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Corporate Governance in India

Submitted in partial fulfillment of the requirements for (FM)


(Prof. GaziaSayed)


Name: (Mahendra Shantaram Patil)

(MFM) Roll No. (MF-11-30.)

Batch: (2011 - 2014)

IESManagementCollege and Research Centre

University of Mumbai

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I hereby declare that this report submitted in partial fulfillment of the requirement of the
award for the marks of master of finance management (MFM / MIM /MMM) to IES
Management College is my original work and not submitted for award for award of any
degree or diploma, fellowship or for similar titles or prizes.
I further certify that I have no objection and grant the rights to IES Management college
to publish any chapter / project if they deem fit the journals/Magazine and newspapers
etc without my permission.

Place : Mumbai

Date :

Name :Mahendra Shantaram Patil Signature:

Class : Master of Finance Management (MFM)

Roll No :MF 11 - 30

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This is to certify that project titled: Corporate Governance in India
has been submitted by Mr. Mahendra Shantaram Patil towards partial fulfillment of the
requirements of the MFM degree course 2011 - 20014 and has been carried out by him
under the guidance of Ms. Gazia Sayed at the IES Management College and Research
Centre affiliated to the University of Mumbai.
The matter presented in this report has not been submitted for any other purpose in this

_______________________ ___________________________
Guide : Director: Dr.Dinesh D. Harsolekar
Place : Place :
Date : Date :
* on IES Letterhead

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Table of Contents

Acknowledgement (i)
Preface (ii)

1. Introduction 1
a) Meaning of Corporate Governance 2
b) India The Birth Place of Corporate Governance 2
c) Fundamental objective of corporate governance 3
2. Evolution of Frame work 4
a) Global scene 4
b) Indian Scene 10
3. Comparison Of Corporate Governance Guidelines & Codes Of Best
Practice In Developed & Developing / Emerging Markets 27
4. Four Pillars of Corporate Governance 34
5. Indian Stock Exchange requirements on compliance 36
6. Triple Effect of Corporate Governance 47
7. Adherence to Corporate Governance - A critical analysis 49
a) On HDFC 49
b) On Infosys 52
8. Flouting of corporate governance norms and its consequences A critical
analysis 56
a) On Enron 56
b) On WorldCom 58
9. Conclusion 62

Bibliography 63

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1. Introduction

Although India has been rather slow in establishing corporate governance principles over
the last two decades, 2012 was a positive year for progression in the Indian corporate governance
arena. The Companies Bill 2012, passed by LokSabha (the lower house) on 18 December 2012,
includes a number of new provisions aimed at improving the governance of public companies.
Many countries have now started recognizing the synergy between macroeconomic and
structural policies. One key element in improving economic efficiency is corporate governance,
which involves a set of relationships between a company's management, its board, its
shareholders and other stakeholders. Corporate governance also provides the structure through
which the objectives of the company are set, and the means of attaining those objectives and
monitoring performance are determined. Good corporate governance should provide proper
incentives for the board and the management to pursue objectives that are in the interests of the
company and shareholders and should facilitate effective monitoring, thereby encouraging firms
to use resources more efficiently.
There has been renewed interest in the corporate governance practices of modern
corporations, particularly in relation to accountability, since the high-profile collapses of a
number of large corporations during 20012002, most of which involved accounting fraud.
Corporate scandals of various forms have maintained public and political interest in the
regulation of corporate governance.

Definitions of Corporate Governance

Cadbury Report (UK), 1992
Corporate Governance is the system by which companies are directed and controlled.

SEBI (Kumar Mangalam Birla) Report on Corporate Governance, January, 2000
Fundamental objective of corporate governance is the enhancement of the long-term
shareholder value while at the same time protecting the interests of other stakeholders.

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a) Meaning of Corporate Governance

Corporate governance refers to the system by which corporations are directed and
controlled. The governance structure specifies the distribution of rights and responsibilities
among different participants in the corporation such as the board of directors, managers,
shareholders, creditors, auditors, regulators, and other stakeholders and specifies the rules and
procedures for making decisions in corporate affairs. Governance provides the structure through
which corporations set and pursue their objectives, while reflecting the context of the social,
regulatory and market environment. Governance is a mechanism for monitoring the actions,
policies and decisions of corporations. Governance involves the alignment of interests among the
Corporate governance refers toan economic, legal and institutional environment that
allows companies diversify, grow, restructure and exit, and do everything necessary to maximize
long term shareholder value.

Corporate Governance harmonizes 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.

b) India The Birth Place of Corporate Governance

We as a country have been practicing Corporate Governance since Nanda and Maurya
Dynasties i.e. 198 BC - 320BC. Kautilya's concept of Corporate Governance tallies with the
global consensus on the objective of Good Corporate Governance.
Kautilya (Chanakya) Says:

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Means : In the happiness and well-being of the subjects, lies the well-being of the king, in the
welfare of the subjects, is the welfare of the king, what is desirable and beneficial to the subjects
and not his personal desires and ambition, is desirable and beneficial for the king.

Chanakya further elaborated on the "four-fold" duties of the king as "Raksha - protection",
"Vriddhi- enhancement", "Palana- maintenance", "Yogakshema- safeguarding". It is the duty of
the king to protect the wealth of the state and its subjects, to enhance the wealth, to maintain it
and safeguard it and the interest of the subjects. The substitution of the STATE by the
SUBJECTS by the SHAREHOLDERS brings out the quintessence of Corporate Governance,
because central to the concept of Corporate Governance is the belief that public good should be
ahead of private good; and that the corporations resources cannot be used for personal benefits.
The fourfold duties of the king can be interpreted to imply for the corporation, as shareholder's
wealth, its enhancement of the wealth through proper utilization of assets, maintenance of that
wealth taking care not to fritter it away in unconnected and non-profitable ventures or through
expropriation, and above all safeguard of the interest of the shareholders.

c) Fundamental objective of corporate governance

From the beginning and until today, the corporate objective has been The conduct of
business activities with a view toward enhancing corporate profit and shareholder gain, keeping
in view the interests of other stakeholder".
The three key constituents of Corporate Governance:
Board of Directors
Share Holders
Corporate governance aims at identifying roles and responsibilities of these constituents as also
their rights to achieve the higher standards of transparency, efficiency and integrity.
The three key aspects of Corporate Governance:

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Equality of treatment for all stakeholders
2. Evolution of framework

a) Global scene

Corporate governance guidelines and codes of best practices began in the early 1990s in
the United Kingdom and the United States in response to problems in the performance of leading
companies and the perceived lack of effective board oversight that contributed to those problems.
The Cadbury Report of the UK, the General Motors Board of Directors Guidelines in the US and
the Dey Report in Canada proved to be influential sources for other guidelines and codes. Over
the past decade, several guidelines and codes have been issued by various countries. Compliance
with these recommendations is generally not mandated by law, although codes that are linked to
stock exchanges sometimes have a mandatory content.

There is a diversity of opinion regarding beneficiaries of corporate governance. The Anglo-
American system tends to focus on shareholders and various classes of creditors. Continental
Europe, Japan and South Korea believe that companies should also discharge their obligations
towards employees, local communities, suppliers, ancillary units, and so on

Irrespective of differences between various forms of corporate governance, all recognize that
good corporate practices mustat the very least satisfy two sets of claimants: creditors and
shareholders. In the developed world, company managers must perform to satisfy creditors dues
because of the disciplining device of debt.

OECD Principles of Corporate Governance

In April 1998, the Business Sector Advisory Group on Corporate Governance, chaired by Ira M.
Millstein, issued a report to the Organization for Economic Cooperation and Development
(OECD) titled Corporate Governance: Improving Competitiveness and Access to Capital in
Global Markets which urged the OECD to formulate a set of core governance principles.

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Subsequently, the OECD organized an Ad Hoc Task Force for this purpose, and the Principles of
Corporate Governance were issued in April 1999.

The OECD Principles address:
I. The Rights of Shareholders;
II. Equitable Treatment of Shareholders;
III. The Role of Stakeholders;
IV. Disclosure and Transparency; and
V. The Responsibilities of the Board.

Intended to serve as non-binding reference points for local governments and private sectors to
adapt and build upon, the OECD Principles are grounded on two important propositions: 1) no
one country or existing system can serve as the model that dictates reform worldwide; and 2)
access to capital is the primary driver for the integration of core corporate governance practices
in the international arena. The G7 countries have endorsed the OECD Principles.

The Principles are intended to assist Member and non-Member governments in their efforts to
evaluate and improve the legal, institutional and regulatory framework for corporate governance
in their countries, and to provide guidance and suggestions for stock exchanges, investors,
corporations, and other parties that have a role in the process of developing good corporate
governance. The Principles focus on publicly traded companies. However, to the extent they are
deemed applicable, they might also be a useful tool to improve corporate governance in non-
traded companies, for example, privately held and state-owned enterprises. The Principles
represent a common basis that OECD Member countries consider essential for the development
of good governance practice. They are intended to be concise, understandable and accessible to
the international community. They are not intended to substitute for private sector initiatives to
develop more detailed "best practice" in governance.
The Principles are non-binding and do not aim at detailed prescriptions for national legislation.
Their purpose is to serve as a reference point. They can be used by policy makers, as they
examine and develop their legal and regulatory frameworks for corporate governance that reflect

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their own economic, social, legal and cultural circumstances, and by market participants as they
develop their own practices.

The Principles are evolutionary in nature and should be reviewed in light of significant changes
in circumstances. To remain competitive in a changing world, corporations must innovate and
adapt their corporate governance practices so that they can meet new demands and grasp new
opportunities. Similarly, governments have an important responsibility for shaping an effective
regulatory framework that provides for sufficient flexibility to allow markets to function
effectively and to respond to expectations of shareholders and other stakeholders. It is up to
governments and market participants to decide how to apply these Principles in developing their
own frameworks for corporate governance, taking into account the costs and benefits of

Following are the principles laid down:
I. The rights of shareholders
The corporate governance framework should protect shareholders rights.
A. Basic shareholder rights include the right to:
1) Secure methods of ownership registration;
2) Convey or transfer shares;
3) Obtain relevant information on the corporation on a timely andRegular basis;
4) Participate and vote in general shareholder meetings;
5) Elect members of the board; and
6) Share in the profits of the corporation.

B. Shareholders have the right to participate in, and to be sufficiently informed on, decisions
concerning fundamental corporate changes such as:
1) Amendments to the statutes, or articles of incorporation or similar Governing documents
of the company;
2) The authorization of additional shares; and
3) Extraordinary transactions that in effect result in the sale of theCompany.

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C. Shareholders should have the opportunity to participate effectively and vote in general
shareholder meetings and should be informed of the rules, including voting procedures, that
govern general shareholder meetings:
Shareholders should be furnished with sufficient and timely information concerning the date,
location and agenda of general meetings, as well as full and timely information regarding the
issues to be decided at the meeting. Opportunity should be provided for shareholders to ask
questions of the board and to place items on the agenda at general meetings, subject to
reasonable limitations. Shareholders should be able to vote in person or in absentia, and equal
effect should be given to votes whether cast in person or in absentia.
D. Capital structures and arrangements that enable certain shareholders to obtain a degree of control
disproportionate to their equity ownership should be disclosed.
E. Markets for corporate control should be allowed to function in an efficient and transparent
manner. The rules and procedures governing the acquisition of corporate control in the capital
markets, and extraordinary transactions such as mergers, and sales of substantial portions of
corporate assets, should be clearly articulated and disclosed so that investors understand their
rights and recourse. Transactions should occur at transparent prices and under fair conditions that
protect the rights of all shareholders according to their class. Anti-take-over devices should not
be used to shield management from accountability.
F. Shareholders, including institutional investors, should consider the costs and benefits of
Exercisingtheir voting rights.

II. The equitable treatment of shareholders
The corporate governance framework should ensure the equitable treatment of all shareholders,
including minority and foreign shareholders. All shareholders should have the opportunity to
obtain effective redress for violation of their rights.
A. All shareholders of the same class should be treated equally. Within any class, all shareholders
should have the same voting rights. All investors should be able to obtain information about the
voting rights attached to all classes of shares before they purchase. Any changes in voting rights
should be subject to shareholder vote. Votes should be cast by custodians or nominees in a
manner agreed upon with the beneficial owner of the shares. Processes and procedures for

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general shareholder meetings should allow for equitable treatment of all shareholders. Company
procedures should not make it unduly difficult or expensive to cast votes.
B. Insider trading and abusive self-dealing should be prohibited.
C. Members of the board and managers should be required to disclose any material interests in
transactions or matters affecting the corporation.

III. The role of stakeholders in corporate governance
The corporate governance framework should recognize the rights of stakeholders as established
by law and encourage active co-operation between corporations and stakeholders in creating
wealth, jobs, and the sustainability of financially sound enterprises.
A. The corporate governance framework should assure that the rights of stakeholders that are
protected by law are respected.
B. Where stakeholder interests are protected by law, stakeholders should have the opportunity to
obtain effective redress for violation of their rights.
C. The corporate governance framework should permit performance-enhancing mechanisms for
stakeholder participation.
D. Where stakeholders participate in the corporate governance process, they should have access to
relevant information.

IV. Disclosure and transparency
The corporate governance framework should ensure that timely and accurate disclosure is made
on all material matters regarding the corporation, including the financial situation, performance,
ownership, and governance of the company.
A. Disclosure should include, but not be limited to, material information on:
The financial and operating results of the company.
Company objectives.
Major share ownership and voting rights.
Members of the board and key executives, and their remuneration.
Material foreseeable risk factors.
Material issues regarding employees and other stakeholders.
Governance structures and policies.

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B. Information should be prepared, audited, and disclosed in accordance with high quality standards
of accounting, financial and non-financial disclosure, and audit.
C. An annual audit should be conducted by an independent auditor in order to provide an external
and objective assurance on the way in which financial statements have been prepared and
V. The responsibilities of the board
The corporate governance framework should ensure the strategic guidance of the company, the
effective monitoring of management by the board, and the boards accountability to the company
and the shareholders.
A. Board members should act on a fully informed basis, in good faith, with due diligence and care,
and in the best interest of the company and the shareholders.
B. Where board decisions may affect different shareholder groups differently, the board should treat
all shareholders fairly.
C. The board should ensure compliance with applicable law and take into account the interests of
D. The board should fulfill certain key functions, including:
Reviewing and guiding corporate strategy, major plans of action, risk policy, annual
budgets and business plans; setting performance objectives; monitoring implementation and
corporate performance; and overseeing major capital expenditures, acquisitions and divestitures.
Selecting, compensating, monitoring and, when necessary, replacing key executives and
overseeing succession planning.
Reviewing key executive and board remuneration, and ensuring a formal and transparent
board nomination process.
Monitoring and managing potential conflicts of interest of management, board members
and shareholders, including misuse of corporate assets and abuse in related party transactions.
Ensuring the integrity of the corporations accounting and financial reporting systems, including
the independent audit, and that appropriate systems of control are in place, in particular, systems
for monitoring risk, financial control, and compliance with the law.
Monitoring the effectiveness of the governance practices under which it operates and
making changes as needed.
Overseeing the process of disclosure and communications.

