Professional Documents
Culture Documents
Final - Ethics Project
Final - Ethics Project
Submitted by
Upasana Gupta (15911)
Diwakar Anand (15912)
Skiti Lakhmani (15926)
Ashima Sehgal (15933)
BFIA III
Acknowledgements
We would like to take this opportunity to thank Ms. Achint Arora, who gave us the opportunity to
We would also like to express our gratitude towards Mr. Suresh Anand, CA, Sachit Khera, Article,
KPMG and Karan Khera, Article, AS Associates, for enhancing our understanding of our topic, and
helping us gain an insight into the way the corporate world observes corporate governance. In the end,
we would also like thank the library staff who helped us find journals, magazines and books related to
our study.
The project would not have been conceived and executed without your support. Thank you all.
Contents
11. CONCLUSION 51
12. ANNEXURES 52
Introduction
The subject of corporate governance leapt to global business limelight from relative obscurity after a
string of collapses of high profile companies. Enron, the Houston, Texas based energy giant, and
WorldCom, the telecom behemoth, shocked the business world with the magnitude of their
unethical and illegal operations. Worse, they seemed to indicate only the tip of a dangerous iceberg.
While corporate practices in the US companies came under attack, it appeared that the problem was
far more widespread. Large and trusted companies from Parma at in Italy to the multinational
newspaper group Hollinger Inc., revealed significant and deep-rooted problems in their corporate
governance. Even the prestigious New York Stock Exchange had to remove its director, Dick Grasso,
amidst public outcry over excessive compensation. It was clear that something was amiss in the area
of corporate governance all over the world.
And while these high-profile corporate governance failures have brought the subject to the
forefront, the issue has always been central to finance and economics.
Further, good corporate governance lowers of the cost of capital by reducing risk, and creates
higher firm valuation, once again boosting real investments. It also ensures better resource
allocation, and the return on assets (ROA) has been shown to be about twice as high in the countries
with the highest level of equity rights protection as in countries with the lowest protection. Finally,
good corporate governance can remove mistrust between different stakeholders, reduce legal costs
and improve social and labour relationships and external economies like environmental protection.
The central issue to corporate governance is the nature of the contract between shareholder
representatives and managers telling the latter what to do with the funds contributed by the former.
The shareholders do not have the expertise or the inclination to run the business, so these must go to
management. The efficient limits to these powers constitute much of the subject of corporate
governance. The reality is even more complicated and biased in favour of management.
In real life, managers wield an enormous amount of power in joint-stock companies and the
common shareholder has very little say in the way his or her money is used in the company. Most
shareholders do not care to attend the General Meetings to elect or change the Board of Directors,
and often grant their “proxies” to the management. Even those that attend the meeting find it
difficult to have a say in the selection of directors as only the management gets to propose a slate of
directors for voting.
Often the CEO himself is the Chairman of the Board of Directors as well. Consequently the
supervisory role of the Board is often severely compromised and the management, who really has
the keys to the business, can potentially use corporate resources to further their own self- interests
rather than the interests of the shareholders.
Keeping a professional management in line is only one, though perhaps the most important, of the
issues in corporate governance. Essentially corporate governance deals with effective safeguarding
of the investors’ and creditors’ rights and these rights can be threatened in several other ways. For
instance, family businesses and corporate groups are common in many countries including India.
Inter-locking and “pyramiding” of corporate control within these groups make it difficult for
outsiders to track the business realities of individual companies in these behemoths. In addition,
managerial control of these businesses are often in the hands of a small group of people, commonly
a family, who either own the majority stake, or maintain control through the aid of other block
holders like financial institutions. Their own interests, even when they are the majority
shareholders, need not coincide with those of the other – minority – shareholders. This often leads to
expropriation of minority shareholder value through actions like “tunneling” of corporate gains or
funds to other corporate entities within the group. Such violations of minority shareholders’ rights
also comprise an important issue for corporate governance.
The history of the development of Indian corporate laws has been marked by interesting contrasts.
However, concerns about corporate governance in India were, however, largely triggered by a spate
of crises in the early 90’s – the Harshad Mehta stock market scam of 1992 followed by incidents of
companies allotting preferential shares to their promoters at deeply discounted prices as well as
those of companies simply disappearing with investors’ money.
These concerns about corporate governance stemming from the corporate scandals as well as
opening up to the forces of competition and globalization gave rise to several investigations into the
ways to fix the corporate governance situation in India. One of the first among such endeavors was
the CII Code for Desirable Corporate Governance developed by a committee chaired by Rahul Bajaj.
The committee was formed in 1996 and submitted its code in April 1998. Later SEBI constituted two
committees to look into the issue of corporate governance – the first chaired by Kumar Mangalam
Birla that submitted its report in early 2000 and the second by Narayana Murthy three years later.
The SEBI committee recommendations have had the maximum impact on changing the corporate
governance situation in India. The Advisory Group on Corporate Governance of RBI’s Standing
Committee on International Financial Standards and Codes also submitted its own recommendations
in 2001.
A comparison of the various recommendations reveals the progress in the thinking on the subject of
corporate governance in India over the years. An outline provided by the CII was given concrete
shape in the Birla Committee report of SEBI. SEBI implemented the recommendations of the Birla
Committee through the enactment of Clause 49 of the Listing Agreements. They were applied to
companies in the BSE 200 and S&P C&X Nifty indices, and all newly listed companies, on March 31,
2001; to companies with a paid up capital of Rs. 10 crore or with a net worth of Rs. 25 crore at any
time in the past five years, as of March 31, 2002; to other listed companies with a paid up capital of
over Rs. 3 crore on March 31, 2003. The Narayana Murthy committee worked on further refining
the rules.
The recommendations also show that much of the thrust in Indian corporate governance reform has
been on the role and composition of the board of directors and the disclosure laws. The Birla
Committee, however, paid much-needed attention to the subject of share transfers which is the
Achilles’ heel of shareholders’ right in India.
Clearly much more needs to be accomplished in the area of compliance. Besides, in the area of
corporate governance, the spirit of the laws and principles is much more important than the letter.
Consequently, developing a positive culture and atmosphere of corporate governance is essential is
obtaining the desired goals. Corporate governance norms should not become just another legal item
to be checked off by managers at the time of filing regulatory papers.
Corporate Governance:
Indian Perspective
Based on the recommendations of the Committee on Corporate
Legislative norms are
Governance under the Chairmanship of Wikipedia defines
supported by various
corporate governance as “Corporate governance is the set of
committee reports such
processes, customs, policies, laws, and institutions affecting the
as the CII code, Birla
way a corporation (or company) is directed, administered or
committee, Murthy
controlled. Corporate governance also includes the relationships
committee etc, which
among the many stakeholders involved and the goals for which
form the skeleton of
the corporation is governed.”
With corporate Governance becoming the new buzzword in the business arena today the need for a
structured and unambiguous reference for code of corporate governance assumes significant
importance.
The evolution of corporate governance norms in India has been in the form of various
recommendations and reports that incorporate changes in the desired norms in the context of time.
The Companies Act, 1956 does provide for certain legislative norms in relation to corporate
governance in India, such as Section 198 (overall maximum managerial remuneration), Section 299
(disclosure of interests by director), Section 309 & 269 (remuneration of directors) and certain other
section of the Act read along with Clause 49 of the Listing Agreement which provides for procedure
relating to the disclosures, composition of board of directors, composition of audit committee
including the appointment of independent directors and certain disclosures relating to accounting
treatment, related party transaction. And these legislative norms are supported by various committee
reports such as the CII code, Birla committee, Murthy committee etc. These reports form the skeleton
of corporate governance and disclosure norms in India.
Also, despite excellent rules and regulations, scams like Satyam and recently Citibank have rocked
the financial services industry. So where does the problem lie? The problem lies in the fact that at
present, corporate governance is still seen as a notional, voluntary set of “guidelines” that define
lines of accountability that segregate the relationship between the company and key corporate
individuals.Regulatory authorities are inadequately staffed and lack sufficient number of skilled
people. This has led to less than credible enforcement. Delays in courts compound this problem.
