Confederation of Indian Industry (CII)

CII drafted some codes of Corporate Governance. CII was set up in mid 1996 under the leadership of Mr. Rahul Bajaj.

Objectives:
1. To develop the Indian industry and help in its growth. 2. To indentify and strengthen industrys role in economic development of the country. 3. To provide updated information and required data to the industry and the government. 4. To indentify and address the special needs of small sector to make it more competitive. 5. To create awareness and support industrys effort on quality, environment and consumer protection. 6. To work towards globalization of the Indian industry.

Recommendations:
1. The full board should meet a minimum of 6 times a year preferably at an interval of 2 months and each meeting should have an agenda item that require at least half a days discussion. 2. Any listed company with a turnover of Rs. 100 crores and above, should have professionally competent, independent and non executive directors who should constitute: 30% of the board if the chairman is non executive At least 50% of the board if the chairman and the managing director is the same person. 3. No single person should hold directorship in more than 10 listed companies. 4. For non executive directors to play a material role in corporate decision making and maximizing long term shareholders value they need to: Become active participants in the board and not passive advisors.

 Have clearly defined responsibilities within the board such as the audit committee, and Know how to read the balance sheet, P&L A/C, cash flow statement, financial ratios and have some knowledge of various company laws. This excludes those who are invited to join the board as experts in other fields such as science and technology. 5. To secure better efforts from the non executive directors of the company should: Pay a commission over and above the sitting fees for the use of professional inputs. Consider offering stock option so as to relate rewards to performance. 6. While reappointing members of the board, companies should give the attendance record of the concerned directors. If a director has not been present for 50% or more meetings then it should be stated in the resolution that is put to vote. As a general practice one should not reappoint any director who has not had the time to attend 50% 0f the meetings. 7. Key information that must be reported and placed before the board should contain: Annual operating plans and budgets together with updated long term plans. Capital budget, manpower and overhead budgets. Quarterly results for the company as a whole and its operating divisions or company segments. Internal audit reports including cases of theft and dishonesty of material nature. Show causes, demand and prosecution notices received from revenue authorities that are considered to be materially important. Fatal or serious accidents, dangerous occurrences and any pollution problems. Default in payment of interest or non payment of principle on any public deposits, creditor or financial institutions. Defaults such as non payments of inter corporate deposits. Details of joint ventures or collaboration agreements. Transactions that involve substantial payments towards good will, brands etcetera.

 Recruitment and remuneration of senior officers just below boards. Labour problem and their and possible solutions. Quarterly details of foreign exchange exposure and steps taken by the management to limit the risk. Any issue which involves possible public or product liability. 8. Listed company with a turnover of over 100 crores or a paid up capital of 20 crores should set up an audit committee within two years. Audit committee should consist of 3 non executive directors, who have adequate knowledge of finance accounts and basic company law. Audit committee shall assist the board for accounting and reporting and provide effective supervision. They will spend considerable time in companys work. They will periodically interact with the auditors and fulfil their responsibilities honestly. 9. Listed company should give data on: High and low monthly averages of share prices in major stock exchanges where the company is listed. Details giving shares in sales, revenue analysis of markets and review of operations and future prospectus. 10. Consolidation of group accounts should be optional and if a company chooses to voluntarily consolidate it should not be necessary to annex the accounts of its subsidiary companies. If the company consolidates, then it should include the parent company and its subsidiaries where the reporting company owns 50% of voting rights. 11. Major Indian stock exchanges should insist upon a compliance certificate signed by the CEO and CFO which should clearly state that: The management is responsible for the preparation of the financial statements. The accounting policies and principles are followed and if not it should be disclosed. The board has overseen the companys internal controls either through director or through its audit committee. 12. For all the companies with paid up capital of 20 crores or more the quality and quantity of disclosure done in GDR issue should be the norm of any domestic issue.