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E. The board should be able to exercise objective judgment on corporate affairs independent, in
particular, from management.
Boards should consider assigning a sufficient number of non-executive board members
capable of exercising independent judgment to tasks where there is a potential for conflict of
interest. Examples of such key responsibilities are financial reporting, nomination and executive
and board remuneration.
Board members should devote sufficient time to their responsibilities.
F. In order to fulfill their responsibilities, board members should have access to accurate, relevant
and timely information.

b) Indian Scene

There is no unique structure of "corporate governance" in the developed world; nor is one
particular type unambiguously better than others. Thus, one cannot design a code of corporate
governance for Indian companies by mechanically importing one form or another.

Second, Indian companies, banks and financial institutions (FIs) can no longer afford to ignore
better corporate practices. As India gets integrated in the world market, Indian as well as
international investors will demand greater disclosure, more transparent explanation for major
decisions and better corporate value.

Hence in India, the Confederation of the Indian Industry (CII) took the lead in framing a
desirable code of corporate governance in April 1998. This was followed by the
recommendations of the Kumar Mangalam Birla Committee on Corporate Governance appointed
by the Securities and Exchange Board of India (SEBI) the recommendations were accepted by
SEBI in December 1999, and are now enshrined in Clause 49 of the Listing Agreement of every
Indian stock exchange

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Desirable Corporate Governance A CII Code (April 1998).

The CII code on Corporate governance finds it useful to limit the claimants to shareholders and
various types of creditors. There are two reasons for this preference.

1. The corpus of Indian labour laws is strong enough to protect the interest of workers in the
organized sector, and both employees as well as trade unions are well aware of their legal rights.
In contrast, there is very little in terms of the implementation of law and of corporate practices
that protects the rights of creditors and shareholders
2. There is much to recommend in law, procedures and practices to make companies more attuned
to the needs of properly servicing debt and equity. If most companies in India appreciate the
importance of creditors and shareholders, then we will have come a long way.

Recommendations made on various aspects of corporate governance are as follows:

Board of Directors:
Obviously not all well governed companies do well in the market place. Nor do the badly
governed ones always sink. But even the best performers risk stumbling some day if they lack
strong and independent boards of directors. The key to good corporate governance is a well
functioning board of directors. The board should have a core group of excellent, professionally
acclaimed non-executive directors who understand their dual role: of appreciating the issues put
forward by management, and of honestly discharging their fiduciary responsibilities towards the
companys shareholders as well as creditors.

Recommendation 1
There is no need to adopt the German system of two-tier boards to ensure desirable corporate
governance. A single board, if it performs well, can maximize long term shareholder value just
as well as a two- or multi-tiered board. Conversely, there is nothing to suggest that a two-tier
board, per se, is the panacea to all corporate problems. However, the full board should meet a
minimum of six times a year, preferably at an interval of two months, and each meeting
should have agenda items that require at least half a days discussion.

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Securing the services of good, professionally competent, independent non-executive
directors does not necessarily require the institutionalizing of nomination committees or search
committees. However, it does require a code that specifies a minimal thumb-rule. This leads to
the second recommendation.

Recommendation 2
Any listed companies with a turnover of Rs.100 crores and above should have professionally
competent and acclaimed non-executive directors, who should constitute
at least 30 percent of the board if the Chairman of the company is a non-executive director, or
at least 50 percent of the board if the Chairman and Managing Director is the same person.

Getting the right type of professionals on the board is only one way of ensuring diligence. It has
to be buttressed by the concept of limitation: one cannot hold non-executive directorships in a
plethora of companies, and yet be expected to discharge ones obligations and duties. This yields
the third recommendation.

Recommendation 3
No single person should hold directorships in more than 10 companies. This ceiling excludes
directorships in subsidiaries (where the group has over 50% equity stake) or associate
companies (where the group has over 25% but no more than 50% equity stake).

As of now, section 275 of the Companies Act allows a person to hold up to 20
directorships. The Report of the Working Group on the Companies Act (February 1997) has kept
the number unchanged. It is extremely difficultalmost inconceivablefor someone to hold 20
directorships and yet discharge his fiduciary responsibilities towards all. In this context, it is
useful to give the trend in the USA. According to a recent survey of over 1,000 directors and
chairmen of US corporations, the directors themselves felt that no one should serve on more than
an average of 2.6 Boards. On 12 November 1996, a special panel of 30 corporate governance
experts co-opted by the National Association of Corporate Directors of the USA recommended

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that Senior executives should sit on no more than 3 boards, including their own. Retired
executives and professional non-executive directors should serve on no more than 6.

Recommendation 4
For non-executive directors to play an important role in maximizing long term shareholder
value, they need to
become active participants in boards, not passive advisors;
have clearly defined responsibilities within the board; and
Know how to read a balance sheet, profit and loss account, cash flow statements and financial
ratios and have some knowledge of various company laws. This, of course, excludes those who
are invited to join boards as experts in other fields such as science and technology.

This brings one to remuneration of non-executive directors. At present, most non-
executive directors receive a sitting fee which cannot exceed Rs.2,000 per meeting. The Working
Group on the Companies Act has recommended that this limit should be raised to Rs.5,000.
Although this is better than Rs.2,000, it is hardly sufficient to induce serious effort by the non-
executive directors.

Recommendation 5
To secure better effort from non-executive directors, companies should:
Pay a commission over and above the sitting fees for the use of the professional inputs. The
present commission of 1% of net profits (if the company has a managing director), or 3% (if
there is no managing director) is sufficient.
Consider offering stock options, so as to relate rewards to performance. Commissions are
rewards on current profits. Stock options are rewards contingent upon future appreciation of
corporate value. An appropriate mix of the two can align a non-executive director towards
keeping an eye on short term profits as well as longer term shareholder value.

The above recommendation can be easily achieved without the necessity of any
formalized remuneration committee of the board. To ensure that non-executive directors properly

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discharge their fiduciary obligations, it is, however, necessary to give a record of their attendance
to the shareholders.

Recommendation 6
While re-appointing members of the board, companies should give the attendance record of
the concerned directors. I f a director has not been present (absent with or without leave) for
50 percent or more meetings, then this should be explicitly stated in the resolution that is put
to vote. As a general practice, one should not re-appoint any non-executive director who has
not had the time attend even one half of the meetings

It is important to recognize that, under usual circumstances, non-executive directors
suffer from informational asymmetry. Simply put, the extent to which non-executive directors
can play their role is determined by the quality of disclosures that are made by the management
to the board. In the interest of good governance, certain key information must be placed before
the board, and must form part of the agenda papers.

Recommendation 7
Key information that must be reported to, and placed before, the board must contain:
Annual operating plans and budgets, together with up-dated long term plans.
Capital budgets, manpower and overhead budgets.
Quarterly results for the company as a whole and its operating divisions or business segments.
I nternal audit reports, including cases of theft and dishonesty of a material nature.
Show cause, demand and prosecution notices received from revenue authorities which are
considered to be materially important. (Material nature is any exposure that exceeds 1 percent
of the companys net worth).
Fatal or serious accidents, dangerous occurrences, and any effluent or pollution problems.
Default in payment of interest or non-payment of the principal on any public deposit, and/or
to any secured creditor or financial institution.
Defaults such as non-payment of inter-corporate deposits by or to the company, or materially
substantial non-payment for goods sold by the company.

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Any issue which involves possible public or product liability claims of a substantial nature,
including any judgment or order which may have either passed strictures on the conduct of
the company, or taken an adverse view regarding another enterprise that can have negative
implications for the company.
Details of any joint venture or collaboration agreement.
Transactions that involve substantial payment towards goodwill, brand equity, or intellectual
Recruitment and remuneration of senior officers just below the board level, including
appointment or removal of the Chief Financial Officer and the Company Secretary.
Labour problems and their proposed solutions.
Quarterly details of foreign exchange exposure and the steps taken by management to limit the
risks of adverse exchange rate movement

The Report of the Working Group on the Companies Act was in favor of Audit Committees, but
recommended that these be set up voluntarily "with the industry associations playing a catalytic
role" [p.23]. The Group felt that legislating in favor of Audit Committees would be counter-
productive, and could lead to a situation where such committees would be often constituted to
meet the letterand not the spiritof the law. Nevertheless, there is a clear need for Audit
Committees, which yields the next recommendation.

Recommendation 8
Listed companies with either a turnover of over Rs.100 cores or a paid-up capital of Rs.20
coreswhichever is lessshould set up Audit Committees within two years.
Audit Committees should consist of at least three members, all drawn from a companys non-
executive directors, who should have adequate knowledge of finance, accounts and basic
elements of company law.
To be effective, members of Audit Committees must be willing to spend more time on the
companys work vis--vis other non-executive directors.
Audit Committees should assist the board in fulfilling its functions relating to corporate
accounting and reporting practices, financial and accounting controls, and financial

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statements and proposals that accompany the public issue of any securityand thus provide
effective supervision of the financial reporting process.
Audit Committees should periodically interact with the statutory auditors and the internal
auditors to ascertain the quality and veracity of the companys accounts as well as the
capability of the auditors themselves.
For Audit Committees to discharge their fiduciary responsibilities with due diligence, it must
be incumbent upon management to ensure that members of the committee have full access to
financial data of the company, its subsidiary and associated companies, including data on
contingent liabilities, debt exposure, current liabilities, loans and investments.
By the fiscal year 1998-99, listed companies satisfying criterion (1) should have in place a
strong internal audit department, or an external auditor to do internal audits; without this,
any Audit Committee will be toothless.

Desirable Disclosure:
The last two years have seen domestic investors escape from equity in favor of debt, particularly
bonds issued by public financial institutions. If the corporate sector wants to create a comeback
for equity, it can only do so through greater transparency. Audit Committees ensure long term
goodwill through such transparency

Our corporate disclosure norms are inadequate. With the growth of the financial press and equity
researchers, the days of having opaque accounting standards and disclosures are rapidly coming
to an end. As a country which wishes to be a global player, we cannot hope to tap the GDR
market with inadequate financial disclosures; it will not be credible to present one set of accounts
to investors in New York and Washington DC, and a completely different one to the
shareholders in Mumbai and Chennai. So, what is the minimum level of disclosure that Indian
companies ought to be aiming for?

The Working Group on the Companies Acthave recommended many financial as well as non-
financial disclosures. It is worth recapitulating the more important ones.

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Non-Financial disclosures recommended by the Working Group on the Companies Act
1. Comprehensive report on the relatives of directorseither as employees or Board membersto
be an integral part of the Directors Report of all public limited companies.
2. Companies have to maintain a register which discloses interests of directors in any contract or
arrangement of the company. The existence of such a register and the fact that it open for
inspection by any shareholder of the company should be explicitly stated in the notice of the
AGM of all public limited companies.
3. Similarly, the existence of the directors shareholding register and the fact that it can be
inspected by members in any AGM should be explicitly stated in the notice of the AGM of all
public limited companies.
4. Details of loans to directors should be disclosed as an annex to the Directors Report in addition
to being a part of the schedules of the financial statements. Moreover, such loans should be
limited to only three categorieshousing, medical assistance, and education for family
membersand be available only to full time directors. The loans should not exceed five times
the annual remuneration of the whole time director, and would need shareholders approval in a
general meeting.
5. Appointment of sole selling agents for India will require prior approval of a special resolution in
a general meeting of shareholders. The board may approve the appointment of sole selling agents
in foreign markets, but the information must be divulged to shareholders as a part of the
Directors Report accompanying the annual audited accounts. In either case, if the sole selling
agent is related to any director or director having interest, this fact has to not only be stated in the
special resolution but also divulged as a separate item in the Directors Report.
6. Subject to certain exceptions, there should be a Secretarial Compliance Certificate forming a part
of the Annual Returns that is filed with the Registrar of Companies which would certify, in
prescribed format that the secretarial requirements under the Companies Act have been adhered

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Financial disclosures recommended by the Working Group on the Companies Act
1. A tabular form containing details of each directors remuneration and commission should form a
part of the Directors Report, in addition to the usual practice of having it is a note to the profit
and loss account.
2. Costs incurred, if any, in using the services of a Group Resource Company must be clearly and
separately disclosed in the financial statement of the user company.
3. A listed public limited company must give certain key information on its divisions or business
segments as a part of the Directors Report in the Annual Report. This should encompass (i) the
share in total turnover, (ii) review of operations during the year in question, (iii) market
conditions, and (iv) future prospects. For the present, the cut-off may be 10% of total turnover.
4. Where a company has raised funds from the public by issuing shares, debentures or other
securities, it would have to give a separate statement showing the end-use of such funds, namely:
how much was raised versus the stated and actual project cost; how much has been utilized in the
project up to the end of the financial year; and where are the residual funds, if any, invested and
in what form. This disclosure would be in the balance sheet of the company as a separate note
forming a part of accounts.
5. The disclosure on debt exposure of the company should be strengthened.
6. In addition to the present level of disclosure on foreign exchange earnings and outflow, there
should also be a note containing separate data on of foreign currency transactions that are
germane in todays context: (i) foreign holding in the share capital of the company, and (ii)
loans, debentures, or other securities raised by the company in foreign exchange.
7. There are often differences in assets and liabilities between the end of the financial year and the
date on which the board approves the balance sheet and profit and loss account. These
disclosures appear in the Directors Report. In addition, such differences should be clearly stated
under the relevant sub-heads, and presented as a note forming a part of the accounts.
8. If any fixed asset acquired through or given out on lease is not reported under appropriate sub-
heads, then full disclosure would need to be made as a note to the balance sheet. This should give
details of the type of asset, its total value, and the future obligations of the company under the
lease agreement.

Mahendra S. Patil Corporate Governance In India Page 19 of 84
9. Any inappropriate treatment of an item in the balance sheet or profit and loss account should not
be allowed to be explained away either through disclosure of accounting policies or via notes
forming a part of accounts.
10. The threshold remuneration of those employees whose details have to divulged under section
217(2A) should be raised to Rs.5 lakhs per year, and this disclosure should only be submitted to
the Registrar of Companies and not form a part of the Directors Report. The statement should be
made available for inspection of shareholders at the AGM. However, if there are any directors
relatives who receive remuneration, full details of such cases should be given.

