CHAPTER-6

CORPORATE LIABILITY- CHECKS AND MEASURES

I. INTRODUCTION:
Satyam Episode of Financial Jagglery:- What happened in Satyam Computers
Services Ltd. is the glaring evidence of misuse of opportunities available in the hands
of corporates to make investments of company money. Following are the facts to
illustrate the Financial Jugglery.
i) News Papers flashed a 7100 Crore of Financial Scam in Satyam Computers
Services Ltd.
ii) Ramalingam Raju, CEO of Satyam Computers Services Ltd. in his
confession letter accepted his guilt for Satyam’s non - existent stock which
resulted in the collapse of company.
iii) Ramalingam Raju, CEO his brother and his son were also found involved
in this fraud.
iv) The fact of fake balance-sheet exposed following criticism of the aborted
Maytas acquisition bid.
v) PwC (Powerwater House Coppers) is the auditors who audited and
prepared the Satyam Balance Sheet.
Following questions strike in mind in light of above case:-
i) Who are liable for this fraud. If B. Ramalinga Raju CEO and his brother
(Managing Director) above are liable for this fraud.
ii) If other directors in Board, Independed directors are also liable.
iii) Whether Regulatory bodies failed to exercise their duty. If yes, why the
regulatory bodies should not face the consequences for their failure to
excise duty.
. iv) If auditors of company be also made liable.
v) If apprehension of Insider Trading are true, who should be liable.

The sources said five sales between December 23 and January 5, totaling 2.45
crore shares are particularly under the scanner. These sales were ail involving shares

245
pledged by the Raju family with various entities to raise loans. All of them were
conducted through IF&FS Trust Company as a trustee for these debenture holders and
lenders.
On December 23, DSP Merill Lynch sold 39 lakh shares on a day when the
average price on NSE was Rs. 146.80 per share. Interestingly, DSP Merrill Lynch was
less than a week later appointed by Satyam to consider strategic options for the
company following criticism of the aborted Maytas acquisition bid.
On the same day, as well as the next, December 24, DSP Blockrock sold a
little over 74 lakh shares of Satyam. The share averaged Rs. 125.88 on Dec. 24.
Around a week later, on Dec. 29 and 30, Deutsche Bank sold over 47 lakh shares at a
time when the scrip was bouncing back somewhat, averaging Rs. 146.66 and Rs.
156.72 respectively.1
vi) If former directors are also liable .
The previous directors of Satyam, including independent directors who
resigned or were snacked by government after Raju’s admission of fraud, stand to face
questioning in the multi agency probe ordered by government with no chances of
immunity despite pleading ignorance.2 3
According to sources, the scope of the investigation - that covers a probe of
the company’s books of accounts and other financial documents apart from the
conduct of senior officials - would look into the role of the independent directors and
whether they had any role in the financial bungling in Satyam’s accounts.
“Nobody would be excluded from the investigations, including directors who
have resigned,” sources said.
Implication are grooming post revelations made by the Ramalingam Raju about
“Satyam Scam”.
Satyam staff is worried. Entry level employees at Satyam are not only reeling
under concerns of losing their jobs as well as salaries but are also losing their sleep
over the princely sum of Rs. 2 lakh that they deposited as “bond money” with the

1 14 Jan, 09 Times of India P -19

2 18 Ibid
3 Ibid

246
company. What seems to have irked them the most is the fact that Satyam charges the
highest bond money in an industry where such a practice has become common.4
The economic slowdown and fall in the stock market was the start, but the
terror attack in Mumbai and Satyam have turned the tide. The narrative in
international circles has switched from the growth potential of India to the risk of
doing business in India. Of course, this does not imply that India is not seen as an
attractive market. It’s just that the pricing of Indian risk has been significantly altered.
We are to discuss in this chapter all these questions and facts.

II) Rationale behind directors’ liabilitv-

In this chapter, we are concerned with corporate liability for wrong investments or bad
investments which proves adverse to the interests of the shareholders. Directors in
every company are in a position of trustee of the shareholders. There is little in the
hands of the shareholders to exercise control over company’s affairs. Directors are
credited for the company’s progress. In the same way, directors are responsible for
their faults which fall on to the company. Directors may be liable for the violation of
statutory direction in any of these ways. If the directors do any act in an irresponsible
manner and make irrational investments in another company, they shall be liable.
Directors shall be liable for not taking care of shareholders’ interests while making
investments in another company. Directors’ liability may arise in case they do not
follow the proper procedure and guidelines under statutory enactments. In order to
ensure compliance with the objectives of various statutes, liability of directors must be
defined. The nature and extent of liability of the directors vary under different
statutory enactments. Here is an attempt to measure the extent of liability for bad inter­
corporate investments. What method has been adopted or had been suggested to make
directors liable are discussed below.
Inter-corporate investments need to be controlled because they may be
used as an instrument to comer shares of a company with appreciable reserves and a
good profit record with a view to supersede the existing management or to compel the
management to purchase the shares at the extortionate price to retain their control. If

4 28 Jan, 09 Times Business P-4

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inter-corporate investments assist acquisition of control over the companies, these
become one of the contributory factors leading to concentration of economy which is
inconsistent with Art. 39 of the Constitution. Thus it leads to concentration of
economic power through utilization of public funds. Public funds, other than for the
shareholders who are controlling the body corporate, are used for which they were
subscribed since most of the shareholders are scattered and they do not exercise their
voting rights effectively to avert such decision.
The power to invest company’s money is in the hands of Board of Director. Section
292 of the Companies Act 1956 confers that power on the Board. According to this
Section, the power to invest the funds of a company has to be exercised by the Board
of directors of the company by means of a resolution passed at its meeting. The Board
may, however by a resolution passed at a meeting, delegate that power to any
committee of directors, the managing director, the manager or any principal officer of
the company or in the case of a branch office of the company, a principal officer of the
branch office. Every resolution delegating the power as aforesaid has to specify the
total amount upto which the funds may be invested and the nature of the investments
which may be made by the delegate. Section 292 applies to all companies, including
private companies. Corporate liability can be seen from two angles. Firstly, what
liability legislature has enacted to impose on directors for violations of provision
relating to inter-corporate investments and secondly what steps legislature has taken to
improve the existing system of corporate life.
A) Who are Liable: a) Labiality of the Directors and others
b) Liability of Regulatory Bodies,
a) Liability of the Directors and others
The Chief advantage of incorporation from which all others follow is the separate
legal entity of the company. However the business of the artificial person is always
carried on by and for the benefit of some individuals. “By fiction of law, a corporation
is a separate legal entity yet in reality it is an association of persons who are infact the
beneficiaries of the Corporate Property”.
This was sated in Gallaghar V. Germania Brewing Company5

5 (1893) 53 Minn. 214

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More or less, corporate personality of is used to commit frauds or improper or illegal
acts. An artificial person is not Capable of doing anything illegal or fraudulent, the
facade of corporate separate legal entity might have to be removed to identify the
persons who are really guilty. This we call lifting the corporate veil. Generally courts
do not interfere and go by the principle of separate legal entity as laid down in
Solomon’s case.
In cotton corporation of India Ltd. Y. G.C. Odusumathal6 the Karnataka High Court
has held that the lifting of the corporate veil of a company as a role is not permissible
in law unless otherwise provided by clear words of the statue or by very compelling
reasons such as where fraud is needed to be prevented or trading with enemy company
is sought to be defeated.
The observations of the Supreme Court in Life Insurance Corporation of India
V. Escorts Ltd.7 8is worth noting in reference to the matter of when corporate viel shall
be lifted.
o
In State of U.P. V. Renu Sugar Power Co. The Supreme Court observed that the
concept of lifting the corporate veil is a changing concept. The veil of corporate
personality, even though not lifted sometimes, is becoming more and more transparent
in modem jurisprudence. It is high time to reiterate that, in the expanding horizon of
modem jurisprudence, lifting of the corporate veil is permissible, its frontiers are
unlimited. But it must depend primarily on the realities of the situation.
The circumstances under which the corporate veil may be lifted are discussed
below. Section 212 of Indian Companies Act, 1956 provides that every holding
company shall attach to its balance sheet, copies of the balance sheet, profit and loss
account, director’s report & auditor’s report etc., in respect of each subsidiary
company. It amounts to lifting the corporate veil because in the eyes of law a
subsidiary is a separate legal person and through this mechanism their identify is
known.
Directors and other officers of a company will be personally liable for all those acts
which they have done on behalf of a company if the same are ultravires the company.

