Corporate Governence

GOOD CORPORATE GOVERNANCE – AN IDEA WHOSE TIME HAS ARRIVED
PROJECT REPORT ON
GOOD CORPORATE GOVERNANCE – AN IDEA

WHOSE TIME HAS ARRIVED
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INTRODUCTION...............................................................................................................................3
OBJECTIVE........................................................................................................................................3
WHAT IS CORPORATE GOVERNANCE:.......................................................................................3
CODE OF CONFEDERATION OF INDIAN INDUSTRIES (CII)...................................................5
REPORT OF THE KUMAR MANGALAM BIRLA COMMITTEE ................................................6
THE CADBURY COMITEE – THE CODE OF BEST PRACTICE ...............................................46
NON-EXECUTIVE DIRECTORS................................................................................................50
DIRECTORS RESPONSIBILITY....................................................................................................55
INSIDER TRADING.........................................................................................................................56
CASE STUDY:..................................................................................................................................60
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INTRODUCTION
Corporate governance has succeeded in attracting a good deal of public interest because of its
apparent importance for the economic health of corporations and society in general. However, the
concept of corporate governance is poorly defined because it potentially covers a large number of
distinct economic phenomenons. As a result different people have come up with different
definitions that basically reflect their special interest in the field. It is hard to see that this 'disorder'
will be any different in the future so the best way to define the concept is perhaps to list a few of
the different definitions rather than just mentioning one definition.
OBJECTIVE
To attain highest standard of procedures and practices followed by the corporate world so as to
have transparency in it’s functioning with an ultimate aim to maximise the value of various
stakeholders.
WHAT IS CORPORATE GOVERNANCE:
Joanna Sheiton, (OCED) described “corporate governance as a set of relationships between a

company’s management, its Board of directors, shareholders and other stakeholders”. In a broader
sense, he defined good corporate governance as “important for overall market confidence, the
efficiency of international capital allocation, the renewal of countries’ industrial bases, and
ultimately nation’s overall wealth and
Welfare”.
The framework for corporate governance is not only an important component affecting the long-
term prosperity of companies, it is a leading species of large genus namely, National Governance,
Humane Governance, societal governance, economic governance and political governance.
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Government provides necessary conditions or environment to Corporates to operate. However,

value can be added by achievements of technological achievement, enhancement of productivity
and optimal use of available resources by corporate sector. It is to be noted that new technologies
are on the anvil e.g. Information Technology thereby improving the speed of communication and
dearth of distance.
The quality of macroeconomic management and the state of competition in product and markets are
no less important in having a bearing on the performance of the company. However, the
competitiveness of the market is influenced by a range of government policies such as trade,
investment and competition policy. The legal system, accounting standards, labour market policies
and patterns of equity ownership also have a strong bearing on corporate performance. Finally,
business ethics and corporate awareness of the environment standards and other societal interests of
the communities in which they operate can also have an impact on the reputation and long-term
success of a company.
Prof. Kenneth Scott of Stanford Law School described, ‘corporate governance’ as to include every
force that bears on the decision-making of the firm, that would encompass not only the control
rights of stockholders, but also the contractual covenants and insolvency powers of the debt
holders, the commitments towards employees, customers and suppliers, the regulations and the
statutes. In addition, the firm’s decisions are powerfully affected by competitive conditions in the
various markets in which it operates. Despite the various attempts to define corporate governance
and its elements, there is no single model of good corporate governance. Although the general
principles are widely accepted, they are not set in concrete and must be adjusted to reflect the
specific circumstances and needs of individual organizations.
The Business Roundtable states:

“Good corporate governance is not a ‘one size fits all proposition, and a wide diversity of
approaches to corporate governance should be expected and entirely appropriate. Moreover, a
corporation’s practices will evolve as it adapts to changing situations.”
The “one size fits all” approach has also been rejected by the OECD, which, instead, has advocated
the need for pluralism, flexibility and adaptability in corporate governance.
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The OECD has recently reinforced this view and stated that ‘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”.
CODE OF CONFEDERATION OF INDIAN INDUSTRIES (CII)
The Confederation of Indian Industry has proposed that a company’s board members should
conform to the higher standards of corporate governance in order to protect investors’ interests.
In a code of conduct released today, the CII said that the board members and senior management
should:
• Act in the best interests of, and fulfill their fiduciary obligations to the company.
• Act honestly, fairly, ethically and with integrity.
• Will deal fairly with all stakeholders.
• Comply with all applicable laws, rules and regulations.
• Act in good faith without allowing their independent judgment to be subordinated.
• Not use any information or opportunity in a manner that would be detrimental to the company’s
interests.
• Disclose any personal interest that they may have regarding any matters that may come before the
board and abstain from discussion, voting or otherwise influencing a decision on any matter in
which the concerned director has or may have such an interest.
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• Abstain from discussion, voting or otherwise influencing a decision on any matters that may come
before the board in which they may have a conflict or potential conflict of interest.
• Respect the confidentiality of information relating to the affairs of the company acquired in the
course of their service as directors or senior management.
• Not use confidential information for personal advantage or for the advantage of any other entity.
• Help create and maintain a culture of high ethical standards and commitment to compliance.
REPORT OF THE KUMAR MANGALAM BIRLA COMMITTEE
Preface
1.1 It is almost a truism that the adequacy and the quality of corporate governance shape the
growth and the future of any capital market and economy. The concept of corporate governance has
been attracting public attention for quite some time in India. The topic is no longer confined to the
halls of academia and is increasingly finding acceptance for its relevance and underlying
importance in the industry and capital markets. Progressive firms in India have voluntarily put in
place systems of good corporate governance. Internationally also, while this topic has been
accepted for a long time, the financial crisis in emerging markets has led to renewed discussions
and inevitably focused them on the lack of corporate as well as governmental oversight. The same
applies to recent high-profile financial reporting failures even among firms in the developed
economies. Focus on corporate governance and related issues is an inevitable outcome of a process,
which leads firms to increasingly shift to financial markets as the pre-eminent source for capital. In
the process, more and more people are recognizing that corporate governance is indispensable to
effective market discipline. This growing consensus is both an enlightened and a realistic view. In
an age where capital flows worldwide, just as quickly as information, a company that does not
promote a culture of strong, independent oversight, risks its very stability and future health. As a
result, the link between a company's management, directors and its financial reporting system has
never been more crucial. As the boards provide stewardship of companies, they play a significant
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role in their efficient functioning.

1.2. Studies of firms in India and abroad have shown that markets and investors take notice of well-
managed companies, respond positively to them, and reward such companies, with higher
valuations. A common feature of such companies is that they have systems in place, which allow
sufficient freedom to the boards and management to take decisions towards the progress of their
companies and to innovate, while remaining within a framework of effective accountability. In
other words they have a system of good corporate governance.
1.3 Strong corporate governance is thus indispensable to resilient and vibrant capital markets and is
an important instrument of investor protection. It is the blood that fills the veins of transparent
corporate disclosure and high-quality accounting practices. It is the muscle that moves a viable and
accessible financial reporting structure. Without financial reporting premised on sound, honest
numbers, capital markets will collapse upon themselves.
1.4 Another important aspect of corporate governance relates to issues of insider trading. It is
important that insiders do not use their position of knowledge and access to inside information
about the company, and take unfair advantage of the resulting information asymmetry. To prevent
this from happening, Corporates are expected to disseminate the material price sensitive
information in a timely and proper manner and also ensure that till such information is made public,
insiders abstain from transacting in the securities of the company. The principle should be ‘disclose
or desist’. This therefore calls for companies to devise an internal procedure for adequate and
timely disclosures, reporting requirements, confidentiality norms, code of conduct and specific
rules for the conduct of its directors and employees and other insiders. For example, in many
countries, there are rules for reporting of transactions by directors and other senior executives of
companies, as well as for a report on their holdings, activity in their own shares and net year to year
changes to these in the annual report. The rules also cover the dealing in the securities of their
companies by the insiders, especially directors and other senior executives, during sensitive
reporting seasons. However, the need for such procedures, reporting requirements and rules also
goes beyond Corporates to other entities in the financial markets such as Stock Exchanges,
Intermediaries, Financial institutions, Mutual Funds and concerned professionals who may have
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access to inside information. This is being dealt with in a comprehensive manner, by a separate
group appointed by SEBI, under the Chairmanship of Shri Kumar Mangalam Birla.
1.5 The issue of corporate governance involves besides shareholders, all other stakeholders. The
Committee's recommendations have looked at corporate governance from the point of view of the
stakeholders and in particular that of the shareholders and investors, because they are the raison
deter for corporate governance and also the prime constituency of SEBI. The control and reporting
functions of boards, the roles of the various committees of the board, the role of management, all
assume special significance when viewed from this perspective. The other way of looking at
corporate governance is from the contribution that good corporate governance makes to the
efficiency of a business enterprise, to the creation of wealth and to the country’s economy. In a
sense both these points of view are related and during the discussions at the meetings of the
Committee, there was a clear convergence of both points of view.
1.6 At the heart of the Committee's report is the set of recommendations which distinguishes the
responsibilities and obligations of the boards and the management in instituting the systems for
good corporate governance and emphasis’s the rights of shareholders in demanding corporate
governance. Many of the recommendations are mandatory. For reasons stated in the report, these
recommendations are expected to be enforced on the listed companies for initial and continuing
disclosures in a phased manner within specified dates, through the listing agreement. The
companies will also be required to disclose separately in their annual reports, a report on corporate
governance delineating the steps they have taken to comply with the recommendations of the
Committee. This will enable shareholders to know, where the companies, in which they have
invested, stand with respect to specific initiatives taken to ensure robust corporate governance. The
implementation will be phased. Certain categories of companies will be required to comply with the
mandatory recommendations of the report during the financial year 2000-2001, but not later than
March31, 2001, and others during the financial years 2001-2002 and 2002-2003. For the non-
mandatory recommendations, the Committee hopes that companies would voluntarily implement
these. It has been recommended that SEBI may write to the appropriate regulatory bodies and
governmental authorities to incorporate where necessary, the recommendations in their respective
regulatory or control framework.
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1.7 The Committee recognised that India had in place a basic system of corporate governance and
that SEBI has already taken a number of initiatives towards raising the existing standards. The
Committee also recognised that the Confederation of Indian Industries had published a code
entitled "Desirable Code of Corporate Governance" and was encouraged to note that some of the
forward looking companies have already reviewed or are in the process of reviewing their board
structures and have also reported in their 1998-99 annual reports the extent to which they have
complied with the Code. The Committee however felt that under Indian conditions a statutory
rather than a voluntary code would be far more purposive and meaningful, at least in respect of
essential features of corporate governance.
1.8 The Committee however recognised that a system of control should not so hamstring the
companies so as to impede their ability to compete in the market place. The Committee believes
that the recommendations made in this report mark an important step forward and if accepted and
followed by the industry, they would raise the standards in corporate governance, strengthen the
unitary board system, significantly increase its effectiveness and ultimately serve the objective of
maximising shareholder value.
The Constitution of the Committee and the Setting for the Report
2.1 There are some Indian companies, which have voluntarily established high standards of
corporate governance, but there are many more, whose practices are a matter of concern. There is
also an increasing concern about standards of financial reporting and accountability, especially after
losses suffered by investors and lenders in the recent past, which could have been avoided, with
better and more transparent reporting practices. Investors have suffered on account of unscrupulous
management of the companies, which have raised capital from the market at high valuations and
have performed much worse than the past reported figures, leave alone the future projections at the
time of raising money. Another example of bad governance has been the allotment of promoter’s
shares, on preferential basis at preferential prices, disproportionate to market valuation of shares,
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leading to further dilution of wealth of minority shareholders. This practice has however since been
contained.
2.2 There are also many companies, which are not paying adequate attention to the basic
procedures for shareholders’ service; for example, many of these companies do not pay adequate
attention to redress investors’ grievances such as delay in transfer of shares, delay in dispatch of
share certificates and dividend warrants and non-receipt of dividend warrants; companies also do
not pay sufficient attention to timely dissemination of information to investors as also to the quality
of such information. SEBI has been regularly receiving large number of investor complaints on
these matters. While enough laws exist to take care of many of these investor grievances, the
implementation and inadequacy of penal provisions have left a lot to be desired.
2.3 Corporate governance is considered an important instrument of investor protection, and it is