While the disclosures recommended by the Working Group in its report as well as in the
modified Schedule VI that would accompany the Draft Bill go far beyond existing levels, much
more needs to be done outside the framework of law., particularly (i) a model of voluntary
disclosure in the current context, and (ii) consolidation of accounts.
All other things being equal, greater the quality of disclosure, the more loyal are a companys
shareholders. Besides, there is something very inequitable about of present disclosure standards:
we have one norm for the foreigners when we go in for GDRs or private placement with foreign
portfolio investors, and a very different one for our more loyal Indian shareholders. This should
not continue. The suggestions given below partly rectify this imbalance.

Recommendation 9
Under "Additional Shareholders 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.
Statement on value added, which is total income minus the cost of all intermediate inputs and
administrative expenses.
Greater detail on business segments or divisions, up to 5% of turnover, giving share in sales
revenue, share in contribution, review of operations, analysis of markets and future prospects

The Working Group on the Companies Act has recommended that consolidation should be
optional, not mandatory. There were two reasons: (i) first, that the Income Tax Department does
not accept the concept of group accounts for tax purposesand the Report of the Working Group

Mahendra S. Patil Corporate Governance In India Page 20 of 84
on the Income Tax Act does not suggest any difference, and (ii) the public sector term lending
institutions do not allow leveraging on the basis of group assets. Thus:

Recommendation 10
Consolidation of Group Accounts should be optional and subject to the FI s allowing
companies to leverage on the basis of the groups assets, and the Income Tax Department
using the group concept in assessing corporate income tax.
I f a company chooses to voluntarily consolidate, it should not be necessary to annex the
accounts of its subsidiary companies under section 212 of the Companies Act.
However, if a company consolidates, then the minimal definition of "group" should include
the parent company and its subsidiaries (in which the reporting company owns over 50% of
the voting stake).

One of the most appealing features of the Cadbury Committee Report (Committee on the
Financial Aspects of Corporate Governance) is the Compliance Certificate that has to
accompany the annual reports of all companies listed in the London Stock Exchange. This alone
has created a far more healthy milieu for corporate governance despite the cosy, club-like
atmosphere of British boardrooms. It is essential that a variant of this be adopted in India.

Recommendation 11
Major I ndian stock exchanges should gradually insist upon a compliance certificate, signed by
the CEO and the CFO, which clearly states that:
The management is responsible for the preparation, integrity and fair presentation of the
financial statements and other information in the Annual Report, and which also suggest that
the company will continue in business in the course of the following year.
The accounting policies and principles conform to standard practice, and where they do not,
full disclosure has been made of any material departures.
The board has overseen the companys system of internal accounting and administrative
controls systems either through its Audit Committee (for companies with a turnover of Rs.100
crores or paid-up capital of Rs.20 crores, whichever is less) or directly.

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As mentioned earlier, there is something inequitable about a company declaring disclosing
substantially more for its GDR issue compared to its domestic issue. This treats Indian
shareholders as if they are children of a lesser God.

Recommendation 12
For all companies with paid-up capital of Rs.20 crores or more, the quality and quantity of
disclosure that accompanies a GDR issue should be the norm for any domestic issue.

Capital Market Issues :
Since "take-over" is immediately associated with "raider", it is considered an unethical act of
corporate hostility. The bulk of historical evidence shows otherwise. Growth of industry and
business in most developed economies have been aided and accompanied by take-overs, mergers
and strategic acquisitions.
International data shows that take-overs usually serve three purposes: (i) creates economies of
scale and scope, (ii) imposes a credible threat on management to perform for the shareholders,
and (iii) enhances shareholder value in the short- and in the medium-term. Because the targets
are typically under-performing companies, take-overs typically enhance short- as well as longer
term shareholder value. The short term value rises because the bidder has to offer shareholders a
price that is significantly higher than the market. Longer term gains tend to occur because the
buyer has not only bet on generating higher value through cost cutting, eliminating unproductive
lines and strengthening productive ones but also put in his money to own the controlling block of
The new Take-over Code has been introduced in India. Although the code has its problems
especially after a 50 percent acquisitionit is a step in the right direction. However, the code is,
at best, necessary for facilitating take-overs; it is hardly sufficient. There lies the basic problem
with take-overs in India. One cannot have a dynamic market and a level playing field for take-
overs when there are multiple restrictions on financing such acquisitions.
Banks do not lend for such activities. Until the slack season credit policy announced on 15 April
1997, banks had imposed a credit limit is Rs.10 lakhs against share collateralhardly the kind
of money that can fund domestically financed take-overs.

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There is no securitisation. This prevents the value of underlying assets to be used in
refinancingsomething which could not only reduce cost of funds but also facilitate take-overs
by dynamic but not necessarily cash rich entrepreneurs.
FIs do not finance take-overs.
There are not enough corporate debt instruments which a company could use to finance a take-
overand even these attract very high rates of Stamp Duty.
In such an environment, it is not surprising that one ends up with a severely limited take-over
code where an acquirer can go into take-over mode and, yet need not increase its equity exposure
to more than 30 percent. Moreover, it queers the pitch in favour of those who have access to off-
shore funds, which do not operate under these artificial constraints. As things stand, there will be
only two types of raiders: (i) entrepreneurs from cash rich industries, and (ii) foreign investors
who can garner substantial cheap funds from abroad. From a perspective of industrial growth
where take-overs become vehicles for synergy, scale, new technological and managerial inputs,
corporate dynamism, and long term enhancement of shareholder valueit is essential that
dynamic Indian firms and entrepreneurial groups attempting take-overs be treated the same way
by Indian banks and FIs as their buyout counterparts are in the west. This leads to an important

Recommendation 13
Government must allow far greater funding to the corporate sector against the security of
shares and other paper. This has been outlined in the slack season credit policy announced on
15 April 1997, but it remains to be seen how banks and FI s will react.

When this is in place, the take-over code should be modified to reflect international norms. Once
take-over finance is easily available to Indian entrepreneurs, the trigger should increase to 20%,
and the minimum bid should reflect at least a 51% take-over.

Creditors Rights :
It is a universal axiom that creditors have a prior and pre-committed claim on the income
of the company, and that this claim has to be satisfied irrespective of the state of affairs of the
company. Important creditors can, and do, demand periodic operational information to monitor

Mahendra S. Patil Corporate Governance In India Page 23 of 84
the state of health of their debtor firms; but, so long as their dues are being repaid (and expected
to be repaid) on schedule, pure creditors have no legal say in the running of a company.
Therefore, insofar as creditors are not shareholders, and so long as their dues are being paid in
time, they should desist from demanding a seat on the board of directors.
This is an important point in the Indian context. Almost all term loans from FIs carry a covenant
that it will represented on the board of the debtor company via a nominee director. This yields
the next recommendation.

Recommendation 14
I t would be desirable for FI s as pure creditors to re-write their covenants to eliminate having
nominee directors except:
in the event of serious and systematic debt default; and
in case of the debtor company not providing six-monthly or quarterly operational data to the
concerned FI (s).

Today, credit-rating is compulsory for any corporate debt issue. But, as in the case of primary
equity issues, the quality of information given to the Indian investing public is still well below
what is disclosed in many other developed countries. Given below are some suggestions.

Recommendation 15
I f any company goes to more than one credit rating agency, then it must divulge in the
prospectus and issue document the rating of all the agencies that did such an exercise.
I t is not enough to blandly state the ratings. These must be given in a tabular format that
shows where the company stands relative to higher and lower ranking. It makes considerable
difference to an investor to know whether the rating agency or agencies placed the company in
the top slots, or in the middle, or in the bottom.
I t is essential that we look at the quantity and quality of disclosures that accompany the issue
of company bonds, debentures, and fixed deposits in the USA and Britainif only to learn
what more can be done to inspire confidence and create an environment of transparency.\

Mahendra S. Patil Corporate Governance In India Page 24 of 84
Finally, companies which are making foreign debt issues cannot have a two sets of disclosure
norms: an exhaustive one for the foreigners, and a relatively minuscule one for I ndian

There is another area of concern regarding creditors rights. This has to do with holders of
company deposits. In the last three years, there have been too many instances where
manufacturing as well as investment and finance companies have reneged on payment of interest
on company deposits or repayment of the principal. Since these deposits are generally unsecured
loans, the deposit holders are prime targets of default.

Recommendation 16
Companies that default on fixed deposits should not be permitted to
accept further deposits and make inter-corporate loans or investments until the default is
made good; and
declare dividends until the default is made good.
Both have been suggested by the Working Group on the Companies Act, and are endorsed by
CI I .

On FIs and Nominee Directors :

Consider two facts: (i) the largest debt-holders of private sector corporate India are public sector
term lending institutions such as IDBI, IFCI, and ICICI; and (ii) these institutions are also
substantial shareholders and, like in Germany, Japan and Korea, sit on the boards as nominee
directors. So, in effect they have combined inside debt-cum-equity positions so common to
German, Japanese and Korean forms of corporate governance. But these informed insiders in
India do no seem to behave like their German counterparts; corporate governance and careful
monitoring do not happen as they are supposed to when a stake-holder is both creditor and owner
of equity, as in Germany.
The apparent failure of government controlled FIs to monitor companies in their dual capacity as
major creditors and shareholders has much to do with a pervasive anti-incentive structure. There

Mahendra S. Patil Corporate Governance In India Page 25 of 84
are several dimensions of this structure. First, major decisions by public sector financial
institutions are eventually decided by the Ministry of Finance, and not by their board of
directors. De jure, this cannot be cause for complaintafter all the Government of India is the
major shareholder and, hence, has the right to call the shots. However, at issue is the manner in
which the government calls the shots, and whether its decisions enhance shareholder value for
the FIs. Second, nominee directors of FIs have no personal incentive to monitor their companies.
They are neither rewarded for good monitoring nor punished for non-performance. Third, there
is a tradition of FIs to supporting existing management except in the direst of circumstances.
Stability of existing management is not necessarily a virtue by itself, unless it translates to
greater transparency and higher shareholder value. Fourth, compared to the number of companies
where they are represented on the board, the FIs simply do not have enough senior-level
personnel who can properly discharge their obligations as good corporate governors. In a
nutshell, therefore, while nominee directors of FIs ought to be far more powerful than the
disinterested non-executive directors, they are in fact at par. Consequently, the institutions which
could have played the most proactive role in corporate governanceIndias largest concentrated
shareholders-cum-debt-holdershave not done so.
The long term solution requires questioning the very basis of majority government ownership of
the FIs, and whether it augurs for better governance and higher shareholder value for Indias
companies as well as the FIs themselves. As a rule, government institutions are not sufficiently
concerned about adverse income and wealth consequences arising out of wrong decisions and
inaction; their incentive structures do not reward performance and punish non-performance; and,
most of all, they remain highly susceptible to pulls and pressures from various ministries which
have little to do with commercial accountability, and which often destroy the bottom-line.
Therefore, it is necessary to debate whether the government should gradually become a minority
shareholder in all its financial sector institutions. This debate needs to be thrown open to
taxpayers and the investing public. But, for the present, there is a short term solution that must be
considered as quickly as possible.

Recommendation 17
Reduction in the number of companies where there are nominee directors. I t has been argued
by FI s that there are too many companies where they are on the board, and too few competent

Mahendra S. Patil Corporate Governance In India Page 26 of 84
officers to do the task properly. So, in the first instance, FI s should take a policy decision to
withdraw from boards of companies where they have little or no debt exposure and where their
individual shareholding is 5 percent or less, or total FI holding is under 10 percent.

This Report is the first formal and comprehensive attempt to evolve a Code of Corporate
Governance, in the context of prevailing conditions of governance in Indian companies, as well
as the state of capital markets.
The Securities and Exchange Board of India (SEBI) appointed the committee on Corporate
Governance on May 7, 1999 under the Chairmanship of Shri Kumar Mangalam Birla, member
SEBI Board, to promote and raise the standards of Corporate Governance. The terms of the
reference are as follows:

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;
To draft a code of corporate best practices; and
To suggest safeguards to be instituted within the companies to deal with insider information and
insider trading. 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 objective of maximising shareholder value. These recommendations will go a long way in
raising the standards of corporate governance in Indian firms and make them attractive
destinations for local and global capital. These recommendations will also form the base for
further evolution of the structure of corporate governance in consonance with the rapidly
changing economic and industrial environment of the country in the new millennium.

Mahendra S. Patil Corporate Governance In India Page 27 of 84
3. Comparison Of Corporate Governance Guidelines & Codes Of Best Practice In Developed
& Developing / Emerging Markets

Corporate governance guidelines and codes of best practice arise in the context of, and
are affected by, differing national frameworks of law, regulation and stock exchange listing
rules, and differing societal values. Although boards of directors provide an important internal
mechanism for holding management accountable, effective corporate governance is supported by
and dependent on the market for corporate control, securities regulation, company law,
accounting and auditing standards, bankruptcy laws, and judicial enforcement. Therefore, to
understand one nations corporate governance practices in relation to anothers, one must
understand not only the best practice documents but also the underlying legal and enforcement

The brief review of the primary principles addressed by various guidelines and codes
framed/adopted in Developed & Developing / Emerging Markets indicates that there is no single
agreed upon system of good governance. Each country has its own corporate culture, national
personality and priorities. Likewise, each company has its own history, culture, goals and
business cycle maturity. All of these factors need to be taken into consideration in crafting the
optimal governance structure and practices for any country or any company.

However, the influence of international capital markets will likely lead to some
convergence of governance practices, as regulatory barriers between national economies fall and
global competition for capital increases, investment capital will follow the path to those
corporations that have adopted efficient governance standards, which include acceptable
accounting and disclosure standards, satisfactory investor protections and board practices
designed to provide independent, accountable oversight of managers.

This convergence is evident in the growing consensus in both developed and developing
nations that board structure and practice is key to providing corporate accountability -- of the
management to the board and the board to the shareholders in the governance paradigm.

Mahendra S. Patil Corporate Governance In India Page 28 of 84
The responsibilities and functions of the corporate board in both developed and
developing nations are receiving greater attention as a result of the increasing recognition that a
firms corporate governance affects both its economic performance and its ability to access
patient, low-cost capital. After all, the board of directors -- or, in two-tier systems, the
supervisory board -- is the corporate organ designed to hold managers accountable to capital
providers for the use of firm assets. The past five years has witnessed a proliferation of corporate
governance guidelines and codes of best practice designed to improve the ability of corporate
directors to hold managements accountable. This global movement to emphasize that boards
have responsibilities separate and apart from management, and to describe the practices that best
enable directors to carry out these responsibilities, is a manifestation of the importance now
attributed to corporate governance generally and, more particularly, to the role of the board.