Thus corporate governance in India still lies between the murky shades of black and white, a clear
gray area, in India. The challenge lies in codifying corporate governance norms in quantifiable,
crystal clear terms that leave no wriggle room. And then follow it up with excellent regulatory
mechanism and strict implementation. Only then can corporate governance be not just a voluntary
action by a few but something that transcends barriers of size, industry, sector etc to become a rule
in India’s emerging corporate sector.
CII Code, 1998
The CII code is one of the oldest codes on corporate governance in India, written in 1996 and
finalized in 1998. It sought to define the term “corporate governance” in clear, unambiguous terms.
This initiative by CII flowed from public concerns regarding the protection of investor interest,
especially
the small investor; the promotion of transparency within business and industry; the need to move
towards international standards in terms of disclosure of information by the corporate sector and,
through all of this, to develop a high level of public confidence in business and industry.
1. Board of directors:-
CII flowed from public concerns
regarding the protection of “Obviously not all well governed companies
investor interest, especially do well in the market place. Nor do the badly
the small investor; the governed ones always sink. But even the best
promotion of transparency performers risk stumbling some day if they
within business and industry lack Strong and independent boards of
and the need to move towards directors”-Business Week, 1996
The full board should meet a minimum of six times a year, preferably at an interval of two
months, and each meeting should have agenda items that require at least half a day’s
discussion
Any listed companies with a turnover of Rs.100 crores and above should have professionally
competent, independent, nonexecutive directors, who should constitute at least 30 percent
of the board if the Chairman of the company is a non-executive director or at least 50
percent of the board if the Chairman and Managing Director is the same person.
No single person should hold directorships in more than 10 listed companies
2. Remuneration of directors:-
Most non-executive directors receive a sitting fee which cannot exceed Rs.2,000 per
meeting. The Working Group on the Companies Act recommended that this limit should be
raised to Rs.5,000. Although this is better than Rs.2,000, it is hardly sufficient to induce
serious effort by the non-executive directors.
To secure better effort from non-executive directors, companies should:
Pay a commission over and above the sitting fees for the use of the professional inputs. The
present commission of 1% of net profits (if the company has a managing director), or 3% (if
there is no managing director) is sufficient.
Consider offering stock options, so as to relate rewards to performance.
3. Reappointment of directors:-
While re-appointing members of the board, companies should give the attendance record of the
concerned directors. If a director has not been present (absent with or without leave) for 50
percent or more meetings, then this should be explicitly stated in the resolution that is put to
vote. As a general practice, one should not reappoint any director who has not had the time
attend even one half of the meeting.
4. Disclosure Requirements:-
Key information that must be reported to, and placed before, the board must contain:
Annual operating plans and budgets, together with up-dated long term plans.
Capital budgets, manpower and overhead budgets.
Quarterly results for the company as a whole and its operating divisions or business
segments.
Internal audit reports, including cases of theft and dishonesty of a material nature.
Show cause, demand and prosecution notices received from revenue authorities which are
considered to be materially important. (Material nature is any exposure that exceeds 1
percent of the company’s net worth).
Fatal or serious accidents, dangerous occurrences, and any effluent or pollution problems.
Default in payment of interest or non-payment of the principal on any public deposit,
and/or to any secured creditor or financial institution.
Defaults such as non-payment of inter-corporate deposits by or to the company, or
materially substantial non-payment for goods sold by the company.
Any issue which involves possible public or product liability claims of a substantial nature,
including any judgement or order which may have either passed strictures on the conduct
of the company, or taken an adverse view regarding another enterprise that can have
negative implications for the company.
Details of any joint venture or collaboration agreement.
Transactions that involve substantial payment towards goodwill, brand equity, or intellectual
property.
Recruitment and remuneration of senior officers just below the board level, including
appointment or removal of the Chief Financial Officer and the Company Secretary.
Labour problems and their proposed solutions.
Quarterly details of foreign exchange exposure and the steps taken by management to limit
the risks of adverse exchange rate movement, if material.
5. In relation to audits:-
i. Listed companies with either a turnover of over Rs.100 crores or a paid-up capital of Rs.20
crores should set up Audit Committees within two years.
ii. Audit Committees should consist of at least three members, all drawn from a company’s
non-executive directors, who should have adequate knowledge of finance, accounts and
basic elements of company law.
iii. To be effective, the Audit Committees should have clearly defined Terms of Reference and its
members must be willing to spend more time on the company’s work vis-à-vis other
nonexecutive directors.
iv. Audit Committees should assist the board in fulfilling its functions relating to corporate
accounting and reporting practices, financial and accounting controls, and financial
statements and proposals that accompany the public issue of any security—and thus
provide effective supervision of the financial reporting process.
v. Audit Committees should periodically interact with the statutory auditors and the internal
auditors to ascertain the quality and veracity of the company’s accounts as well as the
capability of the auditors themselves.
vi. For Audit Committees to discharge their fiduciary responsibilities with due diligence, it must
be incumbent upon management to ensure that members of the committee have full access
to financial data of the company, its subsidiary and associated companies, including data on
contingent liabilities, debt exposure, current liabilities, loans and investments.
vii. By the fiscal year 1998-99, listed companies satisfying criterion (1) should have in place a
strong internal audit department, or an external auditor to do internal audits; without this,
any Audit Committee will be toothless
6. Additional Shareholder information:-
i. Under “Additional Shareholder’s Information”, listed companies should give data on:
ii. High and low monthly averages of share prices in a major Stock Exchange where the
company is listed for the reporting year.
iii. Greater detail on business segments up to 10% of turnover, giving share in sales revenue,
review of operations, analysis of markets and future prospects.
7. Creditor Rights:-
As creditors are not shareholders, and so long as their dues are being paid in time, they should desist
from demanding a seat on the board of directors.
It would be desirable for FIs as pure creditors to re-write their covenants to eliminate having
nominee directors except:
a) in the event of serious and systematic debt default; and
b) in case of the debtor company not providing six-monthly or quarterly operational data to
the concerned FI(s).
8. Credit Rating:-
If any company goes to more than one credit rating agency, then it must divulge in the
prospectus and issue document the rating of all the agencies that did such an exercise.
It is not enough to state the ratings. These must be given in a tabular format that shows
where the company stands relative to higher and lower ranking. It makes considerable
difference to an investor to know whether the rating agency or agencies placed the
company in the top slots, or in the middle, or in the bottom.
Kumar Mangalam Birla
Committee Report, 1999
The CII National Task Force, constituted under the chairmanship of Mr. Rahul Bajaj, presented the
draft guidelines and the code of Corporate Governance for public comments and suggestion in April
1997, on the basis of which, the Desirable Corporate Governance Code was finalized. CII presented
the Code for information, for understanding and for implementation of Indian business and
industry in 1998.
During the process of preparation of this code three aspects were considered crucial by the
committee. Firstly, there is no unique structure of
"corporate governance" in the developed world; nor is
one particular type unambiguously better than others.
While the CII Code was a
That's why mechanical import of the concept is not
huge leap for the
possible. Secondly, the Indian companies, banks and
country in the area of financial institutions (FIs) can no longer afford to ignore
corporate governance better corporate practices. Lastly, corporate governance
goes far beyond company law. The quantity, quality and
frequency of financial and managerial disclosure, the
extent to which the board of directors exercise their fiduciary responsibilities towards shareholders,
the quality of information that management share with their boards, and the commitment to run
transparent companies that maximize long term shareholder value cannot be legislated at any level
of detail. This committee made 17 recommendations on different subject of corporate governance.
While this was a huge leap for the country in the area of corporate governance norms, it was clearly
inadequate. Security and Exchange Board of India (SEBI) also constituted a committee under the
chairmanship of Shri Kumar Mangalam Birla to see the matters of corporate governance and
recommend necessary suggestion. The objective of the committee was to view corporate governance
from the perspective of investors and shareholders and to prepare a code to suit the Indian
corporate environment, as corporate governance frameworks are not exportable. For this purpose
committee identified three major constituents viz. shareholders, the board of directors and the
management and three key aspects viz. accountability, transparency and equal treatment for all
stakeholders of corporate governance. The committee made twenty-five recommendations and
categorized them as mandatory and non-mandatory.