therefore a priority on SEBI’s agenda. To further improve the level of corporate governance, need
was felt for a comprehensive approach at this stage of development of the capital market, to
accelerate the adoption of globally acceptable practices of corporate governance. This would ensure
that the Indian investors are in no way less informed and protected as compared to their
counterparts in the best-developed capital markets and economies of the world.
2.4 Securities market regulators in almost all developed and emerging markets have for sometime
been concerned about the importance of the subject and of the need to raise the standards of
corporate governance. The financial crisis in the Asian markets in the recent past have highlighted
the need for improved level of corporate governance and the lack of it in certain countries have
been mentioned as one of the causes of the crisis. Indeed corporate governance has been a widely
discussed topic at the recent meetings of the International Organisation of Securities Commissions
(IOSCO). Besides in an environment in which emerging markets increasingly compete for global
capital, it is evident that global capital will flow to markets which are better regulated and observe
higher standards of transparency, efficiency and integrity. Raising standards of corporate
governance is therefore also extremely relevant in this context.
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2.5 In the above mentioned context, 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 Committee’s membership is given in Annexure 1 and the detailed terms of the
reference are as follows:
a. to suggest suitable amendments to the listing agreement executed by the stock

exchanges with the companies and any other measures to improve the standards of
corporate governance in the listed companies, in areas such as continuous
disclosure of material information, both financial and non-financial, manner and
frequency of such disclosures, responsibilities of independent and outside directors;
b. to draft a code of corporate best practices; and
c. to suggest safeguards to be instituted within the companies to deal with insider
information and insider trading.
2.6 A number of reports and codes on the subject have already been published internationally –
notable among them are the Report of the Cadbury Committee, the Report of the Greenbury
Committee, the Combined Code of the London Stock Exchange, the OECD Code on Corporate
Governance and The Blue Ribbon Committee on Corporate Governance in the US. In India, the CII
has published a Code of Corporate Governance. In preparing this report, while the Committee drew
upon these documents to the extent appropriate, the primary objective of the Committee was to
view corporate governance from the perspective of the investors and shareholders and to prepare a
Code to suit the Indian corporate environment, as corporate governance frameworks are not
exportable. The Committee also took note of the various steps already taken by SEBI for
strengthening corporate governance, some of which are:
• strengthening of disclosure norms for Initial Public Offers following the recommendations
of the Committee set up by SEBI under the Chairmanship of Shri Y H Malegam;
• providing information in directors’ reports for utilisation of funds and variation between
projected and actual use of funds according to the requirements of the Companies Act;
inclusion of cash flow and funds flow statement in annual reports ;
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• declaration of quarterly results;

• mandatory appointment of compliance officer for monitoring the share transfer process and
ensuring compliance with various rules and regulations;
• timely disclosure of material and price sensitive information including details of all material
events having a bearing on the performance of the company;
• dispatch of one copy of complete balance sheet to every household and abridged balance
sheet to all shareholders;
• issue of guidelines for preferential allotment at market related prices; and
• issue of regulations providing for a fair and transparent framework for takeovers and
substantial acquisitions.
2.7 The Committee has identified the three key constituents of corporate governance as the
Shareholders, the Board of Directors and the Management and has attempted to identify in respect
of each of these constituents, their roles and responsibilities as also their rights in the context of
good corporate governance. Fundamental to this examination and permeating throughout this
exercise is the recognition of the three key aspects of corporate governance, namely; accountability,
transparency and equality of treatment for all stakeholders.
2.8 The pivotal role in any system of corporate governance is performed by the board of directors.
It is accountable to the stakeholders and directs and controls the Management. It stewards the
company, sets its strategic aim and financial goals and oversees their implementation, puts in place
adequate internal controls and periodically reports the activities and progress of the company in the
company in a transparent manner to the stakeholders. The shareholders’ role in corporate
governance is to appoint the directors and the auditors and to hold the board accountable for the
proper governance of the company by requiring the board to provide them periodically with the
requisite information, in a transparent fashion, of the activities and progress of the company. The
responsibility of the management is to undertake the management of the company in terms of the
direction provided by the board, to put in place adequate control systems and to ensure their
operation and to provide information to the board on a timely basis and in a transparent manner to
enable the board to monitor the accountability of Management to it.
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2.9 Crucial to good corporate governance are the existence and enforceability of regulations
relating to insider information and insider trading. These matters are being currently examined
separately by a Group appointed by SEBI under the Chairmanship of Shri Kumar Mangalam Birla.
2.10 Adequate financial reporting and disclosure are the corner stones of good corporate
governance. These demand the existence and implementation of proper accounting standards and
disclosure requirements. A separate committee appointed by SEBI under the Chairmanship of Shri
Y. H. Malegam (who is also a member of this Committee) is examining these issues on a
continuing basis. This Committee has advised that while in most areas, accounting standards in
India are comparable with International Accounting Standards both in terms of coverage and
content, there are a few areas where additional standards need to be introduced in India on an
urgent basis. These matters are discussed in greater detail in Para 12.1 of this report.
2.11 The Committee’s draft report was made public through the media and also put on the web site
of SEBI for comments. The report was also sent to the Chambers of Commerce, financial
institutions, stock exchanges, and investor associations, the Association of Merchant Bankers of
India, Association of Mutual funds of India, The Institute of Chartered Accountants of India,
Institute of Company Secretaries of India, academicians, experts and eminent personalities in the
Indian capital market, foreign investors. A copy of the draft report was also sent to Sir Adrian
Cadbury who had chaired the Cadbury Committee on Corporate Governance set up by the London
Stock Exchange, the Financial Reporting Council and the Accountancy Bodies in the U. K. in 1991.
2.12 The Committee has received comments from most of the above groups. Besides, Sir Adrian
Cadbury, and several eminent persons in the Indian capital market, have sent detailed comments on
the draft report. Separately, the Committee held meetings with the representatives of the Chambers
of Commerce, Chairmen of the Financial Institutions, stock exchanges, and investor associations.
Thus the Committee had the benefit of the views of almost all concerned entities that have a role in
corporate governance. The Committee has taken into account the views and comments of these
respondents in this final report.
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2.13 The Committee puts on record its appreciation of the valuable inputs and painstaking efforts
of Shri Anup Srivastava, Vice-President Corporate Strategy and Business Development of the
Aditya Birla Group, Shri P K Bindlish, Division Chief, SEBI, Shri Umesh Kumar, and other
officers of the SMDRP department of SEBI, in the preparation of this report.
The Recommendations of the Committee
3.1 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. While making the recommendations the Committee has been mindful
that any code of Corporate Governance must be dynamic, evolving and should change with
changing context and times.
It would therefore be necessary that this code also is reviewed from time to time, keeping pace with
the changing expectations of the investors, shareholders, and other stakeholders and with
increasing sophistication achieved in capital markets.
Corporate Governance –the Objective
4.1 Corporate governance has several claimants –shareholders and other stakeholders - which
include suppliers, customers, creditors, the bankers, the employees of the company, the government
and the society at large. This Report on Corporate Governance has been prepared by the Committee
for SEBI, keeping in view primarily the interests of a particular class of stakeholders, namely, the
shareholders, who together with the investors form the principal constituency of SEBI while not
ignoring the needs of other stakeholders.
4.2 The Committee therefore agreed that the fundamental objective of corporate governance is the
"enhancement of shareholder value, keeping in view the interests of other stakeholder". This
definition harmonises the need for a company to strike a balance at all times between the need to
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enhance shareholders’ wealth whilst not in any way being detrimental to the interests of the other
stakeholders in the company.
4.3 In the opinion of the Committee, the imperative for corporate governance lies not merely in
drafting a code of corporate governance, but in practicing it. Even now, some companies are
following exemplary practices, without the existence of formal guidelines on this subject.
Structures and rules are important because they provide a framework, which will encourage and
enforce good governance; but alone, these cannot raise the standards of corporate governance.
What counts is the way in which these are put to use. The Committee is thus of the firm view, that
the best results would be achieved when the companies begin to treat the code not as a mere
structure, but as a way of life.
4.4 It follows that the real onus of achieving the desired level of corporate governance, lies in the
proactive initiatives taken by the companies themselves and not in the external measures like
breadth and depth of a code or stringency of enforcement of norms. The extent of discipline,
transparency and fairness, and the willingness shown by the companies themselves in implementing
the Code, will be the crucial factor in achieving the desired confidence of shareholders and other
stakeholders and fulfilling the goals of the company.
Mandatory and non mandatory recommendations
5.1 The Committee debated the question of voluntary versus mandatory compliance of its
recommendations. The Committee was of the firm view that mandatory compliance of the
recommendations at least in respect of the essential recommendations would be most appropriate in
the Indian context for the present. The Committee also noted that in most of the countries where
standards of corporate governance are high, the stock exchanges have enforced some form of
compliance through their listing agreements.
5.2 The Committee felt that some of the recommendations are absolutely essential for the
framework of corporate governance and virtually form its core, while others could be considered as
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desirable. Besides, some of the recommendations may also need change of statute, such as the
Companies Act, for their enforcement. In the case of others, enforcement would be possible by
amending the Securities Contracts (Regulation) Rules, 1957 and by amending the listing agreement
of the stock exchanges under the direction of SEBI. The latter, would be less time consuming and
would ensure speedier implementation of corporate governance.
The Committee therefore felt that the recommendations should be divided into mandatory and non-
mandatory categories and those recommendations which are absolutely essential for corporate
governance, can be defined with precision and which can be enforced through the amendment of
the listing agreement could be classified as mandatory. Others, which are either desirable or which
may require change of laws, may, for the time being, be classified as non-mandatory.
Applicability
5.3 The Committee is of the opinion that the recommendations should be made applicable to the
listed companies, their directors, management, employees and professionals associated with such
companies, in accordance with the time table proposed in the schedule given later in this section.
Compliance with the code should be both in letter and spirit and should always be in a manner that
gives precedence to substance over form. The ultimate responsibility for putting the
recommendations into practice lies directly with the board of directors and the management of the
company.
5.4 The recommendations will apply to all the listed private and public sector companies, in
accordance with the schedule of implementation. As for listed entities, which are not companies,
but body corporates (e.g. private and public sector banks, financial institutions, insurance
companies etc.) incorporated under other statutes, the recommendations will apply to the extent
that they do not violate their respective statutes, and guidelines or directives issued by the relevant
regulatory authorities.
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Schedule of implementation
5.5 The Committee recognises that compliance with the recommendations would involve
restructuring the existing boards of companies. It also recognises that some companies, especially
the smaller ones, may have difficulty in immediately complying with these conditions.
5.6 The Committee recommends that while the recommendations should be applicable to all the
listed companies or entities, there is a need for phasing out the implementation as follows:
• By all entities seeking listing for the first time, at the time of listing.
• Within financial year 2000-2001,but not later than March 31, 2001 by all entities, which
are included either in Group ‘A’ of the BSE or in S&P CNX Nifty index as on January 1,
2000. However to comply with the recommendations, these companies may have to begin
the process of implementation as early as possible. These companies would cover more than
80% of the market capitalisation.
• Within financial year 2001-2002,but not later than March 31, 2002 by all the entities which
are presently listed, with paid up share capital of Rs. 10 crore and above, or net worth of
Rs 25 crore or more any time in the history of the company.
• 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 above
Board of Directors
6.1 The board of a company provides leadership and strategic guidance, objective judgment
independent of management to the company and exercises control over the company, while
remaining at all times accountable to the shareholders. The measure of the board is not simply
whether it fulfils its legal requirements but more importantly, the board’s attitude and the manner it
translates its awareness and understanding of its responsibilities. An effective corporate governance
system is one, which allows the board to perform these dual functions efficiently. The board of
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directors of a company thus directs and controls the management of a company and is accountable
to the shareholders.
6.2 The board directs the company, by formulating and reviewing company’s policies, strategies,
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, change in financial control and compliance with
applicable laws, taking into account the interests of stakeholders. It controls the company and its
management by laying down the code of conduct, overseeing the process of disclosure and
communications, ensuring that appropriate systems for financial control and reporting and
monitoring risk are in place, evaluating the performance of management, chief executive, executive
directors and providing checks and balances to reduce potential conflict between the specific
interests of management and the wider interests of the company and shareholders including misuse
of corporate assets and abuse in related party transactions. It is accountable to the shareholders for
creating, protecting and enhancing wealth and resources for the company, and reporting to them on
the performance in a timely and transparent manner. However, it is not involved in day-to-day
management of the company, which is the responsibility of the management.
Composition of the Board of Directors

