Report of the Committee Appointed by the SEBI on Corporate Governance under the Chairmanship of Shri Kumar Mangalam Birla

Report of the Kumar Mangalam Birla Committee on Corporate Governance reface 1.1 It is almost a truism that the adequacy and the quality of corporate governance shape the growth and the future of any capital market and economy. The concept of corporate governance has been attracting public attention for quite some time in India. The topic is no longer confined to the halls of academia and is increasingly finding acceptance for its relevance and underlying importance in the industry and capital markets. Progressive firms in India have voluntarily put in place systems of good corporate governance. Internationally also, while this topic has been accepted for a long time, the financial crisis in emerging markets has led to renewed discussions and inevitably focussed them on the lack of corporate as well as governmental oversight. The same applies to recent high-profile financial reporting failures even among firms in the developed economies. ocus on corporate governance and related issues is an inevitable outcome of a process, which leads firms to increasingly shift to financial markets as the pre-eminent source for capital. In the process, more and more people are recogni!ing that corporate governance is indispensable to effective market discipline. This growing consensus is both an enlightened and a realistic view. In an age where capital flows worldwide, "ust as quickly as information, a company that does not promote a culture of strong, independent oversight, risks its very stability and future health. #s a result, the link between a company$s management, directors and its financial reporting system has never been more crucial. #s the boards provide stewardship of companies, they play a significant role in their efficient functioning. 1.%. &tudies of firms in India and abroad have shown that markets and investors take notice of well-managed companies, respond positively to them, and reward such companies, with higher valuations. # common feature of such companies is that they have systems in place, which allow sufficient freedom to the boards and management to take decisions towards the progress of their companies and to innovate, while remaining within a framework of effective accountability. In other words they have a system of good corporate governance. 1.' &trong corporate governance is thus indispensable to resilient and vibrant capital markets and is an important instrument of investor protection. It is the blood that fills the veins of transparent corporate disclosure and high-quality accounting practices. It is the muscle that moves a viable and accessible financial reporting structure. (ithout financial reporting premised on sound, honest numbers, capital markets will collapse upon themselves. 1.) #nother important aspect of corporate governance relates to issues of insider trading. It is important that insiders do not use their position of knowledge and access to inside

information about the company, and take unfair advantage of the resulting information asymmetry. To prevent this from happening, corporates are e*pected to disseminate the material price sensitive information in a timely and proper manner and also ensure that till such information is made public, insiders abstain from transacting in the securities of the company. The principle should be +disclose or desist,. This therefore calls for companies to devise an internal procedure for adequate and timely disclosures, reporting requirements, confidentiality norms, code of conduct and specific rules for the conduct of its directors and employees and other insiders. or e*ample, in many countries, there are rules for reporting of transactions by directors and other senior e*ecutives of companies, as well as for a report on their holdings, activity in their own shares and net year to year changes to these in the annual report. The rules also cover the dealing in the securities of their companies by the insiders, especially directors and other senior e*ecutives, during sensitive reporting seasons. -owever, the need for such procedures, reporting requirements and rules also goes beyond corporates to other entities in the financial markets such as &tock .*changes, Intermediaries, inancial institutions, /utual unds and concerned professionals who may have access to inside information. This is being dealt with in a comprehensive manner, by a separate group appointed by &.0I, under the 1hairmanship of &hri 2umar /angalam 0irla. 1.3 The issue of corporate governance involves besides shareholders, all other stakeholders. The 1ommittee$s recommendations have looked at corporate governance from the point of view of the stakeholders and in particular that of the shareholders and investors, because they are the raison de etre for corporate governance and also the prime constituency of &.0I. The control and reporting functions of boards, the roles of the various committees of the board, the role of management, all assume special significance when viewed from this perspective. The other way of looking at corporate governance is from the contribution that good corporate governance makes to the efficiency of a business enterprise, to the creation of wealth and to the country,s economy. In a sense both these points of view are related and during the discussions at the meetings of the 1ommittee, there was a clear convergence of both points of view. 1.4 #t the heart of the 1ommittee$s report is the set of recommendations which distinguishes the responsibilities and obligations of the boards and the management in instituting the systems for good corporate governance and emphasises the rights of shareholders in demanding corporate governance. /any of the recommendations are mandatory. or reasons stated in the report, these recommendations are e*pected to be enforced on the listed companies for initial and continuing disclosures in a phased manner within specified dates, through the listing agreement. The companies will also be required to disclose separately in their annual reports, a report on corporate governance delineating the steps they have taken to comply with the recommendations of the 1ommittee. This will enable shareholders to know, where the companies, in which they have invested, stand with respect to specific initiatives taken to ensure robust corporate governance. The implementation will be phased. 1ertain categories of companies will be required to comply with the mandatory recommendations of the report during the financial year %555-%551, but not later than /arch'1, %551, and others during the financial years %551-%55% and %55%-%55'. or the non-mandatory recommendations, the