6 (1999) 22 SEC 228 (Kar)

7 (1986) 59 Com. Case. 548
8 (1991) 70 Comp. Cas. 127

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Where the medium of a company has been used for committing fraud or improper
conduct, courts have lifted the veil and looked at the realities of the situation in
Gilford Motor Company V. Home.9
Similarly in the state of U.P. V. Renu Sugar Power Co.10 the Supreme Court
held that where the holding company holds 100% shares in a subsidiary co. and the
latter is created only for the purpose of the holding company, corporate veil can be
lifted. Courts have shown themselves willing to lift the veil where device of
incorporation is used for some illegal or improper purpose.
Who are liable is a question to be discussed at length. Companies Act does not
only hold the board to account for any such failure of due diligence, it also makes no
distinction in the liability of executive and non-executive or independent directors.
The onus is on them to prove the action they had taken to discharge their fiduciary
responsibility. Take the example of Satyam Computers Services Ltd. Where for all his
exertions CEO B. Ramalingam Raju sent his resignation letter and confessed his guilt
but that is not enough to save the skin of other directors. The still have reason to worry
because some of the serious penalties that the directors and others may face under
various enactments are given below:
Section 23 of the securities contract regulation Act 1956, that imposes a
penalty of imprisonment up to 10 years and fine up to Rs. 25 crore. The adjudicating
officers of Sebi is empowered to award such punishment to directors and management
executives for violating the listing agreement by making false and inaccurate
disclosures in the company’s quarterly and annual results. The penalty is severe
because of the enormous damage that the investors are liable to suffer on account of
false disclosures.
Section 24 of the Sebi Act 1992, that imposes a penalty of imprisonment up to
one year for infringement of any provisions of the law or rules and regulations,
including fraudulent and unfair trade practices (FUTP).
Section 477-A of the Indian Penal Code, that imposes a penalty of
imprisonment up to seven years. The police may on their own or the recommendation

9 (1933 ) 7CH935
10 Supra Note 8

250
of the serious fraud investigation office (SFIO) invoke this IPC provision meant to
punish those found to have falsified accounts “willfully and with intent to defraud.”
Section 211 of the Companies Act, that imposes a penalty of imprisonment up
to six months. The company law board is empowered to punish those who are found to
have “willfully” failed to comply with the requirements of law relating to the annual
financial statement.
Liability on directors can be imposed under companies Act, 1956 itself as well
as under provisions of some other Acts also. Section 252 of Indian companies act,
1956 provides that every public company other than a public company which has
become so by virtue of section 43 A shall have at least three directors. General powers
of the directors are contained in section 291.the section further provided that the board
of directors shall not exercise any power or to do any act or thing which is directed or
required, whether by this or any other Act or by the memorandum or articles of the
company or otherwise, to be exercised or done by the company in general meeting to
invest money. Along with this the boards of directors are directed to exercise these
general powers subject to the provisions contained in articles of associations or in the
memorandum of the company. Section 291 provides that board of directors of a
company shall be entitled to exercise all such powers, and to do all such acts and
things, as the company is authorized to exercise and do. Section 292 of the
Companies Act, 1956 gives power to invest companies’ funds in the hands of board of
directors. Thus as some provisions of the Act confers powers on directors individually
while other powers are conferred jointly. Similarly under Act liabilities are joint while
other is several. Some powers relating to transfer of securities in listed companies
and public companies are transferred to SEBI by section 55A of the Companies Act,
1956.*inserted by companies amendment Act, 2000 w.e .f. 13-12-2000. The procedure
to exercise these powers is defined in the Companies Act, 1956 as well as by SEBI.
Violation of any of these provisions shall fetch penalty to the violator. Defaulter may
be the directors itself of the company. Section 58 A of the companies Act, 1956
provides that deposits can not be invited without issuing an advertisement.* see
companies [acceptance of deposits] rules, 1975.* In case violation of this stipulation ,
if a company accepts or invites, or allows or cause any other person to accept or invite

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deposits in violation of the prescribed limit, the company shall be punishable with fine
which shall not be less than the amount equal to the amount of deposit so accepted.
Every officer of the company who is in default shall be punishable with imprisonment
for a term which may extend to five years and shall also be liable to fine.11 By
definition in Section 2[30] substituted by the Companies Amendment Act, 2000, w. e.
f. 13-12-2000 of the Companies Act, 1956 ‘officer’ includes any director, manager,
secretary or any other person in accordance with whose directions, or instructions the
board of directors or any one or more of the directors are accustomed to act. Section
68 of Indian Companies Act, 1956 also punishes any fraudulent inducement to invest
money by any person. Prosecution powers are exercisable by DCA and SEBI officials
concurrently.
Section 322 of Companies Act, 1956 contains provisions that liability of directors of
limited company may be unlimited liability if so provided by the memorandum.
Living all penal provisions aside it is important to notify here penalty under section
372-A sub-section 9 which say that every officer of the company who is in default
shall be punishable with imprisonment which may extend to two years or with fine
which may extend to fifty thousand rupees. Where any guarantee or security has been
given or loan has been repaid in full, no punishment by way of imprisonment shall be
imposed under this section and where such loan has been repaid in part, the maximum
punishment that may be imposed under this sub-section by way of imprisonment shall
be appropriately reduced. Sub-section 10 of section 372-A of Companies Act, 1956
provides that if default is made in complying with the provisions of sub-section 5 the
company and every other officer of the company who is in default shall be punishable
with fine which may extend to five thousand rupees and also with a further fine which
may extend to five hundred rupees for every day after the first day during which the
default continues.
Section 374 contains that every officer of the company who is in default of provisions
under section 372 and section 372 shall be punishable with fine which may extend to
10
fifty thousand rupees.

11 See Section 58-A (6-A) and Section 58 -A (6-B) of ICA, 1956

12 Substitute for ‘five’ by the COs. (Amd) Act, 2000 w.e.f. 13-12-2000

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Here it feels necessary to explain meaning of the term’ every officer’.

i) Meaning of the expression “The Person in charge of the company”.

The expression “the persons who were in charge of, and were responsible to, the
company for the conduct of the business of the company” used in section 372-A or
anywhere else is equivocal and its interpretation is not free from difficulty. While
construing similar expression contained in section 23 C of the Foreign Exchange
Regulation Act, 1947 the Supreme Court held in Girdharilal Gupta’s13 case followed
in State of Karnataka v. Pratap Chand,14 as under
“In the context a person in-charge must mean that the person should be in over
control of the day to day business of the company or firm. This inference follows from
the wording of section 23 C (2). It mentions director, who may be a party to the policy
being followed by a company and yet not be in-charge of the business of the company.
Further it mentions manager, who usually is in charge of the business but not in over­
all-charge. Similarly the other officers may be in charge of only some part of
business.”
Executive directors and manager, “persons in charge” of the company
Simply because a person is director of the company that does not per se make him
liable for the offence. In a limited company “persons in charge” of the company are its
executive directors (the managing director and the whole time director) and the
manager. They are the persons having day to day control over the business of the
company and who in practice run the company and not the Board of directors as a
whole and should ordinarily be held liable for offences by companies as contemplated.
Where a company does not have any of these officers it appears that all the directors
on the Board would be “persons in charge” of the company.
This view gains support from the decision of the Supreme Court in Municipal
Corporation of Delhi v. R.K. Rohatgi,15 where it was held that from the very nature of
his duties it could safely be inferred that the manager of the company who is directly

13 (1981) 51 Comp. Cas. P-758 -59 (SC)

14 (1981) 51 Comp. Cases. 198 (SC)
15 (1983) 1 (SCR 889)

