Chapter 3 - Information and Library Network Centreshodhganga.inflibnet.ac.in/bitstream/10603/21704/6/ch-3.pdfDirectors, Non-executive Directors, Executive Directors and those on Reporting

Chapter 3 Codes of corporate governance & Implementation

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Chapter 3

Codes of Corporate Governance And Implementation

OVERVIEW

The present chapter describes the necessity of formulating the codes of

corporate governance. In brief, it describes the important global best practices.

The chapter describes different reports based on the codes of corporate

governance enforced in India. It covers major recommendations made by the

different committees set up by the various governing bodies like Stock

Exchange Board of India, Reserve Bank of India, Department of Company

Affairs and Confederation of Indian Industry. Lastly it studies the implementation

of codes suggested by the above-mentioned governing bodies in the financial

sector.


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3.1 Introduction Good corporate governance is the key to efficiency in a competitive

environment. Good corporate governance is not merely desirable but it is

essential for survival of a corporation. It is necessary not just because it is good

for the shareholders and other stakeholders, but it is in the interest of the

company itself. Good corporate governance emphasizes ethicality. Decision

making processes should be transparent, consistent with the need to protect the

interests of the company in competitive environment otherwise shareholders and

other stakeholders would lose out interest in the enterprise.

Internationally, corporate governance norms have been initiated

through a judicious mix of the three available routes: legislation, regulation, or

self-discipline and free volition. Often, a fourth one is also evident in the form of

societal pressures. In countries with well-developed economies, capital markets,

and commercial and citizen awareness, legislative interventions are minimal and

not the preferred option. Regulatory agencies such as capital market regulators,

professional bodies and central banks play an important role in bringing about

an orderly and disciplined regimen among their constituents. Self-regulation

through persuasion comes about through initiatives taken by industry chambers

and business associations, often also aided by globalization initiatives that

dictate adoption of international best practices. Societal pressures impact on

corporate social responsiveness and often manifest in corporate responses well


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beyond legislative demands concerning ecology, environment, community

development, and so on.

Numerous reports and studies across the world testify to this

pressing need. In the United Kingdom, while the pioneering foundations for

improving corporate governance were laid by the Cadbury Report in 1992, it was

followed by further extensions and revisions brought about by the Hampel

Committee, the Greenbury Report, and more recently the Turnbull Report. In the

United States, the early nineties saw the publication of the Treadway

Commission Report of the Committee of Sponsoring Organisations. It is indeed

quite revealing that in a country where, for example, Audit Committees were

mandated by the New York Stock Exchange as early as in 1973, a Blue Ribbon

report in 1999 was found necessary to explore ways of improving the

effectiveness of audit committees. Canadian initiatives on corporate governance

spearheaded by the Toronto Stock Exchange, led to the publication in 1994 of

the provocatively titled report, “Where were the Directors”, which was itself the

subject of a 1999 review of compliance and implementation in five years to the

Dey, appropriately named after the chair of the earlier 1994 committee. Similar

is the experience in many other countries where there is a felt need for ongoing

review and up gradation of the requirements.

In India, company legislation has until recently been the main

instrument for improving corporate governance. Tracing its origins to the mid-


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nineteenth century, and thereafter closely following similar developments in the

United Kingdom, the Companies Act 1956 was a consolidating legislation of

monumental proportions and far reaching impact that significantly altered the

structure of corporate management in India. Subsequently incorporating the

recommendations of the Bhabha Committee, this act legislated, among other

things, the abolition of the system of managing agencies, an institution that had

served the country truly and well during the early days of corporatization, but

fallen into disrepute through abuse and malpractice in its application by its latter

day exponents. With this, a pernicious vehicle for siphoning off corporate wealth

for the benefit of a few dominant and controlling shareholders was sought to be

destroyed. Subsequent amendments in the later part of the twentieth century

essentially built upon the basic structure of 1956, and usually attempted to plug

observed loopholes in practice. In-tune-with the times completely revised,

updated, and, abridged version of the legislation introduced in parliament to

meet the requirements of a changing business environment. The Amending Bill

introduced in late 1999 and modified in 2000 has recently been approved by

Parliament. This report aims to offer further inputs for improving standards of

corporate governance in the country.

Governance initiatives through regulation have also made

significant strides in the country. The Securities and Exchange Board of India

(SEBI) has an ongoing programme of reforming the primary and secondary

capital markets. The stock exchanges in the country also mandate several


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beneficial requirements through their listing agreements that every publicly

traded company has to comply with. Among the professions, The Institute of

Chartered Accountants of India (ICAI) has emerged as a mature body regulating

the profession of public auditors, and counts among its achievements the issue

of a number of accounting and auditing standards. Constitution of an

independent National Advisory Committee on Accounting Standards has been

legislated by the amending act of 1999. Other professional bodies such as the

Institute of Cost and Works Accountants of India and the Institute of Company

Secretaries of India (ICSI) have helped in promoting and regulating a well

trained and disciplined body of professionals who could add value to

corporations in improving their management practices. The ICSI has also taken

a major initiative in constituting a secretarial standards board comprising senior

members of eminence to formulate secretarial standards and best secretarial

practices and develop guidance notes in order to integrate, consolidate,

harmonise and standardise the prevalent diverse practices with the ultimate

objective of promoting better corporate practices and improved corporate

governance.

3.2 Global Best Practices

It is essential to outline few of the best international best practices in governing

the corporate sector. In May 1991, the London Stock Exchange set up a

committee under the chairmanship of Sir Adrian Cadbury in order to raise the


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standards of corporate governance and the level of confidence in financial

reporting and auditing. The resulting report, and associated “Code of Best

Practices,” published in December 1992, was generally well received. The

Cadbury Code of Best Practices had 19 recommendations. Being a pioneering

report on corporate governance, it is essential to make a brief reference to its

recommendations, which are in the nature of guidelines relating to the Board of

Directors, Non-executive Directors, Executive Directors and those on Reporting

& Control.

The Cadbury Report stipulated that the Board of Directors should

meet regularly, retain full and effective control over the company and monitor

the executive management. The report has clearly mentioned the division of

responsibilities at the head of the company. This ensures balance of power and

authority so that no individual has unfettered powers of decision. The board

should have a formal schedule of matters, which are specially reserved for

decisions. This ensures that the direction and control of the company is firmly in

its hands. There should also be an agreed procedure for directors in performing

their duties and to take independent professional advice. Any question of the

removal of company secretary should be a matter for the board as a whole.

Non-executive Directors should bring an independent judgement

on certain key issues. The majority of directors should be independent of the


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management and free from any business or other relationship, which could

materially interfere. They must be paid sitting fees. Non-executive directors

should be appointed for specified terms and reappointment should not be

automatic. This means that appointment of non-executive directors should be on

formal basis. Directors’ service contracts should not exceed three years without

shareholders’ approval. The total emoluments including pension contributions

and stock options of the Chairman and the highest-paid UK Directors should be

disclosed.

