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Report of the Kumar MangalamBirla Committee on Corporate

GovernanceGROUP MEMBERS

GEORGE (80)

MELITA (94)

PARIN (98)RAHUL (102)

SAVIO (110)

SWAPNIL (118)

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Kumar Mangalam Birla Committeeo Appointed on May 7, 1999 by SEBI

o Consisted of 17 members under the Chairmanship

of Shri Kumar Mangalam Birla

o Its report is the 1st formal & comprehensive

attempt to evolve a Code of Corporate Governance

o Provides recommendation to distinguish the

responsibilities & obligations of the Board & Mgmt

o Emphasizes the rights of shareholders in

demanding corporate governance

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Contdo A statutory rather than voluntary code would be

purposive and meaningful

o Took into account steps already taken by SEBI

o 3 key constituents of Corporate Governance

Shareholders, Board of Directors & Mgmt

o It attempted to identify the roles & responsibilities

of the key constituents

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Contd Recognition of 3 key aspects of Corporate

Governance Accountability, Transparency &Equality of treatment for all stakeholders

Draft report was made public by media & was puton SEBIs website for comments

Sent to Chambers of Commerce, Stock exchanges,ICAI, ICSI, Association of Merchant Bankers,

Association of Mutual Funds, Association ofInvestors, Financial Institution & Sir AdrianCadbury

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Why was this committee formed? better and more transparent reporting

practices

adequate attention to the basic proceduresfor shareholders service

instrument of investor protection

To prevent insider trading

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Contd. markets and investors take notice of well-

managed companies

concern about the importance of the subjectand of the need to raise the standards of

corporate governance

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Objectives

enhancement of shareholder value, keeping in

view the interests of other stakeholder

to treat the code not as a mere structure, but

as a way of life

proactive initiatives taken by the companies

themselves and not in the external measures

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RECOMMENDATIONS

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Applicability

The Committee is of the opinion that the

recommendations should be made applicable to the

listed companies, their directors, management,

employees and professionals associated with such

companies, in accordance with the time table

proposed in the schedule given later in this section.

Compliance with the code should be both in letter

and spirit and should always be in a manner that

gives precedence to substance over form

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Schedule of implementation

By all entities seeking listing for the first time, at the

time of listing.

Within financial year 2000-2001,but not later than

March 31, 2001 by all entities, which are included

either in Group Aof the BSE or in S&P CNX Nifty

index as on January 1, 2000. However to comply

with the recommendations, these companies mayhave to begin the process of implementation as

early as possible.These companies would cover

more than 80% of the market capitalisation.7/4/2013 10

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Schedule of implementation


March 31, 2002 by all the entities which are

presently listed, with paid up share capital of Rs. 10

crore and above, or networth of Rs 25 crore or more

any time in the history of the company.


March 31, 2003 by all the entities which arepresently listed, with paid up share capital of Rs 3

crore and above

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Board of directors

The board of a company provides leadership and

strategic guidance, objective judgement

independent of management to the company and

exercises control over the company, while

remaining at all times accountable to the

shareholders. The measure of the board is not

simply whether it fulfils its legal requirements but

more importantly, the boards attitude and the

manner it translates its awareness and

understanding of its responsibilities.7/4/2013 12

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Independent Directors

Directors, who have a key role in the entire mosaic

of corporate governance. The Committee was of the

view that it was important that independence be

suitably, correctly and pragmatically defined, so

that the definition itself does not become a

constraint in the choice of independent directors on

the boards of companies.

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Nominee Directors

There is another set of directors in Indian

companies who are the nominees of the financial or

investment institutions to safeguard their interest.

The nominees of the institutions are often chosen

from among the present or retired employees of

the institutions or from outside. In the context of

corporate governance, there could be arguments

both for and against the continuation of this

practice.

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Chairman of the Board

The Committee believes that the role of Chairman is

to ensure that the board meetings are conducted in

a manner which secures the effective participation

of all directors, executive and non-executive alike,

and encourages all to make an effective

contribution, maintain a balance of power in the

board, make certain that all directors receive

adequate information, well in time and that the

executive directors look beyond their executive

duties and accept full share of the responsibilities of

governance7/4/2013 15

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Composition of Board of directors

The Committee recommends that the board of a company

have an optimum combination of executive and non-

executive directors with not less than fifty percent of the

board comprising the non-executive directors.