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in charge of its affairs would be vicariously liable for the offence, but the same cannot
be said for all directors [see also Municipal Corporation of Delhi v. P.D.
Jhujjhunwala,’6 and M.C. Mehta v. Union of India,17. This principle proprio vigore
applies to the managing director and the whole-time director of the company.
In this connection it is significant to note that in section 16 of the Environment
(Protection) Act, 1986 containing similar provisions, the language used is “every
person who was directly in charger of, and was responsible to, the company”
(emphasis supplied). The addition of the word “directly” clearly shows that only those
directors who are directly concerned with the day to day management of the company
and not all directors of the company are liable for the offence.
All this shows that Courts favor the view that the managing director, whole-time
director and manager are prima facie persons in charge of the company as
contemplated by section 278B (1).
Labiality of outgoing directors
In B.N. Kaushik Vs. Registrar of Companies18 a petition to challenge conviction and
sentence was file. Petitioner was convicted for commission of offence punishable
under section 162 r/w section 220 (3) of companies Act 1956 as well as complaints
under section 159 r/w section 162. It was help that once the resignation was made it
will take effect immediately when the intention to resign is made clear. Petitioner
contended that he had resigned from the accused No. 1 Company on 27-07-1971 by
sending a letter at the registered office of the Company and copy of the said
resignation letter was also sent to the respondent - Registrar of Companies, therefore
could not be made liable with the company.
Non-Executive directors, not ‘persons in charge” of the company:
Ordinary directors, i.e., non-executive directors (including nominee directors and
professionals directors), are merely expected to put in an appearance at occasional
Board meetings. They are not persons having control of the day of day business of the
company and can not therefore be said to be “persons in charge” of the company.
They if the offence was committed with their consent or connivance or due to neglect

16 (1983) ISCR895 Ibid P. 895

17 AIR 1987 SC 1086
18 www.companylawonline.com/updates/judgemnts/aspx. (Delhi High Court, 08 Apr. 2009)

254
on their partshall be liable. They may, however, claim relief if they prove that they
acted honestly.

If a director was in charge of the company’s business, e.g. the managing director and
the whole-time director, he may be liable to be prosecuted. If he was not in charge of
the company’s business, he is nonetheless liable to be prosecuted in the circumstances
mentioned therein.

ii) Persons in charge of the company” distingusihed from “persons having

ultimate control over the affairs of the company” ,
Both these expressions have distinct connotations in law. This is clear from section 2
(n) of the Factories Act, 1948 as interpreted by the Supreme Court in J.K. Industries
Ltd. V. Chief Inspector of Factories.19 Section20 2 (n) defines “occupier” of a factory
as meaning the person who has ultimate control over the affairs of the factory and in
the case of a company, any one of the directors shall be deemed to be the occupier.
The Supreme Court pointed out that there was a vast difference between a person
having ultimate control over the affairs of a factory and the one who has immediate or
day to day control over the affairs of the factory. In the case of a company the ultimate
control of the factor owned by the company vests in the company through its Board of
Directors. The manager or any other officer can be nominated by the Board of
directors to have immediate or day to day control over the affairs of the factory.
However, the ultimate control cannot be transferred from its Board of directors to one
of its employees or officers; it was accordingly held that in the directors of the
company who can be notified as occupier of the factory. Where the company who can
be notified as occupier its directors as occupier of the factory, the inspector of
Factories shall at liberty to proceed against any one of the directors shall be at liberty
to proceed against any one of the directors of the company, treating him as the deemed
occupier of the factory, for prosecution and punishment under the Act.

19 1996 26 CLA 45 (S.C.)

20 Sec. 2 (n) of Factories Act, 1948

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Even though the ultimate control over the affairs of the company vests in the directors
all the directors may not be in charge of the company. Thus persons having the overall
control of the day to day business of the company referred to in Girdhari Lai Gupta’s
case cannot be equated with the expression “persons having ultimate control over the
affairs of the factory” used in section 2 (n) of the Factories Act. The expression or
working directors (including the manager) whereas the expression “person having
ultimate control over the affairs of the company refers to all the directors of the
company.
The result is that the expression, “person in charge” of the company as contemplated
in means the persons having the overall control of the day to day business of the
company and thus refers to the executive directors (the managing director and the
whole-time directors) and the manager of the company. Non-executive directors are
not included in the said expression. Though the ultimate control over the affairs of the
company vests in the directors i.e. the Board of Directors as a whole, all the directors
on the Board are not persons in charge of the company.
'j -I

ii) Liability of Auditors:

In an incident thought to be the first of its kind in India partners of the auditing firm
Price water house Coopers (PwC) were arrested on Saturday for their alleged role in
the Satyam Scandal.
Senior partners S. Gopalakrishnan and Srinivas Talluri were booked by Andhra
Pradesh police CID on charges of fraud (Section 420 of the IPC) and criminal
conspiracy (120 B) in the Rs. 7,800 crore scam).
A conviction for fraud, if proven, carries a maximum sentences of seven years
in prison and that for criminal conspiracy can range from a few years to life
imprisonment. They were remanded injudicial custody till February 6.
The functioning of auditors has come in for sharp scrutiny since the Satyam
scam broke, with comparisons being made between PwC and Arthur Andersen, the
auditing company that went down with Enron.
PwC initially claimed client confidentiality. But later, sought to absolve itself
of all responsibility. Those sympathetic to the company are insisting that collusive

21 25 Jan., 09 Times Business P. 20

256
fraud in extremely difficult to detect but others say that the auditing company cannot
be absolved of charges of not revealing the true financial position of the company
especially since they were its auditors form 2000 to 2008.
If convicted, the PwC partners could be sentenced to seven years in jail, or
even a life term.
With this incident, Indian auditors are suddenly nervous. This is the first time
an auditor has been detained by police for failing to discharge his professional
responsibility of ensuring a company’s financial morality. Several auditors told TOI
the development is a turning point for the profession in India.
They said auditors would now be extra cautions and their attitude towards
clients would change.

b) LIABILITY OF REGULATORY BODIES:-

Besides directors of a company regulatory bodies are also liable for failure to exercise
their duties on their part.
The finance ministry had as early as 2005 instructed all government bodies and
regulates to ensure that their funds were maintained in the Public Accounts. The
orders were issued with a view to achieve fiscal objectives set out under the Fiscal
Responsibility and Budget Management (FRBM) Rules. The Finance Ministry had in
its draft action taken note to the Public Accounts Committee in November 2004 also
assured the panel that regulators had been asked to deposit its funds in the Public
Accounts.
The performance of Security & Exchange Board of India (Sebi) & other regulators
such as Insurance Regulatory Development Authority may soon be part under scrutiny
of Comptroller and Auditor General (CAG) for their failures to detect irregularities I
corporate governance such as discovered in Satyam Computer Services Ltd.
CAG has sent a strongly worded letter to the finance ministry stating the Sebi
and IRDA had failed to put their funds under Govt, accounts despite instructions
issued by govt, to do so.