The Executive Directors’ service contracts should not exceed three

years without shareholders’ approval. There should be full and clear disclosure

of their total emoluments and those of the Chairman and the highest-paid UK

directors. Executive Directors’ pay should be subject to the recommendations of

a Remuneration Committee made up wholly or mainly of non-executive

directors.

It is the board’s duty to present a balanced and understandable

assessment of the company’s position. The board should ensure that an

objective and professional relationship is maintained with the auditors. The

board should establish an Audit Committee of at least 3 non-executive directors

with written terms of reference, which deal clearly with its authority and duties.

The directors should explain their responsibility for preparing the accounts next

to a statement given by the auditors about their reporting responsibilities. The


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directors should report on the effectiveness of the company’s system of internal

control. The directors should report that the business is a going concern, with

supporting assumptions or qualifications as necessary.

On the report of Cadbury Committee, Ron Hampel Committee's

final report and the Greenbury Report (Greenbury Report, which was submitted

in 1995, addressed the issue of Directors' remuneration), the London Stock

Exchange appended The Combined Code to the listing rules for all listed

companies in the U.K. as a mandatory compliance.

Beside Cadbury committee, a number of supranational

organizations have drawn codes in response to growing awareness of the

importance of good corporate governance. The most well known is perhaps the

Organization for Economic Cooperation and Development (OECD principles

of corporate governance of 1999). The OECD Principles are the result of a

consensus between participating governments on minimum requirements for

best practice. Although they are non-binding, they provide a reference for

national legislation and regulation, as well as guidance for stock exchanges,

investors, corporations and other parties. It is useful to summarise the five basic

pillars of OECD code, viz.,

i. Protecting the rights of shareholders;

ii. Ensuring equitable treatment of all shareholders including having an

effective grievance redressal system;


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iii. Recognising the rights of stakeholders as established by law;

iv. Ensuring the timely and accurate disclosure regarding the corporation

including the financial situation, performance, ownership and governance of

the company; and

v. Ensuring the strategic guidance of the company, effective monitoring

arrangement by the board and the board’s responsibility to the company and

the shareholder.

The Financial Stability Forum named the OECD principles as one of the twelve

key standards for sound financial systems as they underpin the corporate

governance component of the World Bank/IMF Reports on Standards and

Codes (ROSC).

Following the OECD principles in emphasising the basic tenets of

corporate governance, it is the 1999 Bank for International Settlement (BIS)

paper that went specifically to the issue of enhancing corporate governance for

banking organisation. From banking industry perspective, BIS proposed seven

principles. These are:

i. Establishing strategic objectives and corporate values.

ii. Setting and enforcing clear lines of responsibility and accountability

iii. It ensure that the board members are qualified for their position and are

not subject to undue influence from the management or outside concerns;

iv. It ensure that there is appropriate oversight by senior management;


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v. The work conducted by internal and external auditors effectively utilized;

vi. It ensure that compensation approaches are consistent with the bank’s

ethical values, objectives, strategy and control environment;

vii. The corporate governance should be conducted in a transparent manner.

In the presence of several guidelines on corporate governance

among them some of the ranked best in the world the Enron debacle of 2001,

came in light followed by other scandals where US companies such as

WorldCom, Qwest, Global Crossing was involved. These have shaken the

foundations of business world and triggered another phase of reforms in

corporate governance, accounting practices and disclosures more

comprehensively than ever before. In July 2002, less than a year from Enron file

bankruptcy Sarbanes Oxley Act (SOX) was enacted in US. The act aims to

protect investors by improving the accuracy and reliability of corporate

disclosures and address all the issues associated with corporate failures to

achieve quality governance and to restore investors’ confidence. The act

contains number of provisions regarding – public company accounting oversight

board, auditor independence, corporate responsibility, enhanced financial

disclosures, analyst conflicts of interest, commission resources and authority,

studies and reports, corporate & criminal fraud accountability, white-collar crime

penalty enhancements corporate tax returns, corporate fraud and

accountability.


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The recent events also highlighted a number of areas to

strengthen the OECD Principles. The Principles already cover many of the

issues that have been at the center of recent corporate scandals. They included

recommendations on high quality standards of accounting and audit, the

independence of board members and the need for boards to act in the interest

of the company and the shareholders. Therefore, OECD invited comment on

Draft Revision of its Corporate Governance Principles on Jan.1, 2004.

OECD Secretary-General Donald J. Johnston said, "Once a new text is agreed,

it will be up to governments, companies, investor groups and others to

implement the recommendations and the OECD will follow this process closely."

The new draft text, in addition, sets more demanding standards in

a number of areas. It specifies that investors should have both the right to

nominate company directors and a more forceful role in electing them. It states

that shareholders should be able to express their views about compensation

policy for board members and executives and submit questions to auditors. It

calls on institutional investors to disclose their overall voting policies and how

they manage material conflicts of interest that may affect the way they exercise

key ownership functions, such as voting. The text also identifies the need for

effective protection of creditor rights and an efficient system for dealing with

corporate insolvency. It calls on rating agencies, brokers and other providers of

information that could influence investor decisions to disclose conflicts of

interest and how they are being managed. It also calls on boards to be more


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rigorous in disclosing related party transactions and to protect so-called "whistle

blowers" by allowing them confidential access to a contact at board level. It is

anticipated that a final revised version of the principles, which was submitted to

OECD governments may get approval at the annual meeting of the OECD

Council at Ministerial Level on May 2004.

3.3 Codes of Corporate Governance Recommended by Various

Committees in India

3.3.1 Confederation of Indian Industries Code of Corporate Governance

The initial formal moves towards corporate governance in India can be traced in

1997 with the voluntary code framed by the Confederation of Indian Industry

(CII). In 1996, CII took a special initiative on corporate governance. The

objective was to develop and promote a code for corporate governance to be

adopted and followed by Indian companies, be these in the private sector, the

public sector, banks or financial institutions, all of which are corporate entities. A

voluntary code published by CII in April 1998, under the committee headed by

Shri Rahul Bajaj. A number of companies over the next three years (nearly 30

large listed companies accounting for over 25 per cent of India’s market

capitalisation) voluntarily adopted the CII code. According to its

recommendations –


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• The full board should meet a minimum of six times a year with an interval of

two months. The listed company should have professionally competent and

acclaimed non-executive directors, with a composition of at least 30% of the

board if the chairman is a non-executive director, or at least 50% of the

board if the chairman is a full time director.

• No single person should hold directorships in more than 10 listed companies.

Companies should pay a commission of 1% of net profits (if the company

has a managing director) otherwise 3% above the sitting fees for the use of

the professional inputs. Stock can be offered as a reward to performance.

• While re-appointing members of the board, companies should give the

attendance record of the concerned directors. If a director has not been

present for 50% or more meetings, then this should be explicitly stated in the

resolution that is put to vote.

• Listed companies with either a turnover of Rs.100 crores or a paid up capital

of Rs.20 crores whichever is less should set up audit committees within two

years. Audit Committees must comprise of minimum of 3 non-executive

directors as a member, who should have adequate knowledge of finance,

accounts and basic elements of company law.