The Committee therefore agreed that the fundamental objective of corporate governance is the
"enhancement of shareholder value, keeping in view the interests of other stakeholder". This
definition harmonises the need for a company to strike a balance at all times between the need to
enhance shareholders’ wealth whilst not in any way being detrimental to the interests of the other
stakeholders in the company.
The report submitted by the committee was the first formal and comprehensive attempt to evolve a
‘Code of Corporate Governance', in the context of conditions prevailing in governance in Indian
companies, as well as the state of capital markets.
The Committee's terms of the reference were to:
suggest suitable amendments to the listing agreement executed by the stock exchanges with
the companies and any other measures to improve the standards of corporate governance in
the listed companies, in areas such as continuous disclosure of material information, both
financial and non-financial, manner and frequency of such disclosures, responsibilities of
independent and outside directors;
draft a code of corporate best practices; and
Suggest safeguards to be instituted within the companies to deal with insider information
and insider trading.
The primary objective of the committee was to view corporate governance from the perspective of
the investors and shareholders and to prepare a ‘Code' to suit the Indian corporate environment.
The committee had identified the Shareholders, the Board of Directors and the Management as the
three key constituents of corporate governance and attempted to identify in respect of each of these
constituents, their roles and responsibilities, as also their rights in the context of good corporate
governance.
Corporate governance has several claimants –shareholders and other stakeholders - which include
suppliers, customers, creditors, and the bankers, the employees of the company, the government and
the society at large. The Report had been prepared by the committee, keeping in view primarily the
interests of a particular class of stakeholders, namely, the shareholders, who together with the
investors form the principal constituency of SEBI while not ignoring the needs of other stakeholders.
The committee divided the recommendations into two categories, namely, mandatory and non-
mandatory. The recommendations which were absolutely essential for corporate governance could
be defined with precision and which could be enforced through the amendment of the listing
agreement could be classified as mandatory. Others, which were either desirable or which may have
required change of laws were classified as non-mandatory.
1. Applicability:-
2. Board of directors:-
The Board of a Company provides leadership and strategic guidance, objective judgement
independent of the management to the Company and exercises control over the Company.
The Board must fulfil its legal requirements and also must be aware and understanding of
its responsibilities
An effective corporate governance system is one, which allows the Board to perform these
dual functions efficiently
a) Functions of BOD:-
Directs the Company by formulating and reviewing the Company’s policies.
Controls the Company and its management by laying down the code of conduct.
Is accountable to the shareholders for creating, protecting and enhancing wealth and
resources of the Company.
Is not involved in day to day management of the Company.
b) Composition:-
Executive directors are involved in the day to day management of the Companies
Non executive directors bring external and wider perspective and independence to the
decision making. (Non executive directors may be independent or non-independent.)
Independent Directors
i. Receive director’s remuneration
ii. Do not have any other material pecuniary relationship or transactions with
the Company, its promoters, its management etc.,
iii. Emphasis on the calibre of the non executive directors.
c) Mandatory Recommendations:-
Optimum combination of executive and non-executive directors with not less than 50%
of the board comprising the non executive directors.
At least one third of the board should comprise of independent directors
Institutions should appoint nominees on the board of Companies only on a selective basis
where such appointment is considered necessary to protect the interest of the Institution
The role of the Chairman is to ensure that the board meetings are conducted in an
effective manner. The Chairman’s role should in principle be different from that of the
Chief Executive.
d) Non-mandatory Recommendation:-
3. Audit Committee:-
a) Mandatory recommendations
A qualified and independent audit committee should be set up by the board of a Company.
This would go a long way in enhancing the credibility of the financial disclosures of a
Company and promoting transparency
Audit Committee
o Minimum of 3 members ( non executive directors, majority being independent and
with at least one director having financial and accounting knowledge)
o The chairman of the committee should be an independent director.
o The Chairman should be present at AGM to answer shareholder queries.
o The Company Secretary should act as the Secretary to the Committee
Frequency of meetings and quorum of the Audit committee
o Meet at least thrice a year
o One meeting before finalization and one every 6 months
o Quorum should be either 2 members or 1/3rd of the members of the audit
committee whichever is higher and there should be a minimum of two independent
directors. ( this is a mandatory recommendation
Powers of the Audit Committee
o 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.
o Recommending the appointment and removal of external auditor, fixation of audit fee and
also approval for payment for any other services.
o Reviewing with management the annual financial statements before submission to the
board, focussing primarily on:
o Any changes in accounting policies and practices.
o Major accounting entries based on exercise of judgement by management.
o Qualifications in draft audit report.
o Significant adjustments arising out of audit.
o The going concern assumption.
o Compliance with accounting standards
o Compliance with stock exchange and legal requirements concerning financial statements.
o Any related party transactions i.e. transactions of the company of material nature, with
promoters or the management, their subsidiaries or relatives etc. that may have potential
conflict with the interests of company at large.
o Reviewing with the management, external and internal auditors, the adequacy of internal
control systems.
o Reviewing the adequacy of internal audit function, including the structure of the internal
audit department, staffing and seniority of the official heading the department, reporting
structure, coverage and frequency of internal audit.
o Discussion with internal auditors of any significant findings and follow-up thereon.
o Reviewing the findings of any internal investigations by the internal auditors into matters
where there is suspected fraud or irregularity or a failure of internal control systems of a
material nature and reporting the matter to the board.
o Discussion with external auditors before the audit commences, of the nature and scope of
audit. Also post-audit discussion to ascertain any area of concern.
o Reviewing the company’s financial and risk management policies.
o Looking into the reasons for substantial defaults in the payments to the depositors,
debenture holders, share holders (in case of non-payment of declared dividends) and
creditors.
4. Board procedures:-
The Board meetings should be held at least 4 times in a year with a maximum time gap of
4 months between any two meetings.
A director should not be a member in more than 10 committees or act as a Chairman of
more than 5 committees across all companies in which he is a director.
Every director must inform the Company about the Committee positions he occupies in
other Companies and notify changes as and when they take place.
a) Management
Management is responsible for ensuring that the principles of corporate governance are
adhered to and enforced.
b) Mandatory recommendation
Disclosures must be made by the management to the Board relating to all material
financial and commercial transactions, where they have personal interest that may
have potential conflict with the interest of the Company at large
5. Shareholders:-
The GBM provide an opportunity to the shareholders to address their concerns to the
Board of Directors and comment on and demand any explanation on the Annual report or
on the overall functioning of the Company.
a) Mandatory recommendations
Responsibilities of Shareholders
o Show a greater degree of interest and involvement in the appointment of directors
and the auditors.
o Inform themselves about the new directors.
o Shareholders rights
o Right to transfer and registration of shares.
o Obtaining relevant information on the Company on a timely and regular basis
o Participating and voting in shareholder meetings
o Electing members of the Board
o Right to information on takeovers, sale of assets or divisions of the Company and
changes in the Capital structure.
o Half yearly declaration of financial performance including summary of significant
events in the last 6 months should be sent to each household of shareholders.
A board committee under the chairmanship of a non-executive director should be formed
to specifically look into the redressal of shareholder complaints like transfer of shares,
non-receipt of balance sheet, non receipt of declared dividends etc.
- Narayana NR Murthy,
The Company’s Vision Is: "To be a globally respected corporation that provides best-of breed
business solutions, leveraging technology, delivered by best-in-class people." And, its Mission is: "To
achieve our objectives in an environment of fairness, honesty, and courtesy towards our clients,
employees, vendors and society at large."
Infosys’s stresses that its operations are driven by key values that it calls C-LIFE:
1. Customer Delight: A commitment to surpassing our customer expectations.
2. Leadership by Example: A commitment to set standards in our business and transactions and
be an exemplar for the industry and our own teams.
3. Integrity and Transparency: A commitment to be ethical, sincere and open in our dealings.
4. Fairness: A commitment to be objective and transaction-oriented, thereby earning trust and
respect.
5. Pursuit of Excellence: A commitment to strive relentlessly, to constantly improve ourselves,
our teams, our services and products so as to become the best.