22 Times of India (TOI), Thursday, January, 09

257
B) Measures to enhance directors’ responsibility.
Steps taken by the government to enhance good business environment is backed by
concept of corporate social responsibility. Let’s look to this concept to know the
reasons why government is so inclined toward this principle,
a) Concept of Corporate Social Responsibility:
i) Meaning :It can be defined as
“Corporate social responsibility accepted definition in a manner which meets
or excels the ethical, legal, commercial and public expectations that a society has from
the business.”
Corporate Social Responsibility is nothing but what an organization does, to positively
influence the society in which it exists. It could take the form of community
relationship, volunteer assistance programmes, spcial scholarship, preservation of
cultural heritage and beautification of cities. The philosophy is basically to return to
the society what it has taken from, it in the course of its quest for creation of wealth.
According to Browin H.R., social responsibility is defined as “the obligation of
businessmen to pursue those policies, to make those decisions, or to follow those lines
of action which are desirable in terms of objectives and values of society.” Business
entity is expected to undertake those activities, which are essential for betterment of
the society. Every aspect of business has a social dimension. Corporate Social
Responsibility or Corporate Social Responsibility means open and transparent
business practices that are based on ethical values and respect for employees,
communities and the environment. It is designed to deliver sustainable value to society
at large as well as to shareholders.
The real meaning of social responsibility with reference to business enterprise has to
be understood firstly by understanding the correlation of business with social
responsibility.
Business is expected to create wealth, create market, generate employment, innovate
and produce a sufficient surplus to sustain its activities and improve its
competitiveness. Society is expected to provide an environment in which business can
develop and prosper, allowing investor to earn returns. Business depends for its

23 Corporate Social Responsibility by Scott. C. Newquist, 247.

258
survival and long-term prosperity on society infrastructure. To convert raw materials
into profitable goods or services, it needs these inputs from the society.
Jean Jacques Rousseau writing in 1762, in the tradition of Hobbes and Locke, has said
that society and corporations must co-exist and contribute to the well being of each
other.24 In the age of globalization, corporations and business enterprises have crossed
the national boundaries to become international. Business enterprises have been using
natural resources in a big way for creation of wealth through profits and other rewards.
Business enterprises are a part and parcel of the society and such inevitably enter in
many areas of social life. Hence their responsibility towards society and environment
has emerged.
In India and elsewhere there is a growing realization that business enterprises, are after
all bom out of the society and must therefore serve it for their own enlightened
sustenance in the enlightened self-interest for sustainable social development. It then
becomes the duty and responsibility of the business to share the burden of the society
to develop and mentor the community and to enrich it is a whole.
There is today a growing perception among enterprises that sustainable business
success and shareholder value cannot be achieved solely through maximizing short­
term profits, but instead through market-oriented yet responsible behavior. Companies
are aware that they can contribute to sustainable development by managing their
operations in such a way as to enhance economic growth and increase competitiveness
whilst ensuring environmental protection and promoting social responsibility,
including consumer interests.
Keith Davis feels that social responsibility is often referred to as having risen from an
Enlightened Self Interest where organizations realize that it is in their own best interest
to act in ways that the community considers socially responsible. He talks about the
“Iron Law of Responsibility.” In the long run, those who do not use power in a way
society considers responsible will tend to lose it.25
With the understanding that businesses play a key role of job and wealth creation in
society, Corporate Social Responsibility is generally understood to be the way a

24 Ibid, P. 244
25 Trak.in/tags/business/2007/08/16/ changing Indian business.

259
company achieves a balance or integration of economic, environmental, and social
imperatives while at the same time addressing shareholder and stakeholder
expectations. Corporate Social Responsibility is generally accepted as applying to
firms wherever they operate in the domestic and global economy. The way businesses
engage/ involve the shareholders, employees, customers, suppliers Governments, non-
Govemmental organizations, international organizations, and other stakeholders is
usually a key feature of the concept. While business’s compliance with laws and
regulations on social, environmental and economic objectives set the official level of
corporate social responsibility performance, Corporate Social Responsibility is often
understood as involving the private sector commitments and activities that extent
beyond this foundation of compliance with law.
The term Corporate Social responsibility refers to the concept of business being
accountable for how it managers the impact of its processes on stakeholders and takes
responsibility for producing a positive effect on society. Corporate Social
Responsibility has been defined as the continuing commitment by business to behave
fairly and responsibly and contribute to economic development while improving the
quality of life of the workforce and their families as well as the local community and
society at large.
Corporate Social Responsibility is a concept whereby companies integrate social and
environmental concerns in their business operations and in their interaction with their
stakeholders on a voluntary basis. The main function of an enterprise is to create value
through producing goods and services that society demands, thereby generating profit
for its owners and shareholders as well as welfare for society, particularly through an
ongoing process of job creation. However, new social and market pressures are
gradually leading to be change in the values and in the horizon of business activity.
Essentially, Corporate Social Responsibility is an inter-disciplinary subject in nature
and encompasses in its fold Social, economic, ethical and moral responsibility of
companies and managers; Compliance with legal and voluntary requirements for
business and professional practice; Challenges posed by needs of the economy and
socially disadvantaged groups, and Management of corporate responsibility activities.

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The World Business Council for Sustainable Development has proposed a definition
of Corporate Social Responsibility as:26
“Corporate Social Responsibility is the continuing commitment by business to
behave ethically and contribute to the economic development while improving the
quality of life of the workforce and their families as well as of the local community
and the society at large.”
Corporate Social Responsibility is generally seen as the business contribution to
sustainable development which has been defined as “development that meets the needs
of the present without comprising the ability of future generations to meet their own
needs,” and is generally understood as focusing on how to achieve the integration of
economic, environmental and social imperatives. Corporate Social Responsibility also
overlaps and often is synonymous -Mth many features of other related concepts such as
corporate sustainability, corporate accountability, corporate responsibility, corporate
citizenship, corporate stewardship, etc.
Corporate Social Responsibility commitments and activities typically address aspects
of the firm’s behaviour (including its policies and practices) with respect to such key
elements as; health and safety, environmental protection, human rights human
resource management practices, corporate governance, community development, and
consumer protection, labour protection, supplier relations, business ethics, and
stakeholder rights.
Corporations are motivated to involve stakeholders in their decision making and to
address societal challenges because today’s stakeholders are increasingly aware of the
importance and impact of corporate decisions upon society and the environment. The
stakeholders can reward or punish corporations. Corporations can be motivated to
change their corporate behaviour in response to the business case which a Corporate
Social Responsibility approach potentially promises. This includes (1) stronger
financial performance and profitability (e.g. through eco-efficiency), (2) improved
accountability to and assessment from the investment community, (3) enhanced
employee commitment (4) decreased vulnerability through stronger relationships with
communities, and (5) improved reputation and branding.

26 www.slideshare.net/disinvargehese /course-content-corporate social responsibiltiy - 66K.

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ii) Purpose behind Corporate Social Responsibility
In recent times, most economies have witnessed rolling back of the State. Both in
academic discussions and practice, it has been felt and observed that “Government is
the best which governs the least” and the State has been withdrawing from a number
of activities and industries which hitherto remained the prerogative of public sector.
This rolling back of the State has created new opportunities for the private sector
especially industry and the modem large corporations. Along with the new
opportunity come new responsibilities, which are expected to be performed by the
large corporations.
There exists an implicit or explicit contract between business and the community in
which it operates-27
Business is expected to create wealth; supply markets generate
employment innovate and produce a sufficient surplus to sustain its
activities and improve its competitiveness, while contributing to the
maintenance of the community in which it operates.
Society is expected to provide an environment in which business can
develop and prosper, allowing investors to earn returns while ensuring hat
the stakeholders and their dependents can enjoy the benefits of their
involvement without fear or arbitrary or unjust action.
Commerce requires the external defence and internal order and an agreed set of mles
and regulations and a means of exchange - all of which the society provides. Much of
the social infrastructure on which industry depends, roads, schools, hospitals, defence,
etc. are long-term commitments.
Corporate Social Responsibility is gaining momentum in buz world. Corporate Social
Responsibility has found recognition among enterprises, policy -makers and other
stokeholds, as an important element of new and emerging forms of governance, which
<%o

can help them to respond to the following fundamental changes;

Globalization has created new opportunities for enterprises, but it also has
increased their organizational complexity and the increasing extension of