1ommittee hopes that companies would voluntarily implement these. It has been recommended that &.0I may write to the appropriate regulatory bodies and governmental authorities to incorporate where necessary, the recommendations in their respective regulatory or control framework. 1.6 The 1ommittee recognised that India had in place a basic system of corporate governance and that &.0I has already taken a number of initiatives towards raising the e*isting standards. The 1ommittee also recognised that the 1onfederation of Indian Industries had published a code entitled 78esirable 1ode of 1orporate 9overnance7 and was encouraged to note that some of the forward looking companies have already reviewed or are in the process of reviewing their board structures and have also reported in their 1::;-:: annual reports the e*tent to which they have complied with the 1ode. The 1ommittee however felt that under Indian conditions a statutory rather than a voluntary code would be far more purposive and meaningful, at least in respect of essential features of corporate governance. 1.; The 1ommittee however recognised that a system of control should not so hamstring the companies so as to impede their ability to compete in the market place. The 1ommittee believes that the recommendations made in this report mark an important step forward and if accepted and followed by the industry, they would raise the standards in corporate governance, strengthen the unitary board system, significantly increase its effectiveness and ultimately serve the ob"ective of ma*imising shareholder value.

!he Constitution of the Committee and the Setting for the Report %.1 There are some Indian companies, which have voluntarily established high standards of corporate governance, but there are many more, whose practices are a matter of concern. There is also an increasing concern about standards of financial reporting and accountability, especially after losses suffered by investors and lenders in the recent past, which could have been avoided, with better and more transparent reporting practices. Investors have suffered on account of unscrupulous management of the companies, which have raised capital from the market at high valuations and have performed much worse than the past reported figures, leave alone the future pro"ections at the time of raising money. #nother e*ample of bad governance has been the allotment of promoter,s shares, on preferential basis at preferential prices, disproportionate to market valuation of shares, leading to further dilution of wealth of minority shareholders. This practice has however since been contained. %.% There are also many companies, which are not paying adequate attention to the basic procedures for shareholders, service< for e*ample, many of these companies do not pay adequate attention to redress investors, grievances such as delay in transfer of shares, delay in despatch of share certificates and dividend warrants and non-receipt of dividend warrants< companies also do not pay sufficient attention to timely dissemination of information to investors as also to the quality of such information. &.0I has been