Corporate Governance is an area of critical importance to Infosys and one where it has sought to be
a global leader. It is seeking to use its model example to promote far higher standards in India and
Murthy has been one of the most vocal and influential advocates of corporate governance reform in
his country.
The company states: “We believe that sound corporate governance is critical to enhance and retain
investor trust. Accordingly, we always seek to ensure that we attain our performance rules with
integrity. Our Board exercises its fiduciary responsibilities in the widest sense of the term. Our
disclosures always seek to attain the best practices in international corporate governance. We also
endeavor to enhance long-term shareholder value and respect minority rights in all our business
decisions.”
1. Satisfy the spirit of the law and not just the letter of the law.
2. Corporate governance standards should go beyond the law.
3. Be transparent and maintain a high degree of disclosure levels. When in doubt, disclose.
4. Make a clear distinction between personal conveniences and corporate resources.
5. Communicate externally, in a truthful manner, about how the company is run internally.
6. Comply with the laws in all the countries in which the company operates.
7. Have a simple and transparent corporate structure driven solely by business needs.
8. Management is the trustee of the shareholders’ capital and not the owner.
Infosys stresses that at the core of its corporate governance practice is the Board, which oversees
how the management serves and protects the long-term interests of all the stakeholders of the
company. It states: “We believe that an active, well-informed and independent Board is necessary to
ensure the highest standards of corporate governance. Majority of the Board, 9 out of 16, are
independent members. Further, we have compensation, nomination, investor grievance and audit
committees, which are comprised of independent directors.”
1. Board of Directors:-
It is observed that the voluntary recommendations of the CII Code were followed, as well the
revision by the KMBC Report was also complied with. The number of non-executive directors was
increased from 40% to 50% following the revision. The distribution of the responsibilities was
maintained status quo, between the various positions of responsibility in the organisation structure.
Also, although the minimum number of board meetings was decreased from 6 to 4, the company
continued to hold 9 meetings a year. The decrease may have been prompted by setting up of various
committees to monitor each aspect of the company’s functioning. But in this respect, the company
has displayed that it is not following these recommendations to satisfy the letter of the
recommendation, but the intent.
Another significant difference in the two sets of codes was the CII Code stipulated, “To secure better
effort from non-executive directors, companies should pay a commission over and above the sitting
fees for the use of professional inputs. The present commission of 1% of net profits (if the company
has a managing director) or 3% (if there is no managing director) is sufficient; Consider offering
stock options so as to relate rewards to performance. An appropriate mix of the two can align a
non-executive director towards keeping an eye on short term profits as well as long term
shareholder value.”
In 1998-99, the non-executive directors were eligible for a commission of up to 0.5% of the net
profits of the company, the total amounting to Rs. 24 lakhs. However, no stock options were granted
due to regulatory constraints.
The KMBC Report required the setting up of a formal remuneration committee. “The committee
recommends that the board should set up a remuneration committee to determine on their behalf,
and on the behalf of the shareholders with agreed terms of reference, the company’s policy on
specific remuneration packages for executive directors. To avoid conflicts of interest, the
remuneration committee should comprise at least three directors, all of whom shall be non-
executive directors, the chairman of the committee being an independent director.”
These recommendations were strictly complied with. All members of the compensation committee,
including its chairman, were independent, non-executive directors of the company.
The KMB Committee recommended that “there should be a separate section on Corporate
Governance in the Annual Reports of companies, with a detailed compliance report on Corporate
Governance. Non-compliance of any mandatory recommendations with reasons thereof and the
extent to which the non-mandatory recommendations have been adopted should be specifically
highlighted. This will enable the shareholders and the securities market to assess for themselves the
standards of corporate governance followed by a company. (Mandatory recommendation)”
The remarkable aspect is that Infosys had been following this particular practice since before this
recommendation was made, even though there were no
suggestions to this effect in the CII Code. It is proof that
Corporate Governance is
Infosys has upheld high standards of corporate
an area of critical
governance, and disclosures. Wherever the norms were
importance to Infosys
not followed, even though voluntary, it was mentioned
and one where it has
explicitly, and there was no intention to mislead the users
sought to be a global
of the Report by any omissions.
leader
3. Audit Committee
CII Code – “The Audit Committee should consist of at least three members, all drawn from a
company’s non-executive directors, who should have adequate knowledge of finance, accounts and
basic elements of company law.”
The Audit Committee of the company consisted of four non-executive directors, with Mr. Deepak
Satwalekar (of HDFC Bank) as the chairman. There was no mention of the minimum no. of meetings
of the audit company. But the audit committee met twice in the year and reviewed the reports of the
internal auditors and the statutory auditors.
The recommendations for the Audit Committee by KMBC Report were maintained at membership of
the audit committee to three non-executive directors. The committee also maintained status quo
with four members, and chaired by Mr. Deepak Satwalekar. In addition, the KMBC Report also
prescribed the quorum as either two members or one-third of the members of the audit committee,
whichever higher, with atleast two independent directors. This stipulation was also complied with.
It is mentioned that the CII Code did not prescribe the minimum no. of meetings for the Audit
Committee, but was set at least 3 meetings a year by the KMBC Report. The company failed to
observe this recommendation, and only two meetings were held, as before.
It is significant to note that Infosys consciously expanded the scope of its Audit Committee from:
to:
Conclusion:-
Infosys is popularly called the “high priest of corporate governance”, and not without reason.
Through these recommendations and compliance disclosures, it is evident that the company upheld
high standards of managerial ethics, as well as transparency. It satisfied most of the
recommendations of the two codes, with minor exceptions, which were also adequately disclosed.
However, it was also observed that where the norms which it failed to observe, it maintained the
performance as the previous year. Although this may seem as being rigid, and an argument that the
company failed to observe the new recommendations and was able to satisfy only those which were
already in line with its existing practices, may be given. However, we must note that the time
difference between the release of the report (Nov 1999) and the close of the FY was not substantial
to come to the conclusion, as the contravention might have been temporary and due to lack of
sufficient time for implementation.
It is also significant to note here that the company has strong corporate governance practices in
place, embedded into its structure and operations, and it follows not just the recommendations made
in India, but also the Cadbury Report (U.K.) and the Blue Ribbon Report (U.S.A).
The Stakeholder Theory of Business Ethics states, in a nutshell, that a business may be considered
ethical f it takes care of the interests of all its stakeholders- both primary and secondary, for e.g.
employees, suppliers, customers etc.
The Social Contract theory of Business Ethics states that businesses have an ethical obligation
towards the members of a given society. The theory creates and embeds mutual agreement between
members of societies and established businesses. The members of a society permit business to be
created in these establishments for certain specified benefits that enhance the welfare of the
societies. These benefits include economic efficiency, improved decision-making and improving the
capacity of acquisition and use of modern technology and resources.
As is evident, Infosys is a strongly ethical company, as supported by both these theories of business
ethics as it satisfies the tenets of both of them to qualify as an ethical company.
1. Auditor-Company Relationship:-
Prohibition of any direct financial interest in the audit client by the audit firm, its partners or
members of the engagement team as well as their ‘direct relatives’. It applies when an interest
of more than 2 per cent of the share of profit or equity capital of the audit client is under the
auditor.
Prohibition of receiving any loans and/or guarantees from or on behalf of the audit client by
the audit firm, its partners or any member of the engagement team and their ‘direct relatives’
Prohibition of personal relationships, which would exclude any partner of the audit firm or
member of the engagement team being a ‘relative’ of any of key officers of the client
company,
Prohibition of service or cooling off period, under which any partner or member of the
engagement team of an audit firm who wants to join an audit client, or any key officer of the
client company wanting to join the audit firm, would only be allowed to do so after two years
from the time they were involved in the preparation of accounts and audit of that client.
Also, a list of prohibited non-auditing services has also been provided which include services
such as actuarial, investment banking, internal audit etc.
In the same vein the committee recognizes that it makes sense for auditing corporations to widen
horizons by engaging in business consulting subject to the some covenants.
2. Rotation of auditors:-
The committee takes the issue of qualification of report very seriously and recommends the
following steps.
In case of a qualified auditor’s report, the audit firm may read out the qualifications, with
explanations, to shareholders in the company’s annual general meeting.