27 Corporate Social Responsibility by Virkanda. See http//:ww.businessethics.co./CSR-Articles/axps.in

28 See Article by Sampat Mukherjee in Chartered Secretary, Sep., 1998, P. 846

262
 business activities abroad has led to new responsibilities on a global scale,
particularly in developing countries.
Considerations of image and reputation play an increasingly important role in
the business competitive environment, as consumers and NGO’s ask for more
information about the conditions in which products and services are generated
and the sustainability impact thereof, and tend to reward with their behaviour,
socially and environmentally responsible firms.
Partly as a consequence of this, financial stakeholders ask for the disclosure of
information going beyond traditional financial reporting so as to allow them to
better identify the success and risk factors inherent in a company and its
responsiveness to public opinion.
As knowledge and innovation become increasingly important for
competitiveness, enterprises have a higher interest in retaining highly skilled
and competent personnel.
b) Corporate governance - a good legislative enactment.
The key of good corporate governance is a well functioning of Board of Directors. The
Board has a core group of excellence, professionally acclaimed non-executive
Directors who understand their dual role of appreciating the issues put forward by the
Management and of honestly discharging their fiduciary responsibility towards
company’s shareholders as well as creditors. The Kumar Manglam Committee was of
the view that the term independence by 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
Two-three decades ago the term corporate governance had not been in frequent use.
The matters involved were of concern only as an esoteric branch of commercial law.
Today, the subject is most discussed issue in many countries.
There are several reasons. Corporate fraud and corporate collapse are main reasons.
Economic history records many instances of the collision of greed and naivete. There
as inevitable scandals and crashes, but the majority of corporations which still

263
controlled only a modest proportion of economic activity were run with prudence and
integrity. 29
• •

The important issues of corporate governance rooted in deep, the relationship between
the structure of rules, laws, and conventional practices within which companies
operate and their style of management and the decisions which they make is essential
to study. There are increasingly widespread claims that the incentives, pressures, and
restraints on managers lead to short-term decision making and to failures to invest in
physical equipment, in people, and in the development of businesses, and that these
factors are ultimately profoundly damaging to a country’s environment within which
German and Japanese companies operate may be an element in the economic success
of those countries.30
Corporation is regarded as a creation of private contract, obligations. An obligations
on companies are mainly there to prevent abuse of the privilege of limited liability,
and concern formal matters such as registration and adult. Corporate governance is a
matter for the company itself to determine and to describe in its articles of association.
The legal system, therefore, provides and intended to provide, no more than a
mechanism for the negotiation and enforcement of these contacts.
Making directors and leaders of company accountable to many stakeholders might
make them accountable to none as there would be no clear yardstick for judging their
performance. This problem is familiar from Britain’s experience with nationalized
industries, where the multiplicity of goals led to confusion between the concerns of
government and those of the industry. It also enabled managers to conceal their lack of
success in achieving any of these goals; or simply allowed them to purpose objectives
such as expansion or technical excellence with little concern to balance these things
"2 i

against efficiency or value.

We see similar problems in private corporations operating under the stakeholder
model. Philips is a good example of a company whose technical excellence was not
matched by manufacturing efficiency or marketing effectiveness. The sharpness and
clarity of the objective of shareholders value maximization and the greater prospects

29 (2006) 4 Comp. LJ 26 (Journal)

30 (2004) 3 Comp. LJ 37 (St.)
31 (2000) 2 Comp. LJ 23 (Journal). See chartered secretary Dec., 2000, P. 720

264
of monitoring performance against it, are reasons why that model is becoming
increasingly popular.
If unwelcome or unqualified members are appointed to a board, the likely practical
consequence is that substantive decision making will take place elsewhere.
Thus, one can identify the delicate balancing of criteria which has to be achieved in a
new model of corporate governance. It should give recognition and content to the
trusteeship model which acknowledges corporate personality. It should allow mangers
to pursue multiple objectives, yet hold them responsible for their performance. It
should encourage cohesion within an executive team but be sufficiently open to
outside influence to discourage introversion and ensure that success is rewarded and
failure penalized. That basic objective may be called managerial freedom with
accountability. It is important to recognize that the quest for perfection in systems of
corporate governance is a hopeless one just as democracy is the worst form of
Government ever invented.
Too much effort has gone in recent years into attempts to reforms the way in which
companies are governed. Running a big company is a breeze. What matters most is the
introduction of proper board from procedures. Once manages are held suitably
accountable, the will be forced to make the obvious decisions that will boost their
firms performance.
No doubt finding new ways to turn a profit is a complicated task. And yet the
“corporate governance movement continues to focus on narrow rules and regulations
to the point where producing rule books for board rooms has become something of a
cottage industry. America’s Calipers issued its own new list of boardroom “best
practices”. Similar efforts are being made by company bosses to find ways to please
their increasingly global investors.
A good board of directors should be a lofty supervisor of a management team’s
strategy, denouncing mistakes after it is too late to rectify them. If they are to be
effective custodians of a company, even the outside directors have to become
intimately familiar with the company’s strategy, and must be willing to ask difficult -
often embracing - questions. To create more effective company boards, two changes
are absolutely essential. The first is that outside directors must be given a far bigger

265
stake in the success shares, rather than cash and perks appears to be much the most
constructive boardroom reform that firms could undertake since the would again the
interest of these directors with the interests of the shareholders to whom they are
ultimately responsible. Secondly, directors should be selected for the practical skills
the can bring, not on the basis of success in other careers, such as law or politics, that
may or may not be of relevance.
A truly good director is a rarity. He needs to be someone who is bold enough to ask
the tough questions without distracting the energies of managers; someone who will
learn everything about a company despite having no control over its day-to-day
operation; and someone who will show a chief executive’s passion without receiving
any of the glory, if institutional investors really want boards to champion their
interests, they will begin to vote for directors who show such characteristics. The
solution seems to lie in choosing the right person and give him lots of shares. This
seems to be the simplest and most effective rule in the present corporate
environment.32
The Board of Directors is in charge of the day-to-day business and management of
a company and plays a pivotal role in ensuring good corporate governance. If the
Board is composed of a right mixture of executive and non-executive directors and
among non-executive directors, it comprises of impendent directors who could discuss
without any bias mattes pertaining company affairs, the good corporate governance
will automatically follow. Independence of the Board is critical to ensuring that the
Board fulfils its oversight role objectively and holds the management accountable to
the shareholders. Thus, the Independent directors have an extremely crucial role in
ensuring the quality of corporate governance in a company. The Listing Agreement
has placed considerable emphasis on the inclusion of independent directors on the
Board as well as on various Board committees. The independent directors provide an
assurance to all those dealing with the company that the Board decisions will be not be
based on a narrow vision or short-term developments and expectations. They
constitute a necessary component of a balanced Board structure where in-depth
knowledge of executive directors. Various Codes on Corporate Governance have

32 (2003) 4 Comp. LJ 26 (Journal)

266
underlined the significance of associating independent directors on the Board. When it
conies to defining and determining a truly independent director, practical difficulties
do arise.
Role of independent director in progress of company.
It is increasingly being recognized that independent directors have a big role in the
progress of a company. In fact independent directors are considered as both a
safeguard and a significant source of competitive advantage. The inclusion of
independent directors bring a different view a more knowledgeable view, a more
professional view, of the world in which the company operates. The capabilities
required in an independent director include inter alia financial, marketing literacy,
mentoring capabilities, independence of mind etc. Independent directors are required
because they perform the following important etc.33
i) Balance the often conflicting interest of the stakeholders.
ii) Facilitate withstanding and countering pressure from owners.
iii) Fulfill a useful role in succession planning.
iv) Act as a coach, mentor and sounding Board for their full time colleagues.
v) Provide independent judgment and wider perspectives.
The Kumar Manglam Birla Committee extensively debated the issue of independent
directors. The Task Force said in its report that “the identities of members of Board
crucial to excellence is of course obvious. Equally vital, however are their individual
competencies, experience and track record, which must match the business that the
company is in. and a mix of operational managers, who have the insider’s perspective
and external professionals, who bring in the outsider’s cool detachment, will provide
the collective capability that a Board needs. The key of good corporate governance is a
well functioning of Board of Directors. The Board has a core group of excellence,
professionally acclaimed non-executive Directors who understand their dual role of
appreciating the issues put forward by the Management and of honestly discharging
their fiduciary responsibility towards company’s shareholders as well as creditors. The
Kumar Manglam Committee was of the view that the term independence by suitably,
correctly and pragmatically defined, so that the definition itself does not become a

