Narayana Murthy Corporate Governance Committee Report 2003

Submitted by: Anila P Gestine Arpan Ghosh Libni Mary Jacob Jomet P Thomas Teslin Ranjan

The CII Code [1998] 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.

A Flash BackKumar 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.

Narayana Murthy Committee Report [2003]

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.

Recomm

endationsM

andatoryNon-M

andatory

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

Mandatory Recommendations

Audit committee 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.

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. 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.

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.

Proceeds From Initial Public Offerings (IPO)

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.

Code of Conduct• 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

Nominee Directors

• 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

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.

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.

Non-Mandatory Recommendations

Non-Mandatory Recommendations

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

ConclusionPros

Cons

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.