It should also be mandatory for the audit firm to separately send a copy of the qualified
report to the ROC, the SEBI and the principal stock exchange (for listed companies), about the
qualifications, with a copy of this letter being sent to the management of the company.
4. Certificate of Independence:-
The Committee felt that it will be good practice for the audit firm to annually file a certificate of
independence to the Audit Committee and/or the board of directors of the client company. This will
help in ensuring that the auditors have retained their independence throughout their period of
engagement.
An important question that this committee tries to address is of regulating the regulators. It
recommends setting up of three independent Quality Review Boards (QRB), one each for the ICAI,
the ICSI and ICWAI, to periodically examine and review the quality of audit, secretarial and cost
accounting firms, and pass judgement and comments on the quality and sufficiency of systems,
infrastructure and practices.
6. Independent Directors:-
The committee not only defines the number and persons qualifies to be independent director but
also feels that to be really effective, independent directors need to have a substantial voice, by being
in a majority. It was felt that rather than the management or the promoters, the Committee should
put its weight behind minority shareholders and other stakeholders such as consumer or creditors.
The committee therefore recommends that independent directors have adequate presence and
strength on the Board, especially of the companies that are listed or, being public companies above a
specific size.
Also, the minimum board size of all listed companies, as well as unlisted public limited companies
with a paid-up share capital and free reserves of Rs.10 crore and above or turnover of Rs.50 crore
and above should be seven — of which at least four should be independent directors.
However, this will not apply to:
a) unlisted public companies, which have no more than 50 shareholders and which are
without debt of any kind from the public, banks, or financial institutions, as long as they do
not change their character,
b) Unlisted subsidiaries of listed companies.
7. Question of remuneration:-
The maximum sitting fee permitted by the DCA is Rs.5,000. The committee was repeatedly
reminded that peanuts fetch monkeys. The Committee believes that companies cannot hope to get
the best talent unless they make it worthwhile for professionals to extend their time and expertise.
The committee was cautioned that far too much payment may itself impair independence, just as
over-reliance on a single client compromises the independence of auditors. However, the
committee felt that advantages of adequate remuneration require government to review the
position.
8. Corporate Serious Fraud Office:-
Corporate frauds are so intricate that they can only be unravelled by a multi-disciplinary task force.
The Committee, therefore, suggest setting up a Corporate Serious Fraud Office (CSFO), without, at
this stage, taking away the powers of investigation and prosecution from existing agencies, in the
Department of Company Affairs with specialists inducted on the basis of transfer/deputation and on
special term contracts .This should be in the form of a multi-disciplinary team that not only
uncovers the fraud, but is able to direct and supervise prosecutions under various economic
legislations through appropriate agencies
9. Competitive position:-
The profession of accountancy in India is dominated by small firms. This has not only opened them
to threats of competition from larger better organised international firms, but has also limited their
ability to fund top class human resource development. The Committee felt that, in the long run,
Indian audit firms will have to consolidate and grow if they are to compete, especially in non-
statutory functions, internationally. The Government should consider amending the Partnership Act
to provide for partnerships with limited liability, especially for professions which do not allow their
members to provide services as a corporate body.
Narayana Murthy Committee
Report, 2003
The SEBI Committee on Corporate Governance was constituted under the Chairmanship of Shri N. R.
Narayana Murthy, Chairman and Chief Mentor of Infosys Technologies Limited. The committee, to
the likes of most committees was successful in discussing, recommending and drafting a code,
pertaining to the mentioned laid down points; elucidated as follows:
Mandatory Recommendations:-
Audit committees of publicly listed companies should be required to review the following
information mandatorily:
i. Financial statements and draft audit report, including quarterly / half-yearly financial
information;
ii. Management discussion and analysis of financial condition and results of operations;
iii. Reports relating to compliance with laws and to risk management;
iv. Management letters / letters of internal control weaknesses issued by statutory/ internal
auditors; and
v. Records of related party transactions.
Mandatory Recommendations:-
All audit committee members should be "financially literate" and at least one member should have
accounting or related financial management expertise.
III. Audit Reports and Audit Qualifications:-
Mandatory Recommendation:-
Mandatory Recommendation:-
A statement of all transactions with related parties including their bases should be placed before the
independent audit committee for formal approval / ratification. If any transaction is not on an arm's
length basis, management should provide an explanation to the audit committee justifying the same.
Mandatory Recommendation:-
Procedures should be in place to inform Board members about the risk assessment and minimization
procedures. These procedures should be periodically reviewed to ensure that executive management
controls risk through means of a properly defined framework.
Management should place a report before the entire Board of Directors every quarter documenting
the business risks faced by the company, measures to address and minimize such risks, and any
limitations to the risk taking capacity of the corporation. This document should be formally
approved by the Board.
The Committee noted that there is a real necessity for Board members to understand the components
of the business model and the accompanying risk parameters. However, the Committee also noted
that Board members can always ask for information relating to the business model of the company.
It also observed that the process of Board review of business risks will be a mandatory
recommendation of the Committee. Therefore, training of Board members could be made
recommendatory.
Non-mandatory Recommendation:-
Companies should be encouraged to train their Board members in the business model of the
company as well as the risk profile of the business parameters of the company, their responsibilities
as directors, and the best ways to discharge them.
Mandatory Recommendation:-
Companies raising money through an Initial Public Offering ("IPO") should 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. On an annual basis, the company shall
prepare a statement of funds utilised for purposes other than those stated in the offer
document/prospectus. This statement should be certified by the independent auditors of the
company. The audit committee should make appropriate recommendations to the Board to take up
steps in this matter.
VII. Code of Conduct - Written code for executive management:-
Mandatory Recommendation:-
It should be obligatory for the Board of a company to lay down the code of conduct for all Board
members and senior management of a company. This code of conduct shall be posted on the website
of the company.
All Board members and senior management personnel shall affirm compliance with the code on an
annual basis. The annual report of the company shall contain a declaration to this effect signed off
by the CEO and COO.
Explanation - For this purpose, the term "senior management" shall mean personnel of the company
who are members of its management / operating council (i.e. core management team excluding
Board of Directors). Normally, this would comprise all members of management one level below the
executive directors.
Revised Clause 49 of the Listing
Agreement
Based on the recommendations of the Committee on Corporate Governance under the
Chairmanship of Shri Kumar Mangalam Birla, the SEBI had specified principles of Corporate
Governance and introduced a new clause 49 in the Listing agreement of the Stock Exchanges in the
year 2000. These principles of Corporate Governance were made applicable in a phased manner
and all the listed companies with the paid up capital of Rs 3 crores and above or net worth of Rs 25
crores or more at any time in the history of the company, were covered as of March 31, 2003.
Under the revised clause 49, the definition of the expression ‘independent director’ has been
expanded. The expression ‘independent director’ mean non-executive director of the company who
—
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 preceding three financial
years;
iv. 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 material association with the entity.
v. is not a supplier, service provider or customer of the company. This should include lessor-
lessee type relationships also; and
vi. is not a substantial shareholder of the company, i.e. owning two percent or more of the
block of voting shares.
It has been clarified that the Institutional Directors on the boards of companies are independent
directors whether the institution is an investing institution or a lending institution.
Placing the independent directors and non-executive directors on equal footing, the revised clause
provides that the considerations as regards compensation paid to an independent director shall be
the same as those applied to a non-executive director. The companies have been put under an
obligation to publish their compensation philosophy and statement of entitled compensation in
respect of non-executive directors in its annual report. Alternatively, this may be put up on the
company’s website and a reference thereto in the annual report. The company is also required to
disclose on an annual basis, details of shares held by non-executive directors, including on an “if-
converted” basis.
The revised clause also requires non-executive directors to disclose prior to their appointment their
stock holding (both own or held by / for other persons on a beneficial basis) in the listed company in
which they are proposed to be appointed as directors,. These details are required to be accompanied
with their notice of appointment.
The revised clause 49 requires the Independent Director to periodically review legal compliance
reports prepared by the company and any steps taken by the company to cure any taint. The revised
clause specifies that no defence shall be permitted that the independent director was unaware of
this responsibility in case of any proceedings against him in connection with the affairs of the
company.