33 Independent Directors Role in Corporate Governance P. 219

267
constraint in the choice of independent directors on the Boards of companies. The
touchstone of the independence is the material pecuniary relationships or transactions
of the non-executive directors with the company. Such relationships or transactions
may sometimes affect the independence of a director. In this perspective Birla
Committee agreed on the following definition of independence.34
On the basis of recommendations of the Committee, the SEBI issued directive
to the stock exchanges in the year 1999 to amend the listing agreement to provide for
insertion of new clause relating to Corporate Governance. By virtue of said clause, it
was made compulsory for the Board of Listed companies to have combination of
executive and non-executive directors. The number of independent directors would
depend upon, whether the Chairman is Executive or non-executive.
The issue relating to the definition of independent director was also considered
by the Naresh Chandra Committee. The said committee gave a due thought to the
prevailing scenario in the Indian and international definitions of independent director.
The definition recommended by the Committee is not specific in nature but it is more
of a code comprising seven points. The definition is more in the nature of an
explanation providing negative conditions. The Committee on Corporate Governance
constituted by SEBI under the Chairmanship of Shri N.R. Narayana Murthy
recommended the definition of term independent Director on the lines of Naresh
Chandra Committee.
As per the recommendations of Naryana Murthy Committee, independent director has
been defined to mean non-executive director of the company who:-apart from
receiving director remuneration, does not have any material pecuniary relationships or
transactions with the company, its promoters, its senior management or its holding
company, its subsidiaries and associated companies; is not related to promoters or
management at the Board level or at one level below the Board; is not a partner or an
executive of the statutory audit firm or the internal audit firm that is associated with
the company and has not been a partner or an executive of any such firm for the last
three, years. This will also apply to legal firm(s) and consulting firm(s) that have a

34
Ibid.

268
material association with the entry or is not a supplier, service provider or customer of
the company i.e. owning two per cent or more of the block of voting shares.
It has been explained that “institutional directors on the board of companies should be
considered as independent directors whether the institution is an investing institution
or a leading institution.”
While calculating the percentage of Independent Directors, nominee directors will be
excluded both from the numerator and the denominator. In this respect, it is interesting
to note the different approach adopted by Kumar Manglam Birla Committee and the
Naresh Chandra Committee. While former treats Nominee Directors as Independent,
latter excludes them in determining the percentage of Independent Directors on the
Board of a company.
In our opinion, in addition to the definition given earlier in the Chapter, the following
may also not be regarded as “Independent Director.”
i) Members of the immediate family of an individual who is or has been employed by
the company, or any of its affiliates as an executive officer in any of the past three
years.
The expression “immediate family” includes a person’s spouse, parents, children,
mother-in-law, father-in-law, brother-in-law, sister-in-law, son-in-law, daughter-in-
law, and any person who resides in such person’s home.
ii) Consulting, advisory or personal service contract with the company, its executive
officers or its affiliates.
iii) Officers in organizations, which are suppliers, customers or vendors of the
company.
iv) Members of the Board of directors of a company owned by a substantial
shareholder of a company.
v) Officers or employees of other companies controlled by the CEO or the company’s
majority owners;
vi) A partner or controlling shareholder or an executive officer of any “for-profit
organization” to which the company made; or from which the company received

35 A Committee under Mr. Kumar Manglam Birla was constituted to examine the issue of corporate
governance in 2001. See. (2000) 2 Comp. LJ 23 (Journal)
36 (2004) 3 Comp. LJ 17 (Journal)

269
payments (other than those arising solely from investments in the company’s
securities) that exceeds 5% of the company’s or business organization’s consolidated
gross revenues for that year.
vii) A director of the company having business or financial relationship with
substantial shareholder of the company.
viii) Members of immediate family of another person who will fail to quality as
independent under any of the situations explained herein.
A person who is appointed as an Alternate director to an independent Director need
not be independent. His case will be determined on the basis of criteria of
independence laid down in the Listing Agreement as well as in the forgoing
enunciation.
Non-executive directors should be independent:
It has been recommended that a non-executive director should be independent of the
management and should not have any benefits from the company other than his sitting
fee. It does not prevent a person from being appointed a non-executive director if he
has a contractual relationship with the company or has acquired shares in the
company. According following non-executive directors are regarded as independent.
i) A director or executive of the company’s holding company or major
investor who has no executive responsibilities in the company.
ii) A former executive director who is no longer employed on a full time basis
but nonetheless has the ability to provide valuable inputs on the basis of his
past experience.
iii) A senior executive director of major listed subsidiaries and associates of
the holding company who has no executive responsibility in the holding
company.
It is quite possible for a director to loss his independent status during the tenure of his
office as an independent director with the company. The terms of independent
director’s association with the company should include a provision that if, at any time,
during his tenure, any change occurs in his independent status, it shall be
communicated by the company forthwith. The company should make adequate
disclosures to the shareholders of the manner in which the independent status of

270
director has changed. The Board also must ensure that the present proportion of
independent directors in the composition of the total Board as well as the various
Board committees is maintained.
To ensure that the independent of a non-executive director is not compromised the
Board must take adequate preventive measures. In case a non-executive director enters
into any contract or arrangement with the company, he must be treated as a non-
independent director. Accordingly, he will cease to remain a member of those
committees, which are required to have a certain number of independent directors.
Can substantial shareholdings affect independence of a director? There is no answer to
this question in the Listing Agreement. Explanation to clause 49-1 (A) (iv) provides
that nominee directors on the boards of companies should be considered as
independent. Shareholding will not jeopardize the independent status of a director.
What needs to be guarded against is the likelihood of directors holding significant
number of shares from using their position to promote their own interests rather than
that of the company. For this reason, the Australian Code has provided that
independence is more likely to be assured when the director is not a substantial
shareholder of the company.
Clause 49 of the Listing Agreement has become a buzz word in corporate sector in
India and is being viewed synonymous with good corporate governance norms and
often dubbed as panacea for major corporate ills.
While the clause 49 relates to Indian scenario, it is intrinsically concerned with the
global trend of improving corporate governance. It may be recalled after series of
financial scandals in US and after the Enron scandal, the US corporate came under
heavy criticism for their poor corporate governance which ultimately led to the
passing of the Sarbanes - Oxley Act. In India, SEBI’s clause 49 is influenced by this
Act to a great extent and addresses several corporate governance issues, including the
number of the independent directors on a board.
In India, the first concrete step taken by the Security Exchange Board of India (SEBI)
in this direction was when it constituted a Committee under Mr. Kumar manglam

37 (2006) 2 Comp. LJ 124 (Journal)

271
Birla to examine the issue of Corporate Governance in 2000.38 Again after this
Commttee, a second committee was constituted under Mr. N.R. Narayana Murthy in
2003. SEBI implemented the recommendations of the Committee and public
comments received thereon, SEBI issued a circular on 26 August 2003 revising clause
receive representations / suggestions for corporates/ public on various provisions of
the said circular. It was decided to defer, the implementation of the provisions of the 26
August 2003 circular and revisit clause 49. Recently SEBI decided to implemented the
recommendations made by the Committee head by N.R. Narayana Murthy with effect
from 1 January 2006.39
In the light of the above, it is important to look into some of the major changes
introduced by the amendments in clause 49 of the Listing Agreement.
The number of independent directors would depend on whether the chairman is an
executive or non-executive. In case of a non-executive chairman, at least one-third of
the board should comprise of independent directors and in case of an executive
chairman, at least half of the board should comprise of independent directors.
The term “independent director” has been expanded. The expression independent
director shall mean a non-executive director of the company who:40
i) apart from receiving director’s remuneration, does not have any material
pecuniary relationships or transactions with the company, its promoters, its
senior management or its holding company, its subsidiaries and associated
companies;
ii) is not related to promoters or management at the board level or at one level
below the board;
iii) has not been an executive of the company in the immediately proceeding
three financial years;
iv) is not a partner or an executive of the internal audit firm that is associated
with the company, and has not been a partner or an executive of any such
firm for the three years. Thus will also apply to legal firm(s) and consulting
firm(s) that have a material association with the entity.

