SIMS - 2010 - CG - Evolution in India

8/7/2019 SIMS - 2010 - CG - Evolution in India

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MBA 09-11 - CG - India Evol 1

SIMS MBA Batch of 2009-11CORPORATE GOVERNANCE

Session 5

Evolution of CG in India


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Evolution of CG in India


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Evolution in India

Only country in Asia where industry provided theinitial impetus, rather than Govt. for CG Reform.

Driven by a desire to make Indian business morecompetitive and respected on the world stage, the CII

published a voluntary Code of CorporateGovernance in 1998

SEBI set up Kumar Mangalam Birla Committee,whose recommendations in Dec 1999 formed the

basis for Clause 49 of the Listing Agreement.

SEBI revised Clause 49 in late 2004 based on Reviewby Narayana Murthy Committee (2003); revisionscame into effect on January 1, 2006. (Next slide)


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What is Clause 49

SEBI monitors and regulates corporate governance

of listed companies in India through Clause 49. This

clause is incorporated in the listing agreement of

stock exchanges with companies and it is compulsoryfor them to comply with its provisions.

Issued the Clause in February 00. Amended in late

2004 to be effective April, 2005, extended to Jan 2006

Applicable to all Group A companies of the

Exchange, as also others with minimum paid-up

capital of Rs 3 crore or net worth of Rs 25 crore.


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Kumaramanglam Committee

Report

(Abbreviated as KM)


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KM - Key Mandatory in Detail - 1

Board of Directors: At least 30% independent if

Chairman is non-executive, 50% otherwise

All pecuniary relationship or transactions of the

non-executive directors viz-a-viz. the company

should be disclosed in the Annual Report.

Audit Committee will be set up with qualified

and independent directors as members(Minimum 3) Its Chairman will answer

shareholders in AGM.


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An Audit Committee will oversee entirefinancial reporting process, with powers:

to investigate any activity within its terms ofreference.

to seek information from any employee.

to obtain outside legal or other professionaladvice.

to secure attendance of outsiders withrelevant expertise, if necessary.

It will meet at least thrice a year


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Remuneration of Directors to be decided bythe Board, including for non-executiveDirectors, and will be disclosed fully

No director will be a member in more than 10committees or act as Chairman of more thanfive committees across all companies in whichhe is a director.

A Management Discussion and Analysisreport should form part of the Annual Reportto the shareholders.


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There shall be a separate section on CG in theannual reports of company, with a detailedcompliance report on CG.

Company shall obtain a certificate from the

auditors of the company regarding compliance ofconditions of CG as stipulated, annexe thecertificate with the directors report, which is sentannually to all the shareholders of the company.

The same certificate shall also be sent to the StockExchanges along with the annual returns filed bythe company.


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Narayana Murthy Committee

Report

(Abbreviated as NR)


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Salient Approach Statements of

N R Committee (2003) - 1 Committee was appointed to review the progress on

practice of CG

The approach of the Committee was Evidencesuggests that companies that do not employmeaningful governance procedures can pay asignificant risk premium when competing for

scarce capital in the public markets. In fact,recently, stock market analysts have acquired anincreased appreciation for the correlation betweengovernance and returns.


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Salient Approach Statements of

N R Committee (2003) - 2CG is beyond the realm of law. It stems from the

culture and mindset of management, and cannot beregulated by legislation alone. CG deals with

conducting affairs of a company such that there isfairness to all stakeholders and that its actionsbenefit the greatest no. of stakeholders. It is aboutopenness, integrity & accountability.What

legislation can and should do, is to lay down acommon framework the form to ensurestandards. The substance will ultimatelydetermine the credibility and integrity of the process.


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NR - Key Mandatory in Detail - 1

Audit committees should be required to reviewthe following information mandatorily:

Financial statements and draft audit report,including Qrtly/ yearly financial information;

Management discussion and analysis offinancial condition and results of operations;

Reports relating to compliance with laws andto risk management;

Management letters / letters of internal controlweaknesses issued by statutory/internalauditors; and

Records of related-party (defined) transactions


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A statement ofalltransactions with related

parties including their bases should be placed

before the independent audit committee for

formal ratification. Procedures should be in place to inform Board

members about the risk assessment and

minimization procedures. These procedures

should be periodically reviewed to ensure thatexecutive management controls risk through

means of a properly defined framework.


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It should be obligatory for the Board of acompany to lay down the code of conduct for allBoard members and senior management of a

company. This code of conduct shall be postedon the website of the company. All Boardmembers and senior management personnelshall affirm compliance with the code on an

annual basis. The annual report of the companyshall contain a declaration to this effect signedoff by the CEO and COO.


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There shall be no nominee directors.

Where an institution wishes to appoint a

director on the Board, such appointment

should be made by the shareholders. Aninstitutional director, so appointed, shall

have the same responsibilities and shall

be subject to the same liabilities as anyother director.


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All compensation paid to non-executivedirectors may be fixed by the Board ofDirectors and should be approved byshareholders in general meeting.

Companies should publish theircompensation philosophy and statementof entitled compensation in respect ofnon-executive directors in their annual

report. Alternatively, this may be put up onthe companys website and referencedrawn thereto in the annual report.


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The term independent director adopted is thesame as was defined elaborately by an earlierNaresh Chandra Committee based on aninternationally accepted definition.

(We will discuss the concept of IndependentDirector in more details later)

Personnel who observe an unethical or improperpractice (not necessarily a violation of law) shouldbe able to approach the audit committee withoutnecessarily informing their supervisors.


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The provisions relating to the composition ofthe Board of Directors of the holdingcompany should be made applicable to thecomposition of the Board of Directors of

subsidiary companies. At least one independent director on the

Board of the parent company shall be adirector on the Board of Directors of the

subsidiary company.

The Audit Committee of the parent companyshall also review the financial statements.


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More Recent Events

Amendment to Companies Actunder consideration Bill withparliament

This will synchronize with

Clause 49 and with internationaldevelopments

Documents

SIMS - 2010 - CG - Evolution in India