• Under “Additional Shareholder’s Information”, listed public companies should

give data on - High and low monthly averages of share prices in all the stock

exchanges where the company is listed for the reporting year.


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• Major Indian stock exchanges should gradually insist upon a compliance

certificate, signed by the CEO and CFO, which clearly states the

responsibility of the management in preparing financial statements & other

information in the annual report the accountability policies and principles

conform to standard practice.

3.3.2 Report of the SEBI Committee on Corporate Governance (1999)

The next major cornerstone in the Indian case has been the SEBI Committee

chaired by Shri Kumar Mangalam Birla on May 07,1999, as the first formal and

comprehensive attempt to evolve a Code of Corporate Governance, in the

context of prevailing conditions of governance in Indian companies and the state

of capital markets. The committee recommended that the fundamental objective

of corporate governance is the “enhancement of shareholder value, keeping in

view the interests of other stakeholder”. The committee made recommendations

of far-reaching implications for several issues, such as, the independence of

board, accounting standards and financial reporting, share-holders’ rights and

responsibilities, and formation of audit and remuneration committee. The

mandatory recommendations, applies to listed companies with paid up capital of

Rs.3 crore and above, which are as follows:

• Composition of board - The boards of a company have an optimum

combination of executive and non-executive directors. The board should


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comprise of 1/3 of independent director in case of non-executive chairman

and at least 1/2 when chairman is executive.

• Constitution of audit committee - The audit committee comprises of at least 3

independent directors with one having financial and accounting knowledge.

At least 3 meetings a year. It is responsible for review of financial

performance on half yearly/annually basis; appointment/

removal/remuneration of auditors; review of internal control systems and its

adequacy.

• Remuneration of directors – The remuneration of directors decided by the

board and details of remuneration package, stock options, performance

incentives of directors to be disclosed.

• Board procedures – The board procedures in which at least 4 meetings

should be held in a year with a maximum time gap of four months between

any two meetings as to review operational plans, capital budgets, quarterly

results, minutes of committee’s meeting. The director should not to be

member of more than 10 committees and chairman of more than 5

committees across all companies.

• Management discussion and analysis report - It should include industry

structure & developments, opportunities & threats, segment wise or product

wise performance outlook, risks & concerns internal control systems & its

adequacy, discussion on financial performance, and disclosure by directors

on material financial and commercial transactions with the company.


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• Shareholders information - A brief resume of new/re-appointed directors,

quarterly results to be submitted to stock exchanges and to be placed on

web-site.

• Shareholders’/investors grievance committee – The shareholders’/investors

grievance committee should be constituted under the chairmanship of

independent director to look into the complaints of shareholder and conduct

at least 2 meetings in a year.

• Report on corporate governance and Compliance - A separate section on

Corporate Governance in the annual reports of company certificate from

auditors on compliance of provisions of corporate governance should

according to clause 49 in the listing agreement.

The non-mandatory recommendations implies –

• Role of chairman: The chairman should be given expenses to maintain his

office, so that it enables him to discharge his duties well.

• Remuneration Committee: To set up remuneration committee by board on

their behalf as well on behalf of shareholders as to determine the

company’s policy on specific remuneration packages for executive directors.

• Shareholder Rights: The shareholders’ right for receiving half yearly financial

performance.

• Postal ballot system: The postal ballot covering critical matters like alteration

in memorandum etc, sale of whole or substantial part of the undertaking


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corporate restructuring, further issue of capital, venturing into new

businesses.

3.3.3 Report of the SEBI Committee on Corporate Governance (2003)

SEBI believes that efforts to improve corporate governance standards in India

must continue. This is because these standards are themselves evolving, in

keeping with market dynamics. Recent events worldwide, primarily in the United

States, have renewed the emphasis on corporate governance. These events

have highlighted the need for ethical governance and management, and for the

need to look beyond mere systems and procedures. This will ensure compliance

with corporate governance codes, in substance and not merely in form.

Again, one of the goals of good corporate governance is investor

protection. The individual investor is at the end of a chain of financial

information, stretching from corporate accountants and management, through

boards of directors and audit committees, to independent auditors and stock

market analysts, to the investing public. Many of the links in this chain need to

be strengthened or replaced to preserve its integrity. Therefore, SEBI believed

that a need to review the existing code on corporate governance arose from two

perspectives - to evaluate the adequacy of the existing practices, and to further

improve the existing practices.


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In the context of the above rationale, the SEBI committee on corporate

governance was constituted on February 08, 2003 under the chairmanship of

Shri N. R. Narayana Murthy, Chairman and chief mentor of Infosys

Technologies Limited. The terms of reference of the Committee are set out as

under:

• To review the performance of corporate governance

• To 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 issues discussed by the Committee primarily related to audit

committees, audit reports, independent directors, related parties, risk

management, directorships and director compensation, codes of conduct and

financial disclosures. They are:

• Audit committee - strengthening responsibilities of audit committee,

• Audit reports - to improve quality of financial disclosures,

• Independent directors – does not have any material, pecuniary

relationship or transaction with the company,

• Related parties - to disclose the related party transaction to audit

committee,

• Risk management - to assess & disclose business risks,

• Initial Public Offering - utilization of proceeds from IPO,


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• Director’s compensation - to fix the compensation of non-executive

directors by board of directors and disclose it on website,

• Code of conduct- to introduce the formal code of conduct for board,

• Whistle blower policy - to be place in a company providing freedom to

approach the audit committee,

• Subsidiaries - to be reviewed by audit committee of holding company.

The committee also discussed briefly certain recommendations

that were contained in the report of Naresh Chandra Committee on Corporate

Audit and Governance. It was therefore decided by the committee, that in

making the final recommendations to SEBI, the committee would also

recommend that the mandatory recommendations in the report of the Naresh

Chandra Committee, insofar as they related to corporate governance, be

mandatorily implemented by SEBI through an amendment to clause 49 of the

listing agreement.

3.3.4 Report of the Advisory Group on Corporate Governance The initial move towards corporate governance in banks can be traced in the

Reports of Advisory Group on Corporate Governance: Standing Committee on

International Financial Standards and Codes, chaired by Dr. R.H. Patil, for the

RBI in 2001. The Group has discussed models of corporate governance

prevailing in industrialized and emerging countries, the current status of the


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corporate governance in India in the private sector companies, the public sector

companies set up under the Companies Act, the banks and financial institutions

vis-à-vis the internationally accepted principles, codes and best practices in the

areas of corporate governance. The group adopted the OECD Principles of

corporate governance as the main benchmark for comparing the extent of

compliance by the Indian corporate entities. The Group has relied on the

Combined Code of London Stock Exchange, Cadbury Report, Green Bury

Report and Blue-Ribbon Committee to improve the effectiveness of corporate

audit committees.