38 (2000) 2 Comp. LJ 23 (Journal)

39 (2003) 2 Comp. LJ 22 (Journal)
40 (2006) 2 Comp. LJ 122 (Journal)

272
 v) is not a supplier, service provider or customer of the company. This should
include lessor-lessee type relationship also; and
vi) is not a substantial shareholder of the company, i.e., owning two present or
more of the block of voting shares.
Institutional directors on the boards of companies shall be considered as independent
directors whether the institution is an investing institution or a leading institution.
All compensation paid to non-executive directors shall be fixed by the board of
directors and shall be set for the maximum number of stock options that can be
granted to non-executive directors in any financial year and in aggregate. The stock
options granted to the non-executive directors shall vest after a period of at least one
year from the date such non-executive directors have retired from the Board of the
Company. ; >
Independent director shall periodically review legal compliance reports prepared by
the company as well as steps taken by the company to cure any deviation. In the event
of any proceedings against an independent director in connection with the affairs of
the company, defence shall not be permitted on the ground that the independent
director was unaware of this responsibility.
i) Meetings of board and procedures41
The board meeting shall be held at least four times a year, with a maximum time gap
of four months between any two meetings. A director shall not be a member in more
than 10 committees or act as chairman of more than 10 committees or act as chairman
of more than five committees across all companies in which he is a director. For the
purpose considering the limit of the committees on which a director can serve, all
public limited companies, whether listed or not, shall be included and all other
companies (i.e. private limited companies, foreign companies and companies under
section 25 of the Companies Act, etc.) shall be excluded.
ii) Code of Conduct:
The board of a company shall lay down the code of conduct for all board members and
senior management of a company. The term ‘senior management’ shall mean
personnel of the company who are members of its management/ operating council (i.e.

41 See Cluase 49 andCorporate Governance by Atul Kr. See (2006) 2 Comp. LJ 123

273
core management team excluding board of directors). Normally, this would comprise
all members of management one level below the executive directors.
Term of Office of Non-Executive Directors
The person shall be eligible for the office of non-executive director so long as the term
of office did not exceed nine years in three terms of three years each, running
continuously.
Audit Committee
A qualified and independent audit committee shall be set up and the adult committee
shall have minimum three members. All the members of audit committee shall be non­
executive directors, with the majority of them being independent. The chairman of the
committee shall be an independent director. The audit committee shall meet at least
thrice a year. One meeting shall be held before finalization of annual accounts and one
every six months. The quorum shall be either two members or one third of the
members of the audit committee, which-ever is higher and minimum of two
independent directors. The audit committee shall have powers:42
1. to investigate any activity within its terms of reference,
2. to seek information from any employee,
3. to obtain outside legal or other professional advice,
4. to secure attendance of outsiders with relevant expertise, if it considers
necessary.
The audit committee will have greater power to review related party
transactions such as details of individual transactions with related parties, which are
not in the normal course of business. The role of the audit committee shall also include
the 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.
Any company personnel seeking to report an unethical or improper practice (not
necessarily a violation of law) can approach the audit committee without necessarily

42 Ibid

274
informing their supervisors. The employment and other personnel policies of the
company shall contain provisions protecting Whistle Blowers from unfair termination
and other unfair prejudicial employment practices.
iii) Provisions of holding company applicable on subsidiary company.
The provisions relating to the composition of the board of directors of the holding
company shall be applicable to the composition of the board of directors of subsidiary
companies. At least one independent director on the board of directors of the holding
company shall be a director on the board of directors of the subsidiary company. The
audit committee of the holding company shall also review the financial statements.
The board report of the holding company would also state that they have reviewed the
affairs of the subsidiary company as well.
When money is raised through an initial public offering (IPO), it shall disclose to the
audit committee, the uses/ applications of funds by major category (capital
expenditure, sales and marketing, working capital, etc), on a quarterly basis as a part
of thief quarterly declaration of financial results. Further, on an annual basis, the
company shall prepare a statement of funds utilized for purposes other than those
stated in the offer document/ prospectus. The statement shall be certified by the
impendent auditors of the company. The audit committee shall make appropriate
recommendations to the board to take up steps in this matter.
Certification of CEO/CFO (Chief Executive Officer/ Chief Financial Officers)43
CEO (either the executive chairman or the managing director) and the CFO (whole­
time finance director) of the company shall certify the balance sheet and profit and
loss account and all its schedules and notes on accounts, as well as the cash flow
statements and the directors’ report. CEO and CFO shall certify that these statements
are in compliance with the accounting standards and / or applicable laws/ regulations.
Chief executive officers (CEOs) and Chief financial offers (CEOs) of companies will
also certify internal control systems for the purpose of financial report.
iv) Corporate Governance in annual Report:
A separate section on corporate governance shall be in the annual reports of
company. Non-compliance of any mandatory requirement, i.e. which is part of the

43 (2006) 2 Comp. LJ 124

275
Listing Agreement with reasons thereof and the extent to which the non-mandatory
requirements have been adopted should be specifically highlighted.
The above amendments of clause 49 represents a definite major step forward in
improving the corporate governance practice in the companies. From a positive
perspective, independent directors who are fearless, competent and objectives in their
assessment would bring to the board and unbiased view, useful expertise and
experience. Cross directorship could be useful from this viewpoint. Nonetheless,
following points should be taken note of about changes introduced:
The amendments with regard to induction of large number of independent
directors tend to over emphases the premise that the larger the proportion of
independent directors to the total board strength, better the board is expected to
fulfill the fiduciary asks entrusted to it by the shareholders. However, it may be
noted that since non-executive directors have only a marginal stake in the fortunes
of a company; as a result, they make very limited time commitments for board
meetings which are usefully held once in two or three months. In other words,
stipulating the number of non-executive directors tends to emphasis the process
rather than the quality and substance of the board. Further, it has been noticed that
the tendency of the board is to induct persons who can be relied and would not be
defiant and would endorse their major decisions. A management is not likely to
repose confidence in a director, howsoever suitable the persons may otherwise be,
for the directorship, if it is not sure of his support for its major decisions.
The amendments further do not preclude Government officials from becoming
directors immediately after their superannuation. To make the concept of
independent directors more independent and to prevent potential conflicts of
interest of officials while still in public service, they may not be allowed to
become independent directors of companies immediately after their
superannuation. There should be provision of a cooling off period (may be two-
three years post superannuation or post quitting of official job). This provisions
should be strictly adhered to in case of appointments in private companies which
the official may have had significant dealings in his official capacity.

276
 It would still be better if the provision of whistle blower policy in some form is
extended to the independent directors as well-so that they are not eased out of the
board unceremoniously and meted out prejudicial treatment for their probity and
objectivity. It would be vital so that they can act in the best interests of the
company without undue influence or interference by the management.
It may be worthwhile to consider a policy of maximum terms for independent
directors on a particular board. Such a policy of a great extent would put a check
on independent directors developing permanent vested interest in the company or
the company co-opting them on their side. This would also allow companies to
benefit from new ideas, new experience, new skills which will come with the
change in independent directorship.
No doubt, the recent amendments, in the listing agreement would instill further
confidence in the management of the companies when the Indian economy is growing
fast and the corporate sector is on high growth path. The onus lies squarely on every
stakeholder to see that the independence of ‘independent directors’ does not turn out to
be just a illusion or far-fetch dream,
c) Model code of ethics
This Code of Ethics for Principal Executive and Senior Financial Officers (the
“Code”) helps maintain the standards of business conduct for the Company. The
purpose of the Code is to deter wrongdoing and promote ethical conduct. The matters
covered in this Code are of the utmost importance to the Company, our shareholders
and our business partners. Further, these are essential so that we can conduct our
business in accordance with our stated values. This Code is intended to supplement the
Company’s Code of Conduct.
The Code is applicable to the following persons, referred to as Officers:-44
Our principal executive officer,
Our principal financial officer,
Our principal accounting officer or controller, and
All professionals servicing in the roles of finance, tax, accounting,
purchase, treasury, internal audit, financial analyst and investor relations.