Some of the key elements of governance guidelines and codes of best practice,
particularly as issued in developing nations, are summarized below:

The Corporate Objective :

Variations in societal values lead different nations to view the corporate objective or mission
distinctly. Expectations of how the corporation should prioritize the interests of shareholders and
stakeholders such as employees, creditors and other constituents take two primary forms. In the
Anglo-Saxon nations -- Australia, Canada, the U.K., and the U.S. -- maximizing the value of the
owners investment is considered the primary corporate objective. This objective is reflected in
governance guidelines and codes that emphasize the duty of the board to represent shareholders
interests and maximize shareholder value. Among developing nations, the Brazilian Institute of
Corporate Governance Code, the Confederation of Indian Industry Code, the Kyrgyz Republic
Charter of a Shareholding Society, the Malaysian Report on Corporate Governance, and the
Korean Stock Exchange Code of Best Practice all expressly recognize that the boards mission is
to protect and enhance the shareholders investment
in the corporation.

Mahendra S. Patil Corporate Governance In India Page 29 of 84
In other countries, more emphasis is placed on a broader range of stakeholders. However, this
view is not strongly advocated in the governance guidelines and codes emanating from
developing nations, There is a growing recognition that shareholder expectations need to be met
in order to attract patient, low-cost capital. Likewise, there is growing sensitivity to the need to
address stakeholder interests in order to maximize shareholder value over the long term. As the
General Motors Board of Directors Mission Statement recognizes, the boards responsibilities
to shareholders as well as customers, employees, suppliers and the communities in which the
corporation operates are all founded upon the successful perpetuation of the business. Simply
put, shareholder and stakeholder interests in the success of the corporation are compatible in the
long run.

Board Responsibilities & Job Description
Most governance guidelines and codes of best practice assert that the board assumes
responsibility for the stewardship of the corporation and emphasize that board responsibilities are
distinct from management responsibilities. However, the guidelines and codes differ in the level
of specificity with which they explain the boards role. For example, Canadas Dey Report,
Frances Vienot Report, Malaysias Report on Corporate Governance, Mexicos Code of
Corporate Governance, South Africas King Report and the Korean Stock Exchange Code all
specify board functions such as strategic planning; risk identification and management; selection,
oversight and compensation of senior management; succession planning; communication with
shareholders; integrity of financial controls; and general legal compliance, as distinct board
functions. The Kyrgyz Republic Charter sets out a detailed list of matters requiring board
approval. Other governance guidelines and codes of best practice are far less specific. For
example, the Hong Kong Stock Exchange Code simply refers to directors obligations to ensure
compliance with listing rules as well as with the declaration and undertaking that directors are
required to execute and lodge with the Exchange. The different approaches among codes on this
point likely reflect variations in the degree to which company law or listing standards specify
board responsibilities, rather than any significant substantive differences.

Board Composition

Mahendra S. Patil Corporate Governance In India Page 30 of 84
Most governance guidelines and codes of best practice address topics related to board
composition including director qualifications and membership criteria, the director nomination
process, and board independence and leadership.
Criteria. The quality, experience and independence of a boards membership directly affect
board performance. Board membership criteria are described by various guidelines and codes
with different levels of specificity, but tend to highlight issues such as experience, personal
characteristics (including independence), core competencies and availability.

Director Nomination. The process by which directors are nominated has gained attention in
many guidelines and codes, which tend to emphasize a formal and transparent process for
appointing new directors. The use of nominating committees is favored in the U.S. and U.K. as a
means of reducing the CEOs influence in choosing the board that is charged with monitoring his
or her performance. (See, in the U.S., the Report of the National Association of Corporate
Directors Commission on Director Professionalism (1996), and the General Motors Board of
Directors Guidelines (1994); in the U.K., the Hampel Committee Report (1998)). The Malaysian
Corporate Governance Report expresses a similar view: [T]he adoption of a formal procedure
for appointments to the board, with a nomination committee making recommendations to the full
board, should be recognized as good practice. (Explanatory Note 4. See also Korean Stock
Exchange Code of Best Practice II.3.) At the same time, however -- and as advocated by the
King Report (South Africa) -- it is generally agreed that the board as a whole has the ultimate
responsibility for nominating directors.
Mix of Inside and Outside or Independent Directors.
Most governance guidelines and codes of best practice agree that some degree of director
independence -- or the ability to exercise objective judgment of managements performance -- is
important to a boards ability to exercise objective judgment concerning management
performance. In the U.S., U.K., Canada and Australia, although not required by law or listing
requirements, best practice recommendations generally agree that boards of publicly-traded
corporations should include at least some independent directors. This viewpoint is the furthest
developed in the U.S. and Canada, where best practice documents call for a substantial
majority of the board to be comprised of independent directors. Elsewhere best practice
recommendations are somewhat less stringent and seek to have a balance of executives and non-

Mahendra S. Patil Corporate Governance In India Page 31 of 84
executives, with the non executives including some truly independent directors. (Although non-
management or non-executive directors may be more likely to be objective than members of
management, many code documents recognize that a non-management director may still not be
truly independent if he or she has significant financial or personal ties to management.)
Nonetheless, a general consensus is developing throughout a number of countries that public
company boards should include at least some non-executive members who lack significant
family and business relationships with management.

Definitions of independence vary. For example, according to the Brazilian Institute of
Corporate Governance, a director is independent if he or she: has
no link to the company besides board membership and share ownership and receives no
compensation from the company other than director remuneration or shareholder dividends; has
never been an employee of the company (or of an affiliate or subsidiary); provides no services or
products to the company (and is not employed by a firm providing major services or products);
and is not a close relative of any officer, manager or controlling shareholder.

In comparison, the Cadbury Code simply refers to directors who apart from their fees and
shareholdings -- are independent from management and free from any business or other
relationship which could materially interfere with the exercise of independent judgment. And
many of the best practice documents -- such as the Cadbury Report and the National Association
of Corporate Directors Report on Director Professionalism (U.S.) -- view the ultimate
determination of just what constitutes independence to be an issue for the board itself to
I ndependent Board Leadership. Independent board leadership is thought by some to encourage
the non-executive directors ability to work together to provide true oversight of management.
As explained by the National Association of Corporate Directors (U.S.): the purpose of creating
[an independent] leader is not to add another layer of power but to ensure organization of, and
accountability for, the thoughtful execution of certain critical independent functions such as
evaluating the CEO; chairing sessions of the non-executive directors; setting the board agenda;
and leading the board in responding to crisis. Many guidelines and codes seek to institute
independent leadership by recommending a clear division of responsibilities between Chairman

Mahendra S. Patil Corporate Governance In India Page 32 of 84
and CEO. In this way, while the CEO can have a significant presence on the board, the non-
executive directors will also have a formal independent leader to look to for authority on the
board. Documents that place less emphasis on the need for a majority of independent directors
seem to place more emphasis on the need for separating the role of Chairman and CEO. For
example, the Indian Confederation Report expressly relates the two concepts recommending that
if the Chairman and CEO (or managing director) are the same person, a greater percentage of
non-executive directors is necessary. (Recommendation 2) The Malaysian Report on Corporate
Governance similarly emphasizes that [w]here the roles are combined there should be a strong
independent element on the board. (Best Practice AA.II) This is in accord with the Cadbury
Report, which states that, where the Chairman is also the CEO it is essential that there should be
a strong and independent element on the board. (Section 1.2)

Board Committees
In developed nations, it is fairly well accepted that many board functions are carried out by board
committees. For example, a nominating committee, an audit committee and a remuneration
committee are recommended in Australia, Belgium, France, Japan, the Netherlands, Sweden,
United Kingdom and the United States. While composition of these committees varies, it is
generally recognized that non-executive directors have a special role. The functioning and
composition of the audit committee receives significant attention in most guideline and code
documents because of the key role it plays in protecting shareholder interests and promoting
investor confidence. Certain countries specifically recommend the size of an audit committee. In
India, the minimum size recommended is three members, as it is in Malaysia and the United
Kingdom. Also, South Africa and India both emphasize the extra time requirements demanded of
audit committee members, and the importance of written terms of reference for this committee.
Malaysia also refers to the need for written terms of reference for audit and other board

Disclosure Issues
Disclosure is an issue that is highly regulated under securities laws of many nations. However,
there is room for voluntary disclosure by companies beyond what is mandated by law. Most
countries generally agree on the need for directors to disclose their own relevant interests and to

Mahendra S. Patil Corporate Governance In India Page 33 of 84
disclose financial performance in an annual report to shareholders. Generally this is required by
law, but some guidelines and best practice documents address it as well. Similarly, even though
directors are usually subject to legal requirements concerning the accuracy of disclosed
information, a number of codes from both developed and developing nations describe the boards
responsibility to disclose accurate information about the financial performance of the company,
as well as information about agenda items, prior to the annual general meeting of shareholders.
Many codes also itemize the issues reserved for shareholder decision at the AGM. Generally,
guidelines and codes of best practice place heavy emphasis on the financial reporting obligations
of the board, as well as board oversight of the audit function. Again, this is because these are key
to investor confidence and the integrity of markets. South Africa lays out the key points that the
directors must comment on, whereas other countries do not go to this level of detail, but the
distinction is not necessarily substantive since disclosure tends to be heavily regulated in many
nations through securities laws.

This brief review of the primary principles addressed by various guidelines and codes indicates
that there is no single agreed upon system of good governance. Each country has its own
corporate culture, national personality and priorities. Likewise, each company has its own
history, culture, goals and business cycle maturity. All of these factors need to be taken into
consideration in crafting the optimal governance structure and practices for any country or any
company. However, the influence of international capital markets will likely lead to some
convergence of governance practices. This convergence is evident in the growing consensus in
both developed and developing nations that board structure and practice is key to providing
corporate accountability -- of the management to the board and the board to the shareholders in
the governance paradigm.

Mahendra S. Patil Corporate Governance In India Page 34 of 84

4 Four Pillars of Corporate Governance

Never before has corporate governance received as much attention as it does now. Recent
corporate scandals and questionable business ethics have forced companies and their leadership
under the microscope. To deal with the problems legislation, codes of conduct and guidelines
for corporate governance practices have proliferated.
Directors are under pressure. In the early 20th century, Lord Boothby described his board
meetings as resembling a series of pleasant hot baths followed by food and money. The water
temperature has risen a lot since then!
Most of the prescriptions for improving corporate governance (including the infamous Sarbanes-
Oxley Act) have focused on the structure of boards including their size, composition,
independence of directors and so on. But what is the role of the board and is there a relationship
between board structure and corporate performance? I will consider the answers to these
I will start by looking at the definition of corporate governance and what better place to look for
a definition than a web encyclopaedia.
The definition I found is:
Corporate governance is the set of processes, customs, policies, laws and institutions affecting
the way a corporation is directed, administered or controlled.
It includes the relationships among the many players or stakeholders involved. Of course there
are numerous players and stakeholders in any business but in the context of governance there are
three key ones: shareholders, management and the board of directors.
In an organisation with multiple shareholders (for example a listed company) the concept of the
separation of ownership and control is important in understanding how corporate governance
Shareholders invest but usually do not want to run or are incapable of running the company; they
provide the capital and the risk appetite, but they want people with specialised knowledge to
manage the business, so they appoint an agent the board of directors to oversee their
investment on their behalf. The board is the agent for all shareholders and stakeholders.
The board of directors is the interface between the shareholders and the company and the board

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is ultimately accountable to the shareholders who appoint the directors. But in law the directors
must act in what they consider to be the best interests of the company. This is not necessarily the
same thing as acting in the best interests of shareholders. This is a critical point which I find is
often not that well understood and once it is understood then other aspects of corporate
governance and how the board works fall into place.
So, the board oversees and directs, management manages day to day and implements, and, the
board is accountable to the shareholders, management is accountable to the board.
Having set out the different roles of board and management I will briefly outline some of the
fundamental functions of the board. Then I will talk about the link between board structure and
corporate performance.
There are many ways to explain the functions of a board and many models have been used. I
have chosen to use The Four Pillars of Effective Corporate Governance originally formulated
in the Institutes best practice statement entitled The Role of the Board in Adding Value.
These pillars are:

It ensure that management is accountable to the Board & board is accountable to
shareholders.The board must have ultimate accountability and ownership of the company
purpose and strategy. Management will provide analysis, operational and business knowledge,
research and thinking. Probably they will make recommendations to the board, but it is the board
that must approve the company purpose, philosophy and strategy.

It protect the shareholders rights, & treat all shareholders including minorities, equitably .
Also, provide effective redress for violations.An effective board must ensure that it holds
management to account. Few companies fail overnight. More frequently failure is the result of
ongoing under-performance that accumulates over time. An example here is the recent spate of
finance company collapses you have to wonder if the boards of these companies really
challenged management and understood the risks their companies were taking.

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It ensure timely, accurate disclosure on all material matters, including the financial
situation, performance, ownership.Culture is critical in the performance of the board and the
organization as a whole. Trust is important around the board table but obviously it needs to be
earned. Challenge is also important. Discussion and debate need to be robust. Above all there can
be no compromise on ethics and integrity. This sounds like a simple aspiration, but it should be
shared by both the board and management.
Boards should assess their own performance regularly and should consider issues such as the
balance of skills around the table, succession planning, professional development and, crucially,
whether they add value to the company. I am pleased to say that director evaluation is becoming
much more commonplace and most boards undertake regular assessments. Although it may seem
a somewhat self-serving process, we find that self-evaluation by directors is highly effective. In
reality, good boards have very low tolerance for underperformance amongst their members.

The procedures and structures are in place so as to minimize, or avoid completely conflicts of
interest. Independent Directors and Advisers i.e. free from the influence of others.Boards of
directors need to ensure that a companys financial position is solvent and that other financial
matters including audit, both internal and external are properly and effectively undertaken. As
part of this process the board must also ensure that risk is managed and that a formal process is
put in place for assessing, managing and reporting on risk.
Directors must also be aware of other compliance issues such as regulations, delegated
authorities, confidentiality, safety guidelines and many others. Some of these are common to all
organizations and others will depend on the operating environment of the company.