13. Government must allow greater funding to the corporate sector against the security of shares and other papers. 14. FIs can eliminate having nominee directors except where there is a serious default and company is not providing 6 monthly or quarterly data. 15. If any company goes to more than 1 credit rating agency then it should be mentioned in the prospectus. The rating should be shown in the tabular form giving the details of the companys rating along with all other rating. Companies which are making foreign debt issue should have the same disclosure norms for foreign and Indian investors. 16. Companies that defaulted on fixed deposits should not be allowed to accept further deposits and make inter corporate loans and declare dividends. 17. Reduction in the number of companies where there are nominee directors. FIs are on the board in a number of companies. FIs should take policy decision to withdraw from the companys where there individual shareholdings is 5% or less or the total holdings of the FIs is under10%.

Cadbury Committee Report

A committee was set up under the chairmanship of Adrian Cadbury in May 1991 by the financial reporting council, the London Stock Exchange and the accountancy professional to look into the financial aspects of corporate governance. The committee first submitted its report on 27th May 1992. The recommendations made by the Cadbury committee are as follows: 1. Decision making power should not be vested in a single person. The roles of chairman and chief executive officer should be separate. 2. Non-executive directors should act independently while giving their judgement on performance, strategy, allocation of resources and designing codes of conduct. 3. A majority of directors should be independent/non-executive directors i.e. they should not have any financial interest in the company. 4. The term of director should not exceed 3 years. This can be extended only with the prior approval of the shareholders. 5. There should be full transparency in matters relating directors emoluments. 6. A remuneration committee should largely consist of non-executive directors. They should decide the pay of executive directors. 7. The interim company report should give the balance sheet information and should be reviewed by the auditor. 8. The pension funds should be separately managed. 9. There should be a profession and objective relationship between the board and the executives. 10. Information regarding the audit fees should be made public and there should be regular rotation of auditors. The recommendations made by the Cadbury committee were widely accepted by corporate in UK and they became a reference point for many other committees, which were set up by various governments all over the world.

Clause 49
Clause 49 of the listing agreement requires a listed enterprise to comply with certain conditions of corporate governance and to obtain a certificate from its statutory auditors regarding such compliance. This certificate is required to be annexed to the directors report and is to be sent to the stock exchange along with the annual return. The requirements of the clause and the recommendations of the ICAIs guidance note on certificate on corporate governance are discussed below: 1. BOD composition: BOD shall consist of executive and non-executive directors and not less than 50% of BOD should be non-executive director. Non-executive directors are directors who are not involved in day-to-day management of the company. A non-executive director may or may not be independent. The number of independent directors would depend on whether the chairman is executive or non-executive. In case of a non-executive chairman at least 1/3rd of the board should comprise of independent directors and in case of an executive chairman, at least of the board should consist of independent directors. 2. Pecuniary relationship: The company agrees that all pecuniary relationship or transaction of the non-executive directors with regard to the company should be disclosed in the annual report. 3. Remuneration of the Directors: a. The company agrees that the remuneration of the non-executive directors shall be decided by the BODs. b. The company further agrees that the following disclosures on the remuneration of the directors shall be made in the section on the corporate of the annual report. i. All the elements of remunerations including salary, bonus, pensions. ii. Details of performance linked incentive along with the performance criteria.

iii. iv.

Service control notice period. Stock option details if any.

4. Board procedures: a. Company agrees that the board meeting shall be held at least 4 times a year with a minimum gap of 4 months between any 2 meetings. b. The company agrees that a director shall not be a member in more than 10 committees or act as chairman of more than 5 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 the changes as and when they place. All public company whether listed or not shall be included and private company, foreign company and company of sec 25 of Companies Act shall be excluded. The auditor should examine the minute books of BODs. He should examine the mandatory annual intimation field by each director about the committee position he occupies in other company and the changes notified by every director. 5. Management: a. Management discussion analysis report: The company agrees that as part of the directors report or as an addition thereto, a management discussion and analysis report should form part of the annual report to the shareholders. It includes: i. Industry structure and development. ii. Opportunities and threat. iii. Segment wise/position wise performance. iv. Outlook v. Risks and concerns. vi. Internal control system and their adequacy. vii. Discussions on financial performance. viii. Material development in Human Resource.