The number of independent directors would depend on the

nature of the chairman of the board. In case a company has

a non-executive chairman, at least one-third of board should

comprise of independent directors and in case a company

has an executive chairman, at least half of board should be

independent.

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Example of Composition of Board

of Directors

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Audit Committee

Composition

Frequency of Meetings

Powers

Functions

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Audit Committee

A system of good corporate governance promotes

relationships of accountability between the

principal actors of sound financial reporting the

board, the management and the auditor. It holds

the management accountable to the board and the

board accountable to the shareholders. The audit

committees role flows directly from the boards

oversight function. It acts as a catalyst for effective

financial reporting.

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Composition

the audit committee should have minimum three

members, all being non executive directors, with the

majority being independent, and with at least one

director having financial and accounting knowledge;

the chairman of the committee should be an

independent director;

the chairman should be present at Annual GeneralMeeting to answer shareholder queries.

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Frequency of Meetings

The Committee recommends that to begin with the

audit committee should meet at least thrice a year.

One meeting must be held before finalisation of

annual accounts and one necessarily every six

months.

The quorum should be either two members or one-

third of the members of the audit committee,whichever is higher and there should be a minimum

of two independent directors

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Powers

To investigate any activity within its terms of

reference.

To seek information from any employee.

To obtain outside legal or other professional advice.

To secure attendance of outsiders with relevant

expertise, if it considers necessary.

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Functions

Oversight of the companys financial reporting

process and the disclosure of its financial

information to ensure that the financial statement is

correct, sufficient and credible.

Recommending the appointment and removal of

external auditor, fixation of audit fee and also

approval for payment for any other services. Reviewing with management the annual financial

statements before submission to the board

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Functions

Reviewing with the management, external and

internal auditors, the adequacy of internal control

systems.

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.

Discussion with internal auditors of any significant

findings and follow-up thereon.7/4/2013 24

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Remuneration Committee of the

Board

Mandatory Policy

Credible and transparent policy for remuneration

of director

Avoid potential conflicts of interest between the

shareholders, the directors, and the

management

Non-mandatory

the board should set up a remuneration

committee

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Composition, Quorum etc. of the

Remuneration Committee

Non-mandatory

at least three directors, all of whom should be non-

executive directors, the chairman of committee being an

independent director. Quorum for meeting

all the members of the remuneration committee should

be present at the meeting

Chairman of the remuneration committee should bepresent at the AGM to answer shareholders queries

Mandatory

board of directors should decide the remuneration of

non-executive directors.7/4/2013 26

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Disclosures of Remuneration Package

(Mandatory)

All elements of remuneration package of all the

directors i.e. salary, benefits, bonuses, stock options,

pension etc.

Details of fixed component and performance linked

incentives, along with the performance criteria.

Service contracts, notice period, severance fees.

Stock optiondetails, if anyand whether issued at adiscount as well as the period over which accrued

and over which exercisable.

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Board Procedures

Board meetings should be held at least four times in

a year, with a maximum time gap of four months

between any two meetings

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

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Accounting Standards and Financial

Reporting

Consolidation of Accounts of subsidiaries

Segment reporting where a company has multiple

lines of business.

Disclosure and treatment of related party

transactions

Treatment of deferred taxation

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Management

Aim - To maximize shareholder value without being

detrimental to the interests of other stakeholders

It is responsible for translating into action, the

policies and strategies of the board and

implementing its directives to achieve corporate

objectives of the company framed by the board

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Functions of the Management

Assisting the board in its decision making process

Implementing the policies and code of conduct of

the board

Managing the day to day affairs of the company

Ensuring compliance of all regulations and laws

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Functions of the Management

(contd) Ensuring timely and efficient service to the

shareholders

To protect shareholders rights and interests.

Setting up and implementing an effective internal

control systems, commensurate with the business

requirements.

Implementing and comply with the Code of Conduct

Co-operating and facilitating efficient working of

board committees

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Disclosure related to Management

(mandatory)

As part of the directors report or as an addition there to, a Management

Discussion and Analysis report should form part of the annual report to

the shareholders

Industry structure and developments.

Opportunities and Threats

Segment-wise or product-wise performance.

Outlook.

Risks and concerns

Internal control systems and their adequacy. Discussion on financial performance with respect to operational

performance.

Material developments in Human Resources /Industrial Relations

front, including number of people employed.7/4/2013 33

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Disclosures related to Board made by

Management (mandatory)

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.)

