and non-
mandatory recommendations.

4. KEY RECOMMENDATIONS
Mandatory
Recommendations
1. Audit committee
2. Related party
transactions
3. Proceeds from initial
public offerings
4. Whistle blower policy
5. Risk Management
6. Code of conduct
7. Nominee directors
8. Compensation to non-
executive directors
9. Independent Directors
10. Real Time Disclosures
Non Mandatory
Recommendations
1. Moving to a regime
where corporate
financial statements are
not qualified
2. Instituting a system of
training of board
members
3. The evaluation of
performance of board
members

5. MANDATORY RECOMMENDATIONS >>

6. AUDIT COMMITTEES
Audit committees of publicly listed companies should be required
to review the following information mandatorily:
 Financial statements;
 Management discussion and analysis of financial condition
and results of operations;
 Reports relating to compliance with laws and to risk
management;
 Management letters / letters 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.

7. RELATED PARTY TRANSACTIONS
 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.
 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.

8. PROCEEDS FROM IPOs
 Companies raising money through an IPO should
disclose to the Audit Committee, the uses /
applications of funds by major category like 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.

9. WHISTLE BLOWER POLICY
 Personnel who observe an unethical or improper
practice (not necessarily a violation of law) should be
able to approach the audit committee without
necessarily informing heir supervisors.
 Companies shall take measures to ensure that this
right of access is communicated to all employees
through means of internal circulars, etc.
 The employment and other personnel policies of the
company shall contain provisions protecting “whistle
blowers” from unfair termination and other unfair
prejudicial employment practices.

10. RISK MANAGEMENT
 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.

11. CODE OF CONDUCT
 It should be obligatory for the Board of a company to lay
down the code of conduct for all Board members and
senior management of a company which will be posted to
the website
 All Board members and senior management personnel
shall affirm compliance with the code on an annual basis.
 The annual report of the company shall contain a
declaration to this effect signed off by the CEO and COO.
 For this purpose, the term “senior management” shall
mean personnel of the company who are members of its
management / operating council (i.e. core management
team excluding Board of Directors). Normally, this would
comprise all members of management one level below
the executive directors

12. NOMINEE DIRECTORS
 There shall be no nominee directors.
 Where an institution wishes to appoint a director on
the Board, such appointment should be made by the
shareholders.
 An institutional director, so appointed, shall have the
same responsibilities and shall be subject to the
same liabilities as any other director.
 Nominee of the Government on public sector
companies shall be similarly elected and shall be
subject to the same responsibilities and liabilities as
other directors.

13. COMPENSATION
 All compensation paid to nonexecutive directors may
be fixed by the Board of Directors and should be
approved by shareholders in general meeting.
 Limits should be set for the maximum number of
stock options that can be granted to non-executive
directors in any financial year and in aggregate.
 Companies should publish their compensation
philosophy and statement of entitled compensation
in respect of non-executive directors in their annual
report and website.
 Non-executive directors should be required to
disclose their stock holding (both own or held by / for
other persons on a beneficial basis) in the listed
company in which they are proposed to be appointed
as directors, prior to their appointment.


14. INDEPENDENT DIRECTORS
 The term “independent director” is defined as a non-executive director of the company
who:
 apart from receiving director remuneration, does not have any material pecuniary
relationships or transactions with the company, its promoters, its senior management
or its holding company, its subsidiaries and associated companies;
 is not related to promoters or management at the board level or at one level below the
board;
 has not been an executive of the company in the immediately preceding three
financial years;
 is not a partner or an executive of the statutory audit firm or the internal audit firm that
is associated with the company, and has not been a partner or an executive of any
such firm for the last three years.
 is not a supplier, service provider or customer of the company. This should include
lessor-lessee type relationships also; and
 is not a substantial shareholder of the company, i.e. owning two percent or more of the
block of voting shares.
 The remuneration paid to an independent director shall be the same as those applied
to a non-executive directors.

15. REAL TIME DISCLOSURES
 It was suggested that SEBI should issue rules
relating to real-time disclosures of certain events or
transactions that may be of importance to investors,
within 3-5 business days.
 These would include events such as-
(a) a change in the control of the company,
(b) a company’s acquisition / disposal of a significant
amount of assets,
(c) bankruptcy or receivership,
(d) a change in the company’s independent auditors,
and
(e) the resignation of a director.

16. NON MANDATORY
RECOMMENDATIONS >>

17. Audit Qualifications
 Companies should be encouraged to move towards
a regime of unqualified financial statements.
 This recommendation should be reviewed at an
appropriate intervals to determine whether the
financial reporting climate is conducive towards a
system of filing only unqualified financial statements.

18. Training of BOD
 Companies should be encouraged to train their
Board members in the business model of the
company as well as the risk profile of the business
parameters of the company, their responsibilities as
directors, and the best ways to discharge them

19. Evaluation of Board Performance
 The performance evaluation of non-executive
directors should be by a peer group comprising the
entire Board of Directors, excluding the director
being evaluated; and
 Peer group evaluation should be the mechanism to
determine whether to extend / continue the terms of
appointment of non-executive directors.

20. “Corporate governance is beyond the
realm of law. It cannot be regulated by
legislation alone. Legislation can only lay
down a common framework – the "form" to
ensure standards. The "substance" will
ultimately determine the credibility and
integrity of the process.”
-Shri Narayana Murthy