CORPORATE

GOVERNANCE
 Pre-liberalization
The companies act was introduced in the year 1866 and was
gradually revised in 1882, 1913 and 1932. Indian Partnership
act was introduced for the first time in 1932. The various
agendas which were on its focus were managing agency
model to corporate affair as individuals/business firms
entered into legal contract with joint stock companies.
The period of 1950s and 1960s was a period of setting up of
industrial activities and cost plus regime. The period between
70’s to mid eighties was an era of Cost, Volume and Profit
analysis, as an integral part of the Cost Accounting function.
 Post-liberalization
After liberalization, India has been keenly looked upon by the
organizations/companies worldwide for the purpose of
creating new markets. Progressive firms in India have made
an attempt to put the systems of good corporate governance
in place. The basic minimal code for corporate governance
was
proposed by the Chamber of Indian Industries (CII), 1998.
 The First Phase of India’s Corporate Governance
Reforms : 1996-2008
India’s corporate governance reform efforts were
initiated by corporate industry groups, many of
which were instrumental in advocating for and
drafting corporate governance guidelines. Following
vigorous advocacy by industry groups, SEBI
proceeded to adopt considerable corporate
governance reforms. The first phase of India’s
corporate governance reforms were aimed at
making boards and audit committees more
independent, powerful.
 1998 - Confederation of Indian Industry (CII) -
Desirable Corporate Governance – A Code
CII took a special initiative on corporate governance, the
first institutional initiative in Indian Industry. The objective
was to develop and promote a code for companies, be in
private sector, public sectors, Banks or financial Institutions
(1)protection of investor interest
(2)transparency within business
(3)international standards in terms of disclosure
(4)to develop a high level of public confidence in business
The completed final draft of this code came out in April
1998.
1999- Report of the Committee (Kumar Manglam Birla) on
Corporate Governance
SEBI, appointed Kumar Manglam Birla – as chairman to give a
comprehensive view of the issues related to insider trading to
protect the rights of various stakeholders. The heart of the
committee’s report is the set of recommendations
(1)distinguishes the responsibilities and obligations of the
board and the management
(2)Rights of shareholders in demanding corporate governance.
Many of the recommendations are mandatory.
(3)disclose separately in their annual reports, a report on
corporate governance delineating the steps they have taken
to comply with the recommendations of the committee.
November 2000 - Report of the task force on
Corporate Excellence through Governance
Department of Company Affairs (now MCA),
prepared a report on achieving corporate
excellence through governance.
 2000 - Introduction of Clause 49 of the listing agreement
In 1999, the Birla Committee submitted a report to SEBI to promote and raise the
standard of Corporate Governance for listed companies. The Birla Committee‘s
recommendations were primarily focused on two fundamental goals :
(1) improving the function and structure of company boards
(2) increasing disclosure to shareholders
The committee made specific recommendations regarding board representation
and independence that have persisted to date in Clause 49. The committee also
recognized the importance of audit committees.
The Birla Committee also made several recommendations regarding disclosure
and transparency issues, in particular with respect to information provided to
shareholders. Among other recommendations, the Birla Committee stated that a
company‘s annual report to shareholders should contain a Management
Discussion and Analysis (MD&A) section .
SEBI implemented the Birla Committee’s proposals less than five months later, in
February 2000.
These rules contained in Clause 49 .
 March 2001 – RBI – Report of the advisory group on Corporate Governance:
Standing Committee on International Financial Standards and Code
With keen interest shown by organizations like World Bank, Asian
Development Bank etc., Organization for Economic Cooperation and
Development (OECD) developed a set of principles of Corporate Governance
which are internationally recognized to serve as good benchmarks.
(a) The Basis of an Effective Corporate Governance Framework - The
corporate governance framework should promote transparent and efficient
markets, be consistent with the rule of law
(b) Rights of Shareholders and Key Ownership Functions - The corporate
governance framework should protect and facilitate the exercise of
shareholders’ rights.