The Advisory Group has noted that the predominant form of

corporate governance in India is much closer to the East Asian ‘insider’ model

where the promoters dominate governance in every possible way. The group felt

that it is essential to bring reforms quickly and has suggested amendment of the

Companies Act in which the statutory framework for corporate governance has

already been enshrined for enforcing good governance practices in India. The

group made recommendations on the areas of –

• Responsibilities of the board of directors,

• Accountability to stakeholders/ shareholders,

• Selection procedures for the appointment of directors of the board,

• Size and composition and independence of the board,

• Constitution of committees like audit, nomination, remuneration and

shareholders redressal to oversee the practice of corporate governance,


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• Disclosure and transparency standards,

• Role of shareholders and auditors, etc.

The group looked into public sectors banks and noted that the first

important step to improve governance mechanism in these units is to transfer

the actual governance functions from the concerned administrative ministries to

the boards and also strengthen them by streamlining the appointment process of

directors. Furthermore, Group has underlined the need for public sector banks to

maintain a high degree of transparency in regard to disclosure of information.

3.3.5 Report of the Advisory Group on Banking Supervision

The advisory group on banking supervision for the Standing Committee on

International Financial Standards and Codes, under the chairmanship of Shri

M.S. Verma while looking into several areas in which internationally accepted

best practices are already in place, probed into corporate governance as well.

The minimum benchmarks noted by the Group relate to the following:

• Strategies and techniques basic to sound corporate governance;

• Organizational structure to ensure oversight by board of directors and

individuals not involved in day-to-day running of business;

• To ensure that the direct line of supervision of different business areas are

different;

• To ensure independent risk management and audit functions;


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• To ensure an environment supportive of sound corporate governance; and

role of supervisors.

Interestingly, with reference to public sector banks, the group

noted that the nature of a bank’s ownership is not a critical factor in establishing

sound corporate governance practices and concluded that, “the quality of

corporate governance should be the same in all types of banking organisations

irrespective of the nature of their ownership”. The group, however, felt that there

are some areas where practices in the Indian banking sector fell short of

international best practices, viz., constitutions of boards, their accountability, and

their involvement in risk management. The group gave special emphasis on

enhanced transparency in the constitution and structure of the board and senior

management and in public disclosures.

3.3.6 Report of the Consultative Group of Directors of Banks and

Financial Institutions

Taking this move towards corporate governance further, the Reserve Bank

constituted a consultative group of directors of banks and financial institutions

under the chairmanship of Dr. A.S. Ganguly, to review the supervisory role of

boards of banks and financial institutions. The Ganguly consultative group

looked into the functioning of the boards vis-à-vis compliance, transparency,

disclosures, audit committees and suggested measures for making the role of


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the board of directors more effective. The group submitted its recommendations

in April 2002. The major recommendations of the group are the following:

• The government while nominating directors on the boards of PSBs should be

guided by certain broad “fit and proper” norms for the directors, based on the

lines suggested by BIS.

• The appointment / nomination of independent / non-executive directors to the

board of banks (both public sector and private sector) should be from a pool

of professional and talented people to be prepared and maintained by RBI.

• It would be desirable to take an undertaking from every director to the effect

that they have gone through the guidelines defining the role and

responsibilities of directors, and understood what is expected of them.

• In order to ensure strategic focus it would be desirable to separate the office

of Chairman and Managing Director in respect of large-sized PSBs.

• The information furnished to the board should be wholesome, complete and

adequate to take meaningful decisions. The board’s focus should be devoted

more on strategy issues, risk profile, internal control systems, overall

performance, etc.

• It would be desirable if the exposures of a bank to stockbrokers and market-

makers as a group, as also exposures to other sensitive sectors, viz., real

estate etc. are reported to the board regularly.

• The disclosures of progress made towards establishing progressive risk

management system, the risk management policy, strategy, exposures to


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related entities, the asset classification of such lending / investments etc.

should be in conformity with corporate governance standards, etc.

The Ganguly Committee recommendations have been

benchmarked with international best practices as enunciated in the Basel Paper

as well as of other committees and advisory bodies to the extent applicable to

the Indian environment. RBI has also implemented most of the

recommendations. In general these regulations have created an enabling

framework for improving corporate governance in financial institutions.

3.3.7 Report of the Committee on Corporate Audit and Governance

On 21 August 2002, the Naresh Chandra Committee on Corporate Audit and

Governance appointed by the Department of Company Affairs (DCA) under the

Ministry of Finance and Company Affairs, after a series of corporate scandals in

the US, and the Tata Finance-Ferguson episode in India has come out with

comprehensive recommendations. The thrust of the recommendations is on

providing a greater role for the independent directors on the company boards,

disciplining the auditors, and making the Chief Executive Officer (CEO) and the

Chief Financial Officer (CFO) accountable for financial reporting and statements.

The major recommendations are given by the committee are as:

• A list of disqualifications for audit assignments like direct relationship with

company, any business relationship with client, personal relationship with

director.


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• The committee has, however, not recommended statutory rotation of audit

firms, but favoured compulsory audit partner rotation — a measure that is

in line with the recently enacted Sarbanes Oxley Act of the US.

• The audit firms should not provide services such as accounting, internal

audit assignments etc. to audit clients.

• The auditor needs to disclose contingent liabilities & highlight significant

accounting policies.

• The responsibilities of audit committee is to discuss the annual work

programme with the auditor; review the independence of the audit firm and

recommend to the board, with reasons, either the appointment / re-

appointment or removal of the external auditor, along with the annual audit

remuneration. But, this recommendation excludes government companies

(which follow section 619 of the Companies Act) and scheduled

commercial banks (where the RBI has a role to play).

• The management and directors should certify the accounts and financial

statements of all listed companies and public limited companies with paid

up capital of Rs.10crore and above.

• The redefinition of independent directors – does not have any material,

pecuniary relationship or transaction with the company.

• The composition of board of directors of all listed companies, as well as

unlisted public limited companies with a paid-up share capital of Rs.10

crore and above, or turnover of Rs.50 crore and above should be seven, in


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which at least four should be independent directors excluding the unlisted

public companies, which have no more than 50 shareholders and unlisted

subsidiaries of listed companies.

• Non-audit fees can be restricted, if it is necessary.

Apart from the above recommendations committee does not felt

any requirement for setting up an independent regulator similar to the Public

Company Accounting Oversight Board in the Sarbanes Oxley Act. However, the

committee felt the need to establish an efficient and professional body as to

provide transparent and expeditious auditing quality oversight. Therefore,

committee recommended the setting up of Quality Review Boards. The

recommendations have formed part of companies (amendment) bill, 2003.

3.3.8 Report of the Task Force on Corporate Excellence through

Governance

The Department of Company Affairs in the Ministry of Law, Justice and

Company Affairs, Government of India, being the sort of Alma Mater of

corporate, and responsible for administering the working of companies as also

the companies act, has been working vigorously in the direction of putting in

place an altogether new company law to suit the modern requirements. The

department is very much determined to inculcate a high degree of ethics in the

corporate functioning. Along with the efforts of SEBI to frame a set of corporate

governance practices in the form of a corporate code by appointing the Kumar


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Mangalam Birla Committee and adopting and implementing some of its

recommendations swiftly, the department has gone a step further to transplant

the concept of corporate excellence through corporate governance as the

ultimate benchmark for corporate. ‘With the opening up of the economy and to

be in tune with the WTO requirements, if Indian corporate has to survive and

succeed amidst increasing competition from transnationals and foreign

corporates and it can only be through achieving ‘Excellence’ in their working.