6.3 The Committee is of the view that the composition of the board of directors is critical to the
independent functioning of the board. There is a significant body of literature on corporate
governance, which has guided the composition, structure and responsibilities of the board. The
Committee took note of this while framing its recommendations on the structure and composition
of the board.
The composition of the board is important in as much as it determines the ability of the board to
collectively provide the leadership and ensures that no one individual or a group is able to dominate
the board. The executive directors (like director-finance, director-personnel) are involved in the day
to day management of the companies; the non-executive directors bring external and wider
perspective and independence to the decision making. Till recently, it has been the practice of most
of the companies in India to fill the board with representatives of the promoters of the company,
and independent directors if chosen were also handpicked thereby ceasing to be independent. This
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has undergone a change and increasingly the boards comprise of following groups of directors -
promoter director, (promoters being defined by the erstwhile Malegam Committee), executive and
non executive directors, a part of whom are independent. A conscious distinction has been made by
the Committee between two classes of non-executive directors, namely, those who are independent
and those who are not.
Independent directors and the definition of independence
6.5 among the non-executive directors are independent directors, who have a key role in the entire
mosaic of corporate governance. The Committee was of the view that it was important that
independence be suitably, correctly and pragmatically defined, so that the definition itself does not
become a constraint in the choice of independent directors on the boards of companies. The
definition should bring out what in the view of the Committee is the touchstone of independence,
and which should be sufficiently broad and flexible. It was agreed that "material pecuniary
relationship which affects independence of a director" should be the litmus test of independence
and the board of the company would exercise sufficient degree of maturity when left to itself, to
determine whether a director is independent or not. The Committee therefore agreed on the
following definition of "independence”. Independent directors are directors who apart from
receiving director’s remuneration do not have any other material pecuniary relationship or
transactions with the company, its promoters, its management or its subsidiaries, which in the
judgment of the board may affect their independence of judgement.Further, all pecuniary
relationships or transactions of the non-executive directors should be disclosed in the annual
report.
6.6 The Blue Riband Committee of the USA and other Committee reports has laid considerable
stress on the role of independent directors. The law however does not make any distinction between
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the different categories of directors and all directors are equally and collectively responsible in law
for the board’s actions and decisions. The Committee is of the view that the non-executive directors,
i.e. those who are independent and those who are not, help bring an independent judgment to bear
on board’s deliberations especially on issues of strategy, performance, management of conflicts
and standards of conduct. The Committee therefore lays emphasis on the caliber of the non-
executive directors, especially of the independent directors.
6.7 Good corporate governance dictates that the board be comprised of individuals with certain
personal characteristics and core competencies such as recognition of the importance of the board’s
tasks, integrity, a sense of accountability, track record of achievements, and the ability to ask tough
questions. Besides, having financial literacy, experience, leadership qualities and the ability to think
strategically, the directors must show significant degree of commitment to the company and devote
adequate time for meeting, preparation and attendance. The Committee is also of the view that it is
important that adequate compensation package be given to the non-executive independent directors
so that these positions become sufficiently financially attractive to attract talent and that the non
executive directors are sufficiently compensated for undertaking this work.
6.8 Independence of the board is critical to ensuring that the board fulfils its oversight role
objectively and holds the management accountable to the shareholders. The Committee has,
therefore, suggested the above definition of independence, and the following structure and
composition of the board and of the committees of the board.
6.9 The Committee recommends that the board of a company have an optimum combination of
executive and non-executive directors with not less than fifty percent of the board comprising the
non-executive directors. The number of independent directors (independence being as defined in
the foregoing paragraph) would depend on the nature of the chairman of the board. In case a
company has a non-executive chairman, at least one-third of board should comprise of
independent directors and in case a company has an executive chairman, at least half of board
should be independent.
This is a mandatory recommendation.
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6.10 The tenure of office of the directors will be as prescribed in the Companies Act.
Nominee Directors
7.1 besides the above categories of directors, there is another set of directors in Indian companies
who are the nominees of the financial or investment institutions to safeguard their interest. The
nominees of the institutions are often chosen from among the present or retired employees of the
institutions or from outside. In the context of corporate governance, there could be arguments both
for and against the continuation of this practice.
7.2 There are arguments both for and against the institution of nominee directors. Those who favour
this practice argue that nominee directors are needed to protect the interest of the institutions who
are custodians of public funds and who have high exposures in the projects of the companies both
in the form of equity and loans. On the other hand those who oppose this practice, while conceding
that financial institutions have played a significant role in the industrial development of the country
as a sole purveyor of long term credit, argue that there is an inherent conflict when institutions
through their nominees participate in board decisions and in their role as shareholders demand
accountability from the board. They also argue that there is a further conflict because the
institutions are often major players in the stock market in respect of the shares of the companies on
which they have nominees.
7.3 The Committee recognises the merit in both points of view. Clearly when companies are well
managed and performing well, the need for protection of institutional interest is much less than
when companies are badly managed or under-performing. The Committee would therefore
recommend that institutions should appoint nominees on the boards of companies only on a
selective basis where such appointment is pursuant to a right under loan agreements or where such
appointment is considered necessary to protect the interest of the institution.
7.4 The Committee also recommends that when a nominee of the institutions is appointed as a
director of the company, he should have the same responsibility, be subject to the same discipline
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and be accountable to the shareholders in the same manner as any other director of the company. In
particular, if he reports to any department of the institutions on the affairs of the company, the
institution should ensure that there exist Chinese walls between such department and other
departments which may be dealing in the shares of the company in the stock market.
Chairman of the Board

8.1 The Committee believes that the role of Chairman is to ensure that the board meetings are
conducted in a manner which secures the effective participation of all directors, executive and non-
executive alike, and encourages all to make an effective contribution, maintain a balance of power
in the board, make certain that all directors receive adequate information, well in time and that the
executive directors look beyond their executive duties and accept full share of the responsibilities
of governance. The Committee is of the view that the Chairman’s role should in principle be
different from that of the chief executive, though the same individual may perform both roles.
8.2 Given the importance of Chairman’s role, the Committee recommends that a non-executive
Chairman should be entitled to maintain a Chairman’s office at the company’s expense and also
allowed reimbursement of expenses incurred in performance of his duties. This will enable him to
discharge the responsibilities effectively.
This is a non-mandatory recommendation.
Audit Committee
9.1 There are few words more reassuring to the investors and shareholders than accountability. A
system of good corporate governance promotes relationships of accountability between the
principal actors of sound financial reporting – the board, the management and the auditor. It holds
the management accountable to the board and the board accountable to the shareholders. The audit
committee’s role flows directly from the board’s oversight function. It acts as a catalyst for
effective financial reporting.
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9.2 The Committee is of the view that the need for having an audit committee grows from the
recognition of the audit committee’s position in the larger mosaic of the governance process, as it
relates to the oversight of financial reporting.
9.3 A proper and well functioning system exists therefore, when the three main groups responsible
for financial reporting – the board, the internal auditor and the outside auditors – form the three-
legged stool that supports responsible financial disclosure and active and participatory oversight.
The audit committee has an important role to play in this process, since the audit committee is a
sub-group of the full board and hence the monitor of the process. Certainly, it is not the role of the
audit committee to prepare financial statements or engage in the myriad of decisions relating to the
preparation of those statements. The committee’s job is clearly one of oversight and monitoring and
in carrying out this job it relies on senior financial management and the outside auditors. However
it is important to ensure that the boards function efficiently for if the boards are dysfunctional, the
audit committees will do no better. The Committee believes that the progressive standards of
governance applicable to the full board should also be applicable to the audit committee.
9.4 The Committee therefore recommends that a qualified and independent audit committee
should be set up by the board of a company. This would go a long way in enhancing the credibility
of the financial disclosures of a company and promoting transparency.
9.5 The following recommendations of the Committee, regarding the constitution, functions and
procedures of audit committee would have to be viewed in the above context. But just as there is no
"one size fits all" for the board when it comes to corporate governance, same is true for audit
committees. The Committee can thus only lay down some broad parameters, within which each
audit committee has to evolve its own guidelines.
Composition
9.6 The composition of the audit committee is based on the fundamental premise of independence
and expertise.
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The Committee therefore recommends that
• the audit committee should have minimum three members, all being non executive
directors, with the majority being independent, and with at least one director having
financial and accounting knowledge;
• the chairman of the committee should be an independent director;

• the chairman should be present at Annual General Meeting to answer shareholder queries;
• The audit committee should invite such of the executives, as it considers appropriate (and
particularly the head of the finance function) to be present at the meetings of the Committee
but on occasions it may also meet without the presence of any executives of the company.
Finance director and head of internal audit and when required, a representative of the
external auditor should be present as invitees for the meetings of the audit committee;
• The Company Secretary should act as the secretary to the committee.
These are mandatory recommendations.