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5 Indian Stock Exchange requirements on compliance


1. The Non-executive Directors on board should not be less than fifty percent of
the Board of Directors.
2. In case of a non-executive chairman, at least one-third of board should
comprise of independent directors.
3. A director shall not be a member in more than 10 committees or act as
Chairman of more than 5 committees.
A 1. Audit committee to be set up, consisting 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 shall remain 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
4. The committee may also meet without the presence of any executives of the
5. When required, the representative of external auditor shall remain present in
the meeting.
6. Company Secretary shall be the Secretary of the committee.

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B. Functioning of Audit Committee :
1. Audit committee shall meet at least thrice a year.
2. One meeting to be held before finalisation of Annual Account.
3. Other two meeting should be held at interval of 6 months.
4. The quorum shall be of 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. T o secure attendance of outsiders with relevant expertise, if it considers
necessary .
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 :-
a) Any changes in accounting policies and practices.
b) Major accounting entries based on exercise of judgement by
c) Qualifications in draft Audit report.
d) Significant adjustments arising out of audit.
e) The going concern assumption.
f) Compliance with Accounting Standards.
g) Compliance with stock exchanges and legal requirements concerning
financial statements.

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h) 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.
5. Reviewing the adequacy of internal audit function, including the Structure of
the internal auditors in to department, staffing and seniority of the officials
heading the department, reporting structure coverage and frequency of
internal audit.
6. Discussion with internal auditors any significant findings and follow up there
7. Reviewing the findings of any internal investigations by the internal audit
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. Discussions with external auditors before the audit commences, nature and
scope of audit as well as have post-audit discussion to ascertain any area of
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 (in case of non-payment of
declared dividends) and creditors.
A. Remuneration of non-executive directors to be decided by the Board of Directors.
B. Disclosure in relation to remuneration of the directors shall be made in the
sections on the corporate governance of the annual report.
1. Remuneration package such as salary , benefits, bonuses, stock options,
pensions etc.
2. Details of fixed component and performance linked incentives along with the

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performance criteria.
3. Service contracts, notice period, severance fees.
4. Stock option details.
1. The Board meeting to be held at least four times a year .
2. The difference of two Board meeting should not be more than four months.
3. Information to be made available to the board in respect of the following :-
a) Annual operating plans and budgets and any updates.
b) Capital budgets and any updates.
c) Quarterly results of the company and its operating divisions or business
d) Minutes of meetings of audit committee and other committees of the
e) The information on recruitment and remuneration of senior officers just
below the board level, including appointment or removal of Chief
Financial Officer and the Company Secretary.
f) Show cause, demand, prosecution notices and penalty notices, which are
materially important.
g) Fatal or serious accidents, dangerous occurrences, any material effluent
or pollution problems.
h) Any material default in financial obligations to and by the company, or
substantial non-payment for goods sold by the company.
i) Any issue, which involves possible public or product liability claims of
substantial nature, including any judgment or order which. may have
passed strictures on the conduct of the company or taken an adverse
view regarding another enterprise that can have negative implications on
the company.
j) Details of any joint venture or collaboration agreement.
k) Transactions that involve substantial payment towards goodwill. brand
quality, or intellectual property.

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1) Significant labor problems and their proposed solutions. Any significant
development in Human Resources / Industrial Relations front like
singing of wage agreement, implementation of Voluntary Retirement
Scheme etc.
m) Sale of material nature, or investments, subsidiaries, assets, which is not
in normal course of business.
n) Quarterly details of foreign exchange exposure and the steps taken by
management to limit the risks of adverse exchange rate movement, if
o) Non-compliance of any regulatory, statutory nature or listing
requirements and shareholders service such as non-payment of dividend,
delay in share transfer etc.
A. The Directors report with present the Management Discussions and Analysis
report- This should includes discussions on 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) Risk and concerns.
t) Internal control systems and their adequacy .
g) Discussion on financial performance with respect to operational performance.
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 and which may have a
potential conflict with the interest of the company at large.
A. The shareholders are to be provided following information before appointment of

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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 etc. made by companies to analysts shall be put on
company's web-site.
C. A committee under the name "Shareholders/ Investors Grievances Committee" to
be set up to specifically look into the redressing of shareholder and investors
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 shall attend to share
transfer formalities at least once in a fortnight.
The Annual Report of the Company should comprise a separate section on
Corporate Governance. Non-compliance of any mandatory requirement, which is
part of the listing agreement to be specifically highlighted with the reason for non-
compliance. The suggested list of items to be included in this report is as under:
a) Mandatory :
1. A brief statement on company's philosophy on code of governance.
2. Board of Directors:-
i) Composition and category of directors for example promoter,
executive, non-executive, independent non-executive, nominee
director, which institution represented as Lender or as equity
investor .
ii) Attendance of each director at the BoD meetings and the last AGM.
iii) Number of other BoDs or Board Committees, he is a member or
Chairperson of.
iv) Number of BoD meetings held, date on which held.
3. Audit Committee:-

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i) Brief description of terms of reference.
ii) Composition, name of members and Chairperson.
iii) Meetings and attendance during the year.
4. Remuneration Committee:-
i) Brief description of terms of reference.
ii) Composition, name of members and Chairperson.
iii) Attendance during the year.
iv) Remuneration policy .
v) Details of remuneration to all the directors, as per format in main
5. Shareholders Committee:-
i) Name of non-executive director heading the committee.
ii) Name and designation of compliance officer.
iii) Number of shareholders complaints received so far.
iv) Number not solved to the satisfaction of shareholders.
v) Number of pending share transfers.
6. General Body Meetings:-
i) Location and time, where last three AGMs held.
ii) Whether special resolutions-
iii) Were put through postal ballot last year, details of voting pattern.
iv) Person who conducted the postal ballot exercise.
v) Are proposed to be conducted through postal ballot.
vi) Procedure for postal ballot.
7. Disclosures:-
i) Disclosures on materially significant related party transactions i.e.
transactions of the company of material nature, with its promoters,
the directors or the management, their subsidiaries or relatives etc.
that may have potential conflict with the interest of company at
ii) Details of non-compliance by the company, penalties, strictures

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imposed on the company by Stock Exchange or SEBI or any
statutory authority, or any matter related to caital markets, during
the last three years. -I
8. Means of communication:-
i) Ha1f-yearly report sent to each household of shareholders.
ii) Quarterly results.
iii) Which newspapers normally published in.
iv) Any web-site, where displayed.
v) Whether it also displays official news releases ; and
vi) The presentation made to institutional investors or to the analysts.
vii) Management Discussion and Analysis Report will be aart of Annual
9. General Shareholder information:
i) AGM: Date, time and venue.
ii) Financial Calendar.
iii) Date of Book closure.
iv) Dividend Payment Date.
v) Listing on Stock Exchanges.
vi) Stock Code.
vii) Market Price Data: High, Low during each month in last financial
viii) Performance in comparison to broad-based indices such as BSE
Sensex, CRISIL. index etc.
ix) Registrar and Transfer Agents.
x) Share Transfer System.
xi) Distribution of shareholding.
xii) Dematerialization of shares and liquidity .
xiii) Outstanding GDRs / ADRs / Warrants or any Convertible
instruments, conversion date and likely impact on equity.
xiv) Plant Locations.

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xv) Address for correspondence.
b) Non-Mandatory:-
A Chairman of the Board :
A non-executive Chairman should be entitled to maintain a Chairman's
office at the company's expenses and also allowed reimbursement of
expenses incurred in performance of his duties.
B. Remuneration Committee :
i) The board should set up a remuneration committee to determine on
their behalf and on behalf of the shareholders with agreed terms of
reference, the company's policy on specific remuneration package
for executive directors including pension rights and an
compensation a payment.
ii) To avoid conflicts of interest, the remuneration committee, which
would determine the remuneration packages of the executive
directors should comprise of at least three directors, all of whom
should be non-executive directors, the chairman of committee being
an independent director.
iii) All the members of the remuneration committee should be present
at the meeting .
iv) The Chairman of the remuneration committee should be present at
the Annual General Meeting to answer the shareholder queries.
However it would be up to the Chairman to decided who should
answer the queries.
C. Shareholder Rights :
i) The half-yearly declaration of financial performance including
summary of the significant events in last six-months. should be sent
to each household of shareholders.
D. Postal Ballot :
Currently, although the formality of holding the general meeting is gone
through. in actual practice only a small fraction of the shareholders of

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that company do or can really participate therein. This virtually makes
the concept of corporate democracy illusory .It is imperative that this
situation which has lasted too long needs an early correction. In this
context, for shareholders who are unable to attend the meetings, there
should be a requirement, which will enable them to vote by postal ballot
for key decisions. Some of the critical matters which should be decided
by postal ballots are given below:-
a) Matters relating to alteration in the memorandum of association of
the company like changes in name, objects, address of registered
office etc;
b) Sales of whole or substantially the whole of the undertaking;
c) Sale of investments in the companies, where the shareholding or the
voting rights of the company exceeds 25%;
d) Making a further issue of shares through preferential allotment or
private placement basis;
e) Corporate restructuring;
f) Entering a new business area not germane to the existing business
of the company;
g) Variation in rights attached to class of securities;
h) Matters relating to change in management.
i) 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
director's report. The same certificate will
also be sent to Stock Exchanges with the annual returns.

Schedule of Implementation :
The above amendments to the listing agreen1ent have to be implemented as per
schedule of implementation given below:

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i) By all entities seeking listing for the first time, at the time of listing.
ii) Within financial year 2000-2001, but not later than March 31, 2001 by all entities,
which are included either in Group' A' of the BSE or in S&P CNX Nifty index as
on January 1,2000. However to comply with tile recommendations, these
companies may have to begin the process of implementation as early as possible.
iii) .Within financial year 2001-2002, but not later than March 31, 2002 by all the
entities which are presently listed, with paid up capital of Rs.10 crore and above,
or net worth of Rs.25 crore or more any time in the history of the company.
iv) Within financial year 2002-2003, but not later than March 31 , 2003 by all the
entities which are presently listed, with paid up share capital of Rs.3 crore and
v) As regards the non-mandatory requirement its shall be implemented as per the
discretion of the company. However, the disclosures of the adoption / non-
adoption of the non-mandatory requirements shall be made in the section on
corporate governance of the Annual Report.

Securities and Exchange Board of India (SEBI) has at its meeting held on January 25, 2000
considered the recommendations of the Kumaramangalam Birla Committee on Corporate
Governance and decided to implement the recommendations through an amendment to the
Listing Agreement of companies listed with the stock exchanges.

SEBI has issued a circular dated 21 February, 2000 in respect of incorporation of new clause 49
in the listing agreement for corporate governance. According to this clause it is a mandatory
requirements to set up board committee to look into redressing of shareholder and investor

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6 An Corporate Governance Triple Effect





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Businesses should conduct and govern themselveswith Ethics1, Transparency2 and
Core Elements
The principle recognizes that ethical conduct in all its functions and processes isthe cornerstone
of responsible business.The principle acknowledges that business decisions and actions,
including thoserequired to operationalize the principles in these Guidelines should be amenable
todisclosure and be visible to relevant stakeholders.The principle emphasizes that businesses
should inform all relevant stakeholders ofthe operating risks and address and redress the issues
raised.The principle recognizes that the behavior, decision making styles and actions ofthe
leadership of the business establishes a culture of integrity and ethicsthroughout the enterprise.
1. Businesses should develop governance structures, procedures and practices thatensure ethical
conduct at all levels; and promote the adoption of this principleacross its value chain
2. Businesses should communicate transparently and assure access to informationabout their
decisions that impact relevant stakeholders
3. Businesses should not engage in practices that are abusive, corrupt, or anticompetition
4. Businesses should truthfully discharge their responsibility on financial andother mandatory
5. Businesses should report on the status of their adoption of these Guidelines assuggested in the
reporting framework in this document.
6. Businesses should avoid complicity with the actions of any third party thatviolates any of the
principles contained in these Guidelines

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Businesses should provide goods and services that aresafe and contribute to sustainability11
throughout their life cycle12
Brief Description
Core Elements
The principle emphasizes that in order to function effectively and profitably,businesses should
work to improve the quality of life of people.The principle recognizes that all stages of the
product life cycle, right from designto final disposal of the goods and services after use, have an
impact on society andthe environment. Responsible businesses, therefore, should engineer value
in theirgoods and services by keeping in mind these impacts.The principle, while appreciating
that businesses are increasingly aware of theneed to be internally efficient and responsible,
exhorts them to extend theirprocesses to cover the entire value chain from sourcing of raw
materials orprocess inputs to distribution and disposal.
1. Businesses should assure safety and optimal resource use over the life-cycle of the product
from design to disposal and ensure that everyone connectedwith it- designers, producers, value
chain members, customers and recyclers areaware of their responsibilities.
2. Businesses should raise the consumer's awareness of their rights througheducation, product
labeling, appropriate and helpful marketing communication,full details of contents and
composition and promotion of safe usage anddisposal of their products and services.
3. In designing the product, businesses should ensure that the manufacturingprocesses and
technologies required to produce it are resource efficient andsustainable.
4. Businesses should regularly review and improve upon the process of newtechnology
development, deployment and commercialization, incorporatingsocial, ethical, and
environmental considerations.
5. Businesses should recognize and respect the rights of people who may beowners of traditional
knowledge, and other forms of intellectual property.
6. Businesses should recognize that over-consumption results in unsustainableexploitation of our
planet's resources, and should therefore promote sustainableconsumption, including recycling of

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Businesses should promote the wellbeing19 of all employees
Brief Description
Core Elements
The principle encompasses all policies and practices relating to the dignity andwellbeing of
employees engaged within a business or in its value chainThe principle extends to all categories
of employees engaged in activitiescontributing to the business, within or outside of its
boundaries and covers workperformed by individuals, including sub-contracted and home based
1. Businesses should respect the right to freedom of association, participation,collective
bargaining, and provide access to appropriate grievance redressalmechanisms.
2. Businesses should provide and maintain equal opportunities at the time ofrecruitment as well
as during the course of employment irrespective of caste,creed, gender, race, religion, disability
or sexual orientation.
3. Businesses should not use child labour, forced labour or any form ofinvoluntary labour, paid
or unpaid.
4. Businesses should take cognizance of the work-life balance of its employees,especially that of
5. Businesses should provide facilities for the wellbeing of its employeesincluding those with
special needs. They should ensure timely payment of fairliving wages to meet basic needs and
economic security of the employees.
6. Businesses should provide a workplace environment that is safe, hygienichumane, and which
upholds the dignity of the employees. Business shouldcommunicate this provision to their
employees and train them on a regularbasis.
7. Businesses should ensure continuous skill and competence upgrading of allemployees by
providing access to necessary learning opportunities, on an equaland non-discriminatory basis.
They should promote employee morale andcareer development through enlightened human
resource interventions.
8. Businesses should create systems and practices to ensure a harassment freeworkplace where
employees feel safe and secure in discharging theirresponsibilities.