Towards this direction of achieving excellence, in May, 2000 the DCA made

Task Force by inviting a group of leading industrialists, professionals, and

academics to study and recommend measures to enhance corporate excellence

in India. The recommendations of the task force have been grouped as

essential, to be introduced immediately by legislation and desirable, that can be

left to the discretion of the companies and their shareholders in their wisdom.

Given the challenges of managing change, the task force has recommended

phased implementation of the essential measures, depending upon the size and

capabilities of the companies on the one hand and on the other, the

requirements of the market place.

Internationally, thinkers advocate that corporate governance

measures should be more by self-discipline and market forces, rather than by

legislation and regulation. The task force is however convinced that the level of

non-legislative and non-regulatory intervention is a function of the maturity of the

market and the economy. However, emphasis continues to be on self-regulation.


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The desire for self-regulation should be enhanced by recognition of the

advantages of good governance in improving the company’s credibility and

market acceptance. The recommendations made in the report related to

corporate governance matters were legislative, regulatory and voluntarily. The

recommendations covered issues like general; company, boards, directors &

processes; audit accounts, ethics, disclosure and reporting; and shareholder

democracy & protection of minority interests. The major recommendations are:

• Companies at their option append a model code of best practices in

corporate governance to the companies act, on the lines of Table A, for

adoption with or without modification.

• The group made clear distinction of responsibilities like direction and

management between the board and the executive. Company board should

have a majority of independent non-executive directors. The positions of

Chairman and Managing Director of a listed company should be separated,

but the company may have the option to combine these with the disclosure

requirement.

• It is essential for listed company to constitute audit committee and a

compensation committee consisting of at-least three members, all of them

being independent non-executive directors.

• The executive director of a public company, listed or unlisted, shall not

accept a directorship in any other company, including private limited

companies, partnership, or, engaged in activities with the first company, in


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material lines of its business excluding where a prior approval of the board is

taken.

• Non-executive directors may accept non-executive directorships in other

competing companies but needs to made disclosure in the annual report.

• Every listed company shall constitute a nomination committee, consisting at

least three independent non-executive directors. The non-executive director

should not hold directorship in more than 10 committees or chairmanship of

more than 4 committees in other listed companies.

• The remuneration to executive director apart from monthly salaries and

perquisites should be given Executive Share Option Plan (ESOP) awards

whereas non-executive directors should be awarded Director Share Option

Plan (DSOP) besides sitting fees.

• Listed companies should publish their annual reports and accounts in a

prescribed form for circulation to shareholders. The CEO and CFO of all

public companies, listed and unlisted, should provide a statement in each

annual report to shareholders, acknowledging responsibility for the financials

and provide confirmation of strictly following accounting standards and

practices.

• The measures emphasized to introduce the concept of interested

shareholders in the scheme of voting on resolutions on specific matters by

shareholders in case of listed companies as to provide shareholder

democracy and protection of minority interests.


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• The annual reports to the shareholders should be disclosed each year.

Listed companies should provide user-friendly web sites and provide

information on an ongoing basis to shareholders and others.

3.4 Implementation of Codes of Corporate Governance in Indian Financial Sector

It is evident from the above recommendations that over the last few years, a

series of joint corporate governance committees were appointed by DCA and

SEBI. Their recommendations are reflected in amendments of Companies Act

1956, listing rules and SEBI regulations. The Kumar Mangalam Birla Committee

of the Indian jurisdiction outlined a code of good corporate governance, which

compared very well with the recommendations of the Cadbury Committee and

the OECD codes. The recommendations were implemented through Clause 49

of the Listing Agreements, in a phased manner by SEBI. They were made

applicable within financial year 2000-01, but not later than March 31, 2001 by all

entities, which are included in either in Group A of the BSE 200 or S&P C&X

Nifty indices as on March 31, 2001. The applicability of the recommendations

within financial year 2001-2002, but not later than March 31, 2002 by all entities

listed with paid up capital of Rs.10 crore and above, or networth of Rs.25 crore

or more any time in the history of the company; and within financial year 2002-

2003, but not later than March 31, 2003 by all the entities listed with paid up

share capital of Rs.3 crore and above.


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The accounting standards issued by the ICAI, which are applicable

to all companies under sub-section 3A of section 211 of the companies act,

1956, were specifically made applicable to all listed companies for the financial

year ended March 31, 2002, under the listing agreements.

i. Board of Directors

a. The boards of a company should have an optimum combination of executive

and non-executive directors. The board should comprise of 1/3 of independent

director in case of non-executive chairman and at least 1/2 when chairman is

executive.

b. The company should agree that all pecuniary relationship or transactions of

the non-executive directors vis-à-vis should be disclosed in the annual report.

ii. Audit Committee

A. 1. Composition The company should set up a qualified and independent

audit committee and that consists of:

a) Minimum of three members -all being non-executive directors.

b) Majority of the members to be independent.

c) One member must have financial and accounting knowledge.

d) Chairman of the committee shall be an independent director.

2. The Chairman should present in AGM to answer shareholders queries.

3. The committee should invite company executives as, it considers appropriate

(particularly the head of finance function) to be present in the meeting of the

committee.


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4. The committee may also meet without the presence of any executives of the

company.

5. When required, the representative of external auditor shall remain present in

the meeting.

6. Company secretary shall be the secretary of the committee

B. Functions of audit committee

1. Audit committee should meet at least thrice a year.

2. One meeting should be held before finalisation of annual accounts.

3. Other two meetings should be held at interval of six months.

4. The quorum should be either two members or one third of the members of the

audit committee whichever is higher and minimum of two independent

directors.

C. Power of the Audit committee

1. To investigate any activity within its terms of reference.

2. To seek information from any employee.

3. To obtain outside legal or other professional advice.

4. To secure attendance of outsiders with relevant expertise, if it considers

necessary.


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D. Role of audit committee

1. Oversee the company’s financial reporting process and the disclosure of its

financial information to ensure that the financial statement is correct,

sufficient and credible.

2. Recommending the appointment and removal of external auditor, fixation of

audit fee and also approval for payment for any other services.

3. Reviewing with management the annual financial statements before

submission to the board, focusing primarily on;

• Any changes in accounting policies and practices.

• Major accounting entries based on exercise of judgment by management.

• Qualifications in draft audit report.

• Significant adjustments arising out of audit.

• The going concern assumption.

• Compliance with accounting standards.

• Compliance with stock exchange and legal requirements concerning financial

statements.