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Tata Finance Multicrore Scam

Tata Finance multicrore scam spoil the reputation of the Tata group. Its

spotless corporate reputation has been sullied by this ugly controversy. Dilip

Pendse former managing director of Tata Finance Ltd. accused by the Tata

group of siphoning off more than Rs. 400 crore from the company for his

personal benefits. Some of the alleged offences of Pendse include;

Enter into circular transactions at the end to every quarter between

September 1999 and March 2001;

Misled the board and the regulators about the exposure of the company to

Niskalp;

Enter into back-dated transactions with a view to showing profits in Niskalp;

Cheated the board of directors by concealing the real losses of Niskalp.Undertook illegal and unauthorized carry forward transactions in Global

Telesystems through JhunJhunwala Stock Brokers and falsifying information

in TFLs right issue offer letter.

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HLL Insider trading

Sebi had indicted S. M. Datta the former Chairman of Hindustan Lever and

four directors of HLL including the Chairman Keki B. Dadiseth under the

charge of indulging in the heinous offence of insider trading. Lever had at last

made up its mind to merge with Brooke Bond Lipton India Ltd.

BBLIL witnessed a steep hike much before the merger was came to public

light and Sebi, the market regulator, swung into action without any time lag.

Sebi launched an investigation on HLL on May 12, 1996 and charged the

company of indulging in insider trading on August 4, 1997.

The allegations pinpointed by Sebi then were not against any individual ;

rather the company itself was accused of it. The culmination of the

proceedings of the case took place on March 11, 1998 in form of Sebi holding

HLL guilty and prosecuting 5 HLL directors for the offence of insider trading.

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THE INFOSYS MODEL

A formal code of business conduct and ethics to be signed and adhered to by

employees. Action against any employee for violation thereof.

Contents

General standards of conduct

Management of conflicts of interest

Prohibition of exploitation of corporate opportunities

Protection of companys confidential information

Obligations under securities laws Use of assets

An entire section on responsibilities to customers and stakeholders.

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Shareholders

Aim To provide adequate avenues to the

shareholders for effective contribution in the

governance of the company while insisting ona high standard of corporate behaviour

without getting involved in the day to day

functioning of the company.

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Responsibilities of shareholders

Effective participation in AGM

Involvement in the appointment of the

directors and the auditors

*In case of the appointment of a new

director or re-appointment of a director the

shareholders must be provided withdirectors resume, functional expertise and

past record of directorship7/4/2013 39

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Shareholders rights

Basic rights

Right to participate in, and be sufficiently

informed on decisions concerning fundamental

corporate changes (Beyond Companies Act)

* RTI through company/exchange website

Half-yearly declaration of financialperformance to be sent to each household of

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Shareholders rights

(contd) Convenient AGM venue and voting system A board committee under the chairmanship of

a non-executive director to look after

shareholders grievances

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Manner of Implementation

Amendment in Securities Contracts (Regulation) Rules,

1957 for incorporating the mandatory provisions

Mandatory provisions of the recommendations may be

implemented through the listing agreement of the stockexchanges

Amendment in Securities Contract (Regulation) Act, 1956

to empower exchanges by replacing the concept of listingagreement with listing conditions

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Manner of Implementation

(contd) Empower SEBI and stock exchanges to take deterrentaction in case of violation of provisions

Suitable amendments to the Companies Act in respect of

the recommendations

* Separate section on Corporate Governance in the annual

reports of companies

* Obtain a certificate from the auditors of the company

regarding compliance of mandatory recommendations

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Annexure POSTAL BALLOT SYSTEM

Voting at the general meetings ofcompanies is the most valuable andfundamental mechanism for shareholders.

A company is required to obtain theapproval of its shareholders for variousimportant decisions.

Having proxies in meetings has given riseto this system.

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Items requiring voting by

postal ballotMatters relating to alteration in the memorandum of association of the company likechanges in name, objects, address of registered office etc.

Sale of whole or substantially the whole of the undertaking.

Sale of investments in the companies, where the shareholding or the voting rights of thecompany exceeds 25%.

Making a further issue of shares through preferential allotment or private placementbasis.

Corporate restructuring.

Entering a new business area not germane to the existing business of the company.

Variation in the rights attached to class of securities.

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Procedure for the postal ballot

The board of directors shall appoint aDesignated-Person to conduct, supervise and

control the exercise of postal ballot.