Frequency of meetings and quorum
9.7 The Committee recommends that to begin with the audit committee should meet at least thrice
a year. One meeting must be held before finalisation of annual accounts and one necessarily every
six months.
This is a mandatory recommendation

9.8 The quorum should be either two members or one-third of the members of the audit committee,
whichever is higher and there should be a minimum of two independent directors.
Powers of the audit committee

9.9 Being a committee of the board, the audit committee derives its powers from the authorisation
of the board. The Committee recommends that such powers should include powers:
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• To investigate any activity within its terms of reference.

• To seek information from any employee.
• To obtain outside legal or other professional advice.
• To secure attendance of outsiders with relevant expertise, if it considers necessary.
Functions of the Audit Committee
9.10 As the audit committee acts as the bridge between the board, the statutory auditors and
internal auditors, the Committee recommends that its role should include the following
• Oversight of the company’s financial reporting process and the disclosure of its financial
information to ensure that the financial statement is correct, sufficient and credible.
• Recommending the appointment and removal of external auditor, fixation of audit fee and
also approval for payment for any other services.
• Reviewing with management the annual financial statements before submission to the
board, focusing primarily on:
o Any changes in accounting policies and practices.
o Major accounting entries based on exercise of judgment by management.
o Qualifications in draft audit report.
o Significant adjustments arising out of audit.
o The going concern assumption.
o Compliance with accounting standards
o Compliance with stock exchange and legal requirements concerning financial
statements.
o 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.
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• Reviewing with the management, external and internal auditors, the adequacy of internal
control systems.
• Reviewing the adequacy of internal audit function, including the structure of the internal
audit department, staffing and seniority of the official heading the department, reporting
structure, coverage and frequency of internal audit.
• Discussion with internal auditors of any significant findings and follow-up thereon.
• Reviewing the findings of any internal investigations by the internal auditors into matters
where there is suspected fraud or irregularity or a failure of internal control systems of a
material nature and reporting the matter to the board.
• Discussion with external auditors before the audit commences, of the nature and scope of
audit. Also post-audit discussion to ascertain any area of concern.
• Reviewing the company’s financial and risk management policies.
• Looking into the reasons for substantial defaults in the payments to the depositors,
debenture holders, share holders (in case of non-payment of declared dividends) and
creditors.
Remuneration Committee of the Board
10.1 The Committee was of the view that a company must have a credible and transparent policy
in determining and accounting for the remuneration of the directors. The policy should avoid
potential conflicts of interest between the shareholders, the directors, and the management. The
overriding principle in respect of directors’ remuneration is that of openness and shareholders are
entitled to a full and clear statement of benefits available to the directors.
10.2 For this purpose the Committee recommends that the board should set up a remuneration
committee to determine on their behalf and on behalf of the shareholders with agreed terms of
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reference, the company’s policy on specific remuneration packages for executive directors
including pension rights and any compensation payment.
10.3 The Committee however recognised that the remuneration package should be good enough to
attract, retain and motivate the executive directors of the quality required, but not more than
necessary for the purpose. The remuneration committee should be in a position to bring about
objectivity in determining the remuneration package while striking a balance between the interest
of the company and the shareholders.
Composition, Quorum etc. of the Remuneration Committee
10.4 The Committee recommends that 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.
10.5 The Committee deliberated on the quorum for the meeting and was of the view that
remuneration is mostly fixed annually or after specified periods. It would not be necessary for the
committee to meet very often. The Committee was of the view that it should not be difficult to
arrange for a date to suit the convenience of all the members of the committee. The Committee
therefore recommends that all the members of the remuneration committee should be present at the
meeting.
10.6 The Committee also recommends that 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 decide who should answer the queries.
All the above recommendations in paragraphs 10.4 to 10.6 are non-mandatory.
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10.7 The Committee recommends that the board of directors should decide the remuneration of
non-executive directors.
Disclosures of Remuneration Package
10.8 It is important for the shareholders to be informed of the remuneration of the directors of the
company. The Committee therefore recommends that the following disclosures should be made in
the section on corporate governance of the annual report:
 All elements of remuneration package of all the directors i.e. salary, benefits, bonuses, stock
options, pension etc.
 Details of fixed component and performance linked incentives, along with the performance
criteria.
 Service contracts, notice period, severance fees.
 Stock option details, if any – and whether issued at a discount as well as the period over which
accrued and over which exercisable.
Board Procedures
11.1 the measure of the board is buttressed by the structures and procedures of the board. The
various committees of the board recommended in this report would enable the board to have an
appropriate structure to assist it in the discharge of its responsibilities. These need to be
supplemented by certain basic procedural requirements in terms of frequency of meetings, the
availability of timely information, and sufficient period of notice for the board meeting as well as
circulation of agenda items well in advance, and more importantly, the commitment of the
members of the board.
11.2 The Committee therefore recommends that board meetings should be held at least four times
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in a year, with a maximum time gap of four months between any two meetings. The minimum
information as given in Annexure 2 should be available to the board.
The Committee further recommends that to ensure that the members of the board give due
importance and commitment to the meetings of the board and its committees, there should be a
ceiling on the maximum number of committees across all companies in which a director could be a
member or act as Chairman. The Committee recommends that a director should not be a member
in more than 10 committees or act as Chairman of more than five committees across all companies
in which he is a director. Furthermore it should be a mandatory annual requirement for every
director to inform the company about the committee positions he occupies in other companies and
notify changes as and when they take place.
Accounting Standards and Financial Reporting
12.1 Over time the financial reporting and accounting standards in India have been upgraded. This
however is an ongoing process and we have to move speedily towards the adoption of international
standards. This is particularly important from the angle of corporate governance. The Committee
took note of the discussions of the SEBI Committee on Accounting Standards referred to earlier
and makes the following recommendations:
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 Consolidation of Accounts of subsidiaries

The companies should be required to give consolidated accounts in respect of all its subsidiaries in
which they hold 51 % or more of the share capital. The Committee was informed that SEBI was
already in dialogue with the Institute of Chartered Accountants of India to bring about the changes
in the Accounting Standard on consolidated financial statements. The Institute of Chartered
Accountants of India should be requested to issue the Accounting Standards for consolidation
expeditiously.
 Segment reporting where a company has multiple lines of business.
Equally in cases of companies with several businesses, it is important that financial reporting in
respect of each product segment should be available to shareholders and the market to obtain a
complete financial picture of the company. The Committee was informed that SEBI was already in
dialogue with the Institute of Chartered Accountants of India to introduce the Accounting Standard
on segment reporting. The Institute of Chartered Accountants of India has already issued an
Exposure Draft on the subject and should be requested to finalise this at an early date.
 Disclosure and treatment of related party transactions.
This again is an important disclosure. The Committee was informed that the Institute of Chartered
Accountants of India had already issued an Exposure Draft on the subject. The Committee
recommends that the Institute of Chartered Accountants of India should be requested to finalise
this at the earliest. In the interim, the Committee recommends the disclosures set out in Clause 7 of
Annexure-4
 Treatment of deferred taxation
The treatment of deferred taxation and its appropriate disclosure has an important bearing on the
true and fair view of the financial status of the company. The Committee recommends that the
Institute of Chartered Accountants of India be requested to issue a standard on deferred tax
liability at an early date.
Management
13.1 In the view of the Committee, the over-riding aim of management is to maximize shareholder
value without being detrimental to the interests of other stakeholders. The management however, is
subservient to the board of directors and must operate within the boundaries and the policy
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framework laid down by the board. While the board is responsible for ensuring that the principles
of corporate governance are adhered to and enforced, the real onus of implementation lies with the
management. It is responsible for translating into action, the policies and strategies of the board and
implementing its directives to achieve corporate objectives of the company framed by the board. It
is therefore essential that the board should clearly define the role of the management.
Functions of the Management

13.2 The management comprises the Chief Executive, Executive-directors and the key managers of
the company, involved in day-to-day activities of the company.
13.3 The Committee believes that the management should carry out the following functions:
• Assisting the board in its decision making process in respect of the company’s strategy,
policies, code of conduct and performance targets, by providing necessary inputs.
• Implementing the policies and code of conduct of the board.
• Managing the day to day affairs of the company to best achieve the targets and goals set by
the board, to maximize the shareholder value.
• Providing timely, accurate, substantive and material information, including financial matters
and exceptions, to the board, board-committees and the shareholders.
• Ensuring compliance of all regulations and laws.
• Ensuring timely and efficient service to the shareholders and to protect shareholder’s rights
and interests.
• Setting up and implementing an effective internal control systems, commensurate with the
business requirements.
• Implementing and comply with the Code of Conduct as laid down by the board.
• Co-operating and facilitating efficient working of board committees.
13.4 As a part of the disclosure related to Management, the Committee recommends that as part of
the directors’ report or as an addition there to, a Management Discussion and Analysis report
should form part of the annual report to the shareholders. This Management Discussion &
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Analysis should include discussion on the following matters within the limits set by the company’s
competitive position:
• Industry structure and developments.