(c) Equitable Treatment of Shareholders - The corporate governance
framework should ensure the equitable treatment of all shareholders
 (d) Role of Stakeholders in Corporate Governance
The corporate governance framework should recognize the rights of
stakeholders established by law or through mutual agreements and
should encourage active cooperation between corporations and
stakeholders in creating wealth, jobs and sustainability of financially
sound enterprises.
(e) Disclosure and Transparency - The corporate governance
framework should ensure that timely and accurate disclosure
(f) Responsibilities of the Board - The corporate governance
framework should ensure the strategic guidance of the company, the
effective monitoring of management by the board and the board’s
accountability to the company and the shareholders.
December 2002 –Report of the committee (Naresh Chandra) on
Corporate Audit and Governance Committee
The Department of Company Affairs (DCA) under the ministry of
finance and company affairs appointed a committee under the
chairmanship of Naresh Chandra to examine various corporate
governance issues. The committee took upon the task to analyze, and
recommend changes in diverse areas like:
(a) the statuary auditor, company relationship
(b)determination of audit fee, restrictions
(c) if required on non-auditory fee
(d)procedure for appointment of auditors
(e)measures to ensure that management and companies put forth a
‘true and fair’ statement of financial affairs of company.
 February 2003 (N. R. Narayan Murthy) – SEBI report on
Corporate Governance
The Securities and Exchange Board of India (SEBI), in its
effort to improve the governance standards constituted
a committee to study
(1)the role of independent directors
(2)related parties
(3)risk management
(4)directorship and director compensation
(5)codes of conduct and financial disclosures
 Clause 49 Amendments
The Murthy Committee paid particular attention to
the role and responsibilities of audit committees.
In 2004, SEBI further amended Clause 49 in response
to the Murthy Committee‘s recommendations.
However, implementation of these changes was
delayed until January 1, 2006 .
 Clause 49, as currently in effect, includes the following key
requirements:
(a) Board: Independence Boards of directors of listed companies must have a
minimum number of independent directors. Where the Chairman is an executive or a
promoter or related to a promoter or a senior official, then at least one-half the
board should comprise independent directors; in other cases, independent directors
should constitute at least one-third of the board size.
(b) Audit Committees: Listed companies must have audit committees of the board
with a minimum of three directors, two-thirds of whom must be independent
(c) Disclosure: Listed companies must periodically make various disclosures regarding
financial and other matters to ensure transparency.
(d) CEO/CFO certification of internal controls: The CEO and CFO of listed companies
must:
(i) certify that the financial statements are fair, and
(ii) accept responsibility for internal controls.
(e) Annual Reports: Annual reports of listed companies must carry status reports
about compliance with corporate governance norms.
Kotak Committee Recommendation in June, 2017: SEBI had formed
a committee for improving standards of corporate governance of listed
companies in India under the chairmanship of Shri Uday Kotak.
Committee made 80 recommendation in October, 2017, which cover
composition, role of Board and its Committee, promoter related
agreement, enhancing transparency and disclosure, strengthening
financial reporting and audit etc.

SEBI has accepted most of the recommendations, some without and

some with modifications. Some recommendations have been referred
to other regulatory bodies and the balance have been considered as
voluntary compliance. The mandatory compliance coming out of the
recommendations are being introduced in phases allowing the
companies to implement the changes step by step.
 OECD Principles of Corporate Governance
Organization for Economic Co-operation & Development
(a) The principles have been devised with four fundamental concepts in mind:
(1) the basis for an effective corporate governance framework.
(2) the rights of shareholders.
(3) equitable treatment of shareholders.
(4) the role of stakeholders in corporate governance.
(5) disclosure and transparency, and
(6) the responsibilities of the board.
(b) The 2004 revisions covered four main areas:
(1) a new set of principles on the development of regulatory framework
(2) institutional investors to disclose their corporate governance policies
(3) strengthened principles to reinforce Board oversight and enhance Board
members’ independent judgment, and
(4) conflicts of interest
 The Second Phase of Reform: Corporate
Governance After Satyam
SEBI actions
(a)appointment of the Chief Financial Officer (CFO) by
the audit committee
(b)rotation of audit partners every five years.