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4. Adherence to Corporate Governance - A critical analysis

Here I am giving my own organization example as case study
a) Case Study Indusind Bank Ltd

IndusInd Bank Limited (the Bank / IndusInd Bank) acknowledges the need .to uphold
the integrity of every transaction it enters into and believes that honesty and integrity in
its internal conduct would be judged by its external behaviour. The Bank is conscious of
the reputation it carries amongst its customers and public at large and shall endeavour
to do all it can to sustain and improve upon its reputation while discharging its
This Code of Conduct attempts to set forth the guiding principles on which the Bank shall operate and
conduct its daily business with its multitudinous stakeholders, Government and regulatory agencies,
media, and anyone else with whom it is connected. It recognises that the Bank is a trustee and custodian
of public money and in order to fulfil its fiduciary' obligations and responsibilities, it has to maintain and
continue to enjoy the trust and confidence of the public at large. This Code also brings together, in one
document, the obligations and responsibilities of the Directors and members of the Senior Management
IndusInd Bank shall continue to initiate policies, which are customer centric and which promote financial
prudence. The Bank is committed to continuously review and update its policies and procedures. This
Code recognises all the systems and procedures of the bank and is complementary to all procedural
manuals prescribed for conduct of various activities of the Bank. This Code will be subjected to review
and modification as and when necessary.

This Code of Conduct (Code) helps to practice these Corporate Values by ensuring compliance of all
legal requirements and upholding the standards of business conduct. Further, Clause 49 of the Listing
Agreement entered into by the Bank with the Stock Exchanges, requires to lay down a Code of Conduct
for Directors on the Board and the Senior Management. Accordingly the Bank has laid down this Code
for its Directors on the Board and its Senior Management. The Code envisages and expects the following:
a. Adherence to the highest standards of honest and ethical conduct, including proper and ethical
procedures in dealing with actual or apparent conflicts of interest between personal and
professional relationships.

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b. Full, fair, accurate, sensible, timely and meaningful disclosures in the periodic reports required to
be filed by the Bank with government and regulatory agencies.
c. Compliance with applicable laws, rules and regulations.
d. To address misuse or misapplication of the Bank's assets and resources.
e. The highest level of confidentiality and fair dealing within and outside the Bank.

This code aims to facilitate as a guidance to whom this Code is addressed. None of the persons to whom
the code applies to will be criticised for any loss of business resulting from adherence to this Code.

This Code is addressed to the Members of the Board of Directors and the Senior Management of IndusInd
Bank. The Senior Management for this purpose shall mean personnel employed Indusind Bank who are
members of its Senior management team and would comprise of the heads of functions and departments.

The Bank expects all Directors and members of the Senior Management to exercise good judgement, to
ensure the interests, safety and welfare of customers, employees, and other stakeholders and to maintain a
cooperative, efficient, positive, harmonious and productive work environment and business organization.
The Directors and members of the Senior Management while discharging duties of their office must act
honestly and with due diligence. They are expected to act with that amount of utmost care and prudence,
which an ordinary person is expected to take in his/her own business. These standards need to be applied
while working in the premises of the Bank, at offsite locations where the business is being conducted
whether in India or abroad, at Bank sponsored business and social events, or at any other place where they
act as representatives of the Bank.
a. A "conflict of interest" occurs when personal interest of any member of the Board of Directors and
of the Senior Management interferes or appears to interfere in any way with the interests of the
Bank. Every member of the Board of Directors and Senior Management has a responsibility to
the Bank, its stakeholders and to each other. Although this duty does not prevent them from
engaging in personal transactions and investments, it does demand that they avoid situations
where a conflict of interest might occur or appear to occur. They are expected to perform their
duties in a way that they do not conflict with the Bank's interest such as

Mahendra S. Patil Corporate Governance In India Page 55 of 84
b. Employment / outside Employment: The members of the Senior Management are expected to
devote their total attention to the business interests of the Bank. They are prohibited from
engaging in any activity that interferes with their performance or responsibilities to the Bank or
otherwise is in conflict with or prejudicial to the Bank.
c. Business Interests: If any member of the Board of Directors and Senior Management considers
investing in securities issued by the Bank's customer, supplier or competitor, they should ensure
that these investments do not compromise their responsibilities to the Bank. Many factors
including the size and nature of the investment; their ability to influence the Bank's decisions;
access to confidential information of the Bank, or of the other entity, and the nature of the
relationship between the Bank and the customer, supplier or competitor should be considered in
determining whether a conflict exists. Additionally, they should disclose to the Bank any interest
that they have which may conflict with the business of the Bank.
d. Related Parties: As a general rule, the Directors and members of the Senior Management should
avoid conducting Bank's business with a relative or any other person or any firm, Company,
Association in which the relative or other person is associated in any significant role. Relatives
shall include all blood as well as close relatives.
e. If such a related party transaction is unavoidable, they must fully disclose the nature of the related
party transaction to the appropriate authority. Any dealings with a related party must be
conducted in such a way that no preferential treatment is given to that party.
f. In the case of any other transaction or situation giving rise to conflicts of interests, the appropriate
authority should after due deliberations decide on its impact.

The Directors of the Bank and Senior Management must comply with applicable laws, regulations, rules
and regulatory orders. They should report any inadvertent non-compliance, if detected subsequently, to
the concerned authorities.


The Bank shall make full, fair, accurate, timely and meaningful disclosures in the periodic reports
required to be filed with Government and Regulatory agencies. The members of Senior Management of

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the Bank shall initiate all actions deemed necessary for proper dissemination of relevant information to
the Board of Directors, Auditors and other Statutory Agencies, as may be required by applicable laws,
rules and regulations.


Each member of the Board of Directors and the Senior Management has a. duty to the Bank to advance its
legitimate interests while dealing with the Bank's assets and resources. Members of the Board of
Directors and Senior Management are prohibited from:
using corporate property, information or position for personal gain;
soliciting, demanding, accepting or agreeing to accept anything of value from any person while
dealing with the Bank's assets and resources;
acting on behalf of the Bank in any transaction in which they or any of their relative(s) have a
significant direct or indirect interest.

a. The Bank's confidential information is a valuable asset. It includes all trade related information,
trade secrets, confidential and privileged information, customer information, employee related
information, strategies, administration, research in connection with the Bank and commercial,
legal, scientific, technical data that are either provided to or made available to each member of the
Board of Directors and the Senior Management by the Bank either in paper form or electronic
media to facilitate their work or that they are able to know; or obtain access by virtue of their
position with the Bank. All confidential information must be used for Bank's business purposes
b. This responsibility includes the safeguarding, securing and proper disposal of confidential
information in accordance with the Bank's policy on maintaining and managing records. This
obligation extends to confidential information of third parties, which the Bank has rightfully
received under non-disclosure agreements.
c. To further the Bank's business, confidential information may have to be disclosed to potential
business partners. Such disclosure should be made after considering its potential benefits and
risks. Care should be taken to divulge the most sensitive information, only after the said potential
business partner has signed a confidentiality agreement with the Bank.

Mahendra S. Patil Corporate Governance In India Page 57 of 84
d. Any publication or publicly made statement that might be perceived or construed as attributable to
the Bank, made outside the scope of any appropriate authority in the Bank, should include a
disclaimer that the publication or statement represents the views of the specific author and not the

e. The Bank has many kinds, of business relationships, with many companies and individuals.
Sometimes, they will volunteer confidential information about their products or business plans to
induce the Bank to enter into a business relationship. At other times, the Bank may request that a third
party provide confidential information to permit the Bank to evaluate a potential business relationship
with that party. Therefore, special care must be taken by the Board of Directors and members of the
Senior Management to handle the confidential information of others. Such confidential information
should be handled in accordance with the agreements with such third parties.
f. The Bank requires that every Director and the member of Senior Management, General Managers
should be fully compliant with the laws, statutes, rules and regulations that have the objective of
preventing unlawful gains of any nature whatsoever.
g. Directors and the members of Senior Management shall not accept any offer, payment, promise to
pay, or authorisation to pay any money, gift, or anything of value from customers, suppliers,
shareholders stakeholders, etc. that is perceived as intended, directly or indirectly, to influence
any business decision, any act or failure to act, any commission of fraud, or opportunity for the
commission of any fraud.

Each member of the Board of Directors and Senior Management of the Bank should adhere to the
following so as to ensure compliance with good Corporate Governance practices.
Directors Dos Don'ts


Attend Board meetings
regularly and participate in
the deliberations and
discussions effectively.
Do not interfere in the day
to day functioning of the

Study the Board papers
thoroughly and enquire
Do not reveal any
information relating to any

Mahendra S. Patil Corporate Governance In India Page 58 of 84
about follow-up reports on
definite time schedule
constituent of the Bank to


Involve actively in the
matter of formulation of
general policies
Do not display the logo /
distinctive design of the
Bank on their personal
visiting cards / letter heads.


Be familiar with the broad
objectives of the Bank and
the policies laid down by
the Government and the
various laws and
Do not sponsor any
proposal relating to loans,
investments, buildings or
sites for Bank's premises,
enlistment or empanelment
of contractors, architects,
auditors, doctors, lawyers
and other professionals etc.

Mahendra S. Patil Corporate Governance In India Page 59 of 84

The primary purpose of corporate leadership is to create wealth legally and ethically.
This translates to bringing a high level of satisfaction to five constituencies - customers,
employees, investors, vendors and the society-at-large. The raison d'tre of every corporate body
is to ensure predictability, sustainability and profitability of revenues year after year.
Executive Chairman of the Board

A. Corporate governance policies

Corporate governance is a reflection of our culture, policies, our relationship with
stakeholders, and our commitment to values. Infosys has been a pioneer in benchmarking its
corporate governance practices with the best in the world.Given below are the company's
policies on corporate governance.The current policy is to have an appropriate mix of Executive
and Independent Directors to maintain the independence of the Board, and separate its functions
of governance and management. As at March 31, 2013, the Board consists of 14 members, six of
whom are Executive or whole-time Directors, and eight are Independent Directors.Two of the
Executive Directors are our Founders. The Board periodically evaluates the need for change in
its composition and size.

B. Board meetings

Scheduling and selection of agenda items for Board meetingsDates for Board meetings in the
ensuing year are decided in advanceand published as part of the Annual Report. Most Board
meetings are held at our registered office at Electronics City, Bangalore, India. The Chairperson
of the Board and the Company Secretary draft the agenda for each meeting, along with
explanatory notes, in consultation with the CEO, and distribute these in advance to the Directors.
Every Board member can suggest inclusion of additional items in the agenda. The Board meets
at least once a quarter to review the quarterly results and other items on the agenda, and also on
the occasion of the Annual General Meeting of the shareholders. Additional meetings are held

Mahendra S. Patil Corporate Governance In India Page 60 of 84
when necessary. Independent Directors are expected to attend at least four Board meetings in a
year. However, with the Board being represented by Independent Directors from various parts of
the world, it may not be possible for each one of them to be physically present at all the
meetings. Hence, we use video / teleconferencing facilities to enable their participation.
Committees of the Board usually meet the day before the formal Board meeting, or whenever the
need arises for transacting business. Six Board meetings were held during the year ended
March 31, 2013. These were held on April 13, 2012; June 9, 2012 (coinciding with the Annual
General Meeting of the shareholders); July 12, 2012; September 10, 2012; October 12, 2012, and
January 11, 2013.

C.Board committees

1. Audit committee
2. Compensation committee
3. Nominations committee
4. Investor grievance committee
5. Risk management committee

D. Management review and responsibility

Formal evaluation of officers
The compensation committee of the Board approves the compensation and benefits for all
Executive Board Members as well as members of theExecutive Council. Another committee,
headed by the CEO, reviews, evaluates and decides the annual compensation of our officers from
the level of Vice President upwards, excluding members of the Executive Council. Board
interaction with clients, employees, institutional investors, the government and the media
The Executive Co-Chairman, the CEO and Managing Director, and the CFO handle all
interactions with investors, the media and various governments. The CEO and the Executive Co-
Chairman manage most of the interactions with clients and employees.Risk management
We have an integrated approach to manage risks inherent in various aspects of our business.
More details are provided in the Risk management report section of the Annual Report.

Mahendra S. Patil Corporate Governance In India Page 61 of 84
Management's discussion and analysisA detailed report on this subject is provided in the
Management's discussion and analysis section of the Annual Report

E. Shareholders

Disclosures regarding the appointment or re-appointment of directors
According to the Articles of Association, one-third of the directors retires by rotation, and, if
eligible, seeks re-appointment at the Annual General Meeting of shareholders. According to
Article 122 of the Articles of Association, S. D. Shibulal, Srinath Batni, Deepak M.
Satwalekar, Dr. Omkar Goswami and R. Seshasayee will retire in the ensuing Annual General
Meeting. The Board has recommended the re-appointment of all the retiring Directors.
The detailed profiles of all these Directors are provided in the Notice convening the Annual
General Meeting. Communication to the shareholdersThe quarterly reports are hosted on our
website. The report contains select financial data extracted from the audited financial statements
under the Indian GAAP, and unaudited financial statements under the IFRS. The quarterly
report, along with additional information, is also posted on our website. Moreover, the quarterly /
annual results and official news releases are generally published in The Economic Times,
The Times of India, Business Standard, Business Line, Financial Express and Udayavani (a
regional daily published from Bangalore). Quarterly and annual financial statements, along with
segmental information, are also posted on our website. Earnings calls with analysts and investors
are broadcast live on the website and their transcripts are published on the website thereafter.
Any specific presentations made to analysts and others are also posted on our website. The
proceedings of the Annual General Meeting are webcast live for shareholders across the world.
The video archives are also available on our website, www.infosys.comInvestor grievance and
share transferWe have a Board-level investor grievance committee to examine and
redressshareholders' and investors' complaints. The status on complaints and share transfers is
reported to the entire Board. The details of shares transferred and the nature of complaints are
provided in the Shareholder information section of the Annual Report. For shares transferred
inphysical form, the Company provides adequate notice to the seller before registering the
transfer of shares. The share-transfer committee of the Company will meet as often as required to
approve share transfers. For matters regarding shares transferred in physical form, share

Mahendra S. Patil Corporate Governance In India Page 62 of 84
certificates, dividends, and change of address, shareholders should communicate with Karvy
Training of Board members All new non-Executive Directors inducted into the Board are given
an orientation. Presentations are made by various Executive Directors and senior Management
giving an overview of our operations, to familiarize the new non-Executive Directors with the
operations. The new non-Executive Directors are given an orientation on our services, group
structure and subsidiaries, Constitution, Board procedures, matters reserved for the Board, and
our major risks and risk management strategy.The Board's policy is to have separate meetings
regularly with Independent Directors to update them on all business-related issues and new
initiatives. At such meetings, the Executive Directors and other members of the senior
Management share points of view and leadership thoughts on relevant issues.We also facilitate
the continual education requirements of our Directors. Each Director is entitled to a training fee
of US $5,000 per annum. Independent Directors are allowed to attend educational programs in
the areas of Board / corporate governance.