4. Code of Conduct:-
The revised clause 49 requires the Board of a company to lay down the code of conduct for all Board
members and senior management of a company and the same to be posted on the website of the
company. Accordingly, all Board members and senior management personnel have been put under
an obligation to affirm compliance with the code on an annual basis and a declaration to this effect
signed by the CEO and COO is to be given in the Annual Report of the Company.
It has been clarified that the term senior management will include personnel of the company who
are members of its management / operating council (i.e. core management team excluding Board of
Directors). Normally, this would comprise all members of management one level below the
executive directors.
5. Non–Executive Directors – Not to hold office for more than Nine Years:-
Revised clause 49 limits the term of the office of the non-executive director and provides that a
person shall be eligible for the office of non-executive director so long as the term of office does not
exceed nine years in three terms of three years each, running continuously.
6. Audit Committee:-
Two explanations have been added in the revised clause 49. The first explanation defines the term
“financially literate” to mean the ability to read and understand basic financial statements i.e.
balance sheet, profit and loss account, and statement of cash flows. It has also been clarified that a
member is considered to have accounting or related financial management expertise if he or she
possesses experience in finance or accounting, or requisite professional certification in accounting,
or any other comparable experience or background which results in the individual’s financial
sophistication, including being or having been a Chief Executive Officer(CEO), Chief Financial
Officer(CFO), or other senior officer with financial oversight responsibilities.
The Audit Committee is required to mandatorily review financial statements and draft audit report,
including quarterly / half-yearly financial information, management discussion and analysis of
financial condition and results of operations, reports relating to compliance with laws and to risk
management, management letters/ letters of internal control weaknesses issued by statutory /
internal auditors, and records of related party transactions.
The appointment, removal and terms of remuneration of the Chief Internal Auditor shall be subject
to review by the Audit Committee.
The revised clause 49 requires that in case a company has followed a treatment different from that
prescribed in an Accounting Standards, the management of such company shall justify why they
believe such alternative treatment is more representative of the underlined business transactions.
Management is also required to clearly explain the alternative accounting treatment in the footnote
of financial statements.
Companies have been required to formulate an Internal Policy on access to Audit Committees.
Personnel who observe any unethical or improper practice (not necessarily a violation of law) can
approach the Audit Committee without necessarily informing their supervisors.
Companies are also required to take measures to ensure that this right of access is communicated to
all employees through means of internal circulars, etc. The employment and other personnel
policies of the company should also contain provisions protecting “whistle blowers” from unfair
termination and other unfair or prejudicial employment practices.
Companies have also been required to affirm that it has not denied any personnel access to the
Audit Committee of the company (in respect of matters involving alleged misconduct) and that it has
provided protection to “whistle blowers” from unfair termination and other unfair or prejudicial
employment practices. Such affirmation should form part of the Board’s report on Corporate
Governance that is required to be prepared and submitted together with the annual report.
The revised clause 49 provides that the provisions relating to the composition of the Board of
Directors of the holding company are also applicable to the composition of the Board of Directors of
subsidiary companies. The clause further requires that at least one independent director on the
Board of Directors of the holding company should be a director on the Board of Directors of the
subsidiary company.
The Audit Committee of the holding company has been empowered to review the financial
statements, in particular the investments made by the subsidiary company and the minutes of the
Board meetings of the subsidiary company to be placed for review at the Board meeting of the
holding company. It is further required that the Board’s report of the holding company should state
that they have reviewed the affairs of the subsidiary company also.
The revised clause 49 requires the management to provide a clear description in plain English of
each material contingent liability and its risks, which shall be accompanied by the auditor’s clearly
worded comments on the management’s view. This section is required to be highlighted in the
significant accounting policies and notes on accounts, as well as, in the auditor’s report, where
necessary.
The revised Clause 49 of the Listing Agreement requires the following additional
disclosures:
i. Basis of related party transactions:- A statement of all transactions with related parties shall
be placed before the Audit Committee for formal approval/ratification. If any transaction is
not on an arm’s length basis, management is required to justify the same to the Audit
Committee.
ii. Board Disclosures –Risk management:-The Board members should be informed about the
risk assessment and minimization procedures. These procedures shall be periodically
reviewed to ensure that executive management controls risk through means of a properly
defined framework.
Management shall place a quarterly report certified by the compliance officer of the
company, before the entire Board of Directors documenting the business risks faced by the
company, measures to address and minimize such risks, and any limitations to the risk
taking capacity of the corporation. This document shall be formally approved by the Board.
iii. Proceeds from Initial Public Offerings (IPOs):- 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 their 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. This statement shall be certified by the
independent auditors of the company. The Audit Committee shall make appropriate
recommendations to the Board to take up steps in this matter.
CEO (either the Executive Chairman or the Managing Director) and the CFO (Whole-Time Finance
Director or other person discharging this function) of the company has been put under an
obligation to certify that, to the best of their knowledge and belief, they have reviewed the balance
sheet and profit and loss account and all its schedules and notes on accounts, the cash flow
statements as well as the Directors’ Report and these statements do not contain any materially
untrue statement, omits any material fact or do they contain statements that might be misleading.
Further they are required to certify that these statements together present a true and fair view of the
company, and are in compliance with the existing accounting standards and/or applicable
laws/regulations.
The revised clause requires them to be responsible for establishing and maintaining internal
controls, to evaluate the effectiveness of internal control systems of the company, and to disclose to
the auditors and the Audit Committee, deficiencies in the design or operation of internal controls, if
any. They are also required to disclose to the auditors as well as the Audit Committee, instances of
significant fraud, if any, that involves management or employees having a significant role in the
company’s internal control systems, whether or not there were significant changes in internal
control and / or of accounting policies during the year.
The companies have been required to submit a quarterly compliance report in the prescribed
format to the stock exchanges within 15 days from the close of the quarter. The report has to be
submitted either by the Compliance Officer or the Chief Executive Officer of the company after
obtaining due approvals.
15. Company Secretary in Practice to Issue Certificate of Compliance:-
The following additional items are required to be disclosed in the suggested list of Items to be
included In the Report on Corporate Governance in the Annual Report of Companies.
i. Disclosure of accounting treatment, if different, from that prescribed in Accounting
Standards with explanation.
ii. Whistle Blower policy and affirmation that no personnel has been denied access to the
audit committee.
The following additional disclosures are required to be made under the non-mandatory
requirements:
However, this need not be the case since many essential features of corporate governance which are
already recognized in the Companies Act, 1956 need to be retained and articulated further. What is
required is that along with the changes in the substantive law, wherever required, a review of
procedural aspects may also be undertaken so as to enable greater degree of self-regulation and
easy compliance. Therefore, This would enable the law to remain dynamic and to adapt to the
changes in business environment.1
I. Independent Directors:-
The committee is of the opinion that since the Board is entrusted with a duty to balance the interests
of the stakeholders of the company, the existence of Independent directors on the Board of a
Company would improve corporate governance. Hence, it becomes a stipulation for public
companies or companies with a significant public interest.
1
J.J IRANI recommendations Report-Law and Adaption to Changing circumstances
The whole idea behind the concept is to bring an element of objectivity to the Board process towards
the general interests of the company and thereby to the benefit of minority interests and smaller
shareholders. Independence, therefore, is not to be viewed merely as independence from Promoter
Interests but from the point of view of vulnerable stakeholders who cannot otherwise get their voice
heard.2Thus, it is imperative for Law to recognize the principle of independent directors and spell
out their role, qualifications and liability. At the same time, care should be taken to bring
distinguished prescription as per the different categories of companies.
Major Recommendations:-
1. A committee with a minimum of one third of the total number of directors as independent
directors, irrespective of whether the Chairman is executive or non-executive, independent
or not. This extends to companies listed on the exchange and accepting public deposits.