• Opportunities and Threats
• Segment-wise or product-wise performance.
• Outlook.
• Risks and concerns
• Internal control systems and their adequacy.
• Discussion on financial performance with respect to operational performance.
• Material developments in Human Resources /Industrial Relations front, including number
of people employed.
13.5 Good corporate governance casts an obligation on the management in respect of disclosures.
The Committee therefore recommends that disclosures must be made by the management to the
board relating to all material financial and commercial transactions, where they have personal
interest, that may have a potential conflict with the interest of the company at large (for e.g.
dealing in company shares, commercial dealings with bodies, which have shareholding of
management and their relatives etc.)
Shareholders
14.1 The shareholders are the owners of the company and as such they have certain rights and
responsibilities. But in reality companies cannot be managed by shareholder referendum. The
shareholders are not expected to assume responsibility for the management of corporate affairs. A
company’s management must be able to take business decisions rapidly. The shareholders have
therefore to necessarily delegate many of their responsibilities as owners of the company to the
directors who then become responsible for corporate strategy and operations. The implementation
of this strategy is done by a management team. This relationship therefore brings in the
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accountability of the boards and the management to the shareholders of the company. A good
corporate framework is one that provides adequate avenues to the shareholders for effective
contribution in the governance of the company while insisting on a high standard of corporate
behavior without getting involved in the day to day functioning of the company.
Responsibilities of shareholders
14.2 The Committee believes that the General Body Meetings provide an opportunity to the
shareholders to address their concerns to the board of directors and comment on and demand any
explanation on the annual report or on the overall functioning of the company. It is important that
the shareholders use the forum of general body meetings for ensuring that the company is being
properly stewarded for maximising the interests of the shareholders. This is important especially in
the Indian context. It follows from the above that for effective participation shareholders must
maintain decorum during the General Body Meetings.
14.3 The effectiveness of the board is determined by the quality of the directors and the quality of
the financial information is dependent to an extent on the efficiency with which the auditors carry
on their duties. The shareholders must therefore show a greater degree of interest and involvement
in the appointment of the directors and the auditors. Indeed, they should demand complete
information about the directors before approving their directorship.
14.4 The Committee recommends that in case of the appointment of a new director or re-
appointment of a director the shareholders must be provided with the following information:
• A brief resume of the director;

• Nature of his expertise in specific functional areas; and
• Names of companies in which the person also holds the directorship and the membership of
Committees of the board.
Shareholders’ rights
14.5 The basic rights of the shareholders include right to transfer and registration of shares,
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obtaining relevant information on the company on a timely and regular basis, participating and
voting in shareholder meetings, electing members of the board and sharing in the residual profits of
the corporation.
14.6 The Committee therefore recommends that as shareholders have a right to participate in, and
be sufficiently informed on decisions concerning fundamental corporate changes, they should not
only be provided information as under the Companies Act, but also in respect of other decisions
relating to material changes such as takeovers, sale of assets or divisions of the company and
changes in capital structure which will lead to change in control or may result in certain
shareholders obtaining control disproportionate to the equity ownership.
14.7 The Committee recommends that information like quarterly results, presentation made by
companies to analysts may be put on company’s web-site or may be sent in such a form so as to
enable the stock exchange on which the company is listed to put it on its own web-site.
14.8 The Committee recommends that 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.

14.9 A company must have appropriate systems in place which will enable the shareholders to
participate effectively and vote in the shareholders’ meetings. The company should also keep the
shareholders informed of the rules and voting procedures, which govern the general shareholder
meetings.
14.10 The annual general meetings of the company should not be deliberately held at venues or the
timing should not be such which makes it difficult for most of the shareholders to attend. The
company must also ensure that it is not inconvenient or expensive for shareholders to cast their
vote.
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14.11 Currently, although the formality of holding the general meeting is gone through, in actual
practice only a small fraction of the shareholders of 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. A detailed list of the matters which should require postal ballot is
given in Annexure 3. This would require changes in the Companies Act. The Committee was
informed that SEBI has already made recommendations in this regard to the Department of
Company Affairs.
14.12 The Committee recommends that a board committee under the chairmanship of a non-
executive director should be formed to specifically look into the redressing of shareholder
complaints like transfer of shares, non-receipt of balance sheet, non-receipt of declared dividends
etc. The Committee believes that the formation of such a committee will help focus the attention of
the company on shareholders’ grievances and sensitise the management to redressal of their
grievances.

14.13 The Committee further recommends that to expedite the process of share transfers the
board of the company should delegate the power of share transfer to an officer, or a committee or
to the registrar and share transfer agents. The delegated authority should attend to share transfer
formalities at least once in a fortnight.
Institutional shareholders
14.14 Institutional shareholders have acquired large stakes in the equity share capital of listed
Indian companies. They have or are in the process of becoming majority shareholders in many
listed companies and own shares largely on behalf of the retail investors. They thus have a special
responsibility given the weight age of their votes and have a bigger role to play in corporate
governance as retail investors look upon them for positive use of their voting rights.
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14.15 Given the weight of their votes, the institutional shareholders can effectively use their powers
to influence the standards of corporate governance. Practices elsewhere in the world have indicated
that institutional shareholders can sufficiently influence because of their collective stake, the
policies of the company so as to ensure that the company they have invested in, complies with the
corporate governance code in order to maximise shareholder value. What is important in the view
of the Committee is that, the institutional shareholders put to good use their voting power
14.16 The Committee is of the view that the institutional shareholders
• Take active interest in the composition of the Board of Directors

• Be vigilant
• Maintain regular and systematic contact at senior level for exchange of views on
management, strategy, performance and the quality of management.
• Ensure that voting intentions are translated into practice
• Evaluate the corporate governance performance of the company
Manner of Implementation
15.1 The Committee recommends that SEBI writes to the Central Government to amend the
Securities Contracts (Regulation) Rules, 1957 for incorporating the mandatory provisions of this
Report.
15.2 The Committee further recommends to SEBI, that as in other countries, the mandatory
provisions of the recommendations may be implemented through the listing agreement of the stock
exchanges.
15.3 The Committee recognises that the listing agreement is not a very powerful instrument and the
penalties for violation are not sufficiently stringent to act as a deterrent. The Committee therefore
recommends to SEBI, that the listing agreement of the stock exchanges be strengthened and the
exchanges themselves be vested with more powers, so that they can ensure proper compliance of
code of Corporate Governance. In this context the Committee further recommends that the
Securities Contract (Regulation) Act, 1956 should be amended, so that in addition to the above, the
concept of listing agreement be replaced by listing conditions.
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15.4 The Committee recommends that the Securities Contracts (Regulation) Act, 1956 be amended
to empower SEBI and stock exchanges to take deterrent and appropriate action in case of violation
of the provisions of the listing agreement. These could include power of levying monetary penalty
both on the company and the concerned officials of the company and filing of winding-up petition
etc.
15.5 The Committee also recommends that SEBI write to the Department of Company Affairs for
suitable amendments to the Companies Act in respect of the recommendations which fall within
their jurisdiction.
15.6 The Committee recommends that there should be a separate section on Corporate
Governance in the annual reports of companies, with a detailed compliance report on Corporate
Governance. Non-compliance of any mandatory recommendation with reasons thereof and the
extent to which the non-mandatory recommendations have been adopted should be specifically
highlighted. This will enable the shareholders and the securities market to assess for themselves
the standards of corporate governance followed by a company. A suggested list of items to be
included in the compliance report is enclosed. in Annexure 4.
15.7 The Committee also recommends that the company should arrange to obtain a certificate from
the auditors of the company regarding compliance of mandatory recommendations and annexe the
certificate with the directors’ report, which is sent annually to all the shareholders of the company.
The same certificate should also be sent to the stock exchanges along with the annual returns filed
by the company.
End Note
There are several corporate governance structures available in the developed world but there is no
one structure, which can be singled out as being better than the others. There is no "one size fits all"
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structure for corporate governance. The Committee’s recommendations are not therefore based on
any one model but are designed for the Indian environment.
Corporate governance extends beyond corporate law. Its fundamental objective is not mere
fulfillment of the requirements of law but in ensuring commitment of the board in managing the
company in a transparent manner for maximising long term shareholder value. The corporate
governance has as many votaries as claimants. Among the latter, the Committee has primarily
focussed its recommendations on investors and shareholders, as they are the prime constituencies of
SEBI. Effectiveness of corporate governance system cannot merely be legislated by law neither can
any system of corporate governance be static. As competition increases, technology pronounces the
death of distance and speeds up communication; the environment in which firms operate in India
also changes. In this dynamic environment the systems of corporate governance also need to
evolve. The Committee believes that its 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.
Annexure 1
Names of the Members of the committee
Shri Kumar Mangalam Birla, Chairman, Aditya Birla group

Chairman of the Committee
1. Shri Rohit Bhagat, Country Head, Boston Consulting Group

2. Dr. J Bhagwati, IT. Secretary, Ministry of Finance.
3. Shri Samir Biswas, Regional Director, Western Region, Department of Company Affairs,
Government of India
4. Shri S.P. Chhajed, President of Institute of Chartered Accountants of India
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5. Shri .Virender Ganda, Ex-President of Institute of Company Secretaries of India

6. Dr. Sumantra Ghoshal, Professor of Strategic Management, London Business School
7. Shri Vijay Kalantri, President, All India Association of Industries
8. Shri Pratip Kar, Executive Director, SEBI — Member Secretary
9.Shri Y. H. Malegam, Managing Partner, S.B. Billimoria & Co
10.Shri N. R. Narayana Murthy, Chairman and Managing Director, Infosys Technologies Ltd.
11.Shri A K Narayanan, President of Tamil Nadu Investor Association
12.Shri Kamal Parekh, Ex-President, Calcutta Stock Exchange (Shri J M Chaudhary – President
Calcutta Stock Exchange
13.Dr. R. H. Patil, Managing Director, National Stock Exchange Ltd.
14.Shri Anand Rathi, President of the Stock Exchange, Mumbai
15.Ms D.N. Raval, Executive Director, SEBI
16.Shri Rajesh Shah, Former President of Confederation of Indian Industries.
17. Shri L K Singhvi, Sr. Executive Director, SEBI
18.Shri S. S. Sodhi, Executive Director, Delhi Stock Exchange
Annexure 2
Information to be placed before board of directors
1. Annual operating plans and budgets and any updates.