F. Whistleblower policy

In April 2012, the Board adopted the revised Whistleblower Policy that adopts global best
practices. We have established a mechanism for employees to report concerns about unethical
behavior, actual or suspected fraud, or violation of our Code of Conduct or Ethics policy. It also
provides for adequate safeguards against the victimization of employees who avail of the
mechanism, and allows direct access to the Chairperson of the audit committee in exceptional
cases. We further affirm that no employee has been denied access to the audit committee.

Originally adopted by the Board of Directors on 10 April 2003;
Amended version adopted by the Board of Directors on 15 April 2011
Amended version adopted by the Board of Directors on 7 May 2013
This Code of Conduct is intended to establish and clarify the standards for behavior in the
organization. However, no Code of Conduct can cover all situations you may encounter. Thus,
you need to utilize the following principles where specific rules cannot be established:

Mahendra S. Patil Corporate Governance In India Page 63 of 84
ues and
company objectives.
-term value to its employees, shareholders and society. It
is expected that you will do what is right to support the long-term goals of the company.
of integrity, transparency and
compliance with all applicable laws and regulations.
d be escalated to a higher level of
management for broader consideration.
, it is expected that you will utilize
appropriate channels to report the violation.
This Code of Conduct and Ethics (Code) helps maintain the standards of business conduct
of Infosys Limited, together with its subsidiaries (Infosys or the Company), and ensures
compliance with legal requirements, including with (i) Section 406 of the Sarbanes-Oxley Act of
2002 and the U.S. Securities and Exchange Commission (SEC) rules promulgated thereunder
(ii) Clause 49 of the Listing Agreement entered into with the National Stock Exchange of India
and the Bombay Stock Exchange, and (iii) Section 303A.10 of the Listed Company Manual of
the New York Stock Exchange.
This Code is designed to deter wrongdoing and promote, among other things, (a) honest and
ethical conduct, including the ethical handling of actual or apparent conflicts of interest between
personal and professional relationships, (b) full, fair, accurate, timely and understandable
disclosure in reports and documents we file with or submit to the SEC and in our other public
communications, (c) compliance with applicable laws, rules and regulations, (d) promote the
protection of Company assets, including corporate opportunities and confidential information, (e)
promote fair dealing practices, (f) the prompt internal reporting of violations of this Code, and
(g) accountability for adherence to this Code. All directors, officers, employees and trainees of
the Company are expected to read and understand this Code, uphold these standards in day-to-
day activities, comply with all applicable policies and procedures, and ensure that all agents,
contractors, representatives, consultants, or other third parties working on behalf of the Company
(collectively referred to as third party agents) are aware of, understand and adhere to these
standards. Since the principles described in this Code are general in nature, the Code does not

Mahendra S. Patil Corporate Governance In India Page 64 of 84
cover every situation that may arise. Please use common sense and good judgment in applying
this Code. You should also check the Company policies, procedures and employees handbook as
adopted at the location where you are posted for specific instructions.Nothing in this Code, or in
any company policy and procedures or in other related communications (verbal or written) shall
constitute and shall not be construed to constitute a contract of employment for a definite term or
a guarantee of confirmed employment. This Code supersedes all other such codes, policies,
procedures, instructions, practices, rules or written or verbal representations to the extent that
they are inconsistent. Upon determination that there has been a violation of this Code, the
Company will take appropriate action against any person whose actions are found to violate
these policies or any other policies of the Company. The Company is committed to continuously
reviewing and updating its policies and procedures. Therefore, the Company reserves the right to
amend, alter or terminate this Code at any time and for any reason, subject to applicable law.
Please sign the acknowledgment form at the end of this Code and return the form to the
Human Resources Department indicating that you have received, read, understands and agrees to
comply with its terms. The signed acknowledgement form will be saved and archived as part of
your e-docket. You will be asked to sign an acknowledgment indicating your continued
understanding of the Code once a year. Compliance is everyones business Ethical business
conduct is critical to our business and it is your responsibility to respect and adhere to these
practices. Many of these practices reflect legal or regulatory requirements. Violations of these
laws and regulations can create significant liability for you, the Company, its directors, officers,
and other employees. You should be alert to possible violations and report them in the manner
set forth under the relevant section of this Code. You must cooperate in any internal or external
investigations of possible violations. In all cases, if you are unsure about the appropriateness of
an event or action, please seek assistance in the manner set forth under the relevant section of
this Code. Those who violate the policies in this Code will be subject to disciplinary action, up to
and including termination from the Company. No adverse action will be taken against anyone for
complaining about, re participating or assisting in the investigation of a suspected violation of
this Code, unless the allegation made or information provided is found to be willfully and
intentionally false. To the maximum extent possible, the Company will maintain utmost the
confidentiality in respect of all the complaints received by it. This Code is also available on
Companys website.

Mahendra S. Patil Corporate Governance In India Page 65 of 84
The Board composition policy of Infosys is in line with corporate governance guidelines
and is as follows:

1. Size and composition of the board
The current policy is to have an appropriate mix of executive and independent directors to
maintain the independence of the board, and to separate the board functions of governance and
management. The board consists of sixteen members, eight of whom are executive or whole-time
directors, and eight independent directors. Five of the executive directors are founders of the
company. To ensure independence of the board, the members of the audit committee, the
nominations committee and the compensation committee are composed entirely of independent
The Chairman and Chief Mentor is responsible for mentoring Infosys core management team
in transforming the company into a world-class, next-generation organization that provides state-
of-the-art technology-leveraged business solutions to corporations across the world. He also
interacts with global thought-leaders to enhance the leadership position of Infosys. In addition,
he continues to interact with various institutions to highlight and help bring about the benefits of
IT to every section of society. As chairman of the board, he is also responsible for all board

The CEO, President and Managing Director is responsible for corporate strategy, brand equity,
planning, external contacts, new initiatives, and other management matters. He is also
responsible for achieving the annual business plan.

The COO and Deputy Managing Director is responsible for all customer service operations. He
is also responsible for technology, acquisitions and investments.

The Chairman, CEO, COO, the other executive directors and the senior management make
periodic presentations to the board on their responsibilities, performance and targets.

2. Board definition of independent directors

Mahendra S. Patil Corporate Governance In India Page 66 of 84
According to Clause 49 of the Listing Agreement with Indian stock exchanges, an independent
director means a person other than an officer or employee of the company or its subsidiaries or
any other individual having a material pecuniary relationship or transactions with the company
which, in the opinion of the companys board of directors, would interfere with the exercise of
independent judgment in carrying out the responsibilities of a director.

Infosys adopted a stricter definition of independence as required by NASDAQ listing rules. The
same is provided in the Audit charter section of this Annual Report.

3. Board membership criteria
Board members are expected to possess the expertise, skills and experience required to manage
and guide a high-growth, hi-tech, software company deriving revenue primarily from G-7
countries. Expertise in strategy, technology, finance, quality and human resources is essential.
Generally, they will be between 40 and 60 years of age. They will not be relatives of an
executive director or of an independent director. They are generally not expected to serve in any
executive or independent position in any company in direct competition with Infosys. Board
members are expected to rigorously prepare for, attend, and participate in all board and
applicable committee meetings. Each board member is expected to ensure that their other current
and planned future commitments do not materially interfere with the members responsibility as
a director of Infosys.

4. Selection of new directors
The board is responsible for the selection of any new director. The board delegates the screening
and selection process involved in selecting the new directors to the nominations committee,
which consists exclusively of independent directors. The nominations committee makes
recommendations to the board on the induction of any new member.

5. Membership term
The board constantly evaluates the contribution of its members, and recommends to shareholders
their re-appointment periodically as per statute. The current law in India mandates the retirement
of one-third of the board members (who are liable to retire by rotation) every year, and qualifies

Mahendra S. Patil Corporate Governance In India Page 67 of 84
the retiring members for re-appointment. Executive directors are appointed by the shareholders
for a maximum period of five years at a time, but are eligible for re-appointment upon
completion of their term. Non-executive directors do not have a specified term, but retire by
rotation as per law. The nominations committee of the board recommends such appointments
and/or re-appointments. However, the membership term is limited by the retirement age for the

6. Retirement policy
Under this policy, the maximum age of retirement of all executive directors is 60 years, which is
the age of superannuation for the employees of the company. Their continuation as members of
the board upon superannuation / retirement is determined by the nominations committee. The age
limit for serving on the board is 65 years.

7. Board compensation review
The compensation committee determines and recommends to the board the compensation
payable to the directors. All board-level compensations are approved by shareholders, and
separately disclosed in the financial statements. Remuneration of the executive directors consists
of a fixed component and a performance incentive. The compensation committee makes a
quarterly appraisal of the performance of the executive directors based on a detailed
performance-related matrix. The annual compensation of the executive directors is approved by
the compensation committee, within the parameters set by the shareholders at the shareholders
meetings. Compensation payable to each of the independent directors is limited to a fixed
amount per year as determined and approved by the board the sum of which is within the limit
of 0.5% of the net profits of the company for the year, calculated as per the provisions of the
Companies Act, 1956. The compensation payable to independent directors and the method of
calculation are disclosed separately in the financial statements. Those executive directors who
are founders of the company have voluntarily excluded themselves from the 1994 Stock Offer
Plan, the 1998 Stock Option Plan and the 1999 Stock Option Plan. Independent directors are also
not eligible for stock options under these plans, except for the latest 1999 Stock Option Plan.

8. Memberships of other boards

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Executive directors are excluded from serving on the board of any other entity, unless these are
corporate or government bodies whose interests are germane to the future of the software
business, or are key economic institutions of the nation, or whose prime objective is that of
benefiting society. Independent directors are not expected to serve on the boards of competing
companies. Other than this, there are no limitations on them save those imposed by law and good
corporate governance practices.

Mahendra S. Patil Corporate Governance In India Page 69 of 84

7 Flouting of corporate governance norms and its consequences A critical analysis

Despite the corporate governance revolution, there exists no universal benchmark for
effective levels of disclosure and transparency. At a juncture when the concept of corporate
governance is receiving unprecedented attention, it is ironic, if not disturbing that recent
collapses in the corporate arena have been primarily on account of corporate governance failures.

The two largest bankruptcies in U.S. history, Enron in December and2001WorldCom in
July 2002, stem from corporate mismanagement, and symbolize the broader crisis in corporate

Around The world
a) Enron

On December 2, 2001, Enron Corporation, then the seventh largest publicly traded
corporation in the United States, declared bankruptcy. That bankruptcy sent shock waves
throughout the country, both on Wall Street and Main Street where over half of American
families now invest directly or indirectly in the stock market. Thousands of Enron employees
lost not only their jobs but a significant part of their retirement savings; Enron shareholders saw
the value of their investments plummet; and hundreds, if not thousands of businesses around the
world, were turned into Enron creditors in bankruptcy court likely to receive only pennies on the
dollars owed to them. And all this was due to non-adherence to corporate governance norms.

The role of the Enron Board of Directors in Enrons collapse and bankruptcy.

(1)Fiduciary Failure.

Directors operate under state laws which impose fiduciary duties on them to act in good faith,
with reasonable care, and in the best interest of the corporation and its shareholders. Courts
generally discuss three types of fiduciary obligations. As one court put it: Three broad duties

Mahendra S. Patil Corporate Governance In India Page 70 of 84
stem from the fiduciary status of corporate directors: namely, the duties of obedience, loyalty,
and due care. The duty of obedience requires a director to avoid committing ... acts beyond the
scope of the powers of a corporation as defined by its charter or the laws of the state of
incorporation. ... The duty of loyalty dictates that a director must act in good faith and must not
allow his personal interest to prevail over the interests of the corporation. ... [T]he duty of care
requires a director to be diligent and prudent in managing the corporations affairs.

The Enron Board of Directors failed to safeguard Enron shareholders and contributed to the
collapse of the seventh largest public company in the United States, by allowing Enron to engage
in high risk accounting, inappropriate conflict of interest transactions, extensive undisclosed off-
the-books activities, and excessive executive compensation. The Board witnessed numerous
indications of questionable practices by Enron management over several years, but chose to
ignore them to the detriment of Enron shareholders, employees and business associates.

(2) High Risk Accounting.
The Enron Board of Directors knowingly allowed Enron to engage in high risk accounting

(3)Inappropriate Conflicts of Interest.
Despite clear conflicts of interest, the Enron Board of Directors approved an unprecedented
arrangement allowing Enrons Chief Financial Officer to establish and operate the LJM private
equity funds which transacted business with Enron and profited at Enrons expense. The Board
exercised inadequate oversight of LJM transaction and compensation controls and failed to
protect Enron shareholders from unfair dealing.

(4)Extensive Undisclosed Off-The-Books Activity.
The Enron Board of Directors knowingly allowed Enron to conduct billions of dollars in off-the-
books activity to make its financial condition appear better than it was and failed to ensure
adequate public disclosure of material off-the-books liabilities that contributed to Enrons

Mahendra S. Patil Corporate Governance In India Page 71 of 84
(5)Excessive Compensation.
The Enron Board of Directors approved excessive compensation for company executives, failed
to monitor the cumulative cash drain caused by Enrons 2000 annual bonus and performance unit
plans, and failed to monitor or halt abuse by Board Chairman and Chief Executive Officer
Kenneth Lay of a company-financed, multi-million dollar, personal credit line.

(6)Lack of Independence.
The independence of the Enron Board of Directors was compromised by financial ties between
the company and certain Board members. The Board also failed to ensure the independence of
the companys auditor, allowing Andersen to provide internal audit and consulting services while
serving as Enrons outside auditor.