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 Further, this includes all disclosure committee members, all members of
the senior management, the member of the adult committee, and members
of the board of the Company and its subsidiaries.
Ethical business conduct is critical to our business. Accordingly, Officers are expected
to read and understand this Code, upheld these standards in day-to-day activities, and
comply with all applicable laws; rules and regulations; the Company’s Code of
Conduct; and all applicable policies and procedures adopted by the Company that
govern the conduct of its employees.
Because the principals described in this Code are general in nature, Officers should
also review the Company’s other applicable policies and procedures for more specific
introduction. They may contact HR department or finance department if hey have any
questions.
Nothing in this Code, in any Company policies and procedures; or in other related
communications (verbal or written), creates or implies an employment contract or
term of employment.
Honest and Ethical Conduct
We except all Officers to act in accordance with the highest standards of personal and
professionals integrity, honesty and ethical conduct, while working on the company’s
premises, at offside locations where the Company’s businesses being conducted, at
Company business is being conducted, at Company sponsored business and social
events, or at any other place where Officers are representing the Company.
We consider honest conduct to be conduct that is free from fraud or deception. We
consider ethical conduct to be conduct conforming to the accepted professionals
standards of conduct. Ethical conduct includes the ethical handling of actual or
apparent conflicts of interest between personal and professional relationships,
d) Integral Regulations to Control Insider Trading:
Despite the existence of SEBI (Prohibition of Insider Training) Regulations, 1992, the
menace of insider trading has not been fully curbed. The shadow of indulgence in
insider trading has cast a doubt on the fair functioning of stock trading system. The
companies must, tack a lead in this functioning of stock trading system. The
companies must, take a lead in this regard by strengthening internal systems. Some

♦
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companies have made specific provisions to prevent insider systems. Some companies
have made specific provisions to prevent insider trading while dealing with securities
of the company. The companies should clearly and comprehensively define term like
“insider trading”, “Securities”, “unpublished price sensitive information.”45 These
should prevent the dissemination of unpublished price sensitive information.” These
should prevent the dissemination of unpublished price sensitive information and
should also prohibit dealings, communication or counseling by the insiders as regards
the securities of the company. Penalties for insider dealing must also be clearly
indicated in the company rules. The existence and enforcement of rules should form
part of the service conditions of employees. SEBI has also prescribed Mode Code of
conduct for prevention of Insider Trading for listed companies and for entities.
Ill) CONCLUSION
Companies and government are guided by the concept of corporate social
responsibility.
Companies are generally acutely aware of the need to conduct their business
responsibly in the countries in which they operate and recognize the need to reconcile
all three pillars of sustainable development in their decisions and activities. Many
companies have expressly developed and adopted their own corporate principles and
codes of conduct, which they apply to their worldwide operations. They have long
realized that understanding their responsibilities and investing substantially in their
own human resources enable them to attract and retain a highly qualified workforce.

Principle of corporate social responsibility is well enshrined in India:

A survey by the Tata Energy Research Institute (TERI) called ‘Altered Images: the
2001 State of Corporate Responsibility in India Poll’ traces back the history of
Corporate Social Responsibility in India and suggested that there are four models. The
ethical model as suggested by Mahatma Gandhi where companies voluntarily
committed to public welfare and participated in national building. Then followed the

45
Ibid

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statistic model post India’s independence. Propounded by Jawaharlal Nehru this model
calls for state ownership, and legal requirements of Corporate Social Responsibility.
“Altered Images” surveyed workers, company executives and the public in the four
metropolitan cities.46 Some of the main findings were:
1. Environmental pollution was regarded with great concern by all groups.
2. The main expectation of the companies by the public was that the
companies provide good quality products at low prices, treat employees
well without discrimination, protect the environment, help bridge the gap
between and rich and the poor, and help in social and economic
development. Expectation differed across regions.
3. Companies thought non-governmental organizations (NGOs) were the
most trustworthy to work with, in the interest of the country. Employees
and the public believed in the media and religious groups. The government
was not rated highly in this respect. Similarly, companies were not trusted
to report fairly on their initiatives and performances. External and
independent verification was trusted more. Hence, there is a great role that
NGOs and media can play in moving the agenda forward.
4. Child labour was not seen as an issue by company executives and workers.
But the workers did consider gender discrimination as a cause for concern.
A large number of companies globally are becoming conscious about their
societal role and have taken initiatives in the area. Some of the significant ones being
Johnson & Johnson, Shell, Volkswagen, Coca Cola, Levys, Microsoft and many
others.
Closer home, in India, many industry and corporate groups have and are in the process
of doing their part as far as Corporate Social Responsibility is concerned. To mention
a few, Tatas have been very active in the area of town planning, education, community
health, water management and many more. The Birla group has been associated with a
number of activities including building temples as also building and running large
multispeciality hospitals. Among the newer groups mention should be made about
Infosys Technologies, which has set up an Infosys Foundation, with the specific

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purpose of undertaking community projects in areas of education, rural development,
promotion of art and music. As we look to the future and the road ahead, not
undermining the contributions made by individuals and industry/ corporate in the past,
the following are some of the needs of the hour:
a) There is need to graduate from just “charity” approach and social
responsibility initiatives have to be integrated with the business strategy.
b) There is need for pro-active intervention, rather than just responding to
requests for contributions.
c) There is need to institutionalize decision making and investing employees
and other stakeholders in the process.
d) Last, but not the least, it is important to assess the impact of these
interventions and in the light of that, fine tune strategies.
Result of absorption of the concept of Corporate Social Responsibility, we got in form
of various legislative enactments. The latest example is clause 49 of listing
agreements about corporate governance and the ethical code of conduct for principal
executives and senior financial officers. But the real intention of the legislature can
find root only when corporate world will realize its responsibility towards society.

Not to hesitate this can be said that the terrible scandal in Satyam Computer Services
Ltd. had scorched the wires of measures to enhance Corporate responsibility towards
its employees & society. The Satyam crises has depicted the faith of its employees.
This is visible through the following statements made by its employees.47
One of the Satyam employee said “It was like a tsunami striking us when we
were sleeping.” While the other said that the brand I had boasted of so far rested on
fake balance sheets. The management has been deluding us all along.” Now we learn
from national television that our company is bankrupt and our chairman is a fraud.
Can it get more unprofessional.” This shows the gravity of broken faith of Satyam
Employees can this broken faith be ever healed up and restarted question.
In the wake of the bombshell dropped by Ramalinga Raju on Wednesday, Sebi is
probing whether the sale of a sizable chunk of his shares by FIs in lieu of his debts just

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a few days ago amounted to insider trading. If the suspicions is confirmed, legal
experts feel that the proceeds of that sale could well be distributed among the
thousands of small investors hit by the sharp drop in the value of Satyam shares,
This is despite the fact that, strictly speaking, the law provides little remedy to
investors even when they suffer due to corporate misfeasance. Shares are accepted as
an inherently risk-prone investment.
Last to conclude, it is sure that law will take its course and no one who found
guilty in Satyam Scandal case shall go unscathed.48
CEO, Managing Director Independent Directors and Auditors and also
previous director shall be liable for the contributory fraud and breach of fiduciary
duty.
How could the cash the deposits have been manipulated? PwC made the
situation worse by saying. “The audits were conducted by Pricewater house in
accordance with applicable auditing standards and were supported by appropriate
audit evidence.” Really? Despite following PwC auditing standards, the firm cannot
reveal fictitious cash balances and deposits. Wouldn’t it have made more sense to say
we are reviewing our auditing standards as we missed the boat here? And if they have
any evidence to the contrary, “client confidentiality” is not the best curtain to hide
behind. Soon, PwC may not have any clients to be confidential about.
If international investors and clients of IT companies cannot be assured about
the audited accounts then they will ask for a risk premium when doing business with
India. This is where calling it India’s Enron is misplaced. Enron’s manipulation of
derivates off balance sheet was highly sophisticated, and difficult to penetrate. Here
we are talking cash and deposits. Furthermore, the fact that the top executives ended
up behind bars, the auditing firm went bankrupt, and the employees lost all their
pensions demonstrated that there were high costs for everyone involved. This gives
investors assurance that while fraud can occur; there are teeth in the laws and
substantial costs for fraud can be demanded. 49

48 Times Business, Jan. 25, 09 P. 19

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