(c)voluntary adoption of International Financial
Reporting Standards (IFRS).
(d)interim disclosure of balance sheets
 MCA actions
(a) independence of the boards of directors.
(b) responsibilities of the board, the audit committee, auditors,
secretarial audits.
(c) mechanisms to encourage and protect whistle blowing.
(d) Important provisions include: Issuance of a formal appointment letter
to directors.
(e) Separation of the office of chairman and the CEO.
(f) Institution of a nomination committee for selection of directors.
(g) Limiting the number of companies in which an individual can become
a director.
(h) Tenure and remuneration of directors.
(i) Training of directors.
(j) Performance evaluation of directors.
 Corporate Governance through use of
information technology
Many of Indian Corporate Entities have started
recognizing directors . IT in Corporate
Governance (IT Governance) ensures right
decisions and accountability framework for
encouraging desirable behavior in the use of IT.
 Benefits of good governance
(1)efficient use of capital
(2)promotes market confidence; helps to attract
additional long term capital, both domestic and
foreign
(3)good corporate governance helps to ensure that
corporations take into account the interests of a wide
range of constituencies, particularly when the board
recognizes that corporate social responsibility
(4)business development and growth, lower risk, and
sustainability.
The Companies Act 2013 - Key Initiatives
(a) corporations and society.
(b) absentee shareholder primacy and
protection.
(c) boards and their processes.
(d) disclosure and transparency in reporting,
and
(e) unlisted company governance.
 Corporations and Society

(a)Corporate Social Responsibility 

Refer Section – 135
(b)The Stakeholder Issue  Write
Section – 178 Stakeholders
Relationship Committee
 Absentee Shareholder Primacy and Protection
(a) Restraints on Interested Shareholders’ Voting Rights – Sec – 178 –
Related Party Transactions
(1)No contract or arrangement shall be entered into except with the
prior approval of the company by a ordinary resolution.
(2)No member of the company shall vote on such special resolution,
to approve any contract or arrangement which may be entered
into by the company, if such member is a related party.
(3)These restrictions do not apply to transactions in the ordinary
course of business concluded at an ‘arm’s length’ basis (defined as
transactions between two related parties conducted as if they
were unrelated, so that there is no conflict of interest).
 (b) Containing Other Private Benefits of Control
(1)Directors – Section 192 of The Companies Act , 2013
(2)Directors and Key Managerial Personnel may not engage in
forward transactions in securities of the company
(3)Directors and Key Managerial Personnel may not enter into
‘insider trading’
Containing the Perils of Pyramiding
(a)On Board Chair – CEO Duality – Write Entire Section 203
There are exceptions provided for as well: this mandate will not
apply if the company’s Articles provide otherwise
 (b) On Board Composition and Objectivity
Write Entire Section – 149
On Improving Independent Director Effectiveness
The maximum number of listed company directorships overall
including exempt directorships as alternates, and in private limited
companies that are not holding or subsidiary companies of public
companies, unlimited companies, and not-for-profit companies. It is
noteworthy that the listing agreement requirements in this regard
are more rigorous: the maximum number of listed company
directorships has been pared down to seven and in case of serving
whole time directors in a listed company, this has been further
scaled down to three others.
 (e) On Enhancing Board Independence and Objectivity
(1) The Act requires listed companies to have at least a third of their board members
qualifying as independent Section 149(6) of the Companies Act, 2013.
(2) The provision to have at least one woman director
(3) The Act visualizes a term-based appointment of independent directors for a period
of five years, renewable (by special resolution) for a similar second term
(4) An innovative concept has been introduced in the Act to ensure the
‘independence’ of persons who wish to be re-appointed as such after serving two
five year terms. They can be so appointed but only after a ‘cool-off’ period of
three years and, this is important, during the three year break, the independent
director ‘shall not be appointed in or be associated with the company in any other
capacity, either directly or indirectly.’