There were more than a dozen red flags that should have caused the Enron Board to ask hard
questions, examine Enron policies, and consider changing course. Those red flags were not
heeded. In too many instances, by going along with questionable practices and relying on
management and auditor representations, the Enron Board failed to provide the prudent oversight
and checks and balances that its fiduciary obligations required and a company like Enron needed.
By failing to provide sufficient oversight and restraint to stop management excess, the Enron
Board contributed to the companys collapse and bears a share of the responsibility for it.

b) WorldCom

WorldCom became America's biggest corporate failure with $40bn in debt and gaping
holes in its accounts that could be even larger than the $4bn fraud that has already entered the
record books.

Under Bernie Ebbers in the 1990s WorldCom rose to become the second largest long-distance
and data services company in the United States. The company followed an aggressive strategy
involving 60 acquisitions, the highpoint of which was the $37 billion purchase of MCI in 1996.
By 1999, WorldCom generated close to $40 billion in revenues and its stock peaked in the mid-

Mahendra S. Patil Corporate Governance In India Page 72 of 84
$60 per share range. Ebbers had taken a small company based in Clinton, Mississippi and
converted it into a major global player in the international telecommunications industry.

WorldCom's push to become a major powerhouse, however, came at a cost. To wheel and deal in
the telecom market a considerable sum of capital was borrowed from the banks and raised by
Wall Street firms. Impressed by Ebbers' rag-to-riches tale and his ability to sell the company,
investors lined up. By year-end 2001, WorldCom group's debt was a massive $30 billion. In the
late 1990's, the money poured in. However, the telecom industry began to undergo a dramatic
change. WorldCom's once highly specialized product of long-distance communications shifted
into a lower-priced commodity. Fierce price competition ultimately generated less revenue, just
in time for the tech bubble burst in 2000-2001, taking WorldCom's stock with it.
Complicating matters for WorldCom was that CEO Ebbers had gone on a buying spree and
accumulated a number of personal acquisitions, ranging from a massive timber farm in British
Columbia to a boat called the "Aquasition" and a mansion in Mississippi. Ebbers used
WorldCom stock to secure bank loans to make these purchases. When stock prices began to fall,
the bank called the loans. Ebbers then turned to his board at WorldCom, which first guaranteed
the loan and then assumed the debt itself. Consequently, Ebbers came to borrow money, some
$366 million, from his own firm, an action that is regarded as poor corporate governance and
raises serious moral questions. If nothing else, the loans were a factor in the SEC's decision to
investigate WorldCom. Moreover, they represent an ongoing thorn in the side of John Sidgmore,
Ebbers' successor in April 2002 as CEO.
The accumulation of falling profitability, questionable corporate governance and a SEC
investigation all made WorldCom a focal point for frustrated investors looking for someone to
blame. WorldCom's stock has been severely punished and now trades under $3 a share. The
company's bonds are now junk bonds, as Moody's and Standard & Poor's have both dropped
WorldCom from investment-grade grading to non-investment-grade. The sad commentary on
WorldCom is that what once was one of the stars of Wall St. is now a company struggling to
Consequences of Bad governance

Mahendra S. Patil Corporate Governance In India Page 73 of 84
1. Investors in Wall Street are fleeing anything that is remotely similar to WorldCom or other
troubled sectors, such as energy and utilities (both of which were tagged by Enron). Banks,
which lent money to all of these companies, are also under scrutiny by nervous investors.
2. The US government is moving to re-regulate the economy and moving to tighten controls over
accounting, corporate governance and transparency and disclosure. While this is likely to reduce
chances of corporate wrong doing, it will also add layers of regulations on businesses that will be
more costly in terms of time and money.
3. Customers who are stakeholders are likely to leave in large numbers as a sense of insecurity is
built in them.
4. WorldCom and the other scandals are weakening the dollar. As foreign investor confidence in
the U.S. corporate sector declines, due to concerns about management sleaze, two things could
happen. One, foreign investors, with an eye to the slumping value of the dollar, could demand a
premium to hold U.S. securities. Two, they could also demand a premium for credit risk. Both
trends would only accelerate the dollar's declining value in international markets. In addition,
there is little confidence in U.S. Treasury Secretary O'Neill ability to manage the dollar. His off
the cuffs remarks that Brazil was not worth throwing in more U.S. taxpayers dollars, while
perhaps reflecting common sense, were disastrous to an already spooked market. The danger
with the dollar is that O'Neill believes that market forces should be left to run and if so, the dollar
plummets, he will seek to turn the situation too late in the day. Foreign funds flow into the
United States is not to be casually dismissed considering that the U.S. needs to it help finance its
current account balance of payments deficit, which is expected to be around 5% of GDP, a large
5. The impact of WorldCom beyond U.S. shores. Firstly, the sleaze element is already giving
impetus to greater regulation and better corporate governance in countries such as Canada and
the United Kingdom. Second, WorldCom as well as the earlier Enron scandal, are hurting the
attractiveness of the so-called Anglo-American model of de-regulated capitalism and giving
greater credence to a capitalism modified by a larger state role in the economy (Germany and
France). Third, as WorldCom weakens foreign investor sentiment on U.S. securities, this feeds
into a weaker dollar. This would be bad news for countries who rely upon exports, and whose
currencies are not tied to the dollar.

Mahendra S. Patil Corporate Governance In India Page 74 of 84
The 1990s was a decade characterized by the bull market, the advance of new technologies and
business management techniques, an erosion of corporate governance and accounting standards
and easy big money in the stock market. In many respects, the rising tide of new IPOs and
euphoria over the "new economy" raised all boats. The tide appears to have gone back out. The
2000s are shaping into a decade of bear market runs, a tightening of accounting and corporate
governance standards, and difficult to achieve profits on Wall Street. No doubt other corporate
scandals are lurking, which will reinforce the negative trends. Yet, it is important to remember
that the vast majority of U.S. companies are not corrupt, many are beginning to return to
profitability, and tighter standards will lead to better transparency and disclosure. The U.S. still
remains one of the safest places to invest.

In India

A Study on the Corporate Governance Issues at SATYAM COMPUTERS CONSULTANCY
Satyam Case
Satyam scam was not an easy issue. It has its own complexities as it involved 14000
crore scam. Satyam scam had been the example for following poor governance
Practices. It had failed to show good relation with the shareholders and employees.
So as to throw a light on the poor governance practice at one of the major IT giants,
the need to study such case is made important. Taking this scam as a role model,
it could be suggested that there is a need to frame up good governance rules and
see to the proper implementation of it.
About Satyam Consultancy LTD
SATYAM COMPUTER CONSULTANCY LIMITED was established on June 24 1987.
The founder of the organization was Mr. Ramalinga Raju. CEO at the time of the
scam was Mr. Ram Mynampati and CFO was Mr. Valdamani Srinivas.
satyam computer consultancy limited has its headquarter at Hyderabad.
Satyam computer services limited has its several subsidiaries:

Mahendra S. Patil Corporate Governance In India Page 75 of 84
Satyam BPO
CA Satyam
Bridge Consultancy
The various services offered by the satyam computer consultancy limited Included:
Application Software
Business process outsourcing
Business value enhancement
Consulting and Enterprise Solution6
Infrastructure Management Service
Integrated Engineering Solution
Six Sigma Consulting
Product and Application Testing

In mid-December 2008, Satyam announced acquisition of two companies Maytas Properties and
Maytas Infrastructure owned by the family members of Satyam's founder and Chairman
Ramalinga Raju (Raju).
It planned to acquire 100% and 50% stakes in Maytas property and infra for $1.6B.
Due to adverse reaction from institutional investors and the stock markets, the deal was
Withdrawn within 12 hours.
Questions were raised on the corporate governance practices of Satyam with analysts
and investors questioning the company's board on the reasons for giving consent for the
acquisition as it was a related party transaction.
INDIAS LARGEST FRAUD- Rs.7800crore( now estimated as 14000crore)

Corporate governance includes various parties:

Mahendra S. Patil Corporate Governance In India Page 76 of 84

Governance issue at Satyam arose because of non fulfillment of obligation of the company
towards the various stakeholders. It proved a poor relationship with all the stakeholders. It is well
known that a shareholder has a right to get information from the organization, such information
could be with respect to the merger and acquisition. Shareholders expect transparent dealing in
an organization. They even have right to get the financial reporting and records. In the case of
satyam, the above obligations were never fulfilled.
The acquisition of maytas infrastructure and properties were announced without the consent
of shareholders. They were even provided with false inflated financial reports.The shareholders
were cheated Employees were shown with a inflated figure. The excess of employees in the
organization were kept under VIRTUAL POOL who received just 60% of their salaries and
several were removed. The entire scam had its impact on management. Questions were raised
over the credibility of management. Any organization has its obligation towards the Government
by means of timely payment of taxes and abiding by the rules and laws framed up by the
Government. As per the case with satyam , the company did not pay advance tax for the financial
year 2009. As per therule, the advance taxis to be paid 4 times a year; such was not fulfilled by
them SCS was blacklisted by world Bank over charges of Bribery. It was declared ineligible
for contracts to providing Improper benefit to bank staff. Failing to maintain documentation to
support fees.
Actual scenario:
Despite the shareholders not being taken into confidence, the directors went ahead with
the management's decision. The government too is equally guilty in not having managed to save
the shareholders, the employees and some clients of the company from losing heavily.Simple
manipulation of revenues and earnings to show superior performance. Raising fictitious bills for
services that were never rendered.To increase the Cash & bank balance correspondingly.
Operating profits were artificially boosted from the actual Rs 61 croreto Rs 649 crore. Its
financial statements for years were totally false, cooked up and never had Rs 5064 crores (US$
1.05 Billion) shown as cash for several years. Its liability was understated by $ 1.23 Billion.

Mahendra S. Patil Corporate Governance In India Page 77 of 84
The Debtors were overstated by 400 million plus.The interest accrued and receivable by 376
Millions never existed. So when the case came in light following are the actions that has been
Nasscum sets up panel to avoid satyam like case in future- formed a corporate
Governance & ethics committee, chaired by N.R.Narayana Murthy
(chairman and chief mentor of Infosys.)
Hinduja Global chalks out 100 day plan for satyam.
8 Year ban on satyam to be reviewed.
Govt. orders CBI to probe fraud ( concerned about 52000 employees)
Serious fraud investigation office(SFIO)
Market regulation SEBI,
Institute of chartered accountancy India (ICAI)
Andhra police
The CBI in December gave a clean chit to Satyam in the probe on violation of corporate
governance law.

cases shows an important number of similarities in the companies actions, or negligence allowed
by the persons responsible for management, which inevitably led to failure, which brings
together a complex financial failures, image failures or ethical failures for the company, as
individual cases, but certainly for the sector in which it operates. Behind those scandals are a
number of common factors, including:
Management incompetence
Non-observance of the procedures stipulated in internal regulations
Insufficient attention paid to risk management
Inconsistent distribution of duties and responsibilities
Inefficiency of internal audit
Ignorance showed to the signals provided by external audit
Influencing the external auditors to express an audit opinion inconsistent with reality.

Mahendra S. Patil Corporate Governance In India Page 78 of 84
5. Conclusion

The responsibility of effective corporate governance rests not with a single entity, but is
interplay of various people and organizations performing different roles. The board of directors
has the primary responsibility of ensuring that the fundamentals of corporate governance as
expressed in law and regulation are complied with. Control and supervision of a company, on
behalf of the shareholders is the raison director of a board. The other players, external to the
company, also responsible for corporate governance include auditors, analysts, rating agencies,
regulators and the government, amongst others. If all the internal as well as external players play
their role sincerely the people at large are assured that their investments are safe and further
reinforces their confidence in the market. And this confidence leads to more and more common
people willing to enter the market

Good corporate governance may not be the engine of economic growth, but it is essential for the proper
functioning of the engine. (45) The investors both National and International would be loyal to invest in the Indian
companies if they follow all the standards of corporate governance practices. (46) Further, to nurture and
strengthen this loyalty, our companies need to give clear-cut signal that the words your company have real
meaning. That requires well functioning Board, greater disclosure ,better management practices, and a more open,
interactive and dynamic corporate governance environment. Quite simply, share holders and creditors support
are vital for the survival, growth and competitiveness of Indias companies.(47) Effectiveness of corporate
governance system cannot merely be legislated by law neither can any system of corporate governance be static.
As competition increases, the environment in which companies operate also changes and in such a dynamic
environment the systems of corporate governance also need to evolve .Failure to implement good governance
procedures has a cost in terms of significant risk premium when competing for scarce capital in today's public
markets. Thus, the essence of corporate governance
the effectiveness and the utility of good corporate governance practices rest on its enforceability. Ultimately,
good corporate governance practices in India will be shaped by our administrative and regulatory authorities like
SEBI, MCA, etc. by implementing transparent and effective corporate governance laws

Mahendra S. Patil Corporate Governance In India Page 79 of 84
To promote or to increase awareness among entrepreneurs adoption of good corporate governance
practices,which are the integral element for doing and managing business.

To ensure the quality of audit that is at the root of effective corporate governance by making the Audit or
accountable for the disclosure of financial information.

To make the Board of Directors as well as the CEOs and CFOs accountable for the discharge of their duties
with the proper use of their rights within the powers.

To form an appropriate system in order to check the Directors independence in the board and to monitor the
work of Audit firms.

To pay special attention in the quality and effectiveness of the legal, administrative and regulatory framework.

To increase the shareholder activism i.e. the exercise and enforcement of rights by minority shareholders with the
objective of enhancing shareholder value over the long term(37).

To infuse Indias Business Culture with a Spirit of Corporate Governance in order to maintain sustainable
and effective corporate governance (38).

To implement more robust Bankruptcy Laws which are a key component of any corporate governance system

To eliminate Regulatory Arbitrage i.e. to establish a clear mandate for enforcing tax reforms coupled with
deregulation and competition; etc. but we cannot eliminate the possibility of frauds and scams as seen in the recent
Satyam case.(43) Scams are an integral part of corporate history. They come to light only when the going gets
rough. Only when the tide goes out we see all those swimming naked. Such scams are an opportunity for self-
renewal; neither self-denial nor blame game. The frequency and scale of such scams has been far more in the West
than in India. We need to take such types of scams as an opportunity in future for overhauling the system of
corporate governance in India.

Mahendra S. Patil Corporate Governance In India Page 80 of 84
Bibliography :
I. National Foundation For Corporate Governance(NFCG)
II. Infosys Annual Report
III. HDFC Annual report
IV. thecorporatelibrary.com
V. cnn.com
VI. Kumarmanglam Birla Report on corporate governance
VII. International comparison of board Best practices in developed markets - Holly J. Gregory
VIII. Corporate governance in the twenty-first century Robert A. G. Monks