regularly receiving large number of investor complaints on these matters. (hile enough laws e*ist to take care of many of these investor grievances, the implementation and inadequacy of penal provisions have left a lot to be desired. %.' 1orporate governance is considered an important instrument of investor protection, and it is therefore a priority on &.0I,s agenda. To further improve the level of corporate governance, need was felt for a comprehensive approach at this stage of development of the capital market, to accelerate the adoption of globally acceptable practices of corporate governance. This would ensure that the Indian investors are in no way less informed and protected as compared to their counterparts in the best-developed capital markets and economies of the world. %.) &ecurities market regulators in almost all developed and emerging markets have for sometime been concerned about the importance of the sub"ect and of the need to raise the standards of corporate governance. The financial crisis in the #sian markets in the recent past have highlighted the need for improved level of corporate governance and the lack of it in certain countries have been mentioned as one of the causes of the crisis. Indeed corporate governance has been a widely discussed topic at the recent meetings of the International =rganisation of &ecurities 1ommissions >I=&1=?. 0esides in an environment in which emerging markets increasingly compete for global capital, it is evident that global capital will flow to markets which are better regulated and observe higher standards of transparency, efficiency and integrity. @aising standards of corporate governance is therefore also e*tremely relevant in this conte*t. %.3 In the above mentioned conte*t, the &ecurities and .*change 0oard of India >&.0I? appointed the 1ommittee on 1orporate 9overnance on /ay 6, 1::: under the 1hairmanship of &hri 2umar /angalam 0irla, member &.0I 0oard, to promote and raise the standards of 1orporate 9overnance. The 1ommittee,s membership is given in Annexure 1 and the detailed terms of the reference are as followsA a. to suggest suitable amendments to the listing agreement executed by the stock exchanges with the companies and any other measures to improve the standards of corporate governance in the listed companies, in areas such as continuous disclosure of material information, both financial and non-financial, manner and frequency of such disclosures, responsibilities of independent and outside directors; b. to draft a code of corporate best practices; and c. to suggest safeguards to be instituted within the companies to deal with insider information and insider trading. %.4 # number of reports and codes on the sub"ect have already been published internationally B notable among them are the @eport of the 1adbury 1ommittee, the @eport of the 9reenbury 1ommittee, the 1ombined 1ode of the Condon &tock .*change, the =.18 1ode on 1orporate 9overnance and The 0lue @ibbon 1ommittee on 1orporate 9overnance in the D&. In India, the 1II has published a 1ode of 1orporate 9overnance. In preparing this report, while the 1ommittee drew upon these documents to

the e*tent appropriate, the primary ob"ective of the 1ommittee was to view corporate governance from the perspective of the investors and shareholders and to prepare a 1ode to suit the Indian corporate environment, as corporate governance frameworks are not e*portable. The 1ommittee also took note of the various steps already taken by &.0I for strengthening corporate governance, some of which areA strengthening of disclosure norms for Initial Public =ffers following the recommendations of the 1ommittee set up by &.0I under the 1hairmanship of &hri E - /alegam< providing information in directors, reports for utilisation of funds and variation between pro"ected and actual use of funds according to the requirements of the 1ompanies #ct< inclusion of cash flow and funds flow statement in annual reports < declaration of quarterly results< mandatory appointment of compliance officer for monitoring the share transfer process and ensuring compliance with various rules and regulations< timely disclosure of material and price sensitive information including details of all material events having a bearing on the performance of the company< despatch of one copy of complete balance sheet to every household and abridged balance sheet to all shareholders< issue of guidelines for preferential allotment at market related prices< and issue of regulations providing for a fair and transparent framework for takeovers and substantial acquisitions. %.6 The 1ommittee has identified the three key constituents of corporate governance as the &hareholders, the 0oard of 8irectors and the /anagement and has attempted to identify in respect of each of these constituents, their roles and responsibilities as also their rights in the conte*t of good corporate governance. undamental to this e*amination and permeating throughout this e*ercise is the recognition of the three key aspects of corporate governance, namely< accountability, transparency and equality of treatment for all stakeholders. %.; The pivotal role in any system of corporate governance is performed by the board of directors. It is accountable to the stakeholders and directs and controls the /anagement. It stewards the company, sets its strategic aim and financial goals and oversees their implementation, puts in place adequate internal controls and periodically reports the activities and progress of the company in the company in a transparent manner to the stakeholders. The shareholders, role in corporate governance is to appoint the directors and the auditors and to hold the board accountable for the proper governance of the company by requiring the board to provide them periodically with the requisite information ,in a transparent fashion, of the activities and progress of the company. The responsibility of the management is to undertake the management of the company in terms of the direction provided by the board, to put in place adequate control systems and to ensure their operation and to provide information to the board on a timely basis and in a transparent manner to enable the board to monitor the accountability of /anagement to it.