Major Recommendations:-
The expression ‘independent director’ should mean a non-executive director of the company who:-
a) Apart from receiving director’s remuneration, does not have, and none of his relatives or
firms/companies controlled by him have, any material pecuniary relationships or
2
J.J IRANI recommendations Report-Ministry Of Corporate Affairs
transactions with the company, its promoters, its directors, its senior management or its
holding company, its subsidiaries and associate companies which may affect independence
of the director. For this purpose “control” should be defined in law;
d) is not a the statutory audit firm or the internal audit firm, the legal firm(s) and consulting
firm(s) that have a material association with the company, its holding and subsidiary
companies;
THE J.J Irani committee has recommended a one year cooling off period against a 3 year cooling off
in the Clause-49.
Major Recommendations:-
Other recommendations:-
CEO and CFO should certify all internal controls mandated by the audit committee. A
separate statement on the assessment should also be provided in the director’s report.
The law should also provide for an active role for the shareholders’ associations in ensuring
high quality of financial reporting.
1. The audit committee shall have minimum three directors as members. Two-thirds of the
members of audit committee shall be independent directors.
2. There is no stipulation regarding the no of meetings in a year for the audit committee
Major Recommendations:-
a) Shareholder,
b) deposit holder,
c) debenture holder
Is thousand or more.
D. Meetings of Directors:-
The Committee opines that law should assist the use of technology to carry out statutory
processes efficiently.
Use of electronic means (Teleconferencing and video conferencing included) to carry out
meetings should be allowed; and
Directors who participate through electronic means should be counted for attendance and
form part of Quorum.
The committee has suggested that every company should disclose particulars of the directors
appointed in the public domain through statutory filing of information by the board of
directors.
Major Recommendations:-
1. The committee had in mind two options to regulate the related party transaction
i. Government Approval-based regime;
Based on the international standards, the later approach was considered appropriate.
B. Board remuneration:-
The committee recommended a remuneration policy based on company wishes in ored to ensure the
retention of talented and motivated directors. However it should be transparent and based on
principles that ensure fairness, reasonableness and accountability.
Other requirements:-
The Committee was of the view that the concept of appointment of CFO should be
recognized under the Act. He should also be made responsible for preparation and
submission of financial statements to the Board along with Managing Director, CEO, CFO,
and the Company Secretary.
The law should also provide for an active role for the shareholders’ associations in ensuring
high quality of financial reporting.
B. Provision of Non-Audit Services:
The committee wanted to raise the prohibition on the auditors to provide the non audit services
subject to a prescribed threshold of materiality. However, all non audit services must be approved by
the audit committee.
Law should recognize the “Whistle Blower Concept” by enabling protection to individuals who
expose offences by companies, particularly those involving fraud. Such protection should extend to
normal terms and conditions of service and from harassment. Further, if such employees are
themselves implicated, their cooperation should lead to mitigation of penalties to which they may
otherwise be liable. In regard to the potentially insolvent companies, it is essential that self
regulatory measures be required to be taken by a company to protect the interests of various
stakeholders, preserve assets and adopt such other measures as may be necessary to contain
insolvency. This would enable Whistle Blowing on impending insolvency. 3
3
Committee definition of the whistle blower concept : J.J IRANI (recommendations)Report, 2004
Current Scenario
Regulation:-
Companies Act, 1956: Principle legislation providing the formal structure for corporate
governance.
Other legislations:
Monopolies and Restrictive Trade Practices Act, 1969 (which is replaced by the
Competition Act 2002)
Foreign Exchange Regulation Act,1973 (which has now been replaced by Foreign
Exchange Management Act,1999)
Industries (Development and Regulation) Act, 1951 and other legislations
Board of Directors:-
The Desirable Corporate Governance Code by CII (1998) for the first time introduced the
concept of independent directors for listed companies and compensation paid to them.
The Kumar Mangalam Birla Committee (2000) then suggested that for a company with an
executive Chairman, at least half of the board should be independent directors, else at least
one-third.
The Revised Clause 49 based on the report by the Narayana Murthy Committee further
elaborates the definition of Independent Directors.
The Revised Clause 49 now also states that all compensation paid to non –executive
directors, including independent directors shall be fixed by the Board and shall require
prior approval of shareholders in the General meeting and that limit shall be placed on
stock options granted to non executive directors.
The Board is also required to draft a ‘Code of Conduct’ and affirm compliance to the same
annually.
Audit Committee:-
In India, section 292A of the Companies Act 1956 requires every company with paid up
capital above Rs. Five crore to have an Audit Committee which shall consist of not less than
three directors and such number of other directors as the Board may determine of which
two thirds of the total number of members shall be directors, other than managing or
whole-time directors.
The Desirable Corporate Governance Code by CII (1998) also recommended listed
companies with either a turnover of over Rs.100 crores or a paid-up capital of Rs.20 crores
to set up Audit Committees within two years.
In furtherance to the same the Kumar Mangalam Birla Committee, Naresh Chandra
Committee and the Narayana Murthy Committee recommended constitution, composition
for audit committee to include independent directors and also formulated the
responsibilities, powers and functions of the Audit Committee.
The Audit Committee and its Chairman are also entrusted with the ethics and compliance
mechanisms of an organization, including review of functioning of the whistleblower
mechanism, where it exists.
Subsidiary Companies:-
The Narayana Murthy Committee recommended making provisions relating to the composition of
the Board of Directors of the holding company to be made applicable to the composition of the
Board of Directors of subsidiary companies and to have at least one independent director on the
Board of Directors of the holding company on the Board of Directors of the subsidiary company,
were incorporated in the Revised Clause 49 of the Listing Agreement. Besides the Audit Committee
of the holding Company is to review the financial statements, in particular investments made by the
subsidiary and disclosures about materially significant transactions ensures that potential conflicts
of interests with those of the company may be taken care of.
a) Risk Management
b) Ethics
c) Executive Remuneration
d) CEO/CFO Certification
The continuous focus on stakeholder protection in India has led to the development of
norms and standards for the listed companies. But at the same time, bringing the private
companies that form the major part of the Indian corporate entities into a well knitted
system of corporate governance has remained unaddressed. The sheer importance of this
problem can be understood from the fact that only 1500 companies out of more than 50
thousand companies in India are only listed. The agency problem is likely to be less marked
there as ownership and control are generally not separated. Minority shareholder
exploitation, however, can very well be an important issue in many cases.
Even the most prudent norms can be hoodwinked in a system plagued with widespread
corruption. Hence, a code of conduct should create value and not be reduced to a
compliance protocol. But this, of course is an idealistic situation, in an un-ideal world. They
say, follow the spirit of law, not the letter. And that is the end which leads to a beginning of
every new code.
Annexure
Annexure I
THE whistle blower policy recommended in the recent report of SEBI's committee on corporate
governance and Clause 49 of the Listing Agreement, which was headed by Mr N.R. Narayana Murthy,
Chairman and chief mentor of Infosys Technologies, seems to have evoked the sharpest response
from veteran company secretaries, who have studied the key suggestions in detail.
In fact, judging by what they have to say, it is apparent that this particular recommendation, which is
intended to curb unethical and improper practices in corporates, is being singled out by company
law experts as simply impractical.
What is `whistle blower' policy? It is an internal policy on access to audit committees. What is the
committee's recommendation? Personnel who come to know about unethical or improper practices,
which may not necessarily be a violation of law, should be able to approach the company's audit
committee "without necessarily informing their supervisors".
The committee wants corporates to take steps to see that this right of access is communicated to all
employees through internal circulars. Further, a company's employment and personnel policy should
provide a mechanism to protect whistle blowers from "unfair termination and other unfair,
prejudicial employment practices."
Senior company secretaries Business Line spoke to said that this recommendation, if implemented,
would be instrumental in breeding indiscipline as most likely the audit committee would be flooded
with frivolous complaints and minor issues. Many complainants might go by their personal likes and
dislikes and thus the possibility of the right of access to the audit committee being misused would
always be there.
They noted that the committee had not said anything on providing evidence in support of a
complaint, disclosure of the identity of the complainant and the maximum number of complaints
that an employee could make in a year.
Elimination of unethical or improper practices is the responsibility of respective corporate promoters
and management, for which they have to put in place systems for efficient administration and
transparent transactions. Much also depends on the environment in which corporates operate and
the policies that govern their operations. A whistle blower policy can't be a foolproof safeguard
against unethical and improper practices, they contend.