• Any related party transactions i.e. transactions of the company of material

nature, with promoters or the management, their subsidiaries or relatives etc.

that may have potential conflict with the interests of company at large.

4. Reviewing with the management, external and internal auditors, the

adequacy of internal control systems.


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5. Reviewing the adequacy of internal audit function, including the structure of

the internal audit department, staffing and seniority of the official heading the

department, reporting structure coverage and frequency of internal audit.

6. Discussion with internal auditors any significant findings and follow up there

on.

7. Reviewing the findings of any internal investigations by the internal auditors

into matters where there is suspected fraud or irregularity or a failure of

internal control systems of a material nature and reporting the matter to the

board.

8. Discussion with external auditors before the audit commences nature and

scope of audit as well as has post-audit discussion to ascertain any area of

concern.

9. Reviewing the company’s financial and risk management policies.

10. To look into the reasons for substantial defaults in the payment to the

depositors, debenture holders, shareholders and creditors.

iii. Remuneration of directors

A. Remuneration of non-executive directors to be decided by the board of

directors.

B. Disclosures in relation to remuneration of the directors should be made in the

section on the corporate governance of the annual report.

1. Remuneration package such as salary, benefits, bonuses, stock options,

pension etc.


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2. Details of fixed component and performance linked incentives, along with the

performance criteria.

3. Service contracts, notice period, severance fees.

4. Stock option details, if any.

iv. Board procedures

1. The board meeting to be held at least four times a year,

2. The difference of two board meetings should not be more than four months.

3. A director should not be a member in more than 10 committees or act as

Chairman of more than five committees across all companies in which he is a

director.

v. Management

A. The Management Discussion and Analysis report should form part of the

annual report to the shareholders. This should include discussion on the

following matters within the limits set by the company’s competitive position:

a. Industry structure and developments.

b. Opportunities and Threats.

c. Segment-wise or product-wise performance.

d. Outlook.

e. Risks and concerns.

f. Internal control systems and their adequacy.

g. Discussion on financial performance with respect to operational

performance.


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h. Material developments in Human Resources / Industrial Relations front,

including number of people employed.

B. Disclosures to be made to the board relating to all material financial and

commercial transactions, where they have personal interest, that may have a

potential conflict with the interest of the company at large (for e.g. dealing in

company shares, commercial dealings with bodies, which have shareholding of

management and their relatives etc.)

vi. Shareholders

A. The shareholders must be provided with the following information before

appointment of a new director or re-appointment of a director:

a. A brief resume of the director;

b. Nature of his expertise in specific functional areas; and

c. Names of companies in which the person also holds the directorship and the

membership of Committees of the board.

B. Quarterly results, presentation made by companies to analysts should be put

on company’s web-site.

C. A committee designated as ‘Shareholders/Investors Grievance Committee’

under the chairmanship of a non-executive director should be formed to

specifically look into the redressing of shareholder and investors complaints like

transfer of shares, non-receipt of balance sheet, non-receipt of declared

dividends etc.


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D. To delegate the power of share transfer to an officer or a committee or to the

registrar and share transfer agents. The delegated authority should attend to

share transfer formalities at least once in a fortnight.

vii. Report on Corporate Governance

The Annual report of the company should comprise a separate section on

Corporate Governance. Non compliance of any mandatory requirement i.e.

which is part of the listing agreement with reasons there of and the extent to

which the non-mandatory requirements (non-mandatory recommendations of

Kumar Mangalam as aforesaid above in 3.3.2) have been adopted should be

specifically highlighted.

viii. Compliance

The compliance of conditions of corporate governance is to be certified by

auditors of the company and the same is to be annexed with the directors’

report. The same certificate should also be sent to the Stock Exchanges along

with the annual returns filed by the company.

In terms of SEBI's circular no. SMD/Policy/CIR-03/2001 dated

January 22, 2001 all companies were required to submit a quarterly compliance

report to the stock exchanges within 15 days from the end of a financial

reporting quarter. The SEBI observed that the compliance with the requirements

in clause 49 of the listing agreement is, by and large, satisfactory. However, an

analysis of the financial statements of companies and the report on corporate


78

governance discloses that there was variation in the quality of annual reports.

Variations in the quality of annual reports, including disclosures, raises the

question whether compliance is in form or in substance; and emphasized the

need to ensure that the laws, rules and regulations do not reduce corporate

governance to a mere ritual. Therefore, on August 26, 2003, the Security

Exchange Board of India (SEBI) revised Clause 49 of the listing agreement for

improving the standards of corporate governance.

In the above context, and the recommendations made by the

Naryana Murthy committee SEBI directed amendment to Clause 49 of the

Listing agreement through circular no. SEBI/CFD/DIL/2004/12/10 dated October

29, 2004. The revised clause 49 of the listing agreement relating to corporate

governance set forth a schedule for new listing companies and listed companies

to comply with the revisions. The companies complied with the revised clause by

March 31, 2005. However, in March 2005, SEBI extended the date set for

compliance with these new provisions to December 31, 2005, since a large

number of companies were unprepared to fully implement the changes. Major

changes in the clause include amendments/additions to provisions relating to

definition of independent directors, strengthening the responsibilities of audit

committees, and requiring boards to adopt a formal code of conduct. The

revised clause 49 includes:


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• Change in the definition of Independent Directors – who apart from

receiving director's remuneration does not have any material pecuniary

relationships or transactions with the company or any related party, which

may affect independence of the director.

• Non-Executive director's compensation and disclosures – It shall be fixed

by the Board of Directors and shall require previous approval of

shareholders in general meeting.

• Other provisions related to Board and Committees – The board shall

meet at least four times a year, with a maximum time gap of three months

between any two meetings. A director shall not be a member in more

than 10 committees or act as Chairman of more than five committees

across all companies in which he is a director.

• Code of Conduct – The Board shall lay down a code of conduct for all

Board members and senior management of the company. The code of

conduct shall be posted on the website of the company.

• Composition of Audit Committee – The audit committee shall have

minimum three directors as members. Two-thirds of the members of audit

committee shall be independent directors. All members of audit

committee shall be financially literate and at least one member shall have

accounting or related financial management expertise.

• Meeting of Audit Committee – The audit committee should meet at least

four times in a year and maximum time gap between two meetings should


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be four months. At least minimum two independent members present in a

meeting.

• Subsidiary Companies – At least one independent director on the Board

of Directors of the holding company shall be a director on the Board of

Directors of a material unlisted Indian subsidiary company. The Audit

Committee of the listed holding company shall also review the financial

statements of its subsidiary company.

• Disclosures – The disclosures required as per the amended clause: basis

of related party transactions, disclosures of accounting treatment, board

disclosures, risk management, proceeds from public issues, rights issues,

preferential issues etc., remuneration of directors, management

discussion and analysis

• CEO/CFO Certification – The Chief Executive Officer and the Chief

Financial Officer should certify the validity of financial statement and cash

flow statement to the board.