All communications in this regard shall be madeby and addressed directly to the said Designated-Person.

A notice containing a draft of the resolutions andthe necessary explanatory statement shall be sentto all members entitled to vote.

The notice shall be sent under certificate ofposting.

The Designated-Person shall ascertain the willof the shareholders based on the response.

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List Of Items To Be Included In The Report

On Corporate Governance In The Annual

Report Of Companies

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1. A brief statement on companys philosophy on code

of governance.

2. Board of Directors: Composition & Category of Directors

Attendance

BoD Meeting details

3. Audit Committee:

Description of terms and references

Composition, name of members and Chairperson

Meetings and attendance during the year

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4. Remuneration Committee: Brief description of terms of reference

Composition, name of members and Chairperson

Attendance during the year

Remuneration policy Details of remuneration to all the directors, as per

format in main report.

5. Shareholders Committee.

Name of non-executive director heading the

committee

Name and designation of compliance officer

Number of shareholders complaints received so

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Number not solved to the satisfaction of

shareholders

Number of pending share transfers

6. General Body meetings:

Location and time, where last three AGMs held.

Whether special resolutions

Were put through postal ballot last year, details ofvoting pattern

Person who conducted the postal ballot exercise

Are proposed to be conducted through postal ballot

Procedure for postal ballot

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7. Disclosures: Disclosures on materially significant related party transactions

Details of non-compliance by the company, penalties imposed

on the company by Stock Exchange or SEBI on any matterrelated to capital markets, during the last three years

8. Means of communication: Half Yearly reports Household of shareholders

Quarterly Results newspaper

- website

- Official news release

- Presentation to investors & analysts

Whether MD&A is a part of the annual report or not.

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9. General Shareholder information:

AGM : Date, time and venue

Financial Calendar

Date of Book closure

Dividend Payment Date

Listing on Stock Exchanges

Stock Code

Market Price Data : High., Low during each month in last financial

year

Performance in comparison to broad-based indices such as BSE

Sensex, CRISIL index etc.

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Registrar and Transfer Agents

Share Transfer System

Distribution of shareholding

Dematerialization of shares and liquidity Outstanding GDRs/ADRs/Warrants or any Convertible

instruments, conversion date and likely impact on equity

Plant Locations

Address for correspondence

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Summary of

Recommendation(Mandatory)

Applies to listed companies of paid up capital of Rs.

3 crores .

Composition of Board of Directors - optimum

combination of Executive & Non- Executivedirectors(at least 50%).

Audit Committee- With 3 independent directors,

with 1 having financial and accounting knowledge.

Remuneration committee Disclosure in annual

report relating to all elements of remuneration

package of directors like salary, bonus, ESOPs,

pension, benefits.7/4/2013 54

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Summary of

Recommendation(Mandatory)

Participation of Director- shall not be a member of more

than 10 committees & shall not act as chairman of more

than 5 committees across all the companies.

Disclosure- Management discussion & analysis report

covering industry structure, opportunities, threats, internal

control system.

Information sharing with shareholders.

Board procedures- At least 4 meetings in a year, to review

operational plans, capital budgets & quarterly results.7/4/2013 55

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NON - MANDATORY

RECOMMENDATIONS Role Of Chairman - effective participation of all members Remuneration Committee Of Board credibility &

transparency

Ballot system -Shareholders' Right For Receiving Half YearlyFinancial Performance Postal Ballot Covering Critical

Matters Like Alteration In Memorandum Etc

Sale -Of Whole Or Substantial Part Of The Undertaking

Corporate Restructuring Further Issue Of Capital

Venturing Into New Businesses

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Conclusion By and large, Indian listed companies have been legally

mandated to follow fairly strict standards of corporategovernance and disclosure

Indian corporate sector regulators and companies havebeen quick to incorporate some of the best internationalcorporate governance and disclosure practices

The need of the day is more training of directors, auditcommittee members and senior executives of companies

The challenge is to design and sustain a system that imbibesthe spirit of corporate governance and not merely the

letter of the law7/4/2013 57

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BIBLIOGRAPHY

http://www.nfcgindia.org/krbirla1999.htm

www.business.gov.inhttp://www.sebi.gov.in/commreport/corpgov.jsp/
http://www.nfcgindia.org/krbirla1999.htmhttp://www.business.gov.in/http://www.business.gov.in/http://www.nfcgindia.org/krbirla1999.htm

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Thank You

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Documents

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