The recommendation regarding composition of an audit committee has given rise to confusion.
While this panel has suggested that audit committee members should be non-executive directors,
the Naresh Chandra committee that preceded it suggested that only independent directors should
be on audit committee. The reality is that while all independent directors are non-executive
directors it is not so vice versa.
Regarding contingent liabilities, it has been suggested that management's views thereon and
auditor's comments on management's views should be given in the annual report.
According to senior company secretaries, there are instances where contingent liability cannot be
ascertained, such as, labour disputes, court cases etc. As the description suggests, it's all contingent
upon future developments and, therefore, it can't be proper for a management to pass a judgement
about the risk involved. Ideally, a management should only give the background of a contingent
liability.
The Narayana Murthy panel is for restricting the tenure of non-executive directors to three terms of
three years each, running continuously. The Naresh Chandra panel said that after a nine year-term
the director would not be considered independent, but surely the concerned person would be able
to continue as a non-executive director.
Company secretaries make two points: If the intention is to follow the Naresh Chandra committee's
suggestion, the Narayana Murthy panel's recommendation should be redrafted. Representatives of a
promoter remain on the board of a company as non-independent directors. The recommendation
now made rules out continuation of promoter-directors on the board beyond nine years at a stretch.
It needs to be clarified whether a partner of an audit firm or a solicitor's firm can be treated as an
independent director of a company if his firm is the auditor or legal advisor of another company in
the same group.
On analysts and media role
THE Narayana Murthy committee on corporate governance also discussed reports brought out from
time to time by security analysts and the media, specially the financial press.
As for reports of security analysts, the committee has desired SEBI to make rules for:
* Disclosure whether the company that is being written about is a client of the analyst's employer or
an associate of the analyst's employer, and the nature of services rendered to such company, if any
* Disclosure whether the analyst or the analyst's employer or an associate of the analyst's employer
hold or held (in the 12 months immediately preceding the date of the report) or intend to hold any
debt or equity instrument in the issuer company that is the subject matter of the report of the
analyst.
Regarding scrutiny of the media, particularly the financial press, it has observed the committee
considered views expressed by members.
The Press Council of India has prescribed a code of conduct for the financial media. However,
verifying adherence to the code is difficult. A detailed review by SEBI on the subject is desirable,
keeping in mind issues such as transparency and disclosures, conflicts of interest, etc. before making
any rule. SEBI should consider having a discussion with the representatives of the media, specially
the financial press.
Annexure II
The succession plan, decided earlier, included N Ravi taking over as editor-in-chief after Ram’s
retirement and Malini Parthasarathy taking over as editor of The Hindu
Vidhya Sivaramakrishnan
Chennai: The internal tussle in the family that publishesThe Hindu shows no signs of abating, with
two family members telling Mint that they plan to push for the retirement of the newspaper’s
editor-in-chief N. Ram and escalate some matters to the Company Law Board.
In telephone conversations, N. Murali, who has recently been re-designated as senior managing
director, and N. Ravi, who was supposed to take over as editor-in-chief of the group, said they would
begin to push for corporate governance norms in the firm.
Murali said there are three issues that he would focus on in the immediate future. One would be
retirement norms for family member directors and, therefore, the imminent retirement of Ram “as
agreed by him in September 2009” and implementation of the succession framework as decided
upon by board members earlier. The succession plan included N. Ravi taking over as editor-in-chief
after Ram’s retirement and Malini Parthasarathy taking over as editor of The Hindu.
Fighting for rights: Senior managing director N. Murali says he would focus on retirement rules for
family member directors, entry norms for the younger generation and corporate governance issues
for the firm. Arjoon Manohar / Mint
The other two issues would be setting up of entry norms for the younger generation into the family
business and overall corporate governance issues, and “fight for his rights” as he was recently
replaced by another board member K. Balaji.
“I have been looking after all non-editorial areas of the company over many years and now my
substantial powers and responsibilities have been purportedly removed. And I have been given the
position of senior managing director, which is virtually a dummy position,” said Murali. “Therefore, I
will fight for my powers, including considering the option of going to the Company Law Board.”
Events came to a head following an article published in The Indian Express on Thursday that spoke
about an internal tussle in the family due to Ram’s unwillingness to retire this year. Ram has
threatened to initiate defamatory proceedings against the senior editors and executives of The
Indian Express.
It is unclear if he has initiated the proceedings, yet.
An email questionnaire sent to Ram was unanswered till late Friday evening.
“Discussions on corporate governance have been on for over two years now,” said Ravi. “But
nothing has moved so far. But now, it has gone out of hand and it is time to put it (corporate
governance norms) in place.”
According to Ravi, he, along with Murali, had prepared a document that outlined broad corporate
governance norms and circulated it among the board members on 18 February and the details were
yet to be filled in. He said other board members “wanted time” to study the proposals.
Annexure III
The previous survey, carried out in 2008, had only 47% complaining on this count. At least 75% of Indian firms
said instances of fraud had increased over the past two years
Khushboo Narayan
Mumbai: With white-collar crime almost doubling from last year, financial fraud by insiders remains the single
greatest fear of Indian companies, according to the results of a survey by audit and consulting firm KPMG. The
results were released on Tuesday.
Of the 1,000 companies covered in the survey, 87% said they had incurred losses of at least Rs10 lakh due to
fraud in 2009.
The previous survey, carried out in 2008, had only 47% complaining on this count. At least 75% of Indian firms
said instances of fraud had increased over the past two years.
A lack of objective and independent internal audits, inadequate oversight of senior management’s activities by
the audit committee, and weak regulatory environment were pinpointed as culprits for the spike in financial
statement frauds.
The 10th biennial India Fraud Survey Report 2010 reveals that 81% of the companies surveyed feel that
financial statement fraud is the biggest threat in India, with at least 60% of them saying inadequate
enforcement of regulations has increased such fraud.
The findings of the report suggest that weak internal control systems, eroding ethical values and lack of legal
action against fraudsters create an environment conducive to such crimes.
The survey, conducted by KPMG’s forensic wing in India, covered leading Indian firms from the public and
private sectors. The respondents included chairman and managing directors, chief operating officers, chief
financial officers, internal auditors, heads of investigation divisions and other senior management officials.
Indian companies, according to the study, remain highly vulnerable to fraud in the absence of “inadequate
internal control framework” that can identify and deal with such crimes. The report suggests that 41% of
Indian firms do not have fraud risk management systems.
The KPMG report shows that 45% of the firms have experienced fraudulent activities in the past two years,
with financial services and consumer markets showing the highest levels of risk.
But more than the lack of monitoring systems, what is prevalent and disturbing is the reluctance of companies
to report incidence of frauds. According to the survey, only 35% of the companies initiated legal action against
a perpetrator of fraud. A majority of the frauds had been investigated internally.
That, however, may be changing. Deepankar Sanwalka, head (forensic services), KPMG, said that following the
scam at Satyam Computer Services Ltd, in which founder and chairman B. Ramalinga Raju admitted to
showing non-existent income over the years of Rs7,136 crore, the trend in fraud detection has changed.
“Companies are more open to discuss and take action against fraudsters. Increasingly, fraud risk mitigation
mechanism are being discussed in management meetings,” he said.
The frauds covered in the survey include anti-corruption compliance. Almost 42% of the companies strongly
believed bribery is acceptable behaviour in India while 38% said it is an “integral feature of the practices in
their industry”.
According to the World Bank, bribes paid annually amount to more than $1 trillion (Rs44.5 trillion) globally.
India scores poorly on corruption and bribe payments in the list of organizations such as Transparency
International, which ranks countries based on corruption and propensity to demand bribes.
India’s corruption perception index score in 2009 was 3.4 on a scale of 0-10, with 10 being the least corrupt.
In 2008, it was one of the bottom four on the global bribe payers index, with a score of 6.8.
The way to a cleaner balance sheet, however, may be harder than expected. As Rohit Mahajan, executive
director (advisory), forensic services, KPMG, told Mint, “Indian firms lack (a) holistic approach to frauds.
Focusing on financial fraud will not help control white-collar crimes.”