%.: 1rucial to good corporate governance are the e*istence and enforceability of regulations relating to insider information and insider trading. These matters are being currently e*amined separately by a 9roup appointed by &.0I under the 1hairmanship of &hri 2umar /angalam 0irla. %.15 #dequate financial reporting and disclosure are the corner stones of good corporate governance. These demand the e*istence and implementation of proper accounting standards and disclosure requirements. # separate committee appointed by &.0I under the 1hairmanship of &hri E. -. /alegam >who is also a member of this 1ommittee? is e*amining these issues on a continuing basis. This 1ommittee has advised that while in most areas, accounting standards in India are comparable with International #ccounting &tandards both in terms of coverage and content, there are a few areas where additional standards need to be introduced in India on an urgent basis. These matters are discussed in greater detail in para 1%.1 of this report. %.11 The 1ommittee,s draft report was made public through the media and also put on the web site of &.0I for comments. The report was also sent to the 1hambers of 1ommerce, financial institutions, stock e*changes, investor associations, the #ssociation of /erchant 0ankers of India, #ssociation of /utual funds of India, The Institute of 1hartered #ccountants of India, Institute of 1ompany &ecretaries of India, academicians, e*perts and eminent personalities in the Indian capital market, foreign investors. # copy of the draft report was also sent to &ir #drian 1adbury who had chaired the 1adbury 1ommittee on 1orporate 9overnance set up by the Condon &tock .*change, the inancial @eporting 1ouncil and the #ccountancy 0odies in the D. 2. in 1::1. %.1% The 1ommittee has received comments from most of the above groups. 0esides, &ir #drian 1adbury, and several eminent persons in the Indian capital market, have sent detailed comments on the draft report. &eparately, the 1ommittee held meetings with the representatives of the 1hambers of 1ommerce, 1hairmen of the inancial Institutions, stock e*changes, investor associations. Thus the 1ommittee had the benefit of the views of almost all concerned entities that have a role in corporate governance. The 1ommittee has taken into account the views and comments of these respondents in this final report. %.1' The 1ommittee puts on record its appreciation of the valuable inputs and painstaking efforts of &hri #nup &rivastava, Fice-President 1orporate &trategy and 0usiness 8evelopment of the #ditya 0irla 9roup, &hri P 2 0indlish, 8ivision 1hief, &.0I, &hri Dmesh 2umar, and other officers of the &/8@P department of &.0I, in the preparation of this report. !he Recommendations of the Committee '.1 This @eport is the first formal and comprehensive attempt to evolve a 1ode of 1orporate 9overnance, in the conte*t of prevailing conditions of governance in Indian companies" as well as the state of capital markets. (hile making the recommendations the 1ommittee has been mindful that any code of 1orporate 9overnance must be