(5) Executive compensation – Section – 178 – Nomination and Remuneration
Committee (NRC)
(6) The company and independent directors are required to “abide by the provisions
specified in Schedule IV” of the Act, which provides a detailed Code for
independent directors.
 Disclosure and transparency in reporting
(a) On Financials, Disclosure and Reporting
There has been a movement to harmonize Indian accounting Standards with the global
Financial Reporting Standards (FRS) for some years now. The Act takes this forward. Schedule
III of the Act sets out general instructions for preparation of balance sheet and statement of
profit and loss of a company.
(1) Meeting a longstanding demand for overall group financials, holding companies are now
mandatorily required to prepare consolidated financials incorporating financials of
subsidiaries (including associates and joint ventures)
(2) Recognizing the need to formalize acceptable processes for reopening and restating the
financials of a company as a fallout of fraud or Mismanagement – Section 130
(3) A National Financial Reporting Authority (NFRA) has been created charged with
responsibilities for recommending accounting standards and overseeing their compliance
by companies. – Section 133
(4) The financials of the company (including consolidated accounts, if any) are now to be
signed by the Chief Financial Officer as well.
(5) Reporting requirements in the Directors’ annual report to shareholders have been
considerably extended by the Act. – Section 134
 (b) On Audits, Auditors and Oversight – Rotation of Auditor – Write
Section 139(2)
(3) Audit independence criteria, disqualifying a person, have also been
tightened. For example:
a) A business relationship with the company, or its subsidiary, or its
holding or associate company,
or subsidiary of the holding company, or an associate company.
b) A relative is a director or employed as key management personnel.
c) A conviction for an offence within the ten years preceding.
d) A subsidiary or associate company or any other form of entity is
engaged in prohibited
consultancy or specialized services specified in Section 144 of the Act.
 (c) On Prevention of Oppression and
Mismanagement
Extant company legislation already had provisions to protect
absentee shareholders against oppression and
mismanagement by incumbent management, whether
promoter controlled or otherwise. Broadly these protection
measures have been retained in the 2013 Initiatives. In
addition, for the first time in the country, provision has also
been made in the Act for “class” action
 Unlisted Companies Governance
They don’t follow SEBI guidelines rather they follow The Companies Act, 2013  Write
Section – 149 , 177 , 178
(a) Indian Corporate Governance Standards - Road Ahead to Achieve the Next Level of
Excellence - There are still miles to go before one can
claim, if ever at all, to have scaled commanding heights in governance. Indian
corporate governance standards are to move up the scale to the next level of
excellence.
(b) On Empowering Board Independence - Two measures might be helpful in this
regard: The quorum requirements for duly constituting a board or committee meeting
should be modified to require that at least a minimum number of independent
directors should be present . In terms of approvals at board and committee meetings,
the law should be modified to require affirmative votes in favor by at least a majority
of independent directors present or participating through video-conferencing before a
resolution can be deemed duly approved.
(c) On Strengthening Audit Independence
(d) On Disclosure and Reporting
 Corporate Governance in Family Business

Advantages of the Family Businesses over Non-Family Businesses

(a) Commitment, Passion and Dedication: It is believed that owners
tend to take better care of their businesses
(b)Agile decision-making abilities: Not having responsibilities towards
any shareholders gives the Indian family businesses greater
flexibility in terms of making decisions faster
(c) Deep industry insight: Family businesses gain significant
experience and expertise as they typically work in one industry for
longer durations.
(d)Mutual trust: Family businesses thrive on mutual trust
 Disadvantages of the Family Businesses over Non-Family
Businesses
(a) Staff recruitment: External talent can be reluctant to join the family
businesses.
(b) Raising funds for growth: Access to capital is required to grow and
evolve. However, it is difficult to raise the required funds for the family
businesses than non-family businesses.
(c) Family conflicts: Conflict among the family members is the major
setback for the family businesses.