b. Disclosures: Disclosures must be made by the management to the board relating to all material financial and commercial transactions where they have personal interest eg. Dealing in company shares, commercial dealings with bodies which have shareholding of management and their relatives etc. 6. Shareholders: A. Appointment and reappointment of directors: The company agrees that in case of the appointment of the new director and reappointment of the director the shareholders must be provided with the following information: i. A brief resume of the director. ii. Nature of his expertise in specific functional areas. iii. Names of company in which the person also hold the directorship and the membership of committee of the board. B. Website: The company further agrees that the information likely quarterly results, presentations made by company to analysts shall be put on companys website or shall be sent in such a form so as to enable the Security Exchange on which the company is listed to put it on its own website. C. Investors grievances: The company further agrees that a board committee under the chairmanship of a non-executive director shall be formed to specifically look into the redressing of shareholders, non receipt of balance sheet, non receipt of declared dividends etc. D. Share transfer: The company further agrees that to expedite the process of share transfer the board of the company shall delegate the power of share transfer to an officer or a committee or to the registrar and the share transfer agents. The delegated authority shall attend to share transfer formalities at least once in a fortnight.

7. Report on corporate governance: The company agrees that there shall be a separate section on corporate governance in the annual report of the company with a detailed compliance report on corporate governance. Non compliance of any mandatory requirement i.e. which is part of the listing agreement with reasons thereof and the extent to which the non mandatory requirements have been adopted should be specifically highlighted.

Kumar Mangalam Birla Committee Report Kumar Mangalam Birla headed the committee appointed by the SEBI on 7 th May 1999. The committee was formed to promote and raise the standard of corporate governance. Recommendations of Birla Committee report are as follows: 1. Composition of Board of Directors: The board should consist of executive as well as non executive directors. At least 50% of the board should consist of non executive directors. At least 50% of the executive chairman should be an independent director and 1/3rd of the non executive chairman should be an independent director. 2. Audit committee: A qualified and an independent audit committee should be set up by the board of the company. This will help in increasing the importance of the financial disclosures of a company and promote transparency. 3. Remuneration committee: The board should set up a remuneration committee to determine on their behalf and on behalf of the shareholders, the companys policy on remuneration packages of executive director. 4. Shareholder issues: The board should set up a committee under the chairmanship of non executive/independent director to specifically look into shareholders issues including share transfer and redressing shareholders complaints. 5. Share transfer: To expedite the process of share transfer, the board should delegate the power of share transfer to an officer or a committee or the registrar and share transfer agents.

 The delegated authority should attend the share transfer formalities at least once in fortnight.

6. Annual report: The corporate governance section of annual report should make disclosures on remunerations paid to director in all form including salary, bonuses, benefits, stock options, pensions etc. 7. Board meetings: The board meeting should be held at least 4 times in a year with a maximum of time gap of 4 months between any 2 meetings and all information recommended by the SEBI committee should be placed before the board. 8. Management discussion analysis report: As a part of the disclosure related to management in additions to the directors report, management discussion and analysis report should form part of the annual report to the shareholders. 9. Website: All company related information like quarterly results, presentations made by company to analysts may be put on companys website 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 website. 10. Compliance: There should a separate section on corporate governance in the annual report with the details on the level of compliance by the company. If nay mandatory recommendations are not complied with, then reason should be specified.

11. Committees position: No director should be a member in more than 10 committees or act as a chairman in more than 5 committees across all the companies in which he is a director. Every director should inform the company about the committees position he occupies. 12. Brief resume: The company should provide a brief resume, the expertise in functional areas, names of companies in which they are the directors and members of the committee. 13. Disclosures: Disclosures should be made to the board by the management regarding all material, financial and commercial transactions where they have personal interest. 14. Declarations: The half yearly declarations of financial performance including summary of the significant events in last 6 months should be sent to each shareholder. 15. Financial Institutions: The financial institutions should have no direct role in the decision making of the board of the company. 16. Recommendations: A separate section on compliance with the mandatory recommendations of clause 49 should form part of the report and details of non compliance should be highlighted. 17. Certificate from auditors: A certificate from the auditors on compliance should form part of the annual report; an annual report and annual return copy has to be sent to the stock exchange.