2. Capital budgets and any updates.
3. Quarterly results for the company and its operating divisions or business segments.
4. Minutes of meetings of audit committee and other committees of the board.
5. 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.
6. Show cause, demand and prosecution notices which are materially important
7. Fatal or serious accidents, dangerous occurrences, any material effluent or pollution
problems.
8. Any material default in financial obligations to and by the company, or substantial non-
payment for goods sold by the company.
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9. 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.
10. Details of any joint venture or collaboration agreement.
11. Transactions that involve substantial payment towards goodwill, brand equity, or
intellectual property.
12. Significant labour problems and their proposed solutions. Any significant development in
Human Resources/ Industrial Relations front like signing of wage agreement,
implementation of Voluntary Retirement Scheme etc.
13. Sale of material nature, of investments, subsidiaries, assets, which is not in normal course of
business.
14. Quarterly details of foreign exchange exposures and the steps taken by management to limit
the risks of adverse exchange rate movement, if material.
15. Non-compliance of any regulatory, statutory nature or listing requirements and shareholders
service such as non-payment of dividend, delay in share transfer etc.
Annexure 3
POST BALLOT SYSTEM
Rationale
Voting at the general meetings of companies is the most valuable and fundamental mechanism by
which the shareholders accept or reject the proposals of the board of directors as regards the
structure, the strategy, the ownership and the management of the corporation. Voting is the only
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mechanism available with the shareholders for exercising an external check on the board and the
management.
Under the present framework of the Companies Act, 1956, a company is required to obtain the
approval of its shareholders for various important decisions such as increase in its authorised
capital, shifting of registered office, change in the name, amalgamation and reconstitution, buy-
back of shares, further issue of shares, etc. Since the shareholders of any large public listed
company are scattered throughout the length and breadth of the country, they are unable to
physically attend the general meetings of the company to exercise their right to vote on matters of
vital importance. The system of voting by proxy has also not proved very effective.
With a view to strengthening shareholder democracy, it is felt that all the shareholders of a
company should be given the right to vote on certain critical matters through a postal ballot system,
which has also been envisaged in the Companies Bill, 1997.
Items requiring voting by postal ballot
Some of the critical matters which should be decided by this system are –
1. matters relating to alteration in the memorandum of association of the company like

changes in name, objects, address of registered office etc;
2. sale of whole or substantially the whole of the undertaking;
3. sale of investments in the companies, where the shareholding or the voting rights of the
company exceeds 25%;
4. Making a further issue of shares through preferential allotment or private placement basis;
5. Corporate restructuring;
6. Entering a new business area not germane to the existing business of the company;
7. Variation in the rights attached to class of securities.
Procedure for the postal ballot
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Where a resolution is to be passed in relation to any of the aforesaid items through postal ballot,
1. The board of directors shall appoint a Designated-Person to conduct, supervise and control
the exercise of postal ballot. This person may be the Company Secretary, a retired judge or
any person of repute who, in the opinion of the board, can conduct the voting process in a
fair & transparent manner.
2. All communications in this regard shall be made by and addressed directly to the said
Designated-Person.
3. A notice containing a draft of the resolutions and the necessary explanatory statement shall
be sent to all members entitled to vote requesting them to send their assent or dissent within
a period of thirty days from the date of posting of the letter.
4. The notice shall be sent under certificate of posting and shall include with the notice, a pre-
paid postage envelope for facilitating the communication of the assent or the dissent of the
shareholders to the resolutions within the said period.
5. The envelope by post will be received directly by the Post Office through Box No, which
will be obtained by the Designated-Person in advance and will be indicated on each pre-
paid envelope to be used by the members for sending the resolution.
6. The Designated-Person shall ascertain the will of the shareholders based on the response
received and the resolution shall be deemed to have been duly passed if approved by
members not less in number, than as prescribed by law.
7. The Designated-Person shall thereafter give a report to the Chairman and on the basis of
such report the Chairman shall declare the results of the poll.
Annexure 4
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Suggested List of Items to Be Included In The Report on Corporate Governance In The

Annual Report Of Companies
1. A brief statement on company’s philosophy on code of governance.

2. Board of Directors:
• 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.
• Attendance of each director at the Board meetings and the last AGM.
• Number of Board meetings held, dates on which held.
3. Audit Committee.
• Brief description of terms of reference

• Composition, name of members and Chairperson
• Meetings and attendance during the year
4. Remuneration Committee.
• Brief description of terms of reference

• Composition, name of members and Chairperson
• Attendance during the year
• Remuneration policy
• Details of remuneration to all the directors, as per format in main report.
5. Shareholders Committee.
• Name of non-executive director heading the committee

• Name and designation of compliance officer
• Number of shareholders complaints received so far
• Number not solved to the satisfaction of shareholders
• Number of pending share transfers
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6. General Body meetings.
• Location and time, where last three AGMs held.

• Whether special resolutions
o Were put through postal ballot last year, details of voting pattern
o Person who conducted the postal ballot exercise
o Are proposed to be conducted through postal ballot
o Procedure for postal ballot
7. Disclosures.
• 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 interests of company
at large.
• Details of non-compliance by the company, penalties, and strictures imposed on the
company by Stock Exchange or SEBI or any statutory authority, on any matter related to
capital markets, during the last three years.
8. Means of communication.
• Half-yearly report sent to each household of shareholders.

• Quarterly results
o Which newspapers normally published in.
o Any website, where displayed
o Whether it also displays official news releases; and
o The presentations made to institutional investors or to the analysts.
• Whether MD&A is a part of annual report or not.
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9.General Shareholder information
• AGM : Date, time and venue

• Financial Calendar
• Date of Book closure
• Dividend Payment Date
• Listing on Stock Exchanges
• Stock Code
• Market Price Data : High., Low during each month in last financial year
• Performance in comparison to broad-based indices such as BSE Sensex, CRISIL index etc.
• Registrar and Transfer Agents
• Share Transfer System
• Distribution of shareholding
• Dematerialization of shares and liquidity
• Outstanding GDRs/ADRs/Warrants or any Convertible instruments, conversion date and
likely impact on equity
• Plant Locations
• Address for correspondence
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THE CADBURY COMITEE – THE CODE OF BEST PRACTICE
INTRODUCTION
Reasons for setting up the Committee
• The Committee was set up in May 1991 by the Financial Reporting Council, the London
Stock Exchange and the accountancy profession to address the financial aspects of
corporate governance. Its sponsors were concerned at the perceived low level of confidence
both in financial reporting and in the ability of auditors to provide the safeguards which the
users of company reports sought and expected. The underlying factors were seen as the
looseness of accounting standards, the absence of a clear framework for ensuring that
directors kept under review the controls in their business, and competitive pressures both on
companies and on auditors which made it difficult for auditors to stand up to demanding
boards.
• These concerns about the working of the corporate system were heightened by some
unexpected failures of major companies’ and by criticisms of the lack of effective board
accountability for such matters as directors’ pay.. Further evidence of the breadth of feeling
that action had to be taken to clarify responsibilities and to raise standards came from a
number of reports on different aspects of corporate governance which had either been
published or were in preparation at that time.
• T h e Committee wherever possible drew on these documents, and a wide range of
submissions from interested parties, in producing its draft report which was issued for
public comment on 27 May 1992.
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• Since then, the Committee has received over 200 written responses to its proposals, the
great majority of which broadly support the Committee’s approach, and has carefully
considered the balance of opinions expressed on particular issues.
• The role of the auditors is to provide the shareholders with an external and objective check
on the directors’ financial statements which form the basis of that reporting system.
Although the reports of the directors are addressed to the shareholders, they are important to
a wider audience, not least to employees whose interests boards have a statutory duty to
take into account.
• The Committee’s objective is to help to raise the standards of corporate governance and the
level of confidence in financial reporting and auditing by setting out clearly what it sees as
the
respective responsibilities of those involved and what it believes is expected of them.
CONTENTS OF REPORT
THE CODE OF BEST PRACTICE

Degree of regulation would, in any event, be more likely to be well directed, if it were to
enforce what has already been shown to be workable and effective by those setting the standard.
STATEMENT OF COMPLIANCE
We recommend that listed companies reporting in respect of years ending after 30 June 1993
should state in the report and accounts whether they comply with the Code and identify and give
reasons for any areas of non-compliance. The London Stock Exchange intends to require such a
statement as one of its continuing listing obligations.
We envisage, however, that many companies will wish to go beyond the strict terms of the London
Stock Exchange rule and make a general statement about the corporate governance of their
enterprises as some leading companies have already done. We welcome such statements and leave
it to boards to decide the terms in which they make their statement of compliance. Boards are not
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expected to comment separately on each item of the Code which they are complying, but areas of
non-compliance will have to be dealt with individually.
THE CODE OF BEST PRACTICE