• Report on Corporate Governance – a separate section on Corporate

Governance in the Annual Reports of company, with a detailed

compliance report on Corporate Governance and shall submit a quarterly

compliance report to the stock exchanges within 15 days from the close

of quarter and should be signed either by the Compliance Officer or the

Chief Executive Officer of the company.


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• Compliance –To obtain a certificate from either the Auditors or practicing

Company Secretaries regarding compliance of conditions of corporate

governance as stipulated in this clause and the non-mandatory

requirements may be implemented as per the discretion of the company.

In addition to the initiatives taken by SEBI regarding

implementation of the recommendations, DCA has also accepted most of the

suggestions of the Naresh Chandra Committee on `Corporate Audit &

Governance'. The recommendations of Naresh Chandra Committee on

‘Corporate Audit & Governance' form part of the two proposed Bills —

Companies (Amendment) Bill, 2003 and the Bill to amend the Chartered

Accountants Act. Many recommendations of the report were incorporated in the

Companies (Amendment) Bill 2003, which is currently being reviewed. The

amendment would possibly focus on reforming the audit process and the board

of directors:

• In order to reform the audit process, the bill is expected to make the

provisions for:

1. Laying down the process of appointment and qualification of auditors.

2. Prohibiting non-audit services by the auditors.

3. Prescribing compulsory rotation, at least of the Audit Partner.

4. Requiring certification of annual audited accounts by both CEO and CFO.

5. Providing an expeditious disciplinary mechanism for the auditors.


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• In order to reform the boards, following major initiatives are being proposed:

1. The expression ‘Independent Director’ would be defined. Among other

requirements, an independent director should not have substantial

pecuniary interest or hold more than 2% of the company’s shares.

2. Remuneration of non-executive directors can be fixed only by

shareholders and must be disclosed. A limit on the amount, which can be

paid would also be laid down.

3. It is also envisaged that the independent directors should be imparted

suitable training.

In the way of initiating steps towards implementation of corporate

governance principles RBI also played a major role. On the basis of various

recommendations given by the Report of Consultative Group of Directors of

Banks/Financial Institutions (Chairman Dr A S Ganguly), RBI addressed a

circular letter to all the scheduled commercial banks (excluding foreign banks,

regional rural banks and local area banks) bearing DBOD. No.BC. 116 /

08.139.001/2001-02 dated June 20, 2002. Incidentally, certain

recommendations of the group require the approval of the government or

legislative amendments and hence they referred to government for

consideration. In view of the importance of the recommendations made by the

group for effective functioning of banks, the RBI has implemented most of the

recommendations, which are as follows:


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• Recommendations implemented to all banks

i. Responsibilities of the Board of Directors: to oversee the risk profile,

monitoring, integrity control mechanisms; to ensure expert management,

maximization of interests of stakeholders, delegation of powers, strategic

planning, organizational structure, financial and economic features of the

market and competitive environment.

ii. Role and responsibility of independent and non-executive directors: to

circulate among the new directors a brief profile of the bank, the sub

committees of the board, their role, details on delegation of powers, the

profiles of the top executives etc. Training facilities for directors: Need-

based training programmes / seminars/ workshops may be designed by

banks. While RBI can offer certain training programmes/seminars in this

regard at its training establishments, large banks may conduct such

programmes in their own training centres.

iii. Submission of routine information to the Board: To review various

performance areas that may be put up to the Management Committee of

the board and only a summary on each of the reviews may be put up to

the board of directors at periodic intervals.

iv. Agenda and minutes of the board meeting The draft minutes of the

meeting should be forwarded to the directors, preferably via the

electronic media, within 48 hours of the meeting and ratification obtained

from the directors within a definite time frame.

v. Committees of the Board


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a. Shareholders' Redressed Committee: The banks, which have

issued shares/debentures to public, may form a committee under

the chairmanship of a non-executive director to look into redressed

of shareholders' complaints.

b. Risk Management Committee: In pursuance of the Risk

Management Guidelines issued by the Reserve Bank of India in

October 1999, every banking organization is required to set up risk

management committee. The formation and operation of such

committee should be speeded up and their role further

strengthened.

c. Supervisory Committee: The role and responsibilities of the

supervisory committee as envisaged by the group viz., monitoring

of the exposures (both credit and investment) of the bank, review

of the adequacy of the risk management process and upgradation

thereof, internal control system, ensuring compliance with the

statutory / regulatory framework etc., may be assigned to the

management committee/ executive committee of the board.

vi. Disclosure and Transparency: The disclosures regarding putting in place

a progressive risk management system, and risk management policy

and strategy followed by the bank, exposures to related entities of the

bank, viz. details of lending to/investment in subsidiaries, the asset

classification of such lending/investment, etc. and conformity with


85

corporate governance standards should be reported to the board of

directors at regular intervals.

• Recommendations applicable only to public sector banks

i. Information flow: A summary of key observations made by the directors,

which should be submitted in the next board meeting and a more detailed

recording of the proceedings, which will clearly bring out the

observations, dissents, etc. by the individual directors, which could be

forwarded to them for their confirmation.

ii. Company Secretary: All banks should consider appointing qualified

Company Secretary as the Secretary to the Board and have a

Compliance Officer (reporting to the Secretary) for ensuring compliance

with various regulatory / accounting requirements.

• Recommendations applicable only to private sector banks

i. Eligibility criteria and ' fit and proper' norms for nomination of directors:

The Government while nominating directors on the Boards of public

sector banks should be guided by certain broad "fit and proper" norms

for the directors. The criteria suggested by the BIS may be suitably

adopted for considering 'fit and proper" test for bank directors.

ii. Commonality of directors of banks and non-banking finance companies:

Directors on the boards of NBFCs may be permitted to become


86

independent / non-executive directors on the boards of banks, subject to

certain conditions.

iii. Composition of the Board: Boards of banks more contemporarily

professional by inducting technical and specially qualified personnel.

Efforts should be aimed at bringing about a blend of 'historical skills' set,

i.e. regulation based representation of sectors like agriculture, SSI,

cooperation etc. and the 'new skills' set, i.e. need based representation

of skills such as, marketing, technology and systems, risk management,

strategic planning, treasury operations, credit recovery etc.

3.5 Discussion

In the light of the above reports it is, not surprising that all committees set up in

India for reforming and improving corporate governance practices have given a

lot of weightage to improving the boards. This includes independent directors,

separating the role of the CEO and board chairman, setting up of board sub-

committees, and regulations on board size and meeting frequency are some

interventions for promoting board effectiveness.

Independence of director is often considered to be the universal

remedy for board problems. One of the main recommendations of the Birla

Committee was that board with an executive chairman, at least half the

members should be independent. In case of a non-executive chairman, one-

third of the board members should be independent. This was suggested to keep

away promoter-directors from dominating the function of the board. Going a step


87

further, the Naresh Chandra committee made no distinction between a board

with an executive chairman and a non-executive chairman. However raised the

level of independent directors to 50% and also made the definition of

independence stricter. The Narayana Murthy Committee further upheld that

board independence is crucial for its effectiveness. While independence is

necessary, it too is not enough. The directors should have a strong business

sense, as well as the capability and the willingness to contribute to strategic

decision-making. Therefore, training of board members were made

recommendatory by the committee.To attract quality independent directors, the

Naresh Chandra further recommended that these directors should be exempt

from criminal and civil liabilities.