(d) Ownership vs Management: Separating the ownership from the
management and reaching a consensus on the roles of family members in
the business are two important issues for the family businesses to
address.
 Unique challenges:
(a) Managing the diverse opinions of family members in the business,
solving internal issues and disputes, etc.
(b) Creating clear succession plans between siblings or cousins.
(c) Difficulties the younger generation may face in proving themselves
to the former generation.
(d) Differing views between the older generation and the newer
generation.
(e) Hiring external staff which may perceive that career advancement,
freedom and decision making are solely the purview of family
members.
(f) Regular and streamlined access to the capital to help grow and
develop the business.
 Corporate Governance in Family Business
Same as challenges above
Governance Issues - Family Owned Business
Some of the Governance Issues that crop up in Family Owned
Business are discussed below:
Role of the CEO
In selecting the CEO of a company, one should want the organization
to be run by the ‘most competent’ person with professional
knowledge and experience.
Succession Plan
A change of guard or succession is a complex and stressful event for
any business and in the case of family businesses it gets extra
complicated.
Internal Control Formation – Internal Control should be strong to manage
the challenges
Family Constitution - Weaknesses Family constitution is a living document
that evolves as the family and its business continue to grow. As a
consequence, it is necessary to regularly update the constitution
Innovation for a Competitive Advantage - Innovation is critical maintain their
relevance in the changing business environments.
Retaining Talent - This is important for any organization. Family businesses
believe that attracting the right talent and then retaining it is a challenge that
will have to be faced in the medium term.
Efficient Succession Planning - Mentoring and developing the next generation
of successors and leaders is crucial to the success of family businesses.
Need for New Technology - Technological advancements are redefining
business models, strategies and the changing industry dynamics.
 OECD Guidelines
(a) The OECD Guidelines on Corporate Governance of State-Owned
Enterprises (the Guidelines) are recommendations to
governments on how to ensure that SOEs operate efficiently,
transparently and in an accountable manner.
The Guidelines aim to:
(1) professionalize the state as an owner.
(2) make SOEs operate with similar efficiency, transparency and
accountability as good practice private enterprises, and
(3) ensure that competition between SOEs and private enterprises
 The OECD guidelines focused on the following areas:
(1)Rationales for State Ownership - evaluate and disclose the
objectives that justify state ownership
(2) The State’s Role as an Owner - a high degree of professionalism
and
effectiveness.
(3) State-Owned Enterprises in the Marketplace – SOEs should ensure
a level playing field and fair competition
(4) Equitable Treatment of Shareholders and other Investors
(5) Disclosure and Transparency
 The Concept of MOU
In India the Memorandum of Understanding
is a negotiated document between the
Government, acting as the owner of Public
Sector Enterprise (PSE) and a specific PSE.
 High Power Committee
(a) Cabinet Secretary, Chairman
(b) Finance Secretary, Member
(c) Secretary(Expenditure), Member
(d) Secretary(Planning Commission), Member
(e) Secretary(Programme Implementation), Member
(f) Chief Economic Adviser, Member
 MOU Division
(a)provide logistical, technical and administrative
support to the Task Force.
(b)develop information and data base on MOU
signing PSEs.
(c)monitor the progress of MOUs.
(d)advise and counsel to the MOU signatories on
methodological and conceptual aspects of the
MOU policy
 Objectives of MoU System
(a)Improve the performance of CPSEs though
increased management autonomy.
(b) Remove the haziness in goals and
objectives.
(c) Evaluate management performance
through objective criteria;
 Evaluation of MOU
The MOU evaluation is finalized on the basis of
the actual performance and the PSEs are
graded as “EXCELLENT”, “VERY GOOD”,
“GOOD”, “FAIR” & “POOR”. Some portion of
the Performance Related Pay (PRP) is linked to
MOU rating.
 Achievements of the MOU System
(a) The focus, under the MOU system, has
shifted to achievements of results.
(b) Operational autonomy