dynamic, evolving and should change with changing conte*t and times. t would therefore be necessary that this code also is reviewed from time to time, keeping pace with the changing expectations of the investors, shareholders, and other stakeholders and with increasing sophistication achieved in capital markets. Corporate Governance #the $b%ective ).1 1orporate governance has several claimants Bshareholders and other stakeholders which include suppliers, customers, creditors, the bankers, the employees of the company, the government and the society at large. This @eport on 1orporate 9overnance has been prepared by the 1ommittee for &.0I, keeping in view primarily the interests of a particular class of stakeholders, namely, the shareholders, who together with the investors form the principal constituency of &.0I while not ignoring the needs of other stakeholders. !." #he $ommittee therefore agreed that the fundamental ob%ective of corporate governance is the "enhancement of shareholder value, keeping in view the interests of other stakeholder&. This definition harmonises the need for a company to strike a balance at all times between the need to enhance shareholders, wealth whilst not in any way being detrimental to the interests of the other stakeholders in the company. ).' In the opinion of the 1ommittee, the imperative for corporate governance lies not merely in drafting a code of corporate governance, but in practising it. .ven now, some companies are following e*emplary practices, without the e*istence of formal guidelines on this sub"ect. &tructures and rules are important because they provide a framework, which will encourage and enforce good governance< but alone, these cannot raise the standards of corporate governance. (hat counts is the way in which these are put to use. #he $ommittee is thus of the firm view, that the best results would be achieved when the companies begin to treat the code not as a mere structure, but as a way of life. ).) It follows that the real onus of achieving the desired level of corporate governance, lies in the proactive initiatives taken by the companies themselves and not in the e*ternal measures like breadth and depth of a code or stringency of enforcement of norms. The e*tent of discipline, transparency and fairness, and the willingness shown by the companies themselves in implementing the 1ode, will be the crucial factor in achieving the desired confidence of shareholders and other stakeholders and fulfilling the goals of the company. Applicability of the Recommendations Mandatory and non mandatory recommendations 3.1 The 1ommittee debated the question of voluntary versus mandatory compliance of its recommendations. The 1ommittee was of the firm view that mandatory compliance of the recommendations at least in respect of the essential recommendations would be most

appropriate in the Indian conte*t for the present. The 1ommittee also noted that in most of the countries where standards of corporate governance are high, the stock e*changes have enforced some form of compliance through their listing agreements. 3.% The 1ommittee felt that some of the recommendations are absolutely essential for the framework of corporate governance and virtually form its core, while others could be considered as desirable. 0esides, some of the recommendations may also need change of statute, such as the 1ompanies #ct, for their enforcement. In the case of others, enforcement would be possible by amending the &ecurities 1ontracts >@egulation? @ules, 1:36 and by amending the listing agreement of the stock e*changes under the direction of &.0I. The latter, would be less time consuming and would ensure speedier implementation of corporate governance. #he $ommittee therefore felt that the recommendations should be divided into mandatory and non- mandatory categories and those recommendations which are absolutely essential for corporate governance, can be defined with precision and which can be enforced through the amendment of the listing agreement could be classified as mandatory. 'thers, which are either desirable or which may require change of laws, may, for the time being, be classified as non-mandatory. Applicability (.) #he $ommittee 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. 1ompliance with the code should be both in letter and spirit and should always be in a manner that gives precedence to substance over form. The ultimate responsibility for putting the recommendations into practice lies directly with the board of directors and the management of the company. (.! #he recommendations will apply to all the listed private and public sector companies, in accordance with the schedule of implementation. As for listed entities, which are not companies, but body corporates *e.g. private and public sector banks, financial institutions, insurance companies etc.+ incorporated under other statutes, the recommendations will apply to the extent that they do not violate their respective statutes, and guidelines or directives issued by the relevant regulatory authorities. Schedule of implementation 3.3 The 1ommittee recognises that compliance with the recommendations would involve restructuring the e*isting boards of companies. It also recognises that some companies, especially the smaller ones, may have difficulty in immediately complying with these conditions. (., #he $ommittee recommends that while the recommendations should be applicable to all the listed companies or entities, there is a need for phasing out the implementation as follows-

.y all entities seeking listing for the first time, at the time of listing. /ithin financial year "000-"001,but not later than 1arch )1, "001 by all entities, which are included either in 2roup 3A4of the .56 or in 578 $9: 9ifty index as on ;anuary 1, "000. -owever to comply with the recommendations, these companies may have to begin the process of implementation as early as possible. These companies would cover more than ;5G of the market capitalisation. /ithin financial year "001-"00",but not later than 1arch )1, "00" by all the entities which are presently listed, with paid up share capital of <s. 10 crore and above, or networth of <s "( crore or more any time in the history of the company. /ithin financial year "00"-"00),but not later than 1arch )1, "00) by all the entities which are presently listed, with paid up share capital of <s ) crore and above