The Chandra committee has also built the concept of the audit

committee made up of board members, which was earlier recommended by the

Birla committee. The Birla committee recommended that audit committee should

have three non-executive directors as members with at least two independent

directors, and the chairman of the committee should be an independent director.

This had led to the possibility of a promoter-director without an executive role in

the company becoming a member of the audit committee. But the Chandra

committee seems to be keen on its recommendation that all audit committee

members should be independent directors.

It is evident that in April 1998, India produced the first substantial

code of best practice on corporate governance after the start of the Asian


88

financial crisis in mid-1997. The CII began working on "Desirable Corporate

Governance: A Code prior to the financial crisis. All the recommendations of CII

explicitly discusses domestic corporate governance problems and seeks to

apply best-practice ideas to their solution.This code was voluantarily adopted by

the companies before clause 49 came into existence.

In February 2000, the Securities and Exchange Board of India

(SEBI) revised its Listing Agreement to incorporate the recommendations of the

country’s new code on corporate governance, produced in late 1999 by the Birla

Committee. These rules—contained in a new section, Clause 49, of the Listing

Agreement, which took effect in phases over 2000-2003.The mandatory and

non-mandatory recommendations of the committee were adopted in clause 49.

This included the recommendations of the committee regarding composition of

board, constitution of audit committee, remuneration of directors, board

procedures, management discussion & analysis report, shareholders

information, shareholders / investors grievances committee and report on

compliance of provision.

In late 2002, the Securities and Exchange Board of India

(SEBI), in response to rapidly evolving international standards and corporate

collapses in the US and elsewhere, formed a new committee to "evaluate the

adequacy of existing corporate governance practices and further improve these

practices" was chaired by Shri N.R Narayana Murthy. The report of the

committee shows that significant progress was made by the corporate sector


89

after introduction of clause 49. It then made a series of recommendations that

aim to encourage companies to follow the substance, not just the form, of good

governance. The committee's report was released on February 8, 2003. The

intention was to incorporate its main recommendations relating to audit

committees and reports, independent directors, related party transactions, risk

management, director compensation, codes of conduct and financial disclosure

into SEBI's Listing Agreement.

Given the overlap with the Naresh Chandra Committee formed by

the then Department of Company Affairs (discussed below), the Murthy

Committee suggested that the mandatory recommendations of the Chandra

Committee, as they relate to corporate governance, should also be incorporated

into SEBI's Listing Agreement. In October 2004, the Securities and Exchange

Board of India (SEBI) published a revised Clause 49 of the Listing Agreement

relating to corporate governance, setting forth a schedule for newly listing

companies and listed companies to comply with the revisions. However, in

March 2005, SEBI extended the date set for compliance with these new

provisions to December 31, 2005, since a large number of companies were

unprepared to fully implement the changes. Major changes in the clause include

amendments/additions to provisions relating to definition of independent

directors, strengthening the responsibilities of audit committees, and requiring

Boards to adopt a formal code of conduct.


90

It is evident that a Consultative Group was constituted by Reserve

Bank of India (RBI) in November 2001 under the Chairmanship of Dr. A.S.

Ganguly: basically, with a view to strengthen the internal supervisory role of

Boards of banks and financial institutions. An Advisory Group on Corporate

Governance under the chairmanship of Dr. R.H. Patil had earlier submitted its

report in March 2001, which examined the issues relating to corporate

governance in banks in India including the public sector banks and made

recommendations to bring the governance standards in India on par with the

best international standards. There were also some relevant observations by the

Advisory Group on Banking Supervision under the chairmanship, Shri M.S.

Verma, who submitted its report in January 2003. Keeping all these

recommendations in view and the cross-country experience, the Reserve Bank

initiated several measures to strengthen the corporate governance in the Indian

banking sector.

The Ganguly Group made its recommendations within three

months after a comprehensive review of the existing framework as well as of

current practices and benchmarked its recommendations with international best

practices as enunciated by the Basel Committee on Banking Supervision, as

well as of other committees and advisory bodies, to the extent applicable in the

Indian environment. In June 2002, the report of the Ganguly Group was

transmitted to all the banks for their consideration while simultaneously

transmitting it to the Government of India for appropriate consideration.


91

It may be noted here that a basic difference between the private

sector banks and public sector banks as far as the Reserve Bank’s role in

governance matters relevant to banking is concerned. The current regulatory

framework ensures, by and large, uniform treatment of private and public sector

banks by the Reserve Bank in so far as prudential aspects are concerned.

However, some of the governance aspects of public sector banks, though they

have a bearing on prudential aspects, are exempt from applicability of the

relevant provisions of the Banking Regulation Act, as they are governed by the

respective legislations under which various public sector banks were set up. In

brief, therefore, the approach of RBI has been to ensure, to the extent possible,

uniform treatment of the public sector and the private sector banks in regard to

prudential regulations. In regard to governance aspects relevant to banking, the

Reserve Bank prescribes its policy framework for the private sector banks while

suggesting to the Government the same framework for adoption, as appropriate,

consistent with the legal and policy imperatives.

As a follow-up of the Ganguly Committee report, in Mid-Term

Review of the Monetary and Credit Policy in November 2003, the concept of ‘fit

and proper’ criteria for directors of banks was formally enunciated, and it

included the process of collecting information, exercising due diligence and

constitution of a Nomination committee of the board to scrutinise the

declarations made by the directors of the banks.


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Moving ahead, Department of Company Affairs (DCA)

constituted committee in May 2000, under Dr. P.L. Sanjeev Reddy, Chairman.

The group was given the ambitious task of examining ways to "operationalise

the concept of corporate excellence on a sustained basis", so as to "sharpen

India's global competitive edge and to further develop corporate culture in the

country". In November 2000, a task force set up by the group produced a report

containing a range of recommendations for raising governance standards

among all companies in India. It also suggested the setting up of a Centre for

Corporate Excellence. Later in in August 2002, Naresh Chandra Committee

was set up by DCA. The committee has given recommendations regarding

relationship between the auditor and the client, norms for financial reporting,

definition of an independent director and other related issues, which are under

implementations as certain amendments in the Companies Act and the

Chartered Accountants Act are required. The recommendations regarding non-

audit services to audit clients, rotation of auditors and qualified audit opinions

are included in the Companies (Amendment) Bill 2003. It is important that this

legislation should go forward. In order to enhance the quality of auditing

practice, policymakers should consider options to establish a monitoring and

enforcement arrangement in line with recent international developments and the

recommendations of Naresh Chandra.

Documents

Chapter 3 - Information and Library Network Centreshodhganga.inflibnet.ac.in/bitstream/10603/21704/6/ch-3.pdfDirectors, Non-executive Directors, Executive Directors and those on Reporting