The Code is to be followed by individuals and companies in the light of their own particular
circumstances. They arc responsible for ensuring that their actions meet the spirit of the Code and
in interpreting it they should give precedence to substance over form. Keeping the Code up to date
We have addressed those issues which appeared from the evidence before us to require the most
immediate attention. The situation, however, is developing. The Accounting Standards Board has in
hand a programme of work on the basis of financial reporting. Revised accounting standards and
improved methods of financial presentation will result. At the same time, views on best boardroom
practice will evolve in the light of experience, and European Community directives and regulations
may give rise to new issues. It is essential, therefore, that the Code, in addition to being monitored,
is kept up to date.
Every public company should be headed by an effective board which can both lead and control the
business. Within the context of the UK unitary board system, this means a board made up of a
combination of executive directors, with their intimate knowledge of the business, and of outside,
non-executive directors, who can bring a broader view to the company’s activities, under a
chairman who
accepts the duties and responsibilities which the post entails.
All directors are equally responsible in law for the board’s actions and decisions. Certain director s
may have particular responsibilities, as executive or non-executive directors, for which they are
accountable to the board. Regardless of specific duties undertaken by individual directors, however,
it is for the board collectively to ensure that it is meeting its obligations.
BOARD EFFECTIVENESS
Every public company should be headed by an effective board which can both lead and control the
business. Within the context of the UK unitary board system, this means a board made up of a
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combination of executive directors, with their intimate knowledge of the business, and of outside,
non-executive directors, who can bring a broader view to the company’s activities, under a
chairman who
accepts the duties and responsibilities which the post entails
Tests of board effectiveness include the way in which the member’s of the board as a whole work
together under the chairman, whose role incorporate governance is fundamental, and their
collective ability to provide both the leadership and the checks and balances which effective
governance demands. Shareholders are responsible for electing board members and it is in their
interests to see that the boards of their companies are properly constituted and not dominated by
any one individual.
All directors are equally responsible in law for the board’s actions and decisions. Certain directors
may have particular responsibilities, as executive or non-executive directors, for which they are
accountable to the board. Regardless of specific duties undertaken by individual directors, however,
it is for the board collectively to ensure that it is meeting its obligations.
Whilst it is the board as a whole which is the final authority, executive and non-executive directors
are likely to contribute in different ways to its work. Non-executive directors have two particularly
important contributions to make to the governance process as a consequence of their independence
from executive responsibility. Neither is in conflict with the unitary nature of the board.
The first is in reviewing the performance of the board and of the executive. Non-executive directors
should address this aspect of their responsibilities carefully and should ensure that the chairman is
aware of their views. If the chairman is also the chief executive, board members should look to a
senior non-executive director, who might be the deputy chairman, as the person to whom they
should address any concerns about the combined office of chairman/chief executive and its
consequences for the effectiveness of the board. A number of companies have recognised that role
and some have done so formally in their Articles.
The second is in taking the lead where potential conflicts of interest arise. An important aspect of
effective corporate governance is the recognition that the specific interests of the executive
management and the wider interests of the company may at times diverge, for example over
takeovers, boardroom succession, or directors’ pay. Independent non executive directors, whose
interests are less directly affected, are well-placed to help to resolve such situations.
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THE CHAIRMAN
The chairman’s role in securing good corporate governance is crucial. Chairmen are primarily
responsible for the working of the board, for its balance of membership subject
to board and shareholders’ approval, for ensuring that all relevant issues are on the agenda, and for
ensuring that all directors, executive and non-executive alike, are enabled and encouraged to play
their full part in its activities. Chairmen should be able to stand sufficiently back from the day-to-
day running of the business to ensure that their boards are in full control of the company’s affairs
and alert to their obligations to their shareholders.
It is for chairmen to make certain that their non-executive directors receive timely, relevant
information tailored to their needs, that they are properly briefed on the issues arising at board
meetings, and that they make an effective contribution as board members in practice. It is equally
for chairmen to ensure that executive directors look beyond their executive duties and accept their
full share of the responsibilities of governance.
Given the importance and particular nature of the chairman’s role, it should in principle be separate
from that of the chief executive. If the two roles are combined in one person, it represents a
considerable concentration of power. We recommend, therefore, that there should be a clearly
accepted division of responsibilities at the head of a company , which will ensure a balance of
power and authority, such that no one individual has unfettered powers of decision.
NON-EXECUTIVE DIRECTORS
The Committee believes that the caliber of the non executive members of the board is of special
importance in setting and maintaining standards of corporate governance. The emphasis in this
report on the control function of non executive directors is a consequence of our remit and should
not in any way detract from the primary and positive contribution which they are expected to make,
as equal board members, to the leadership of the company.
Non-executive directors should bring an independent judgment to bear on issues of strategy,
performance, resources, including key appointments, and standards of conduct. We recommend that
the caliber and number of non-executive directors on a board should be such that their views will
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carry significant weight in the board’s decisions. To meet our recommendations on the composition
of sub-committees of the board, all boards will require a minimum of three non-executive directors,
one of whom may be the chairman of the company provided he or she is not also its executive head.
Additionally, two of the three should be independent in the terms set out in the next paragraph.
An essential quality which non-executive directors should bring to the board’s deliberations is that
of independence of judgment. We recommend that the majority of non executives on a board
should be independent of the company. This means that apart from their directors’ fees and share
holdings, they should be independent of management and free from any business or other
relationship which could materially interfere with the exercise of their independent judgment. It is
for the board to decide in particular cases whether this definition is met. Information about the
relevant interests of directors should be disclosed in the Directors’ Report.
On fees, there is a balance to be struck between recognising the value of the contribution made by
non executive directors and not undermining their independence. The demands which are now
being made on conscientious non-executive directors are significant and their fees should reflect the
time which they devote to the company’s affairs. There is, therefore, a case for paying for
additional responsibilities taken on, for example, by chairmen of board committees. In order to
safeguard their independent position, we regard it as good practice for non-executive directors not
to participate in share option schemes and for their service as non-executive directors not to be
pensionable by the company. Non-executive directors lack the inside knowledge of the company of
the executive directors, but have the same right of access to information as they do. Their
effectiveness turns to a considerable extent on the quality of the information which they receive and
on the use which they make of it. Boards should regularly review the form and the extent of the
information which is provided to all directors. Given the importance of their distinctive
contribution, non executive directors should be selected with the same impartiality and care as
senior executives. We recommend that their appointment should be a matter for the board as a
whole and that there should be a formal selection process, which will reinforce the independence of
non-executive directors and make it evident that they have been appointed on merit and not through
any form of patronage. We regard it as good practice for a nomination committee (dealt with
below) to carry out the selection process and to make proposals to the board. Companies have to be
able to bring about changes in the composition of their boards to maintain their vitality. Non
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executive directors may lose something of their independent edge, if they remain on a board too
long. Furthermore, the make-up of a board needs to change in line with new challenges. We
recommend, therefore, that non-executive directors should be appointed for specified terms. Their
Letter of Appointment should set out their duties, term of office, remuneration and its review.
Reappointment should not be automatic, but a conscious decision by the board and the director
concerned. Our emphasis on the qualities to be looked for in non executive directors, combined
with the greater demands now being made on them, raises the question of whether the supply of
non-executive directors will be adequate to meet the demand. When companies encourage their
executive directors to accept appointments on the hoards of the board of companies, the companies
and the individuals concerned all gain. A policy of promoting this kind of appointment will
increase the pool of potential non-executive directors, particularly if the divisional directors of
larger companies are considered for non-executive posts, as well as their main board colleagues.
THE COMPANY SECRETARY

The company secretary has a key role to play in ensuring that board procedures are both followed
and regularly reviewed. The chairman and the board will look to the company secretary for
guidance on what their responsibilities are under the rules and regulations to which they are subject
and on how those responsibilities
All directors should have access to the advice and services of the company secretary and should
recognize that the chairman is entitled to the strong and positive support of the company secretary
in ensuring the effective functioning of the board. It should be standard practice for the company
secretary to administer, attend and prepare minutes of board proceedings.
Under the Companies Act the directors have a duty to appoint as secretary someone who is capable
of carrying out the duties which the post entails. The responsibility for ensuring that the secretary
remains capable, and any question of the secretary’s removal, should be a matter for the board as a
whole. The Committee expects that the company secretary will be a source of advice to the
chairman and to the board on the implementation of the Code of Best Practice.
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AUDITING
The annual audit is one of the cornerstones of corporate governance. Given the separation of
ownership from management, the directors are required to report on their stewardship by means of
the annual report and financial statements sent to the shareholders. The audit provides an external
and objective check on the way in which the financial statements have been prepared and
presented, and
it is an essential part of the checks and balances required. The question is not whether there should
be an audit, but how to ensure its objectivity and effectiveness.
Audits are a reassurance to all who have a financial interest in companies, quite apart from their
value to boards of directors. The most direct method of ensuring that companies are accountable for
their actions is through open disclosure by boards and through audits carried out against strict
accounting standards.
The framework, in which auditors operate, however, is not well designed in certain respects to
provide the objectivity which shareholders and the public expect of auditors in carrying out their
function.
SUMMARY OF RECOMMENDATIONS
Directors should state in the report and accounts that the business is a going concern, with
supporting assumptions or qualifications as necessary, and the auditors should report on this
statement. The accountancy profession together with representatives of preparers of accounts
should develop guidance for companies and auditors
The question of legislation to back the recommendations on additional reports on internal control
systems and going concern should be decided in the light of experience
The Government should consider introducing legislation to extend to the auditors of all companies
the statutory protection already available to auditors in the regulated sector (banks, building
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societies, insurance, and investment business) so that they can report reasonable suspicion of fraud
freely to the appropriate investigatory authorities
The accountancy profession together with the legal profession and representatives of prepareis of
accounts should consider further the question of illegal acts other than fraud.
The board should meet regularly, retain full and effective control over the company and monitor the
executive management
The board should include non-executive directors of sufficient caliber and number for their views
to carry significant weight in the board’s decisions.
The board should have a formal schedule of matters specifically reserved to it for decision to ensure
that the direction and control of the company is firmly in its hands.
There should be an agreed procedure for directors in the furtherance of their duties to take
independent professional advice if necessary, at the company’s expense.
All directors should have access to the advice and services of the company secretary, who is
responsible to the board for ensuring that board procedures are followed and that
applicable rules and regulations are complied with. Any question of the removal of the company
secretary should be a matter for the board as a whole. ‘_
Non-executive directors should bring an independent judgment 10 bear on issues of strategy,
performance, resources, including key appointments, and standards of conduct.
The majority should be independent of management and free from any business or other
relationship which could materially interfere with the exercise of their independent judgment. Apart
from their fees and shareholding. Their fees should reflect the time which they commit to the
company.
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DIRECTORS RESPONSIBILITY
The following major responsibilities of the board of directors reflect the broad purposes of
governance:
• Define and uphold the mission and purpose of the MFI

• Develop and approve strategic directions (with management); monitor achievement of
strategic goals
• Oversee management performance, including selection, support and evaluation of CEO
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• Ensure that the MFI manages risks effectively; assume fiduciary responsibility
• Foster effective organizational planning, including succession planning
• Ensure adequate resources to achieve the mission, including assisting in raising of equity
and debt
• Represent the MFI to the community and the public; ensure that organization fulfills its
responsibilities to the larger community
• Ensure that the organization changes to meet emerging conditions; particularly in times of
distress, temporarily assume management responsibilities
Three further responsibilities address board and board member conduct:

• Uphold the ethical standards of the organization, with transparency and avoidance of
conflicts of interest
• Represent the interests of the MFI as a whole and not those of one shareholder or group of
shareholders
• Evaluate (or seek external evaluation of) its own performance and commit to improving that
performance
INSIDER TRADING
Another important aspect of corporate governance relates to issues of insider trading. It is important
that insiders do not use their position of knowledge and access to inside information about the
company, and take unfair advantage of the resulting information asymmetry. To prevent this from
happening, Corporates are expected to disseminate the material price sensitive information in a
timely and proper manner and also ensure that till such information is made public, insiders abstain
from transacting in the securities of the company. The principle should be ‘disclose or desist’. This
therefore calls for companies to devise an internal procedure for adequate and timely disclosures,
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reporting requirements, confidentiality norms, code of conduct and specific rules for the conduct of
its directors and employees and other insiders. For example, in many countries, there are rules for
reporting of transactions by directors and other senior executives of companies, as well as for a
report on their holdings, activity in their own shares and net year to year changes to these in the
annual report. The rules also cover the dealing in the securities of their companies by the insiders,
especially directors and other senior executives, during sensitive reporting seasons. However, the
need for such procedures, reporting requirements and rules also goes beyond Corporates to other
entities in the financial markets such as Stock Exchanges, Intermediaries, Financial institutions,
Mutual Funds and concerned professionals who may have access to inside information. This is
being dealt with in a comprehensive manner, by a separate group appointed by SEBI, under the
Chairmanship of Shri Kumar Mangalam Birla.
SHAREHOLDERS
The shareholders are the owners of the company and as such they have certain rights and
responsibilities. But in reality companies cannot be managed by shareholder referendum. The
shareholders are not expected to assume responsibility for the management of corporate affairs. A
company’s management must be able to take business decisions rapidly. The shareholders have
therefore to necessarily delegate many of their responsibilities as owners of the company to the
directors who then become responsible for corporate strategy and operations. The implementation
of this strategy is done by a management team. This relationship therefore brings in the
accountability of the boards and the management to the shareholders of the company. A good
corporate framework is one that provides adequate avenues to the shareholders for effective
contribution in the governance of the company while insisting on a high standard of corporate
behavior without getting involved in the day to day functioning of the company.
Rights and Responsibilities of shareholders
The basic rights of the shareholders include right to transfer and registration of shares, obtaining
relevant information on the company on a timely and regular basis, participating and voting in
shareholder meetings, electing members of the board and sharing in the residual profits of the
corporation.
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The Committee therefore recommends that as shareholders have a right to participate in, and be
sufficiently informed on decisions concerning fundamental corporate changes, they should not only
be provided information as under the Companies Act, but also in respect of other decisions relating
to material changes such as takeovers, sale of assets or divisions of the company and changes in
capital structure which will lead to change in control or may result in certain shareholders obtaining
control disproportionate to the equity ownership.
The Committee recommends that information like quarterly results, presentation made by
companies to analysts may be put on company’s web-site or may be sent in such a form so as to
enable the stock exchange on which the company is listed to put it on its own web-site. The
Committee recommends that 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.
A company must have appropriate systems in place which will enable the shareholders to
participate effectively and vote in the shareholders’ meetings. The company should also keep the
shareholders informed of the rules and voting procedures, which govern the general shareholder
meetings. The annual general meetings of the company should not be deliberately held at venues or
the timing should not be such which makes it difficult for most of the shareholders to attend. The
company must also ensure that it is not inconvenient or expensive for shareholders to cast their
vote.
Currently, although the formality of holding the general meeting is gone through, in actual practice
only a small fraction of the shareholders of 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. This would require changes in the Companies Act. The Committee was
informed that SEBI has already made recommendations in this regard to the Department of
Company Affairs.
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The Committee believes that the General Body Meetings provide an opportunity to the shareholders
to address their concerns to the board of directors and comment on and demand any explanation on
the annual report or on the overall functioning of the company. It is important that the shareholders
use the forum of general body meetings for ensuring that the company is being properly stewarded
for maximising the interests of the shareholders. This is important especially in the Indian context.
It follows from the above that for effective participation shareholders must maintain decorum
during the General Body Meetings.
The effectiveness of the board is determined by the quality of the directors and the quality of the
financial information is dependent to an extent on the efficiency with which the auditors carry on
their duties. The shareholders must therefore show a greater degree of interest and involvement in
the appointment of the directors and the auditors. Indeed, they should demand complete
information about the directors before approving their directorship.
The Committee recommends that in case of the appointment of a new director or re-appointment of
a director the shareholders must be provided with the following information:
• A brief resume of the director;

• Nature of his expertise in specific functional areas; and
• Names of companies in which the person also holds the directorship and the membership of
Committees of the board.
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CASE STUDY:
Tata's Steep Price for Corus
The fierce battle over Corus (CGA) was recently decided when Tata, the Indian steelmaker, beat
CSN, the Brazilian rival, in a final face-off. The price was 608 pence per share, which translates to
a total purchase price of $12 billion. Tata thus agreed to pay approximately nine times EBITDA
[earning before interest, taxes, depreciation, and amortization] for what many industry observers
regard as a troubled steel company. Why? What's next for the steel industry? And how will this
deal affect the industry's ongoing consolidation efforts?
Corus was formed via the merger of Hoogovens, a Dutch steel company, and the former British
Steel. Between the two sets of assets, everyone in the industry regards the Dutch assets as the
crown jewel. The British assets are older, less productive, and less profitable. They have union
issues and are burdened with more than $13 billion of pension liabilities. On the other hand, Corus
represents about 20 million tons of annual steel production, which is a very large amount of
additional capacity for a growth-oriented steel company to add. Indeed, with this acquisition, Tata
will catapult from being outside the 30 largest steel companies to No. 5 on a capacity basis.
Corus had been on the market for at least the last two years. Several major steel companies looked
seriously at Corus and kicked the tires. They ultimately decided, however, that Corus was not worth
the effort or the price, even when the price was around $5 billion. The big question everyone in the
steel business is asking: What does Tata [and CSN] see in Corus that would make it pay $12 billion
for a company that many other strategic players passed on at $5 billion?
Feeding Frenzy or Light Lunch? One theory is that Tata violated the "in-too-far" rule, meaning that
Tata simply got caught up in a kind of deal frenzy, convincing themselves that the acquisition
would be good at almost any price, and they just could not back down. Certainly, Tata's
shareholders thought that the company had caught a bad case of irrational exuberance, since each
time Tata raised or threatened to raise the price for Corus, its own share price fell significantly.
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Tata's shares lost 11% on the day after its winning bid was announced, while CSN's stock price
jumped more than 7% after it lost the auction.
Another theory is that, despite the enormous price tag for Corus, the purchase price per ton amounts
to about half of what it would cost today to build those same assets from scratch. This theory
maintains that there are also big synergies available by combining the two companies which will
boost earnings. A third theory is that, like Mittal's purchase of the U.S. steel company ISG in 2004
-- which sold for a then-unheard-of $230 per ton -- over time the Corus price will be viewed as just
another speed bump in steel's global consolidation.
Certainly, steel's global consolidation played a major role in the contest over Corus. Mittal set the
standard with its acquisition of Arcelor (MTTFF), creating a global superpower at over 120 million
tons per annum of production. By comparison, the next largest steel company, Japan's Nippon, has
a mere 35 million tons. Putting Tata and Corus together will create a company with about 29
million tons of production -- a giant leap for Tata, which now produces some 9 million tons, but
still light years from Mittal.
Reading the Future Yet there is simply no other steel company the size of Corus available on the
market, so if a smaller player like Tata had aspirations to become a large player, this was perhaps
the only one-stop move that Tata could make to do so.
Which brings me to the price. As noted above, Tata agreed to pay about nine times Corus's
EBITDA. This is an astronomical price in the steel business, where all other major steelmakers
trade at roughly five to seven times EBITDA. Indeed, Arcelor Mittal, the industry leader, trades at
6.5 times EBITDA. Should Corus be valued at a multiple that is more than 30% greater than that of
Arcelor Mittal? I don't think anyone believes so, except maybe Tata and CSN.
Perhaps the most important question coming out of the Corus/Tata deal, however, is what does this
transaction presage for the steel industry? Certainly, the age of consolidation is upon us.
Consolidation is intended to bring price stability to an industry that has historically suffered
through constant feast-or-famine pricing cycles. In the period from the late 1990s through 2003
alone, more than 50 U.S. independent steel companies were forced into bankruptcy due to pricing
swings, legacy liabilities, dumping, and other forms of economic misery.
Page 61 of 62
Hoping for Sustainable Earnings However, in the last year, Arcelor Mittal has led the charge to
bring stability to the industry. Thus, in 2006, amid generally falling steel prices, Arcelor Mittal and
other major producers cut production rather than prices -- a move that benefited them and all other
participants up and down the steel food chain.
Industry leaders are hoping that price stability combined with various shareholder-friendly actions,
such as transparent corporate governance and a formal dividend policy, will result in sustainable
earnings for the industry and lead to a re-rating of the industry by the financial markets. The steel
industry has historically been valued by the markets at significantly less than other industrial
sectors such as oil and gas, mining, cement, and chemicals.
Certainly, more blockbuster deals will be necessary to further consolidate and stabilize the industry.
Where will these deals come from? That is the harder question, because the steel industry is
populated by public and private companies that are run by "kings," each of whom wants to run the
show. Getting two kings to agree to a mega-merger is a tough assignment, given all the personal,
business, and cultural issues.
So, the bottom line on the Corus-Tata deal is that it is part of the new continuum in the steel
business, one that has seen the industry consolidate as never before and which augurs well for the
future. It will be interesting to see whether, say five years from now, the industry looks back on
Corus-Tata deal wistfully, remembering fondly the time when a major steel company sold for
"only" nine times EBITDA.
Source: Business Week
Page 62 of 62

Corporate Governence

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Corporate Governence

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GOOD CORPORATE GOVERNANCE – AN IDEA WHOSE TIME HAS ARRIVED

GOOD CORPORATE GOVERNANCE – AN IDEA

WHAT IS CORPORATE GOVERNANCE:

Joanna Sheiton, (OCED) described “corporate governance as a set of relationships between a

Government provides necessary conditions or environment to Corporates to operate. However,

The Business Roundtable states:

CODE OF CONFEDERATION OF INDIAN INDUSTRIES (CII)

• Act honestly, fairly, ethically and with integrity.

• Will deal fairly with all stakeholders.

• Comply with all applicable laws, rules and regulations.

• Act in good faith without allowing their independent judgment to be subordinated.

REPORT OF THE KUMAR MANGALAM BIRLA COMMITTEE

role in their efficient functioning.

2.3 Corporate governance is considered an important instrument of investor protection, and it is

a. to suggest suitable amendments to the listing agreement executed by the stock

• declaration of quarterly results;

The Recommendations of the Committee

Corporate Governance –the Objective

Mandatory and non mandatory recommendations

Composition of the Board of Directors

Independent directors and the definition of independence

This is a mandatory recommendation.

Chairman of the Board

This is a non-mandatory recommendation.

This is a mandatory recommendation.

The Committee therefore recommends that

• the chairman of the committee should be an independent director;

These are mandatory recommendations.

This is a mandatory recommendation

This is a mandatory recommendation.

Powers of the audit committee

• To investigate any activity within its terms of reference.

This is a mandatory recommendation.

Functions of the Audit Committee

This is a mandatory recommendation

Remuneration Committee of the Board

This is a non-mandatory recommendation.

Composition, Quorum etc. of the Remuneration Committee

All the above recommendations in paragraphs 10.4 to 10.6 are non-mandatory.

This is a mandatory recommendation.

Disclosures of Remuneration Package

This is a mandatory recommendation.

This is a mandatory recommendation.

Accounting Standards and Financial Reporting

 Consolidation of Accounts of subsidiaries

Functions of the Management

• Industry structure and developments.

This is a mandatory recommendation

This is a mandatory recommendation.

• A brief resume of the director;

This is a mandatory recommendation

This is a mandatory recommendation.

This is a non-mandatory recommendation.

This is a mandatory recommendation

This is a mandatory recommendation.

14.16 The Committee is of the view that the institutional shareholders

• Take active interest in the composition of the Board of Directors

This is a mandatory recommendation.

This is a mandatory recommendation

Shri Kumar Mangalam Birla, Chairman, Aditya Birla group

1. Shri Rohit Bhagat, Country Head, Boston Consulting Group

5. Shri .Virender Ganda, Ex-President of Institute of Company Secretaries of India

1. Annual operating plans and budgets and any updates.